IFRS – Global Financial Reporting Dialect
CGA Alberta requested my support in writing an International Financial Reporting Standards (IFRS) article by Magdalena Matracki. The article entitled IFRS – the Global Financial Reporting Dialect appeared in the spring 2009 edition of CGA Alberta’s Better Business Advocate, and is an excellent publication which provides an overview of the basic rationale for IFRS, its expected impact on Canadian business, and steps necessary in order for companies to prepare for, and convert to IFRS.
Please click here for link to the entire CGA Alberta IFRS article, which can be located on Page 8 of the Better Business Advocate.
However, for ease and convenience, I am providing excerpts from the article on the Edelkoort Smethurst Schein CPA’s LLP web-site. Please see below.
Canadian GAAP and IFRS Introduction
Before we talk about IFRS, it may be helpful for a brief overview and history lesson of Canadian Generally Accepted Accounting Principles (GAAP). Canadian GAAP are accounting principles that provide guidance on how to report financial information, in a way that is done on a consistent basis, and which provides various stakeholders such as management and investors with uniform financial reports. Financial accounting information must be assembled and reported objectively. Third-parties who rely on such information have a right to be assured that the data are free from bias and inconsistency, whether deliberate or not. For this reason, financial accounting relies on certain standards or guides that are called “Generally Accepted Accounting Principles” (GAAP).
Canadian (GAAP) has 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 Canadian Institute of Chartered Accountants (CICA), and the Canadian 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. 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….
Overview of IFRS
• Why is this important to business owners?
• What you need to know?
• Why is this happening?
As mentioned, the IASB has dedicated itself to developing a ‘common language’ for accounting – International Financial Reporting Standards (IFRS) – so that financial reports would be consistent and comparable between different countries. Until recently, essentially every country in the world had its own accounting standards, so it was and still is, very time consuming to reconcile financial statements so that they are comparable. As global trade has expanded, so has the exchange of financial reporting, and the need for comparability. This has been particularly true for the European Union during the last 10 years, and elsewhere throughout the world. IFRS are currently being used, or are in the process of being used in over 100 countries worldwide. Europe, South Africa and Australia transitioned in 2005. The USA has not yet announced their plans, but speculation is that, if adopted, it will be no sooner than 2014.
Canada will be transitioning its accounting policies (Canadian GAAP) to International Financial Reporting Standards (IFRS) effective January 1, 2011 for all publicly accountable entities (PAE). This date was decided after lengthy study and discussions, and is not subject to change. At the present time, there are ongoing discussions related to how to deal with other types of entities, such as private companies and not for profit organizations, currently excluded in the IFRS transition. The objective of IFRS of course, is for Canada and the global accounting community to be working from a common set of accounting standards in the not too distant future, allowing for comparability in financial reporting around the world.
• Who is it going to affect?
• Why should companies care?
All Publically Accountable Entities (PAE’s) will be required to report using International Financial Reporting Standards (IFRS) effective January 1, 2011. PAE’s include all companies with securities listed on a stock exchange in Canada. It also includes non-listed financial institutions, securities dealers and many co-operative enterprises Furthermore, the Public Sector Accounting Board, which is also under CICA jurisdiction, recently indicated that “government business enterprises” or “government business-type organizations” will also adopt IFRS. However, this continues to be under review, with an announcement expected during early 2009.
Exclusions – at the present time, IFRS will not be applicable to private companies, or to not-for-profit organizations. These entities will continue to use Canadian GAAP. Of interesting note are private corporations, of which there are thousands 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 this will continue to be the case for now. However, private companies may also consider implementing IFRS for a variety of reasons; they may have plans to go public at some point in the future, bankers may require IFRS financial statements for lending purposes, or perhaps a mandate from parent companies.
So why should companies care? Well, to begin with, as outlined above, by 2011 the use of IFRS will be pervasive throughout Canada. Furthermore, although there are many similarities between IFRS and Canadian GAAP, there are also many differences, and as users and producers of financial statements, it will be very important to understand these differences.
Time constraints – why you need to start now
• Public Sector bodies will be required to adopt IFRS for their 2009/2010 accounts and will also be required to restate 2008/09 accounts using IFRS to provide comparative information. If businesses don’t start now, they won’t be able to provide 2009 numbers. (Note – I don’t think the adoption dates on your email is correct for public sector bodies).
Key Timelines and Requirements – Canada
Although January 1, 2011 sounds like a long ways off, the work to convert to IFRS must begin long before 2011 arrives. In fact, as the milestones below indicate, the work should already have begun.
• 2008 – PAE’s are required to include within their MD&A, a qualitative discussion pertaining to their plans and analysis in regards to IFRS implementation. This requirement falls within existing MD&A requirements (MI 51-102F1) wherein listed entities must discuss and analyze the impact of accounting changes to future reporting periods. The details are also discussed in MI 52-320 dated May 9, 2008, and would pertain to interim and annual reports. Companies should therefore be performing initial assessments and developing project plans.
