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A summary of current CICA projects and initiatives

The future direction of accounting standards

By Robert Colapinto

fter seven long and arduous years working to harmonize Canadian GAAP with its neighbour’s “gold standard,” the Accounting Standards Board (AcSB) has recently announced a bold sea-change in its strategy to find the proper course for Canadian accounting standards. Canadian GAAP, in its present form — one that had supported some form of convergence with US and international standards, while concentrating primarily on harmonizing with US GAAP — has had its day.

In its 2005 Draft Strategic Plan, the AcSB proposes what is, in essence, the scrapping of a unique set of Canadian GAAP for full convergence with International Financial Reporting Standards (IFRS) within the category of public com-panies (or publicly accountable enterprises, as described in Handbook Section 1300.) And except for those public companies that are SEC-registrants (that may be permitted to report using US GAAP), the great experiment of harmonization with US GAAP will be de-emphasized and wound down.

The board’s five-year (2006 to 2011) plan to transition from its current strategy — developed in the mid-1990s — encompasses not only a new stream for public companies, but also seeks to rejig accounting standards for two other major reporting categories: private business (nonpublicly accountable enterprises) and not-for-profit organizations (NFPO).

The basic premise, says Paul Cherry, chair of the AcSB, is that in the Canadian experience “one size does not necessarily fit all” when it comes to developing standards for the full spectrum of Canadian reporting entities. “The vast majority of our companies have no interest in US GAAP,” he explains, “and therefore, there was a growing concern with our current strategy, which was that we have one set of standards that applies across the board.” Over the years, the board’s strategic direction had been to basically avoid major differences with the US. “But this actually had the practical effect of dragging the whole system closer to US GAAP,” he admits. “I think a big benefit that we’re now proposing is to say we will sever that connection for those of you who are not SEC registrants, and for public companies we will have a system that aligns first and foremost with international standards.”

For public companies, putting an end to a distinct set of Canadian GAAP as the primary vehicle for standard-setting has been deemed necessary because the Canadian standards have morphed into an inefficient hybrid form in an attempt to conform to the ever-changing mix of international and US GAAP standards. Quite simply, says Cherry, it is time for Canada to commit to a more comprehensible and comparable set of internationally recognized standards. “If we allowed the current strategy to continue much longer,” he says, “we would not only look more and more similar to the US, but confusion would also reign because beneath that level of similarity on points of principle are huge differences in terms of detailed requirements; and at any point in time the two systems can produce quite different numbers.” For the board, most financial statement preparers and their users, this state of affairs had become completely unsatisfactory.

Conforming to IFRS and a concomitant strategic alliance with the International Accounting standards Board (IASB) is expected to provide far more clarity and a unified global direction for standard-setting and implementation. “It is a massive undertaking to fully comply with US GAAP,” says Cherry. “So I think we’re making a more informed decision now than would have been possible in the mid-’90s.” Cherry is speaking to the fiascos at Enron and WorldCom (both under US GAAP’s watch), which have certainly given Canadian and international standard-setters reason to suspect the gold standard may be seriously flawed and no longer a suitable guide. And he speaks to the overwhelming body of accounting rules and requirements that have continued to build within US GAAP over the years. “This has been one of the major causes of frustration,” he says. “People have been complaining there’s been so many changes — and these changes were us eliminating major differences that had accumulated over the years with US GAAP, but also we discovered, no surprise here, the creation of a policy that consciously aligns us with the US machinery had forced us to take action every time the Americans changed their rules. The US machinery being,” he laughs, “a full-time board snapping to attention when the SEC requires action. So as we worked over the past few years, it became much clearer what life under US GAAP means.”

Replacing individual Canadian standards to conform to corresponding IFRS, as the draft plan describes the process, is expected to be a less difficult task when compared with the US harmonization imbroglio. IFRS are principles-based, like Canadian GAAP; whereas US GAAP’s regime has a hard-fast rules-based foundation that has been shown to be not only confusing, but also less amenable to change. The mid-1990s strategy for international convergence — which was instituted prior to the creation of the ISAB — sought to align with standards that were more rules-based and less similar in style and philosophy to Canadian standards.

