Canadian Accounting Standards 

Standards

Canadian Accounting Standards

As Chair of the Canadian Accounting Standards Board (AcSB), Paul Cherry, FCA, is charged with overseeing the AcSB's development of a new strategic plan. He spent some time in late January talking to CGA Magazine staff about current issues faced by the accounting profession and the AcSB.

FROM: MAR-APR 2005 ISSUE

CGA Mag: There has been much discussion about actions planned to move toward more integrated international standards in 2005. At this point, how close are we to converged international standards?

Cherry: In eliminating important differences, we still have a long way to go. On the other hand, in terms of a process and the working arrangements, we've got a mechanism in place. In that sense, I'd say we're very close to how we will handle the issues. But the big issues have major interdependencies. We're close to a critical point where we can't make major advances or watershed developments without a significant amount of reinforcement of our conceptual framework in puzzling through multi-dimensional problems. Even a narrow standard takes several years to put together, so on a global scale it can easily take five to seven years to position us to move forward. That being said, there will be lots happening over those years. Overall, I'm very positive.

CGA Mag: How closely are the standards that came into effect in Europe in January 2005 being monitored?

Cherry: The intention is to monitor the developments in Europe quite closely and in fact, the SEC has said point blank that the real issue now is the quality of the implementation as much as the quality of the standards. Initially the big worry was that these weren't real standards — they were seen to be too loose with too many options — those impediments have been removed as most of the options have been eliminated and there's a lot more implementation guidance. The big issue now is that the standards don't operate in the abstract. Will they be treated as standards the way that we in Canada and the U.S. treat them — i.e. force of law, as opposed to the way standards are treated in other cultures, including large parts of Europe, which is as guiding principles? Canada and the AcSB will be watching very closely as there are a lot of lessons we can learn.

We will also be looking at the Australian experience. The Australians have prided themselves on being closer to international standards than to U.S. standards. A big concern is nailing down what these international standards are going to be so that businesses can manage their financial reporting obligations to meet them. I think that one of the sore points at the moment is that the IASB is still mucking around making changes to the "mostly stable platform."

CGA Mag: So what is the current thinking in the U.S. regarding international standards? What are the current positions held by the SEC and the FASB?

Cherry: The important point is that there's a big distinction between the positions of the SEC and the FASB. When people talk about U.S. standards, more often than not they are talking about public companies, which means of course that you have to factor in the SEC. We don't have much direct contact with the SEC, which is what one would expect. My sense is that the SEC has a huge investment in international standards. They've been working on various projects since 1986 or 1987 and they're committed by every characteristic I can think of. At one point the SEC chief accountant had said they might endorse the international standards by the end of this decade, then he said possibly by 2007, but now they are saying it may be a bit longer.

The FASB is also very involved in the process of global convergence. The FASB and the IASB meet jointly once a year and they have a formal agreement to achieve both short-term and long-term convergence of U.S. and international standards. We work very closely with the FASB and have an excellent working relationship with them. In fact, we have more experience than any other country in dealing with the FASB.

CGA Mag: How much of a challenge is it for the AcSB to keep up with changes implemented by the FASB and the IASB?

Cherry: There are two aspects to the answer. In terms of "keeping up" with our new projects, we're obliged to do that as part of the deal we have for the international partnership. Many people don't understand that it is a formal partnership arrangement. Besides Canada, there are eight bodies in the partnership and we have committed to aligning our agendas. If you took the FASB's work program and the IASB's work program, and the Canadian Board's work program, if you were to white-out the names you'd have to be a really close follower of standards to be confident that you could specifically identify whose program was whose. We really are trying to get a commonality of work programs — that doesn't mean we are bound to accept the output of those projects at the end of the day, but the view is that we should have a common starting point, a common framework. In that respect Canada is obliged to be very current on new developments.

This brings me to the second part of the answer. Is there a sense that Canada has lagged behind some other jurisdiction? I don't think Canada has ever lagged behind the international standards overall. You can look at individual topics — for example, financial instruments — and say, "the IASB had standards in place years before Canada," but the reality is that the starting point of that project was a joint project between Canada and the IASB.

Now some think we are not caught up to the U.S., but views are divided and there are many that say, "thank goodness you haven't caught up to the U.S.," while a small number think we should be embracing U.S. standards in their entirety.

Overall I think there is a higher level of consensus now than I would have expected. But there still are legitimate competing interests, some of which drive people to a strong U.S. connection, and then there are many who think that approach is inappropriate and too expensive. The U.S. system essentially caters to U.S. public companies and I'm often asked why would Canada ever even think of moving to that system? To be clear, the AcSB has never intended a massive incorporation of U.S. rules, but we have been working to avoid having major differences.

CGA Mag: What are the chief criticisms that are levelled at Canadian accounting standards today?

