A foreign franchisor preparing to enter Canada will usually have financial statements already. A publicly traded franchisor may have audited consolidated statements prepared under International Financial Reporting Standards or U.S. generally accepted accounting principles. A privately held franchisor may have reviewed statements prepared by its regular accountant. A smaller company may have only internally prepared accounts or compilation statements.
The predictable question is whether those existing statements can be included in the Canadian Franchise Disclosure Document.
The answer is frequently yes—but not merely because the statements exist, appear reliable or were prepared by a reputable accounting firm.
Canadian franchise legislation is concerned with two separate things. The first is the accounting framework used to prepare the financial statements. The second is the level of independent assurance provided by the accountant who reports on them. A set of statements may satisfy one requirement and fail the other. It may use an acceptable accounting framework but lack the required audit or review engagement report. Conversely, it may have been examined by an accountant but relate to the wrong corporate entity, the wrong fiscal year or a form of financial information that does not constitute the prescribed financial statements of the franchisor.
This distinction matters because attaching inadequate financial information is not a minor drafting defect. The financial statements form part of the statutory disclosure package. In the Canadian disclosure provinces, a deficient package may expose the franchisor to rescission and damages claims. The correct question is therefore not simply whether the franchisor already has financial statements. It is whether the existing statements satisfy the accounting, assurance, timing and entity requirements imposed by the applicable franchise legislation.
Why financial statements form part of franchise disclosure
A prospective franchisee is entering into a long-term relationship with the franchisor. The franchisee will depend on the franchisor to maintain the brand, administer the system, provide training and support, manage advertising funds, protect intellectual property and continue investing in the network.
The financial statements help the prospective franchisee and its advisers assess whether the franchisor appears financially capable of performing those obligations.
They do not provide a prediction that the franchise will succeed. They may reveal very little about the economics of an individual franchise location. Nor should they be treated as a substitute for examining the initial investment, operating costs, royalties, market conditions or unit-level performance.
Their purpose is narrower but still important. They provide independently prepared financial information concerning the organization that is asking the franchisee to make a substantial and often irreversible investment.
That purpose explains why ordinary management accounts are not enough. A spreadsheet produced by the chief financial officer may be entirely accurate, but the legislation generally requires financial statements that have been subjected to an independent audit or review engagement, unless a specific exemption applies.
Accounting standards and assurance standards are different
The terminology is often confused, including by sophisticated businesspeople.
Accounting standards govern how financial statements are prepared. They address such matters as revenue recognition, asset valuation, liabilities, consolidation, impairment, leases and the presentation of financial information.
Assurance standards govern the work performed by the independent public accountant and the nature of the accountant’s report.
Those are two distinct inquiries.
A U.S. franchisor may have statements prepared in accordance with U.S. GAAP. That answers the accounting-framework question. The accountant may then have audited those statements under standards established by the American Institute of Certified Public Accountants or, for a public company, the Public Company Accounting Oversight Board. That answers the assurance question.
A European franchisor might instead prepare statements under IFRS and have them audited under International Standards on Auditing.
A Canadian private company may prepare its statements under Canadian accounting standards for private enterprises and have them reviewed under Canadian Standard on Review Engagements 2400.
Each combination must be examined to determine whether it satisfies the legislation of the province in which disclosure will be given.
The practical lesson is that the words “audited financial statements” are not the end of the analysis. Counsel should review the accounting policies, the independent accountant’s report, the identity of the reporting entity, the period covered and the standards expressly identified in the report.
What is an audit?
An audit provides the higher of the two customary levels of assurance accepted for franchise disclosure.
During an audit, the auditor undertakes procedures designed to obtain reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. The auditor assesses risks, tests evidence, evaluates accounting policies and estimates, considers internal controls for purposes of designing the audit procedures, and forms an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework.
Reasonable assurance is a high level of assurance, but it is not an absolute guarantee. An audit does not certify that every transaction is correct or that fraud is impossible. It provides an independent professional opinion based on the work required by the applicable auditing standards.
For a foreign franchisor that already obtains an annual audit for financing, investor, securities-law or corporate-governance purposes, the audit requirement will often create no additional burden. The existing audited statements may be usable in Canada, provided the applicable accounting and auditing standards are accepted and the statements otherwise meet the franchise legislation.
Ontario now expressly recognizes financial statements prepared under Canadian, U.S. or international accounting standards and audited under specified Canadian, American or international auditing standards. That change removed much of the former uncertainty for foreign franchisors whose statements were already prepared under U.S. GAAP or IFRS and audited under recognized U.S. or international standards.
Other provinces express the rule somewhat differently. British Columbia, for example, permits statements prepared under the generally accepted accounting principles of the jurisdiction in which the franchisor is based, provided the audit or review standards meet the prescribed Canadian or international standards or are at least equivalent. The regulations in the remaining disclosure provinces must be checked individually, but the common concern is substantive equivalence to the required level of financial reporting and assurance.
The result is that a foreign audit is not disqualified merely because the accountant is not Canadian. What matters is the framework and the standard under which the work was performed.
What is a review engagement?
An audit is not invariably required. Franchise legislation generally permits financial statements accompanied by a review engagement report as an alternative.
A review engagement provides limited assurance rather than the reasonable assurance provided by an audit. The accountant principally uses inquiry, analytical procedures and professional judgment to determine whether anything has come to the accountant’s attention that causes the accountant to believe the statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.
The accountant does not perform all of the procedures required in an audit. There is ordinarily less testing of underlying records, less corroboration and no audit opinion.
That does not make a review engagement casual or informal. Canadian Standard on Review Engagements 2400 imposes professional requirements concerning independence, acceptance of the engagement, understanding the entity and its environment, materiality, inquiry, analytical procedures, evaluation of evidence, documentation and the form of the review engagement report.
A properly completed review engagement is therefore fundamentally different from an accountant merely assisting management in preparing the statements.
For many privately held franchisors, a review engagement represents the most cost-effective route to compliance. It provides the prescribed level of independent assurance without the expense and disruption of a full audit. A franchisor that does not otherwise require audited statements should discuss the review engagement alternative with Canadian franchise counsel and its accountant at the beginning of the disclosure process.
The timing is important. A review engagement cannot necessarily be commissioned and completed in a few days. The accountant must obtain sufficient information, make inquiries, perform analytical procedures, resolve inconsistencies and issue the required report. Where the company’s records are incomplete, its accounting policies are informal or several related companies conduct elements of the franchise business, the engagement may take considerably longer than management expects.
A compilation engagement is not a review engagement
This is the point most frequently missed by smaller and privately held franchisors.
A compilation engagement—historically called a “notice to reader”—does not ordinarily satisfy the financial statement requirement.
Under a compilation engagement, the accountant assists management in compiling financial information. The accountant does not perform an audit or a review and does not provide assurance that the statements are free from material misstatement.
The fact that the statements appear on an accounting firm’s letterhead does not change their legal character. Nor does the fact that the accountant prepared year-end adjusting entries, corporate tax returns or working papers.
The report attached to the statements controls. If the report states that the accountant has not performed an audit or review engagement and provides no assurance, the statements should not be treated as review-engagement financial statements.
Internally prepared statements, bookkeeping reports, tax-basis statements and management accounts present the same difficulty. They may be useful supplements to the franchisor’s internal planning, but they are not substitutes for the prescribed audited or reviewed statements.
This distinction should be identified immediately. A franchisor that learns, shortly before launch, that its “accountant-prepared financial statements” are only compilation statements may be forced to postpone franchise sales while a review engagement or audit is completed.
Can a U.S. franchisor use its U.S. financial statements?
In many cases, yes.
A U.S. franchisor with financial statements prepared under U.S. GAAP and audited under the standards of the AICPA or PCAOB will generally be well positioned, particularly in Ontario, where those standards are expressly recognized.
A privately held U.S. franchisor with reviewed financial statements may also be able to use them, but the accountant’s report must be examined carefully. The issue is whether the review was completed under an accepted review engagement standard—not whether the accountant performed something described informally as a “review.”
American terminology can create confusion. A review conducted under the applicable Statements on Standards for Accounting and Review Services may satisfy the required standard, while a compilation or preparation engagement will not.
The Canadian FDD should identify the financial statements accurately. Counsel should not describe statements as audited or reviewed merely because that is how management refers to them. The accountant’s report and the standards cited in it must support the description.
Can a franchisor use IFRS financial statements?
Financial statements prepared in accordance with IFRS are commonly usable.
