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IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements 

Report highlights

At the aggregate level, IFRS adoption does not significantly change the central values that describe the financial position and performance of Canadian companies

  • Central values of IFRS financial statement figures and ratios are not significantly different from those derived under CGAAP since the equality of means and the equality of medians are not statistically rejected for all figures and ratios, except net profit/loss.
  • These results suggest that the databases built from aggregated accounting information would generally be consistent in IFRS and CGAAP.

Differences between individual IFRS and CGAAP values can be significant

  • The analysis of individual differences between IFRS and CGAAP values shows that assets and liabilities are higher in IFRS than in CGAAP; however, these differences are mostly offset in shareholders’ equity.
  • Sales and operating revenues are reduced under IFRS compared to CGAAP, but profit is higher and other comprehensive income (OCI) adjustments are predominately negative (losses).
  • The scale of differences observed in the balance sheet can be striking. For instance, total assets in IFRS are less than half of the total assets in CGAAP for the company that has the largest negative difference in the sample examined and more than double the total assets in CGAAP for the company with the largest positive difference.
  • Fair value accounting for investment property, consolidation and strategic investments, financial instruments, and derivatives and hedges are the most important categories of accounting adjustments in the reconciliation of IFRS and CGAAP figures.

Volatility of financial statement figures is mostly higher in IFRS than in CGAAP

  • The equality of variances of IFRS and CGAAP figures is statistically rejected for three items from the balance sheet – total assets, current liabilities and total liabilities – for which the variance in IFRS is higher than that in CGAAP.
  • The variance of all other figures from financial statements is also higher in IFRS than in CGAAP (although the equality of variances is not statistically rejected), except for non-controlling interest, sales and net operating cash flow.
  • Adjustments related to consolidation (including strategic investments), financial instruments (including derivatives and hedges), and fair value for investment property emerge as the areas with the most significant volatility.

Specific effects related to a company’s sector are observed

  • Finance and Real Estate sectors have significantly higher assets and profit in IFRS than in CGAAP arising from fair value accounting.
  • In the Management sector, the level of assets and liabilities is noticeably higher in IFRS than in CGAAP as a result of accounting adjustments on financial instruments (including derivatives and hedges).
  • In the Retail sector, the level of assets and liabilities is noticeably higher in IFRS as a result of adjustments related to consolidation and strategic investments. A similar situation is observed in the Transport sector, but the direction of the impact is reversed.
  • Comprehensive income is significantly reduced under IFRS in Information and Manufacturing sectors due to pension and other employee-benefits adjustments.

Choice of auditor within the ‘Big Four’ firms is not associated with any particular type of accounting adjustments related to IFRS adoption

  • The differences between IFRS and CGAAP values are randomly distributed across auditors.

Recommendations to financial analysts and other users of financial statements

  • According specific attention to the trend analysis may be beneficial when comparing pre-adoption data under CGAAP with post-adoption data in IFRS.
  • Comparing financial ratios under both CGAAP and IFRS for the comparative year prior to IFRS adoption may be seen as a prudent first step prior to undertaking a trend analysis of a particular company. If differences are important, analysts are encouraged to become aware of the underlying reasons for the differences as they transpire from the transition note that accompanies the first IFRS statements.
  • According particular attention to the Finance, Management, Professional Services, Real Estate, Retail and Transport sectors is desirable as differences in IFRS and CGAAP values are particularly noticeable in those sectors.
  • Being aware that the volatility of accounting figures in IFRS is generally higher than in CGAAP (ceteris paribus) is important.
  • Cash flows may be relied on to avoid the subjectivity inherent to accounting adjustments. In general, cash flows are not affected by accounting methods and estimates, except when there is a change in the scope of consolidation.

Methodology:
The analysis is based on a comparison of accounting figures and financial ratios computed under IFRS and pre-changeover Canadian GAAP for the same period using a sample of 150 companies listed on the Toronto Stock Exchange which mandatorily adopted IFRS in 2011. The differences observed in the figures and ratios are grouped into 18 categories of accounting adjustments. Empirical tests are conducted to identify the main areas of differences and investigate specific effects related to company’s industry affiliation and auditor.


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CGA-Canada | Last Updated: October 3, 2013

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    IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements