What every Canadian CFO needs to know

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In other sections of this web-site there is discussion and information about C-SOX, Risk Management and Strategic Planning – all of which have been highlighted as top priorities for senior financial managers these days. There are two areas that we would like to point out – one is an emerging accounting development that will significantly change Canadian GAAP in the upcoming years (International Financial Reporting Standards), and another is a time saving, value adding process that will provide significant benefits to any organization (Performance Metrics).

International Financial Reporting Standards (IFRS)

Before we talk about IFRS, it is very helpful for a brief, historical accounting overview on Canadian Generally Accepted Accounting Principles (GAAP).

Canadian (GAAP) evolved over a long period of time and comes from 2 main areas:

  • Historical accounting practices that became widely accepted.
  • Authoritative pronouncements by accounting standard-setting bodies such as the CICA Accounting Standards Board (AcSB).

Canadian GAAP has always been in a continuous state of transition, and has been driven primarily by changes in the accounting practices of its largest trading partner, the USA.

Similar to Canada, the U.S. has its own GAAP and accounting standard-setting body – Financial Accounting Standards Board (FASB). In recent years, changes to Canadian GAAP have largely been driven to align Canadian GAAP more closely with U.S. GAAP. With the amount of cross border trade, listing of public companies in stock exchanges in both countries, and foreign ownership, it makes a lot of sense for Canada and the USA to align as much as possible.

On the international front, there has also been an accounting standard-setting body – the International Accounting Standards Board (IASB) an independent organization based in London, England that has been in existence in various forms since 1973. The accounting guidelines issued by the IASB are known as International Financial Reporting Standards (IFRS). The IASB has attempted to harmonize the accounting standards of major industrialized countries so that, as was the case for Canada and USA, that the financial statements are easier to compare amongst trading partners. Not surprisingly, the IASB has been successful in persuading stock exchanges in Europe and Hong Kong to adopt IFRS. The few major stock exchanges that do not yet accept financial statements based on IFRS are those of the United States and Canada. However, all that is about to change.

IFRS will be adopted by Canada

Excerpts from CICA (Canadian Institute of Chartered Accountants) ….

“In January 2006, the Canadian Accounting Standards Board (AcSB) announced its decision to replace Canadian Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS) for all Canadian Publicly Accountable Enterprises (PAEs). PAEs include listed companies and any other organizations that are responsible to large or diverse groups of stakeholders, including non-listed financial institutions, securities dealers and many co-operative enterprises. Effective January 1, 2011, enterprises issuing financial statements under standards other than IFRS must demonstrate that they are not publicly accountable. To allow affected companies sufficient time to prepare for the transition, the AcSB announced a five-year transition period, with an expected changeover date of January 1, 2011, for annual periods beginning on or after that date. This date will be confirmed by March 31, 2008.
This transition will be significant and far reaching for affected organizations and all their stakeholders, including their employees, lenders, and investors.

The time to begin preparing for the transition is now.”

Ron Salole, Vice President, Standards
CICA (Canadian Institute of Chartered Accountants)


Canada’s timeline for change

“January 1, 2011 is the expected changeover date at which International Financial Reporting Standards will replace Canadian GAAP for all publicly accountable enterprises. The date is for all annual periods beginning on or after that date. This date will be confirmed by March 31, 2008. The AcSB is conducting a progress review prior to finalizing the appropriateness of the date. To provide Canada’s publicly accountable enterprises with sufficient time to adapt their expertise, systems and procedures to the transition, the AcSB is implementing the changes in a thoughtful, orderly manner. The approach is intended to minimize the disruption and ensure an effective changeover.

In developing an IFRS transition plan, organizations will be required to start collecting data in accordance with IFRS requirements earlier than January 1, 2011. Organizations preparing financial statements under IFRS in 2011 will need to start collecting data under IFRS for comparative purposes in 2010. SEC registrants may need two years of comparative data, which would require data collection in accordance with IFRSs in 2009”.

