Standardizing the standards

By Ian P.N. Hague
Illustration: Mike Constable

How do Canada’s accounting standards compare to International Financial Reporting Standards?

International Financial Reporting Standards (IFRS) are now reported to be used as the primary basis for financial reporting by public companies in more than 90 countries. As of January 1, all publicly listed companies in the European Union, Australia and Russia are required to prepare financial statements in accordance with IFRS. While companies and investors in most parts of Europe, Asia and Australasia are familiar with IFRS, in North America they remain relatively unknown. But that is likely to change as significant parts of the world’s capital markets report in accordance with these standards.

Canadian parent companies and Canadian subsidiaries of companies listed in countries that have adopted IFRS are likely to have to become familiar with IFRS for financial reporting to and from those countries. Increasingly, international financial analysts will likely want to compare the results of canadian entities with those reporting in accordance with IFRS. It is also likely that Canadian standards will continue to align more closely to IFRS as international convergence gathers pace, both directly and as a result of enhanced convergence efforts between the International Accounting Standards Board (IASB) and the US’s Financial Accounting Standards Board (FASB).

IFRS have become a rigorous set of accounting standards that will be applied by a significant number of major international companies and will be rigorously enforced by leading securities regulators worldwide.

But how do IFRS compare to Canadian standards? At first sight, IFRS seem familiar to those who know Canadian standards. They are structured in a similar manner to Canadian standards, with bold-faced, italicized paragraphs setting out the main principles, supported by more detailed background in normal type. The level of detail in IFRS is also similar to that in Canadian standards and, as in Canada, IFRS are supported by interpretations issued by the International Financial Reporting Interpretations Committee.

The process by which IFRS are set is comparable to that used to set Canadian standards, involving open deliberation of standards by the IASB, public consultation in the form of exposure drafts and sometimes public hearings and similar meetings, and adoption of a standard only af-ter a majority of board members vote in favour.

The concepts on which IFRS are based and those used in Canada are also similar; perhaps not surprising, as Canadians were involved in the development of the IASB Framework. As in Canada, the focus of IFRS is on users of financial statements — primarily investors. The IASB Framework is built around definitions of assets, liabilities, revenue and expenses very similar to those in Canadian financial statement concepts, as well as analogous criteria for when an asset or liability should be recognized on the balance sheet (recognition criteria).

Canadians have been involved in the development of IFRS since the establish-ment of the IASB’s predecessor, the International Accounting Standards Committee, in 1973. In 1998, the importance of IFRS was recognized when the Accounting Standards Board (AcSB), on the recommendation of the CICA’s Task Force on Standard Setting, adopted a harmonization and convergence strategy, part of which is to work with the FASB, IASB and other national standard-setting bodies to converge with a single set of globally accepted high-quality international accounting standards. Furthermore, since 2001, the AcSB has entered into a formal liaison arrangement with the IASB, which establishes a duty for the AcSB to align its agenda and promote convergence with not only that of the IASB but also that of other partner standard-setters, including the FASB. The FASB, and standard-setters in six other countries, have also entered in-to a similar arrangement. Thus, global accounting standards are increasingly converging with one another and with IFRS.

A summary of the principle differences and similarities between IFRS and Canadian standards follows. (The summaries are based on standards promulgated by January 31. References in square brackets in Tables 1, 2 and 4 are to Handbook sections or Accounting Guidelines (AcG). References in square brackets in Table 3 are to International Accounting Standards (IAS).) The summary is not comprehensive and does not include all sources of those standards. There are many differences in the details and one should refer to the standards themselves for the specific requirements. However, the summary gives an indication of where the most significant differences between IFRS and Canadian standards are likely to arise.

As IFRS become more and more important, it will become increasingly important to be familiar with them and to understand the differences between Canadian standards and IFRS. Projects to eliminate the differences are likely to be the focus of Canadian standard-setting in the coming years as the world moves closer to a single set of globally converged accounting standards. Canadian accountants who wish to remain at the forefront of developments would be well advised to thoroughly understand and pay attention to IFRS, as IFRS are likely to underpin future financial reporting requirements for Canadian public companies.

The AcSB is currently considering its strategic plan for the future and expects to have issued an Invitation to Comment in late March, which will include consideration of its strategy for international convergence. Look out for the Invitation to Comment on the AcSB website at www. acsbcanada.org.

