The road to IFRS

By Ian Hague

While the transition to international reporting standards won’t be easy, with some planning the changeover can be successful

It might well be only four years until Canadian publicly accountable enterprises are required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS). For many, this will require significant education and planning to understand and consider how best to apply the requirements of IFRS. In some cases, this will provide an opportunity for a fresh look at accounting policies. Those who plan early are likely to be best prepared for the opportunities and challenges posed by the changeover.

There are a number of key steps that will take place between now and the date of full adoption of IFRS, and there are a number of IFRS to focus on first.

Key steps to adoption of IFRS
The Accounting Standards Board has published an implementation plan outlining the key activities it plans to undertake to facilitate the adoption of IFRS. One of the key activities is the progress review leading to determination of the date for the changeover. That progress review is presently underway, with the objectives of (a) assessing whether there have been significant changes in the environment since the convergence strategy was developed that would lead the board to revise its plans, and (b) assessing the state of preparedness in the Canadian business community for the changeover. The board has indicated that it expects to be able to announce the date of changeover no later than March 31, 2008. This announcement should remove any lingering uncertainty as to exactly when IFRS will be adopted in Canada.

Even though the changeover date has not yet been announced, it is not too early to start planning your transition to IFRS. Early familiarization with the standards, and assessment as to how they are likely to affect your organization, will reap dividends in the future. In some cases, the effects might be relatively small. However, in other cases they might require significant systems changes to capture new data, or process existing data in different ways. The changeover will also create opportunities to re-evaluate accounting policies and assess the relative advantages of some of the accounting policy choices available in IFRS.

The transition will be facilitated by working with those who use your financial statements to help them understand the changes that are likely to occur. This might be achieved through disclosures, as well as by other activities of investor relations groups and the like. Regardless of how the communication with financial statement users takes place, it will be necessary to evaluate at an early stage what the effects of the standards are likely to be on your organization.

Evaluating the standards
The starting point for an evaluation of IFRS is International Financial Reporting Standard IFRS 1, First-time Adoption of IFRS. This standard was developed to specify how a company changes its accounting to IFRS from another basis of accounting. The standard establishes a general principle that financial statements prepared in accordance with IFRS should be prepared as if the company had always applied IFRS. However, it includes a number of practical accommodations, recognizing that in many cases retrospectively re-stating transactions that occurred a long time ago, such as past business combination transactions, is not possible. It also precludes some retrospective adjustments, such as adjustments to fair value measurements with the benefit of hindsight and retrospective designation of hedges for purposes of applying hedge accounting.

The International Accounting Standards Board regularly updates IFRS 1 to reflect provisions of new standards issued. Also, it is possible that the Canadian board might choose to eliminate some of the options that were designed for a transition from a previous basis of accounting far less developed than Canadian GAAP. However, a review of this standard will help you assess the extent to which you might have to restate prior information. It also establishes the requirement that the starting point for the preparation of the first set of IFRS-compliant financial statements is the preparation of a balance sheet at the beginning of the opening comparative period in accordance with the accounting policies to be applied for the current reporting period.

Thus, for example, a company adopting IFRS for a year ending December 31, 2011, and with one year of comparative information, would prepare an opening balance sheet at January 1, 2010, using the accounting policies to be adopted for 2011.

The significance of other IFRS to a company’s accounting policies will depend on its circumstances. Some existing IFRS are expected to change between now and the date of changeover to IFRS. In these cases your planning should be based on the expect-ed new standards that will result from present standard-setting projects. The table on the preceding page sets out those standards that, at the time of writing this article, are expected to change by the changeover date.

Many other IFRS are broadly similar to Canadian standards, but include considerable differences in details, some of which might affect individual companies to a significant extent. IFRS containing requirements that differ most from existing Canadian standards are included in the table below. These might be worthy of your initial attention.

In addition to the items listed in the above table, some other IFRS contain requirements that differ significantly for particular types of transactions, such as transfers of receivables (see IAS 39, Financial Instruments — Recognition and Measurement), or for particular types of activities, such as agricultural activities (see IAS 41, Agriculture).

Whatever your approach to evaluating the standards, you will eventually need a thorough understanding of the standards that will be in effect at the date of changeover to IFRS. A number of tools are available from the Accounting Standards Board’s website (www.acsbcanada.org/international activities) to assist you in that regard. These include comparisons between IFRS and Canadian GAAP in varying degrees of detail, as well as the AcSB’s IFRS Implementation Plan. The CICA is also in the process of developing additional tools, including training courses, to assist with the transition.

Also, watch the IASB website (www.iasb.org) for ongoing developments in standard-setting projects, such as those referred to above, that will affect the standards you will be adopting in the future.

For most enterprises, the changeover will not be easy, but if you start now and follow a logical approach to your planning, you will be well positioned to avoid difficulties that could otherwise occur. You will also have more time to assess and take advantage of the opportunities that will arise from taking a fresh look at your accounting policies. Companies in the European Union and in Australia successfully made the change to IFRS in a shorter time frame than is anticipated for Canada; many commencing with a starting point far less well developed than current Canadian accounting standards. We can learn from their experiences. With careful planning, the changeover can be achieved successfully here too.

Ian Hague is a principal with the Accounting Standards Board, responsible for international activities. Views in this article are his own and do not represent official positions of the Accounting Standards Board

Technical editor: Ron Salole, vice-president, Standards