Of interesting note are non-publicly traded entities – ie private corporations, of which there are many in Canada (subsidiaries of U.S. companies, or Canadian companies who have never needed to access public markets for cash). Private companies have always been allowed to “opt out” of Canadian GAAP in specific areas (known as differential reporting), and it is not clear at this point (February 2008) if this practice will continue to be allowed as Canada adopts IFRS. Please stay tuned to the CICA web-site for further developments. The bottom-line message to Canadian CFO’s is they need to be getting well versed on the changes that are coming, and ensure they are taking the necessary measures to adjust their company’s systems and processes. 2009 will be here very soon!

Performance metrics

An area that senior financial managers can add a great deal of value to any organization is to provide their companies with performance measure statistics commonly referred to a performance metrics. Balanced score cards are often used to provide an integrated system of various performance measures – balancing off different aspects of the organization’s strategies.

Performance metrics – Why are they important to have and to measure?

As much as the company’s strategic plan as approved by the board of directors / owners creates the necessary vision and blueprint for achieving long-term objectives, and as much as the annual operating budget provides the direction to manage on achieving short-term objectives, it is every bit important to have ongoing updates to ensure that performance is on track. Performance metrics are key statistics that are drawn from the annual operating budget that are tracked on a frequent basis (usually weekly) which allows management to stay in tune with business trends. That metrics are typically a combination of financial (example – gross margin) and operational (example – volume), but they would be tailored for each specific organization. Often the metrics will include industry standards to allow for benchmark comparisons to competitors. It is important to do review the metrics frequently otherwise the organization will run the risk of not understanding and reacting to adverse trends.

Getting started

To begin with, keep it simple and build from a base. Often the task will appear too daunting if a company attempts to implement performance metrics from scratch. This is a process that can evolve and improve over time. Information systems that don’t provide timely, accurate or complete information in support of metrics often is an excuse for not employing this tool. Systems at companies are rarely perfect and always lacking – so do the best with the system at hand using other applications as needed (Excel, PowerPoint, Word etc). This also could be an indication that the company’s systems are not keeping abreast with ongoing needs of the organization.

Larger organizations have taken to implementing specialized software that pulls the performance metrics that have been established, and displays it on employee’s computers on a daily basis -similar to a pop up. This can add all sorts of efficiencies but is normally supported by a fully integrated and reliable ERP system.

Trend-lines

Performance metrics are a powerful tool, but they really “get their pop” whenever information can be viewed as a trend – ideally over 12 months, compared to the operating budget. When this is done, management will have great information and be in an excellent position to properly manage the business. Graphically displayed trends are that much more powerful – “a picture is worth a thousand words”.

Use it as stock for support of MDA, budgets, special presentations

Another great use of performance metrics is in support of the company’s Management Discussion and Analysis (MD&A). This is often where all the hard work in creating and tracking metrics really pays off. The metrics can often be incorporated into the MD&A and be used to further substantiate financial and operational information. Transparency is the oft used work these days, in other words to parlay as much information as possible to stakeholders, and metrics are an excellent tool to accomplish that.

Who is responsible for compiling Performance Metrics?

Performance metrics are of high interest to various stakeholders, and as a result they will usually be embraced quite eagerly throughout the organization.

However, the finance department is often responsible for, or acts as a conduit for, financial and operational information, and therefore is in a position to provide impartial guidance on how the company has been performing, and perhaps compiling the performance metrics. That doesn’t mean the finance department has to be solely responsible for compiling the metrics – in fact there will likely be a lot of information for which it will need to rely on other operating departments. However, the finance department certainly needs to examine and verify the information, and the method used to extract the information, to ensure that it is accurate – that’s where impartiality comes in.
Furthermore, the senior financial manager can play a leading role in determining what information is relevant, providing standardized templates, ensuring that confidential information is not disclosed and making sure the metrics strike the right overall balance.

Thank you very much for your interest and time in reading this information!

Please feel free to call Edelkoort Smethurst Schein CPA’s LLP about how Performance Metrics can be implemented at your company.

Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.

All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.

2016-10-14T13:27:03+00:00

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