The End of Canadian GAAP? 

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The End of Canadian GAAP?

The switchover to International Financial Reporting Standards has begun, and the race is on to implement the changes by 2011.

FROM: JUL-AUG 2007 ISSUE | BY GUNDI JEFFREY

Canada is saying adieu to Canadian GAAP and hello to International Financial Reporting Standards (IFRS). The Canadian Accounting Standards Board (AcSB) recently decided that publicly accountable enterprises (PAE) will have to use IFRS – developed by the International Accounting Standards Board (IASB) – for their financial reporting by the year 2011.

“While there may have been opposing views, CGA-Canada has supported the adoption of international standards for some time,” explains Rock Lefebvre, CGA, the organization’s vice-president, research and standards. “National standard setting served Canada well when it was a relatively self-contained economic entity and the profession could respond to the cultural homogeneity of the profession and of its constituents. With the movement to a global economy and more vibrant international trade and commerce, it is imperative that Canada capitalize on its ability to integrate itself within that global landscape.”

Although 2011 seems like a long way off, AcSB chair Paul Cherry says it’s time for companies to get cracking – change is coming sooner than they might think. “To meet the 2011 deadline, companies will need to have comparative figures for 2010, which means that the systems to produce those figures need to be ready and operational by 2009 – and we’re already well into 2007.” Moreover, companies may need to make certain disclosures as soon as 2008.

Why Now?

Cherry explained that AcSB’s original vision of aligning Canada’s standards with U.S. GAAP was not working out as intended, and a change in direction was required. “We were inadvertently pushing ourselves into adopting U.S. GAAP, and that wasn’t what we wanted.” U.S. GAAP is too rule-bound, detailed, and expensive to use, not to mention inappropriate for the smaller Canadian market, he said.

IFRS, on the other hand, are much more compatible with Canadian standards. “They strike a good balance between rules and principles; they are similar in style and form to Canadian standards and often make the same or similar recommendations.”

In any case, in 2002, the IASB and the U.S. Financial Accounting Standards Board agreed to work together on producing new joint standards, which means the differences between U.S. and international standards will gradually disappear. As well, in late April 2007, the SEC decided to ask for comments on a proposal that would allow foreign private issuers registered with it to use either IFRS or U.S. GAAP for their financial reporting. This would effectively eliminate, by 2009, the reconciliation requirement that asks foreign issuers to reconcile statements prepared according to other GAAP with U.S. GAAP. The commission is also considering the possibility of giving U.S. issuers the same choice.

And, of course, many other countries have already made the move. The European Union adopted IFRS in 2005, as did Australia, and New Zealand will be using the international standards as of this year. “We had to act now,” says Cherry, adding that Canada is a little different because its business community decided to switch voluntarily, whereas in the other countries the change was mandated by government. “In that respect, we’re a world leader.”
 
No Small Effort

The fact that IFRS are compatible with Canadian GAAP doesn’t mean the changeover will be a simple undertaking... which is why Cherry is urging the business community to get started as soon as possible.

Companies might begin, he suggests, by setting up an implementation team charged with assessing what impact differences between current Canadian GAAP and IFRS will have on them. For example, Cherry notes, accounting for items such as revenue, impairment of assets, and financial instruments will affect most companies. Undoubtedly, debt covenants, tax planning, and employee incentive programs such as profit-sharing will also be affected. Oil and gas companies will have to assess the impact on accounting for reserves. Banks will need to review effects on their loan losses. He recommends that these teams also assess any changes in Canadian GAAP and IFRS during the transition period. “A number of significant changes are likely to be made to Canadian GAAP with respect to, for example, business combinations, income taxes, and financial statement presentation.”

But according to Rafik Greiss, Canadian IFRS leader at Ernst & Young LLP, converting is more than just a technical exercise. “It provides executives with the opportunities to challenge the ways in which their organization is viewed and evaluated by investors, other key stakeholders, and competitors. Every important decision a company makes will be affected by IFRS.”

In 2008, AcSB plans to announce the definitive changeover timetable. By the end of that year, public companies should have completed the planning for transition to IFRS and have assessed the anticipated effect on financial reporting, advised the AcSB in a special bulletin. “A public company will want to be in a position to disclose its particular plans for the transition and the broad impact on its financial reporting and other communications. What will the users of your financial statements see that’s different?”

The Canadian Securities Administrators (CSA) is working on related guidance and requirements. According to John Carchrae, chief accountant of the Ontario Securities Commission (OSC), the CSA is determining the nature, extent, and timing of disclosure that it will expect from companies in the lead-up to the first full set of IFRS. “This may range from early disclosure of a company’s plans for evaluating the impact of IFRS through to presentation of quantitative IFRS information in addition to the current Canadian GAAP financial statements.”

Who’s Going to Help?

To make the transition, says Cherry, “will require a huge amount of training and education, especially for corporate accountants responsible for maintaining financial records. This does not simply involve a bunch of journal entries, the changes need to be baked into the basic financial reporting systems. We are encouraging professionals and business organizations to translate the strategy we’ve outlined into an action plan.”

The major accounting firms have on offer a battery of services to help clients plan for the conversion, train staff, develop and implement appropriate systems, and review the results.