• 2009 – As a continuation of the work done in 2008, PAE’s are required to provide a further in-depth (ideally quantitative) analysis, describing the major identified differences, enabling investors to understand the key elements of the financial statements that will be impacted by changeover to IFRS. Companies should therefore have completed a detailed review of key standards and policy choices, and information system considerations that are applicable.
• 2010 – PAE’s will be required to provide an update on the IFRS project. During 2010, companies will essentially need to be able to report under both Canadian GAAP and IFRS, because of the comparative information that will be required for 2011.
• 2011 – IFRS is fully implemented. Restate January 1, 2010 opening Balance Sheet and quarter end 2010 interim reports for comparatives.
It is important that companies begin planning and working on this as soon as possible. In addition to the milestones indicated above, IFRS reporting will likely require significant changes to an organization’s information systems. Furthermore, for first time convergence with IFRS in 2011, there will be special “one-time only” exemptions and exclusions available, as part of what is referred to as IFRS-1. This could save considerable time and effort. However, an organization will not be able to take advantage of IFRS-1 after the fact, and therefore must understand and evaluate them in advance. One more reason to start early!
Challenges faced by other countries who have already adopted IFRS
• UK – 4 years after implementation of IFRS, there is still a shortage of IFRS specialists
• What is happening in the US? IFRS adoption in 2014
As mentioned, over 100 countries have implemented or are in the process of implementing IFRS, and therefore Canada is in a position to learn from the experience of others prior to 2011. Not surprising, the data suggests that companies that planned ahead had the most favourable result, with the majority believing that IFRS implementation resulted in an improvement in the quality of financial reporting. (Refer to Appendix 3). Canada will also have to contend with the fact that the USA, our largest trading partner, plans to implement IFRS no earlier than 2014. The good news is that the SEC has decided to allow Canadian and other foreign companies with securities listed in the US, to use IFRS without the requirement to reconcile between IFRS and U.S. GAAP.
Other IFRS Considerations and Comments
The following are some additional considerations and comments that I think are very important and relevant to IFRS convergence in Canada:
• Canadian-GAAP and IFRS are both largely principles based as opposed to rules based, meaning that financial reporting is done in the true spirit of assisting users in their understanding of financial reports, as opposed to following strict interpretation of rules. With this in mind, the transition to IFRS is consistent with the overall direction of that Canada has been following with regards to accounting principles.
• Convergence vs adoption. Numerous changes have been made in recent years to convert C-GAAP to IFRS (notably Financial Derivatives, and Inventories), and therefore in Canada, the terminology used to describe IFRS transition is convergence, as opposed to adoption.
• As changes to financial reporting, IT systems, business processes and perhaps entity controls evolve throughout the IFRS conversion time frame, it’s critical that internal controls, especially those related to NI 52-109 and SOX 404 certification, are maintained, redesigned and operate effectively throughout this project. The last thing a company wants to have happen is to let all of the SOX hard work and success be eclipsed by financial reporting problems related to IFRS. For most companies the experience of the SOX project is still fresh, and many of the same project oversights, support, monitoring and testing are applicable to IFRS. This would include:
• Documentation and testing of processes.
• Changes in certification process.
• Internal or external staff and Project leads.
• 5 year financial planning – most companies are using 5 year financial forecasts to support their business plans. A key consideration will be to understand the major impacts relating to IFRS implementation, because the 5 year planning horizon will include a combination of C-GAAP and IFRS. Companies to will want to avoid unnecessary and perhaps costly errors in forecasting due to misinterpretation of accounting standards in the planning process.
• Resource planning and training – Companies will need to focus on staffing for the IFRS project, as well as appropriate training for financial professionals. Furthermore, other stakeholders (banks, investors etc) will need to understand the changes brought about by IFRS. Senior financial people will be called upon to interpret results. Project and Change management specialists may likely be required.
• Financial Reporting system – Companies that has been considering the implementation of a new financial reporting system, would want to review the timing very carefully. Imagine trying to implement IFRS and a new financial reporting system at the same time.
• As part of the IFRS convergence work, it will obviously be critical to gain an understanding of the specifics differences between of IFRS and Canadian GAAP. There is not enough space in this article to have any meaningful discussion of those specifics, and furthermore, each company and industry will likely have unique situations. Fortunately, there are excellent web-sites and other resource materials available to assist – see Appendix 1 for a partial list. The CICA web-site has an excellent on-line tutorial (free of charge) which provides an overview of IFRS, and specific examples of the differences between IFRS and Canadian GAAP.
The transition to IFRS will be significant and far reaching for affected organizations and all their stakeholders including their employees, lenders, and investors.
The bottom-line message to Canadian business is that the impact of IFRS will be widespread – PAE’s will need to have a detailed understanding of the impact, and other stakeholders including investors will need to understand them as well – it will impossible to avoid. 2011 will be here very soon – get started now and avoid the last minute crunch!
Hope this helps. Please contact Edelkoort Smethurst Schein CPA’s LLP for further information.