Financial statements for Mission equipment-heavy businesses

Depreciation is an accounting choice, not a tax schedule

Capital cost allowance is a tax deduction with rates set by regulation. Depreciation in the financial statements is a policy the business adopts to spread an asset’s cost over the period it is genuinely useful. They are not the same thing and they produce different numbers, which is why the statements and the tax schedule diverge and why the difference has to be tracked.

Many small equipment-owning corporations simply post the CCA figure as depreciation because it saves a step. The consequence is that the balance sheet stops describing the fleet. A skidder written to nil for tax while still working daily appears on the balance sheet as worth nothing, which is the opposite of what a lender needs to see. See equipment CCA classes for the tax side.

Useful life, salvage value and heavy-use assets

A depreciation policy needs an estimated useful life and a residual value, and for forestry and construction equipment both are genuinely arguable. A machine run on a single shift in mild conditions has a very different life from the same model working steep ground year-round. Hours-based depreciation — writing the asset down against metered use rather than the calendar — frequently reflects reality better for a business whose activity swings with the season.

Whatever basis is chosen goes in the notes and stays put. Rebuilds complicate it further: a major component replacement that extends the machine’s life is capital and gets depreciated over the extended life, while routine maintenance is expense. Treating every rebuild as expense understates the asset base.

Lease or buy, and where the lease lands on the balance sheet

How an equipment lease is classified changes the shape of the statements substantially. A lease that transfers substantially all the risks and rewards of ownership is capitalized: the machine appears as an asset and the obligation appears as debt, split between current and long-term. An operating lease stays off the balance sheet and runs through the income statement as rent.

Two businesses with identical fleets and identical cash payments can therefore report very different total assets, very different debt and very different profit, purely because of how their leases were written. Anyone comparing the statements to a covenant threshold or a debt-to-equity test needs to know which situation applies, and the classification decision belongs in the file with the reasoning, not assumed from the invoice heading.

Trade-ins, disposals and the gain nobody expected

Equipment businesses cycle machines, and every disposal produces an accounting result and a separate tax result. If a unit is sold or traded for more than its depreciated book value, the statements show a gain; for tax, the same transaction may trigger recapture of capital cost allowance previously claimed. Owners are regularly surprised by a tax bill arising from a trade-in they thought was a wash because no cash changed hands.

Trade-ins specifically need unpicking: the invoice shows a net figure, but two events sit inside it — a disposal and an acquisition — and recording only the net understates both. See recapture for the tax consequence.

What an equipment lender or lessor reads

Equipment finance underwriting works differently from general commercial lending. The lender already holds security over specific machines, so the questions are about coverage and cash: does operating cash flow service the total payment schedule, how much of the fleet is already encumbered and to whom, and what is genuinely unencumbered if more security is needed.

That means the debt note matters more than almost anything else on the statements. Facilities split by lender, current portion separated from long-term, and security described clearly. A single line labelled long-term debt tells an equipment lender nothing useful and will simply generate a request for the detail.

Compilation, review, audit — and which one the finance company asked for

A CSRS 4200 compilation engagement presents information the business provides, with no verification and no opinion. The accountant does not inspect the machines, confirm the balances with the finance companies or express any conclusion. It is not an audit and it is not a review. A review engagement adds limited assurance through enquiry and analytical work; an audit adds an opinion backed by evidence. All three exist and they are not interchangeable.

Most owner-managed Mission equipment businesses operate on compiled statements. What is worth checking is whether a specific finance agreement says otherwise — some equipment lessors and larger facilities specify review-level statements in their reporting covenants, and the covenant is binding regardless of what has been supplied in past years without complaint.

How the year end runs, remotely, from Abbotsford

EverStone is one CPA working from one office in Abbotsford, about twenty minutes from Mission. There is no Mission office. Documents move through a secure portal, meetings are by video and signatures are electronic, so a year end closes without anyone leaving the yard.

The work suits incorporated logging and forestry contractors, excavation and site-services businesses, equipment rental operations, trucking businesses with owned fleets, and manufacturing and millwork shops with meaningful plant. Related pages: the Mission small-business CPA page and Mission equipment business accounting.

Where the decision is which machine to buy next and how to structure it, see fractional CFO support for Mission equipment businesses.