Sunday, December 20, 2009

The GAAPing hole in Flaherty’s argument

The textbook, Financial Accounting, that is in widespread use in Universities and Colleges across Canada informs students about the "Accrual accounting" method versus the "Cash Accounting" method of accounting, by stating on page 107:

"Cash Basis Accounting records revenue when cash is received and expenses when cash is paid.

Accrual Accounting Basis records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments."

The significance of this basic difference in accounting methods to the issue of income trusts is that Flaherty's argument of tax leakage only has any validity if he uses the Cash Method of Accounting and IGNORES the deferred taxes paid on the 38% of income trusts held in RRSPs, and gets "tax leakage", by ignoring all of the 38% of the taxes actually collected by the government from income trusts, whereas if Flaherty uses Accrual Accounting then these deferred taxes get included, and there is NO tax leakage.

Eventhough this presents a choice, in theory, about which approach is best, Flaherty had no choice, since the Auditor General called upon the Government of Canada to adopt Accrual Accounting a long time before Flaherty showed up on the scene, and yet he went ahead and used the wrong Accounting standard.

In the world of law that Flaherty comes from, this is called jurisdiction shopping, where you seek out the jurisdiction that is most favorable to the point you want to make/defend/promote.

Except this isn’t the world of law, but rather the world of accounting and the rules of the Government of Canada and the Auditor General.

Meanwhile the textbook goes on to conclude: "Therefore, generally accepted accounting principles (GAAP) require the accrual basis accounting for financial reporting purposes."

No wonder that Flaherty is hiding his analysis of alleged tax leakage behind 18 pages of blacked out documents....because of this GAAPing hole in his logic.

And to think, this is the same clown who preaches that we need greater financial literacy in this country? Perhaps that could begin with a few reporters in the media poiting out the Finance Minister’ own misunderstanding and misuse of some of the most rudimentary concepts of Finance and Financial Accounting, himself?

1 comment:

Dr Mike said...

I just wish Jim would have let me pay taxes based on the cash method.

In my Dental practice they taxed me on the basis of my billings wether I collected them or not.

Is it too much to expect the same standards should be applied to our finance minister as his tax leakage calcs did not take into account the taxes to be paid in the future by those of us who held trusts in our Registered Retirement accounts.

Yet on the other hand he made it readily available to pension funds to hold trusts tax free because he said that eventually these monies will be taxed once the fund makes pension payments to it`s members.

Jim is just one big inconsistency & it appears that either he doesn`t know squat about accounting or he is trying to pull the wool over the eyes of the Canadian public.

I don`t mind fair treatment under the tax laws but when we are being shafted by a numbers game , then that is just plain wrong.

This is in essence stealing the money right out of our savings accounts.

Anybody else but politicians would be looking at a stint in jail for any such a maneuver.

Dr Mike Popovich