Today’s IFRS shares similar approaches to standard-setting and reporting regimens, and the AcSB has had the foresight since the late 1990s to work with its international counterparts to eradicate differences that do exist between Canadian and international standards. Canada, like most other countries, has been pleasantly surprised by the rapid progress and the growing influence of IFRS and the IASB. Although it has worked on developing international standards, it is one of the few major countries — other than the seemingly self-sufficient US — that, under the current strategy, has no formal plan to converge with IFRS.

Cherry believes an alignment with this international brand will allow the Canadian system a more powerful voice. The IASB is perceived as being more receptive to input from major standard-setters such as the AcSB and more open to persuasion than the FASB. He points out, however, that Canada is not turning its back on the US. First, Canadian SEC registrants, although relatively few in number, represent a very substantial part of canadian public companies. Second, the Americans are strongly committed to working with the IASB and national standard-setters for a single set of global standards, which gives the international community the opportunity to influence the evolution of US standards. “One has to remember,” he says, “that on the international side, a global standard doesn’t mean anything if one doesn’t have the support of the US.” The SEC itself, although it has not yet agreed to accept IFRS on an equal footing with US GAAP, has committed laudable time and effort to the global standards sphere since 1986. It too realizes that the US has a significant stake in the success of global standards and that it must exercise its considerable influence. “So over time,” he says, “the significance of our choosing international or US will be less traumatic than it is today because the experts’ shared vision is that the two of them are going to converge in time.”

Stakeholders in the public company sector have heatedly told Cherry that, although US GAAP will remain a world standard leader, Canada’s present ambivalent course is untenable and fraught with danger. The board has listened and has determined it is time to reposition Canada for IFRS convergence. “We’re still going to also have in our marketplace significant amounts of US GAAP information in play,” Cherry assures. “Canadian investors will continue to invest in US companies, no matter the standards regime. And our financial analysts seem comfortable with that proposition. For everyone else in the public domain, we’ll go with international standards.”

In the private business sector, financial statement preparers, users and auditors have had an equally difficult time coping with the current system. The draft strategic plan will attempt to create a new set of standards based on best-use Canadian GAAP standards for those companies that have significant external users of their financial statements, a new reporting model — the current model having been roundly dismissed as unworkable by a majority of stakeholders, according to Cherry — and possibly a good dose of applicable standards from IFRS.

This decision is based on the realization that the specific reporting needs of these companies are not being met by requiring compliance with a set of standards as wide-ranging as those found in GAAP. The scope of GAAP for many nonpublicly accountable companies simply runs contrary to the board’s recognition that “one size does not necessarily fit all.”

For the many private companies that do not prepare statements for external reporting purposes, the board is committed to removing GAAP requirements altogether. “Because it is such a huge group,” Cherry says, “and it ranges from extremely small organizations to massive ones, we’re saying to the ones without external users that we’re going to give them the option to opt out of the system.”

It may be some time before the new models for private enterprises can be activated. Additional detailed AcSB research programs tailored to determine how and where differential reporting fails and succeeds, an evaluation of who actually uses private sector business statements, what those users need, and the ultimate cost/benefit tradeoff for either limiting or widening reporting (depending on the entity and its circumstances), along with a transition period to digest the changes, will likely require at least three to four more years before the new models can move from transition to practical compliance.

The board expects the standards for the not-for-profit sector to also converge with IFRS and a revamped GAAP. At the same time, it recognizes that NFPO also have unique needs and concerns. Cost and the complexity and relevance of new standards, including whether the majority NFPO even need a standards reporting regime, are particularly sensitive topics for entities not geared to engineering profit. Yet it is the concept of change and the fear of a resurgent standards overload that is most troubling for this and all major categories of business activity.

Cherry is not one to dillydally on how quickly Canada should move to conformity with IFRS. But for a checkpoint at the 24- to 30-month point in the transition program, the changeover to IFRS should be made with little vacillation. The five-year period is expected to allow time for the necessary modifications of Canadian GAAP and its changeover to IFRS. “I think the worst of all worlds is to proclaim harmonization or convergence — whatever the term you use — with any other set of standards, whether US or international,” he says, “and then turn around and re-debate all the issues and say, ‘well, I like this sentence but not that one.’ That problem became very evident in the last seven years as we harmonized with the US.”

Cherry admits the new AcSB strategy will create, by the very nature of change, a receptive environment for standards overload problems similar to those blamed on the failed US harmonization policy. “The past two or three years have definitely been exceptionally difficult,” he says. “Some of the stan-dards overload concern has come from people who thought they were being saddled with problems to which they hadn’t contributed; and the whole system was paying a price. But it’s a price that the system has to pay, if we want our reputation to be held in high regard.”

By creating a clear distinction between the public and private sectors and by addressing their divergent reporting needs through separate strategies that promise to be more precise, accessible and responsive, Cherry believes the standards overload issue will soon abate. “There will always be an issue around standards overload,” he says, “but if we time this right and provide the support required, the problem will not be lasting.”

For some, this promise of a more receptive and less onerous financial reporting system based on an alliance or reliance on the IASB and its IFRS may be too great a trade-off in terms of the potential loss of control over the country’s standard-setting capability. “I don’t think you can achieve the strategy that we’re proposing and have sovereignty of standard setting,” admits Cherry. “If we go this route, we have to give up, in a meaningful way, the final decision.”

This does not mean the board and stakeholders will lose the ability to ensure that interests particular to the Canadian experience are addressed. For Cherry and the AcSB, the new strategy will confirm Canada’s seat at the table and that it not be an impotent voice on the sidelines at a time when the increasingly influential international brand and the ever-powerful US system begin its inevitable convergence.

CICA Elections Task Force issues guide for auditors of Registered Electoral District Associations appointed under Canada Elections Act

Under amendments made to the Canada Elections Act, which were assented to June 19, 2003 and effective as of January 1, 2004, federal Electoral District Associations are permitted to register with Elections Canada. Although registration is not mandatory, unregistered associations can only receive transfers from their registered party. They cannot accept contributions, provide goods or services or transfer funds to election candidates, the registered party, or another registered association of that party, and they cannot accept funds from a candidate, leadership contestant or a nomination contestant.

Upon registration, a registered electoral district association has to appoint both a financial agent and an auditor. The application for registration must include their consent so to act. Chartered accountants who are considering accepting the appointment as a financial agent should refer to the Registered Association Handbook issued by Elections Canada (www.elections.ca), which identifies the eligibility requirements for financial agents as well as their responsibilities (including a checklist). With respect to the responsibilities of the auditor, the CICA’s Elections Task Force has issued a guide, posted on the CICA website (www.cica.ca).

Within five months of the end of a fiscal (calendar) year, the financial agent of the registered association must submit to the Chief Electoral Officer a Financial Transactions Return, which includes a declaration by the financial agent that the information contained in the return is correct. An audit of the return is only required if the registered association has, in a fiscal period, accepted contributions or incurred expenses of $5,000 or more in total. In such instances, the auditor is to report to the financial agent on the Financial Transactions Return and shall, in accordance with generally accepted auditing standards, make any examination that will enable the auditor to give an opinion in the report as to whether it presents fairly the information contained in the financial records on which it is based. If such is not the case, or if it appears that proper accounting records have not been kept, the auditor should indicate that such is the case in the auditor’s report.

The Financial Transactions Return comprises four parts. Part 1 comprises a declaration by the financial agent. Part 2 comprises several statements relating to contributions received, for which the legislative requirements are similar to those relating to contributions received by federal election candidates. Part 3 comprises a statement of transfers made by the association and a statement of unpaid claims. Part 4 comprises the association’s financial statements, a Statement of Assets and Liabilities, including any sur-plus or deficit, and a Statement of Revenues and Expenses, both of which must be prepared in accordance with generally accepted accounting principles.

The guide issued by the CICA’s Elections Task Force sets out the eligibility requirements for the auditor, which are identical to those for the auditor of a candidate in a federal election. It also comments on a number of issues that the auditor is likely to face, including, but not restricted to, auditor independence and objectivity, audits of opening balances (in the context that audits are only required for certain, and not all, fiscal periods), contributions received (the audit issues are similar to those for the audit of a federal election candidate), and the GAAP requirement for the association’s financial statements. Samples of a consent letter, engagement letter and representation letter, as well as an auditor’s report that is considered appropriate for this type of engagement, are also included in the guide.

Staff contact: Andrée Lavigne, CA, principal Research Studies, andree.lavigne@cica.ca

Standards Digest

LIENS CONNEXES

Standardizing the standards, by Ian P.N. Hague, CAmagazine, April 2005

Accounting Standards Board Planning, CICA

Accounting standards in Canada: future directions

Canada’s Accounting Standards Board invites comment on its draft strategic plan

New federal election guide for auditors, CAmagazine, August 2004