Cherry: There is a very small, vocal group who think we are not prescriptive enough. They would essentially have us embrace U.S. GAAP entirely. That is a very small minority. Against that, I think there is a general worry that Canada may be starting to trend toward the U.S. detailed style of rules-based accounting standards. In that sense, the criticism may be more anticipatory in terms of thinking a move toward the U.S. approach is the wrong direction for Canada to go in. These concerns are causing difficulties in practice because it is not just the standards in isolation, it is how the standards are treated in our legal system and in our culture. Rightly or wrongly, our system is highly integrated with the U.S. system. Even though many people say we should keep the standards short and allow room for judgment, I'm hearing lots of accountants say, "just give me the answer. It's too risky for me to make a personal interpretation and discover several years later that a judge doesn't agree with me." That's another reason why the strategic review we're doing at the moment is so terribly important. There's no point in putting together a relatively brief statement of principles without giving people detailed rules if in practice people are finding that legal pressures are pushing in a different direction. We need to resolve that tension.

CGA Mag: Can you comment on differential financial reporting for small and medium-sized enterprises?

Cherry: Canada has gone further than any other country in providing relief not only from disclosure requirements but also certain recognition and measurement requirements. Most people strongly support differential reporting for certain private companies but views remain sharply divided. Some people feel we haven't gone nearly far enough and should provide more relief. Others feel we are on the right track but more experience in working with the current approach is needed. Still others worry about the loss of comparability among private companies. Our current strategic review has identified an urgent need for more research in this area in order for the AcSB to make an informed decision.

CGA Mag: What's your view of the AcSB's relationship with CGA-Canada?

Cherry: We have an excellent relationship with CGA-Canada. There is a rich tradition of co-operation between the AcSB and CGA-Canada. More recently, efforts have been made to expand the extent of interaction — which is terrific. We're really looking forward to the secondment. It is a terrific opportunity both for the individual selected and for the Board. We've had other secondments with considerable success, and at the moment, the nature of the work and the opportunities are phenomenal. For example, the international partnership we have has amazing opportunities. The interaction is incredible. We're dealing with the leading thinkers in all of the standards setting jurisdictions. There's absolutely no effort to exclude people from being involved. As a standard setter, Canada is very highly regarded, there's no doubt about that — and I think if we were to say which of the number of opportunities we would like to step up to the plate on, we would have our pick.

CGA Mag: What can CGAs do to participate in standard setting?

Cherry: We're hoping we can expand the number of people we actively engage in our processes. Currently, it is a big web of volunteers; a highly important group of people. At any point in time more than 80 individuals are involved in advisory groups and committees. These groups are not catering just to accountants — we want broad based participation. We need more input in our projects. As we go more global it really is important for people to pay attention early in the process. The process of achieving global consensus can be lengthy. If someone comes in at the eleventh hour and wants to raise a fundamental point — it gets increasingly difficult to incorporate that view.

It is getting harder and harder to get people's attention until well after the standard-setting process is finished and we're into the implementation phase. We need to get people involved earlier in the process and not dismissing papers as "only" exposure drafts. Many times, people wait for the final outcome, but the way the process works, there's rarely a trial balloon. Standard setters are trying to make it a little bit easier for our stakeholders to participate. For example, the AcSB is holding more informal roundtables, we also canvass stakeholders for input on potential agenda items, and we post surveys and regular progress reports to our Web site on our technical projects.

CGA Mag: CGA-Canada and other organizations have publicly expressed concerns that the AcSB does not operate as an independent, arm's length entity. What are your thoughts on this subject?

Cherry: I appreciate the opportunity to comment and I'd like to provide both an assessment of what the system has done and a personal view. The issue has been canvassed several times recently. It was raised by the Senate Banking and Finance Committee and they didn't see it as problematic. It was carefully considered by our Oversight Council and they did not see it as problematic. Speaking personally, I've never shared that concern in our current context and certainly in my tenure as chair of the Board, I've never ever felt there was any element of compromise. I think the strategic direction that we're reconsidering may put this one to bed in a sense. Realistically, my view is that in any strategic direction short of total isolation, the role of national standard-setters is changing. We're not resisting that — we're in favour of those changes — I see that as a big positive.

Also, under any strategy, the two dominant players are going to be the FASB and the IASB. I think the world is saying, "don't let it shrink to just those two." Most people would see that as catastrophic, as most people fear that if it were to shrink to those two, FASB would come out the winner — not because the U.S. has the best standards, but because they have the New York Stock Exchange. There continues to be a strong desire that there be a meaningful national presence.

I think it would be a huge setback for financial reporting globally if we lost any of the national boards, as there are really only very few active standard setters with established infrastructures. The way I see it, a big contribution Canada should make in the future is research projects such as the measurement and financial instrument projects the AcSB has already been involved with. And twice now the Board has not agreed with the prevailing view and has provided constructive comments — that's a valuable role. But if there are residual concerns about the independence of the Board, I would like to think that those concerns should diminish as the role of national standards-setters evolves.

CGA Mag: What is the timeline for approval of the new strategic plan?

Cherry: We'd like to put it out as an exposure draft for public comment by the end of March 2005 and we plan to allow 120 days as a comment period. If we allow time to deliberate on the views, we would hope to have agreement such that we could start to implement it by April 1, 2006.

Once we have the strategic direction confirmed, one of the first orders of business would be to look at our current work program to determine whether or not it is compatible with the strategy. And once we have agreement on the vision that is going to drive us for the next five years, we'll address some of the other issues such as how big the Board should be, whether members should be full-time or part-time, and there will be a further round of discussions as we have key choices to make. Also, there are statutory requirements and it may take time to deal with that, so we will continue our discussions and consultations with government and regulators.

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