IFRS is particularly relevant to public companies and international groups headquartered outside the United States. Ontario recognizes accounting standards established by the International Accounting Standards Board and auditing standards established by the International Auditing and Assurance Standards Board. British Columbia also recognizes the applicable international assurance standards in its regulation.
Again, however, “IFRS financial statements” answers only part of the question. Counsel must also determine whether the statements have been audited or reviewed under an accepted assurance standard, whether they relate to the correct franchisor entity and whether they cover the required fiscal period.
A glossy annual report containing selected financial highlights is not necessarily a complete set of financial statements. The FDD should contain the full statements, including the notes and the independent auditor’s or reviewer’s report.
The notes are not optional decoration. They form part of the financial statements and may contain essential information regarding debt, contingencies, related-party transactions, revenue-recognition policies, guarantees, litigation and the basis of consolidation.
Which company’s financial statements must be included?
The legislation generally calls for the financial statements of the franchisor.
That sounds obvious until the corporate structure is examined.
An international group may include a public parent corporation, an intellectual-property holding company, a domestic operating company, a Canadian subsidiary and a special-purpose franchise entity. The company with the strongest balance sheet may not be the company named as franchisor in the Canadian franchise agreement.
If a newly incorporated Canadian subsidiary grants the franchise, the parent’s financial statements do not automatically become the subsidiary’s financial statements. Attaching the financially stronger parent’s statements may be commercially reassuring, but it does not necessarily satisfy the statutory requirement applicable to the franchisor.
Conversely, consolidated financial statements may include the franchisor within a larger reporting group. Whether those consolidated statements are sufficient requires analysis of the governing regulation, the reporting structure and any available exemption.
The corporate structure should therefore be settled before the financial statement strategy is finalized.
A foreign franchisor should not create a thinly capitalized Canadian subsidiary, designate it as the franchisor and only then ask whether the foreign parent’s audited statements can be attached. The identity of the franchisor affects the franchise agreement, tax structure, intellectual-property licensing, liability profile, financial disclosure and the representations made to franchisees.
Where the Canadian entity is new, it may have no completed fiscal year. The regulations generally provide an alternative based on an opening balance sheet or other prescribed initial financial statements. Those statements must still be prepared and reported on in the required manner.
Using a newly formed subsidiary therefore does not eliminate the financial statement requirement. It changes the requirement.
How current must the statements be?
The usual requirement is financial statements for the franchisor’s most recently completed fiscal year.
Most regulations provide a limited period after fiscal year-end during which the previous year’s statements may continue to be used while the new statements are being completed. The precise timing differs and must be checked under the applicable provincial regulation.
This creates an annual FDD-management issue.
Suppose a franchisor has a December 31 fiscal year-end. Its existing FDD contains the statements for the year ended December 31, 2025. During the prescribed transition period in early 2027, those statements may remain usable. Once that period expires, the 2026 statements will ordinarily have to be incorporated before further disclosure occurs.
The franchisor cannot solve the problem by delivering the old FDD and promising to send the new financial statements later. Canadian disclosure is generally required to be delivered as one document at one time. The package must be complete when delivered.
The finance team, auditors and franchise department should therefore coordinate the annual financial reporting and FDD renewal calendar. A delay in completing the annual review or audit can bring franchise sales to a stop even though every other section of the FDD is ready.
What happens if the auditor’s report is qualified?
A modified or qualified auditor’s report is not something franchise counsel should ignore.
The first question is whether the report still constitutes an audit report issued under the required standard. The second, and often more important, question is what the qualification reveals.
A qualification concerning inventory records may have a different significance from a going-concern uncertainty, an inability to verify revenue, a material misstatement or a limitation affecting a substantial portion of the statements.
Even where the statements technically meet the audit requirement, the underlying issue may be a material fact requiring additional disclosure in the FDD. It may also affect the franchisor’s ability to certify that the disclosure document contains no untrue information and includes every material fact.
The same analysis applies to emphasis-of-matter paragraphs, material uncertainty related to going concern, restatements, subsequent-event disclosures and significant contingencies.
Financial statements should not simply be inserted at the back of the FDD by an administrative assistant. Franchise counsel should read the accountant’s report and the notes and identify matters that may require narrative disclosure elsewhere in the document.
Are there exemptions?
The provincial regulations contain exemptions or alternative requirements for certain franchisors, including some established and financially substantial organizations and some newly formed franchisors.
