A closing statement that followed the wrong half of its own clause

The situation

A buyer purchased all of the shares of an Ontario specialty food manufacturer for an enterprise value of $5,800,000, adjusted by a completion-accounts mechanism rather than a locked box. The purchase agreement's closing statement clause read, in substance, that the statement would be prepared “in accordance with ASPE, applied consistently with past practice.” The target working capital peg had been set months earlier using the company's own historical financial statements — also prepared, as it happened, on the same past practice.

The problem

The target's long-time bookkeeper had, for years, expensed certain packaging and inventory-handling costs as they were incurred rather than capitalizing them into ending inventory. ASPE's inventory-costing requirements do not permit that treatment — costs of bringing inventory to its present location and condition are meant to sit in inventory until the goods are sold, not be expensed immediately. Nobody had ever corrected the practice, because nobody outside the bookkeeper's own ledgers had ever had reason to look closely at it, and it had been used consistently enough that the peg-setting historical average and the actual closing statement were, on their face, prepared the same way.

Then the buyer's own accountants prepared the post-closing statement strictly in accordance with ASPE — correctly capitalizing the packaging costs into inventory, as the standard actually requires. That single correction increased reported inventory, and therefore working capital, relative to what past practice would have shown for the identical closing-date numbers. The seller stood to collect a true-up payment for a swing that came entirely from an accounting-policy correction, not from anything that had actually happened to the business between signing and closing. The buyer objected that the clause's two limbs — “in accordance with ASPE” and “consistent with past practice” — pointed in different directions the moment past practice turned out not to be ASPE, and the agreement never said which one controlled.

The numbers

Working capital measured on past practice, matching how the peg itself had been set, came to $612,000. The same closing-date figures, prepared strictly per ASPE, came to $781,000 — a $169,000 difference, entirely attributable to the inventory-capitalization correction. A naive true-up under the peg mechanism would have paid the seller the full $169,000, on top of the headline $5,800,000 price, for a change in bookkeeping method rather than a change in the business.

The rule that decided it

No statute governs which of the two limbs controls. ASPE — Accounting Standards for Private Enterprises, part of the CPA Canada Handbook — is a professional accounting standard set by the profession's own standard-setting body, not legislation, and nothing in law dictates how a private contract should order it against a “past practice” clause when the two conflict. That ordering is purely a drafting choice, and here the drafters never made it.

The way this kind of clause is conventionally read, and the way it was read here, treats “consistent with past practice” as governing discretionary judgment calls made within a framework that is otherwise ASPE-compliant — things like estimation methods, reserve percentages, or the timing of routine accruals — rather than as a licence to keep applying a bookkeeping method the standard does not permit at all. Read that way, the two limbs are not actually in conflict for most of what a closing statement covers; they only collide at the narrow point where past practice departed from a mandatory ASPE rule rather than exercising a judgment ASPE leaves open. Treadstone Law's own explainer of these clauses makes the same point about scope: “The purchase agreement should spell out exactly which accounts count toward … what accounting policies apply, and who has the right to review supporting records during the process” — precisely the specificity this clause was missing.

The outcome

Rather than litigate the point, the dispute went to the purchase agreement's own independent-accountant referral mechanism. The accountant separated the $169,000 swing into its components: roughly $54,000 came from a genuinely discretionary, consistently applied inventory-reserve estimate that ASPE leaves to management judgment, and that component was awarded to the seller under the “past practice” limb. The remaining $115,000 came from the straight capitalization rule ASPE does not leave open to judgment at all, and that component followed the “in accordance with ASPE” limb and was denied to the seller.

What it would have cost otherwise

Had the clause gone entirely one way or the other, the swing would have been resolved without an independent accountant at all — and if it had gone entirely to “past practice” as the seller initially argued, the buyer would have paid the full $169,000, a windfall equal to roughly 2.9% of the entire purchase price, for a correction that had nothing to do with how the business actually performed between signing and closing. The independent accountant's own fee for resolving the ambiguity ran to $22,000, split evenly between the parties — a cost neither side would have paid had the clause named which limb prevailed in the first place.

The tell

The tell was available before signing, in the same historical statements both sides were already relying on to set the peg: comparing how the peg was actually calculated against what the closing-statement clause would technically require to prepare the final number would have surfaced the mismatch between “past practice” and true ASPE months before it became a live dispute.

Takeaways

• • “In accordance with ASPE, applied consistently with past practice” assumes past practice was ASPE-compliant to begin with — when it was not, the clause does not say which limb wins.
• • ASPE is a professional accounting standard, not a legal rule; no statute resolves a conflict between it and a contractual reference to past practice.
• • The conventional reading treats “past practice” as governing discretionary judgment calls within an ASPE-compliant framework, not as a licence to keep applying a non-compliant method.
• • Before signing, check whether the historical figures used to set the peg were prepared the same way the closing-statement clause will technically require — a mismatch there is where this dispute starts.
• • An explicit ordering clause naming which limb prevails in a conflict costs one sentence at drafting and avoids an independent-accountant referral later.

Sources

• • No statute governs the ordering of “in accordance with ASPE” against “consistent with past practice” in a completion-accounts clause. ASPE (the CPA Canada Handbook's Accounting Standards for Private Enterprises) is a professional standard set by CPA Canada, not legislation; it is not separately quoted here because it is not a source this review could independently fetch, and the ordering itself is purely a matter of the parties' own drafting.
• • Treadstone Law — purchase price adjustment clauses in an Ontario business sale — explains why a purchase agreement should spell out exactly which accounting policies apply to a closing statement. It covers the working-capital adjustment generally; the specific ASPE-versus-past-practice conflict addressed here is not part of that piece.