ASPE to US GAAP After a Delaware Flip: Consolidated Financials

ASPE to US GAAP after a Delaware flip: what is the usual approach?

US investors in the Delaware parent generally want the parent's consolidated US GAAP statements: the parent and every company it controls, shown as one business. Under US GAAP, a parent consolidates its majority-owned subsidiaries, foreign ones included, and eliminates intercompany balances and transactions (FASB ARB 51; FASB Statement 94, both now in the FASB Accounting Standards Codification). The Canadian company does not have to rebuild its own books to get there:

1. Keep the Canadian ledger in Canadian dollars. It still feeds the T2.
2. Each month, adjust the Canadian trial balance to US GAAP outside the ledger, with a written schedule of adjustments.
3. Translate the adjusted figures to US dollars.
4. Add the parent, eliminate intercompany items, and report one set.

A case stops being simple when the Canadian company capitalized development costs or uses the taxes payable method, claims refundable SR&ED credits, has stock options in both companies, bills or is funded by the parent in US dollars, or still has founders holding exchangeable shares. A first audit that reaches back before the flip adds opening balances to rebuild.

Gather: both companies' trial balances, the intercompany agreement and invoices, the exchange rates used and their source, option and share ledgers for both companies, and the flip closing documents (share exchange agreement, exchangeable share terms, the parent's opening balance sheet).

After the flip, whose financial statements do investors want?

Investors hold shares of the Delaware parent, so they want the parent's statements, consolidated with the Canadian subsidiary. Their investment and voting agreements set what they receive, how often, and whether it is audited; read those first.

The Canadian company's own year-end statements, often compiled by a Canadian accountant, stay for Canadian purposes such as the T2. A compilation engagement report under CSRS 4200 replaced the old notice to reader for periods ending on or after December 14, 2021 (AASB). Compiled Canadian statements do not replace the consolidated US GAAP set. For the audit itself, see audited financials for investors; for the monthly package, see monthly financials for investors and the board.

Can the Canadian company keep ASPE books and still feed US GAAP statements?

Yes. The Canadian company can keep its ASPE ledger and convert to US GAAP through a documented adjustments schedule (a bridge) each month. The alternative is to keep the Canadian ledger on US GAAP and adjust for Canadian tax instead.

Either way, the T2 takes its financial statement figures, mapped to GIFI codes, in Canadian dollars unless the company made a functional currency election (CRA RC4088). Keeping ASPE suits a company with few differences and a Canadian bookkeeper who already closes the month. Moving the ledger to US GAAP suits a company whose bridge grows every month. Keep the bridge repeatable and supported: the auditor will test each adjustment.

Which ASPE and US GAAP differences usually matter for a startup?

Four items often need adjusting in a young technology company. Other differences can arise; ask the auditor to confirm the list for your company.

Exchangeable shares need their own answer. If founders kept exchangeable shares of the Canadian company, the parent may not own all of its equity, and how those shares appear in consolidated equity is a judgment to settle with the auditor before the first close.

Which currency: functional currency, reporting currency and translating Canadian dollars?

Three different rule sets each ask "which currency?", and the answers can differ for the same company.

A Canadian company with its own Canadian staff, costs and customers usually has the Canadian dollar as its US GAAP functional currency. A company that operates as a direct and integral extension of the parent, for example one funded by and working mainly for the parent, may have the US dollar instead. That judgment decides where exchange differences land:

• Canadian dollar functional currency: translate assets and liabilities at the period-end rate, and revenue and expenses at the rates on their dates or a weighted average for the period. The difference goes to a separate component of equity, not net income.
• US dollar functional currency, Canadian dollar books: remeasure as if the books had been kept in US dollars, with equipment and other nonmonetary items at historical rates. Exchange gains and losses generally go through net income.

For rates, pick one posted source and use it every month. The IRS has no official exchange rate and generally accepts any posted rate used consistently; it also publishes yearly averages (IRS). A T2 functional currency election cannot be filed again once a company has filed or revoked one, so treat it as a long-term choice.

How are intercompany balances and service fees eliminated?

In consolidation, every amount one company owes or charges the other drops out: receivables and payables, service fee revenue and expense, interest, and the parent's investment against the subsidiary's equity (FASB ARB 51). Both sides must match after translation before they can be eliminated; differences usually come from timing, exchange rates or an invoice booked on one side only.

An intercompany balance in a currency other than one company's functional currency creates an exchange gain or loss that does not eliminate. When settlement is not planned or expected in the foreseeable future, that gain or loss goes to equity with translation adjustments instead of net income (FASB Statement 52, paragraph 20). Document which balances are of that long-term nature.

Elimination is only for the consolidated statements. Each company's return still reports the fee: the parent as income on Form 1120, the Canadian company as an expense on its T2, priced at arm's length (pricing between your Canadian and US companies). A management fee paid to the parent is also subject to Canadian non-resident tax unless treaty relief applies, and the Canadian company owes any tax it should have withheld (Income Tax Act ss. 212(1)(a), 212(4) and 215(6)); the same guide covers the check. For who records which sale and how to set up due-to and due-from accounts, see books for a Canadian company and its US company.

Does the Canadian T2 change after the flip?

The T2 is still prepared from the Canadian company's own statements, in Canadian dollars unless a functional currency election applies. US GAAP adjustments and consolidation entries do not go on the T2. What changes is who owns the company and what it deals with:

For the tax on the share exchange itself, see moving a Canadian startup under a Delaware parent.

What does the Delaware parent file about its Canadian subsidiary?

The parent attaches Form 5471 for the Canadian subsidiary to its Form 1120, filed by the return's due date including extensions. A US corporation owning more than 50% of the vote or value of a foreign corporation is a Category 4 filer and must complete Schedule M (IRS instructions). In the year it acquires the shares, the parent is also a Category 3 filer and reports the acquisition on Schedule O, Part II. The penalty for failing to file the required information starts at US$10,000 per foreign corporation per year.

Several Form 5471 schedules come straight from the monthly bridge:

Year-end US GAAP figures that already tie to the consolidated statements make Form 5471 a reconciliation rather than a rebuild. For filer categories, controlled foreign corporation status and income the parent may have to include, see a US parent of a foreign operating company.

Who keeps which books, and in what order does the month close?

Each company keeps its own ledger in its own currency; one person owns the consolidation. A typical order:

An intercompany invoice left unbooked at step 2 holds up every later step. Keep each month's bridge, rates and elimination entries together; the auditor and the Form 5471 preparer will ask for the same file.

Example

These examples are illustrative; amounts are in the currency shown, and the exchange rates are made up.

Monthly close across two ledgers

A Canadian subsidiary with a Canadian dollar functional currency spends C$400,000 in a month. At an illustrative average rate of 1.38 Canadian dollars per US dollar, those expenses show as about US$290,000 in the consolidated income statement. Its month-end balance sheet is translated at the month-end rate instead, and the difference goes to the translation adjustment in equity. The T2 at year-end still uses the Canadian dollar figures.

Intercompany service fee

The parent charges the Canadian subsidiary US$50,000 a quarter for management services. In the consolidated statements, the parent's fee revenue and the subsidiary's fee expense eliminate, and so does any unpaid balance. The parent still reports the fee as income on Form 1120; the subsidiary still deducts it on its T2 in Canadian dollars if the price is arm's length, after checking Canadian withholding on the fee; and Form 5471 Schedule M shows the year's total.

SR&ED refund

The Canadian subsidiary expects a C$300,000 refundable SR&ED credit. Its ASPE statements show the credit under its existing policy, while the US GAAP presentation agreed with the auditor may put it on a different line. The board package says which line holds it, so the board does not count it twice or miss it in the burn figure.

Different for you?

• The flip has not closed yet, or founders are asking about tax on the exchange: see moving a Canadian startup under a Delaware parent and get startup tax help.
• The first audit is coming: see audited financials for investors and the income tax provision for a first audit.
• US investors may have ended CCPC status: see losing CCPC status to foreign investors.
• The round may cut your refundable SR&ED credit: see SR&ED and small business limits after a large round.
• Employees in Canada hold options in the Canadian company or the parent: see stock options for employees in Canada.
• Intercompany accounts are already out of balance: see books for a Canadian company and its US company and get cross-border tax help.
• The parent has not filed Form 5471 since the flip: see a US parent of a foreign operating company and get startup tax help.