Axel Thesberg, FCA, KPMG LLP’s Canadian managing partner, professional practice and risk management, says the firm started getting ready several years ago to help clients with the changes required. Now, it’s ready to offer “advice on the process that has worked for companies in other countries that have already made this change. We’re also asked to provide some initial awareness training so clients can begin to think about the development of their IFRS implementation plan. In other cases, we help identify where they will encounter significant changes in their accounting policies, because they want to plan for those areas first. Often those change areas will require resources and skills outside of the financial department, or may have a big impact on their IT systems or business processes or contractual agreements.”

Some clients have asked for guidance on particular IFRS standards, Thesberg says, such as those dealing with income taxes and inventory, which are to be adopted in Canada before the 2011 transition date. “We’ve also been asked for our early thoughts on standards that are currently part of Canadian GAAP but for which there is no clear, comparable standard in IFRS. An example is the acceptability of rate regulation accounting under IFRS.”

Professional bodies are also offering advice aplenty. CGA-Canada’s Lefebvre says one of the biggest challenges will “lie in orienting and training professionals to become conversant in IFRS.” He explains that CGA-Canada programs and member services are increasingly adopting an international flavour in the development of curriculum, professional development material, and additional products and services rendered to members. “CGA-Canada will continue to publish the Public Practice Manual, newsletters, practice alerts and guidance bulletins, the GAAP-GAAS Guide, and the GAAP-GAAS Review amongst a number of additional resources which intend to keep members current and predisposed to international convergence.”

The Financial Executives Institute has launched the online IFRS Resource Centre (www.feicanada.org/ifrs), which features recent announcements from the IASB and AcSB, industry-specific overviews of the impact of IFRS, and useful information from a variety of IFRS thought leaders.

AcSB publishes helpful bulletins on its website (www.acsbcanada.org), while CICA is offering a variety of conferences and workshops on implementing IFRS. And, of course, adds Cherry, Canada has the benefit of adopting IFRS after other countries have already gone down that path and can, therefore, draw on their experience. “In these countries, some useful training materials are already available.”

What, Me Worry?

Will all this helpful advice meet the needs of the corporate world? Anecdotal evidence suggests few Canadian companies have done any formal preparation for IFRS adoption so far. That is partly because they are so busy with current financial reporting that they haven’t yet begun to analyze the changes, and partly because at least some managers think the change won’t be such a big deal.

We expect the impact to be relatively minimal, given the somewhat lengthy transition period and the relatively small size of our company, as well as the ongoing adoption of IFRS that will emerge during the transition period,” says Linda McCurdy, president and CEO of K-Bro Linen Systems, a large provider of laundry and linen services for Canada’s health care industry.

“Our base reporting system will not require significant change. Some additional accounts will need to be added to our chart of accounts, but that’s relatively minor. Our supporting systems regarding disclosure will need to be enhanced also.”

But the OSC’s Carchrae warns that “we cannot afford to underestimate the magnitude of the shift to IFRS. This will not be a simple process. Even for those standards that seem, at first sight, to be substantially the same as their Canadian equivalents, the devil will be in the detail,” he says. “We will be looking for consistency in application and we will challenge applications that do not seem to be appropriate, based on the substance of the [new] standards. We will expect issuers and their auditors to be able to demonstrate how they exercised their professional judgment in arriving at a particular answer where an issue is not addressed directly in the standards. If we see significant diversity emerging in practice and the diverse interpretations seem to be soundly based, this will be a test for the international interpretations process.”

What About Private Business?

Although the AcSB has decided to adopt IFRS for publicly accountable enterprises – primarily public companies, banks, etc. – it hasn’t yet proposed a plan for private companies and not-for-profit organizations (NFPO), says Paul Goodyear, FCMA, the Salvation Army’s chief financial officer, who also serves on Canada’s Accounting Standards Oversight Council and chairs CICA’s NFPO Advisory Committee. He explains that both the IASB and the AcSB are, however, considering standards for these organizations. “The IASB has issued an exposure draft on accounting for small and medium enterprises, and the AcSB expects to issue an exposure draft later this year.”

Cherry adds that “we can’t impose the same system on private companies as public ones, but there are many different – and divergent – views on what we should do. We will make some specific proposals and see. It may be that the bigger private companies will self-select themselves into the public company group and follow the same standards.”

Goodyear thinks that any standards adopted for private companies could also be applied to non-profits. “Eighty per cent of NFPOs in Canada have revenues of less than $500,000 per year, so it may be more appropriate for them to apply standards that are developed for small and medium enterprises than for large public companies. Of course, there would still have to be some supplementary material to deal with the unique needs of NFPOs. My own view is that, to the greatest extent possible, the financial reporting of NFPOs should be based on the same principles and conceptual framework as that for for-profit enterprises.”

Concludes Lefebvre, “while there will be growing pains for the accounting profession, it is my view that the profession will be well served by the move to IFRS. With financial statements being prepared under similar rules, the information will be more comparable (for investors and analysts), the formats better understood (for shareholders and creditors), and the process more homogenous (for regulators and preparers). It will also be great for mobility and will bolster consumer confidence in the products and services that the profession delivers.”

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