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FROM: SEP-OCT 2008 ISSUE | BY GUNDI JEFFREY
Canada’s switch to international financial reporting standards (IFRS) – which has now been officially confirmed for January 2011 – is inexorably drawing closer, yet Canada’s business community appears to be dragging its heels getting ready. Surprisingly, Canada’s standard setters say that the country’s business community is actually right on track.
“Anecdotal and survey evidence indicates that Canadian public companies are not where they should be in the changeover process,” says Kevin Hoyt, CGA, director of Regulatory Affairs and CFO of the New Brunswick Securities Commission, “and it would be a mistake to underestimate the amount of resources – human, financial, governance – required to successfully implement IFRS.”
A recent IFRS Readiness Report sponsored by Ernst & Young LLP and published by the Canadian Financial Executives Research Foundation, FEI Canada’s research arm, concluded that “relatively few senior finance executives are aware of the differences between IFRS and Canadian GAAP, most have not briefed their audit committees, few have calculated the costs of conversion, and a majority don’t yet know if their systems can handle the job.”
Similarly, a Deloitte LLP survey showed that 90 per cent of Canada’s financial professionals indicated that their IFRS knowledge is either low or moderate. And yet another survey found that, of the 550 executives polled, only eight per cent have either started (four per cent) or completed (four per cent) the conversion process. Almost 75 per cent have not even begun to assess the potential impact of making the conversion.
The results aren’t surprising, says Paul Cherry, FCA, chair of the Accounting Standards Board (AcSB). “We didn’t expect companies to be ready today. But we are definitely on track for implementing the conversion on time.” The key thing, he adds, was to confirm the changeover date. “That was essential. Companies weren’t going to spend serious time and money on this without that date.”
The AcSB confirmed in February that companies had to start using IFRS beginning January 1, 2011. Soon after, it published an omnibus exposure draft setting out all the IFRS published to date. This was followed by guidance from the Canadian Securities Administrators (CSA) stating what companies should be disclosing in their MD&As, beginning this year. Now, says Cherry, “the preparation has been done and we are actually seeing a high level of awareness of the changeover.”
CGA-Canada’s president Anthony Ariganello, FCGA, agrees. Members, especially those attending CGA conferences and workshops on the subject, “are now much more aware of the changes ahead and how much preparation is required.”
Must-know for 2008
CSA Staff Notice 52-320, published May 2008, provides guidance on what companies are to disclose in their MD&A for fiscal 2008 – only a few months away, warns Hoyt. “Essentially, it expects issuers to discuss the key elements and timing of their changeover plans and include impacts of IFRS on matters such as accounting policies, information technology, internal control over financial reporting, disclosure controls, expertise and training requirements, and business matters that may be influenced, such as debt covenants, capital requirements, and compensation arrangements.”
For fiscal 2009, companies will have to make similar disclosures, but with more details on the effects of the changeover. January 1, 2010, they need to start collecting comparative information using IFRS and include that information in their 2011 financial statements. Then, December 31, 2010 closes the last fiscal year companies can report their numbers based on Canadian GAAP. January 1, 2011 launches the new IFRS era.
“January 2011 may seem like a long way off, “says Jad Shimaly, one of Ernst & Young’s IFRS leaders, “but it’s not. The most important thing we’ve learned from the European conversion – which took place in 2005 – is that we’ve got to start early. In Europe, companies only had two years to work on their IFRS conversion. In Canada, we’re fortunate to still have three years. Companies here need to take advantage of that extra time and really dig into this now if they want to stay ahead of the game. We cannot afford to underestimate the amount of time it will take to get a complete understanding of how IFRS will impact a business, internal processes, systems, people, and then implement the necessary changes.”
Begin How?
It’s key for companies to make sure they have the right people around the table from the get-go, advises Shimaly. “This is a significant change management project. It’s going to reach into all corners of publicly accountable companies. When planning for IFRS conversion, leadership needs to have human resources involved, information technology, tax, legal, and numerous other functions. Otherwise, they’ll be playing catch-up later.”
Establish a clear vision at the beginning, advises Diane Kazarian, CA, CPA, national IFRS leader for PricewaterhouseCoopers. “In addition, it is crucial to ensure the right structure is in place, and that the CFO, senior executives, and the board deliver consistent messages to the people who execute the IFRS projects, as well as to the entire organization.” Kazarian adds that implementation is best done at the business unit level, rather than at the corporate level. “It is a top-down and bottom-up approach, with business units involved earlier rather than later.”
Next, says Shimaly, comes the impact assessment, “or IFRS diagnostic as we call it – the first and most critical step in the transition to IFRS.” This is where businesses closely examine the new accounting standards that will affect them the most and assess the impact they will have on key areas of their businesses. “Significant accounting differences between IFRS and Canadian GAAP often reside in the details, causing recognition, measurement, and presentation differences.”
Differences will certainly be found, for example, in the areas of financial instruments, full-cost accounting for oil and gas, insurance accounting, using fair values, hedge accounting, consolidation of special purpose entities, investments in subsidiaries, inter-company asset transfers, business combinations, and impairment of non-financial assets.
Cherry adds that only a few standards are really important to each industry “and that is where you will put most of your energy.” CICA has been encouraging the creation of specific industry task forces –say, for oil and gas and financial services – who aim to make sure that everyone understands the requirements of the new standards. “They work on identifying significant changes in accounting and financial reporting policies and, if they find major challenges in making the switch, they look for ways to resolve those challenges to make the changeover easier.”
Kazarian stresses that, beyond finance and accounting, IFRS will affect management reporting, including budgets and forecast, performance measures, bonus structures, key performance indicators, and debt covenants. IFRS may also affect the measurement and reporting of income taxes for financial statement purposes and the calculation of Canadian taxes payable. “Furthermore, senior management needs to ensure that IFRS implications are considered as part of the approval process for all new strategic investments.”
Shimaly suggests that companies review their IT systems and platforms to see whether they are capable of dual reporting. “In Canada, there will be a period of time, specifically during the fiscal 2010 periods, when companies will have to report under both Canadian GAAP and IFRS. In addition, some industries might require other reporting for regulatory purposes. IT systems need to be ready to handle all of that reporting simultaneously in a controlled and reconcilable manner.”
Kazarian advises that a comprehensive training program for everyone involved in the change process will prove invaluable. “Our experience has shown us that early awareness and training for key executives and board members highlighting the important areas of impact and changes under IFRS will allow for a smooth adoption and conversion program. This will enable stakeholders to be fully briefed on the new requirements and help drive a positive spirit of change management throughout the organization.”
There’s even a business case to be made for getting on the IFRS bandwagon as soon as possible, says Shimaly. “It’s a great opportunity to create efficiencies by redesigning how information systems capture, process, and report financial information.” And, perhaps equally important, U.S. Securities and Exchange Commission (SEC) registered companies using IFRS will no longer have to meet the SEC’s requirement to reconcile financial statements based on Canadian GAAP with U.S. GAAP. The SEC dropped that requirement last year. In response, in late June, the CSA released Staff Notice 52-321, which will permit early adoption of IFRS for companies wishing to do so.
Hoyt, for one, is ready. “The New Brunswick Securities Commission is well-positioned at this stage. Though we are aided by our relatively straight-forward capital structure and business model, we have a definite plan in place and have committed resources.
We have engaged our audit committee and external auditors. Relevant staff have taken mandatory IFRS training. We have reviewed IFRS 1, First Time Adoption of International Financial Reporting Standards, and are proceeding through the other standards with a view to determining the impacts of IFRS adoption by the end of our current fiscal year on our financial disclosures and financial systems, as well as determining any other consequences.”
Help at Hand
For those about to start the process, a good place to go for reference material, advises Cherry, is the AcSB website, which contains the new omnibus exposure draft on IFRS and the entire literature on the topic published by the International Accounting Standards Board. The website also offers a wealth of material on training and education, implementation strategies, discussion by industry groups, experiences of other countries, and more.
CGA-Canada has offered two-day IFRS conferences in major cities across Canada. Another will be held in September. As well, PDNet, the professional development website for CGAs, offers online courses, video seminars, and webcasts on the subject, along with a vast searchable library and a customized monthly e-newsletter. Ariganello promises that CGA-Canada will have completely integrated IFRS into its student program curriculum by 2011.
No slouches either, the major accounting firms have posted on their websites a wealth of implementation advice, conversion strategies, comparisons between Canadian GAAP and IFRS, industry-specific help, areas needing the greatest attention, and advice on how to make the process as painless as possible.
If you have not yet started, warns Hoyt, “be very concerned. Develop a strategic implementation plan with appropriate timelines and milestones. Stay focused. Respect the existing workload of your employees and adequately resource the conversion process. Communicate – with your audit committee, senior management, project team, and auditors. In many ways, 2011 means now.”
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