IFRS and Canadian standards similar
Many IFRS and Canadian standards are similar. These include those in such areas as:
(a)  what constitutes generally accepted accounting principles [1100];
(b)  disclosures of accounting policies [1505];
(c)  accounting changes [1506];
(d)  presentation of primary financial state-ments — balance sheet, income statement, cash flow statement and statement of changes in equity/other comprehensive income [1400, 1510, 1520, 1530, 1540, 3000, 3010, 3020, 3030, 3040, 3210, 3240, 3250, 3260];
(e)  business combinations, subsidiaries, eq-uity accounting and accounting for good-will [1581, 1590, 3050, 3062];
(f)  foreign currency translation [1650];
(g)  interim financial reporting [1751];
(h)  impaired loans [3025];
(i)  property plant and equipment (except that IFRS allows revaluations) [3061];
(j)  leases [3065];
(k)  asset retirement obligations — recognition and initial measurement [3110];
(l)  research and development [3450];
(m)  employee future benefits [3461];
(n)  income taxes [3465];
(o)  disposals and discontinued operations [3475];
(p)  earnings per share [3500];
(q)  government assistance [3800];
(r)  subsequent events [3820];
(s)  related-party transactions — disclosure [3840];
(t)  financial instruments — recognition, measurement, disclosure & presentation, including hedges [3855, 3860, 3865]; and
(u)  stock-based compensation [3870].

Canadian standards more highly developed than IFRS
In some cases, Canadian standards are more highly developed than IFRS — pro-viding additional guidance or addressing areas not addressed by IFRS. These include:
(a)  differential reporting [1300] — the IASB is presently undertaking a project on accounting by small and medium-sized entities;
(b)  consolidation methodology [1600] — IFRS have less detail on dilution gains, but an international project is underway to remedy this;
(c)  comprehensive revaluations [1625] — there is no equivalent requirement in IFRS;
(d)  remeasurement of asset retirement obligations [3110] — IASB is enhancing IAS 37, which is likely to increase equivalence;
(e)  investment tax credits [3805] — IFRS are less extensive;
(f)  nonmonetary transactions [3830] — IFRS have a narrower scope;
(g)  related-party transactions — measure-ment [3840] — there is no equivalent in IFRS;
(h)  economic dependence [3841] — there is no equivalent in IFRS;
(i)  future-oriented financial information [4250] — there is no equivalent in IFRS;
(j)  not-for-profit organizations [4400 series] — IFRS are not developed with not-for-profit organizations in mind;
(l) lending fees [AcG-4] — IFRS are less extensive;
(m)  management report [AcG-7] — there is no equivalent in IFRS;
(n)  oil and gas accounting — full cost [AcG-16] — IFRS contains only very limited guidance specific to extractive industries and does not address the full cost method of accounting. An international project dealing with the extractive industries will produce a new standard that is likely to replace AcG-16.

IFRS more highly developed than Canadian standards
In other cases, IFRS are more highly developed than Canadian standards — providing additional guidance or addressing areas that are not addressed by Canadian standards. These include:
(a)  going concern [IAS 1] — there is more extensive guidance in IFRS, but work is in progress to enhance Canadian standards;
(b)  revenue recognition [IAS 11 & 18] — IFRS are more specific than equivalent Canadian standards, but fundamental international reconsideration of this subject, led by the IASB and FASB, is underway and the AcSB intends that Canadian standards will follow suit;
(c)  borrowing costs [IAS 23] — IFRS provides guidance on how the amount of borrowing costs eligible for capitalization is determined;
(d)  reporting in hyperinflationary eco-nomies [IAS 29] — IFRS are more comprehensive;
(e)  disclosure of financial risks [IAS 30] — IFRS currently address disclosure of financial risks in a banking context, however, revisions are underway to broaden this to all entities;
(f)  provisions [IAS 37] — IFRS establish criteria for when liabilities of uncertain timing or amount are to be recognized and how they are to be measured. There is no equivalent general Canadian standard;
(g)  intangible assets [IAS 38] — IFRS are more comprehensive;
(h)  investment property [IAS 40] —IFRS address circumstances in which property held for investment purposes may be revalued. Canadian entities would have to follow the cost model in Section 3061;
(i)  agriculture [IAS 41] — IFRS require that biological assets be measured at fair value while they are growing. There is no equivalent Canadian standard.

IFRS and Canadian standards differ
There are a number of areas where both IFRS and Canadian standards address a topic but reach different conclusions, or deal with the topic in substantially different degrees of depth. These conflict areas are:
(a)  no true and fair override in Canadian standards [1400];
(b)  segment disclosures [1701] — underlying approaches differ. A convergence project is underway;
(c)  joint ventures/proportionate consolidation [3055] — IFRS permit both proportionate consolidation and the equity method; Canadian standards require proportionate consolidation;
(d)  impairment testing [3062/3063] — impairment models are fundamentally different;
(e)  extraordinary items [3480] — IFRS does not allow extraordinary items;
(f)  insurance [4210/AcG-3/AcG-8/AcG-9] — IFRS presently contains limited requirements. An international insurance project will produce a superior standard to replace existing IFRS and Canadian standards;
(g)  transfers of receivables [AcG-12] — IFRS adopt a different model, with a broader scope, than Canadian standards;
(h)  variable interest entities [AcG-15] — IFRS do not deal with variable interest entities in the same manner, relying on the general principles for consolidation. A consolidation project is underway, internationally;
(i)  investment companies [AcG-18] — IFRS contain no special treatment for accounting for an investment company’s investments by the investment company’s parent or equity method investor.