Changing lanes: A tale of two accounting standards

Published in the Ottawa Business Journal newspaper and website.
June 8, 2009

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Shift from Canadian GAAP to new standards not just a matter for finance departments

Carol Devenny of PricewaterhouseCoopers.
Carol Devenny of PricewaterhouseCoopers.
Photo by ETIENNE RANGER for the Ottawa Business Journal

Although it isn’t until Jan. 1, 2011 that reporting issuers must officially switch from using current Canadian accounting standards – known as Generally Accepted Accounting Principles – to the new International Financial Reporting Standards, many firms have already started the complicated, multi-phase process.

And not a moment too soon, experts say. “It’s not just an accounting change,” says Carol Devenny, who’s in charge of PricewaterhouseCooper’s audit practice.

Among other things, the level of disclosure required of a company will increase, meaning most departments, if not all, will have to start gathering new and more detailed types of information to comply. A firm might find it has to overhaul its entire IT system to accommodate the changes, some say.

As well, adds Ms. Devenny, shareholders will have to be appraised of the effect of IFRS adoption on the recognition of revenues and expenses for items such as employee benefits, since stakeholders who aren’t clear could be shocked by apparent drops or increases in earnings or costs due to calculation differences.

“Profit calculation as we know it today will change … so everything has to be well-planned,” she adds. “You need to go through your numbers line by line and ask what’s the difference and what to do to gather information for (the different levels of disclosure) in order to maintain credibility and let your shareholders know.”

Another key difference between GAAP and IFRS is a shift from valuing assets based on cost to a fair-value model, which can make it tricky for companies to tally up non-liquid assets and equipment, says Mario Malouin, chief financial officer of the Canadian Air Transport Security Authority. It’s a Crown corporation currently switching to the new standards.

“If there’s not a liquid market like with stocks, how do you assess the fair value? For example, with our screening equipment at the airport, if tomorrow we wanted to dispose of them and replace them, not a lot of companies would want to buy that equipment, so fair value would not be applicable for us from that point of view,” says Mr. Malouin.

There are legal concerns too, adds David Lowdon of Perley-Robertson, Hill & McDougall LLP.

“Companies may find that their loans might come due because their covenant is based on a financial target using GAAP measures, or … executives may be entitled to bonuses based on the attainment of certain financial targets,” says Mr. Lowdon.

The changes will also affect companies looking to do mergers and acquisitions, since the value of a firm’s assets factors into purchase prices, says Ms. Devenny.

Still, besides making it easier to do business internationally since there will be more comparability with the more than 100 countries using the new standards, the switchover is a chance for a company to step back and re-examine how business is done, she adds.

“A company might simply have had a bunch of Excel spreadsheets pulled together, but now they can look at how to gather information in a more streamlined … way,” Ms. Devenny says.

And firms will find it easier to benchmark themselves against global competitors, since most major capital markets are changing or have changed to IFRS, she says. Even the U.S. is in talks to switch, although it’s lagging behind.

So when should companies prepare for the switchover? Ms. Devenny recommends budgeting about 18 months to be able to complete the process in a “calm, organized fashion.”

She notes that most reporting issuers have already begun preparing to comply with the new rules. For example, CATSA started looking into IFRS in June 2008 and expects to be almost done with its plan by March 2010, says Mr. Malouin.

“The challenge with IFRS is that on paper it can look easy, but when you want to apply it, you have to keep in mind that it’s a culture change and you have to educate people not just in finance, but outside finance as well,” he says.

“The biggest mistake is to have it done in silos within the financial division … You need to bring all staff in the organization up to speed.”

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