Those exemptions are narrower than businesspeople often assume.
Being a large international brand does not, by itself, create an exemption. Nor does being publicly traded, profitable or well known. The particular statutory conditions must be satisfied, and the conditions are not identical in every province.
Some exemptions depend on the franchisor’s operating history, net worth or the financial position of a controlling corporation. Others prescribe an opening balance sheet where the franchisor has not completed its first fiscal year.
The exemption analysis should be documented. Where the franchisor relies on the financial strength or operating history of a parent, counsel should establish that the statutory relationship and financial thresholds are met rather than relying on the general commercial connection between the companies.
Even where an exemption is technically available, the franchisor should consider whether using it is sensible. Prospective franchisees, lenders and advisers may expect meaningful financial information, particularly where substantial initial investments are required. The absence of statements may generate questions that outweigh the savings achieved by relying on the exemption.
Translation and currency
Canadian franchise legislation does not generally require the financial statements to be restated in Canadian dollars merely because they are included in a Canadian FDD.
The original currency should be identified clearly. A franchisor should not casually convert individual figures into Canadian dollars because doing so may create inconsistencies with the audited or reviewed statements and the accountant’s report.
The narrative portions of the FDD may explain the reporting currency and, where useful, provide contextual Canadian-dollar information using a clearly stated exchange rate and date. The formal financial statements themselves should remain intact.
Language may raise a separate issue. Statements prepared in a language other than English or French will ordinarily require an accurate translation for use in the disclosure document. That translation should include the accountant’s report and notes, not merely the primary statements.
The franchisor should determine whether the accountant must approve or participate in the translation process and whether the translated version adequately conveys the terminology and qualifications contained in the original report.
The best time to address the issue
The financial statement analysis should begin before the Canadian FDD is drafted.
At the outset of a Canadian expansion, I recommend obtaining the complete financial statements for the two most recent fiscal years; the independent accountant’s audit, review or compilation report; a description of the accounting framework and assurance standards used; the corporate organization chart; the proposed identity of the Canadian franchisor; the anticipated fiscal year-end and reporting timetable; and details of any proposed Canadian subsidiary, parent guarantee or restructuring.
Counsel can then determine whether the existing statements are usable, whether a review engagement or audit must be commissioned, whether a statutory exemption is available, and whether the proposed corporate structure creates an avoidable disclosure problem.
That analysis may also reveal broader concerns. A franchisor with persistent losses, negative working capital, substantial related-party debt or a going-concern disclosure may still be legally entitled to sell franchises. Those matters, however, may require additional material-fact disclosure and careful consideration of what representations are being made to prospective franchisees.
The practical answer
A foreign franchisor can often use its existing financial statements in a Canadian Franchise Disclosure Document.
Existing audited statements prepared under Canadian GAAP, U.S. GAAP or IFRS and audited under recognized Canadian, American or international standards are the easiest cases.
Properly reviewed financial statements may also be sufficient and often provide a practical alternative for private companies that do not otherwise require an audit.
Compilation statements, internally prepared accounts and tax returns are not equivalent to audited or review-engagement financial statements and should not be treated as though they are.
The statements must relate to the franchisor, cover the required period, include the complete accountant’s report and notes, and comply with the legislation of every province in which they will be used. Any exemption must be established under the specific regulation rather than assumed from the franchisor’s size or reputation.
The principal danger is rarely that the problem cannot be solved. The danger is discovering it after the franchisor has recruited a franchisee, negotiated a site and announced a Canadian launch.
At that point, an accounting issue becomes a sales stoppage.
Addressed at the beginning of the Canadian expansion, it is usually no more than a manageable part of the disclosure process.
Looking ahead: What else must be disclosed?
Financial statements provide structured information about the franchisor’s historical financial position. They do not disclose every circumstance that could reasonably influence a prospective franchisee’s investment decision.
Canadian franchise legislation also requires disclosure of all material facts—a deliberately broad obligation that extends beyond the prescribed items listed in the regulations.
The next article in this series will examine what constitutes a material fact, how foreign franchisors should identify material information that does not appear in their existing disclosure documents, and why the obligation to update disclosure does not end when the annual FDD is completed.
This article forms part of a series on franchising in Canada for international brands considering expansion into the Canadian market.