Just a few months to go

By Joanne Barradas
Illustration: Baiba Black

IFRS transition is just around the corner, and here are a few practical steps toward the implemention of IFRS 1

IFRS 1, First-time Adoption of International FinancialReporting Standards, is the most important standard for all first-time adopters of IFRS, and the opening balance sheet at the transition date hinges on the successful implementation of this rules-based standard. The many rules of IFRS 1 may seem like a paradox when read alongside the predominantly principles-based IFRS standards. For preparers of financial statements, the good news is these rules will help make the transition smoother. IFRS requires management to prepare its opening balance sheet at the date of transition — for example, January 1, 2010 — for calendar year-end publicly accountable Canadian companies. The transition date is the start of the earliest period that a company must present full comparative information under IFRS in its first IFRS financial statements.

IFRS must be adopted retroactively, also known as retrospectively, as if IFRS has always existed. The benefits of IFRS 1 are that it provides a list of possible exemptions to the retrospective application of IFRS that companies can elect. It also provides a list of four mandatory exceptions, which are required on transition to IFRS. (These exceptions are not discussed here, the focus being on the optional elections.) The standard also provides guidance about how to prepare an opening balance sheet, which then becomes the starting point for compliance with IFRS. Given that there are only four months left until the transition date for calendar year-end companies, those that are just beginning their IFRS 1 considerations and those that have already been evaluating the IFRS 1 standard may benefit from the hindsight and experience of those, such as Ontario Power Generation Inc. (OPG), that are advanced in the evaluation of IFRS 1.

OPG commenced its IFRS conversion project during 2007. By the end of 2007, the power generator had completed the diagnostic phase, which involved a high-level review of the major differences between current Canadian GAAP and IFRS. OPG determined that the differences with the highest potential to impact OPG’s accounting included rate regulated accounting, accounting for fixed assets, asset retirement obligation accounting, as well as the initial adoption of IFRS under the provision of IFRS 1. The preliminary review of IFRS 1 began in January 2008, and the detailed review began in June 2008. Starting the detailed IFRS 1 review then was appropriate for OPG, as it had already begun the evaluation of all other accounting areas, thus enabling it to include the impact from these areas in the detailed IFRS 1 review. It also wanted enough time to make the appropriate election choices. Looking at IFRS 1 early gave OPG the opportunity to consider many factors in its decision-making process, given the decisions will have lasting effects, as the choices made provide the starting point for future financial reporting under IFRS.

Canadian firms should devote sufficient time and resources to IFRS 1 immediately. If IFRS 1 decisions aren’t made by January 2010, it will be difficult to re-create the financial information under IFRS after the transition date. The full period of 2010 is a dual reporting year for calendar year-end companies, as they are required to report Canadian GAAP financial information while tracking IFRS financial information in their systems/processes. The latter set of financial statements can’t be done without the transition balance sheet completed as a starting point. Don’t miss opportunities for maximizing the full use of the IFRS 1 elections and the associated accounting policy decisions most advantageous for your firm.

Practical steps to implement IFRS 1

• Begin immediately, if you haven’t already. Review progress regularly, especially when reviewing IFRS 1 in conjunction with other IFRS standards
OPG began a preliminary evaluation of IFRS 1 during the evaluation of specific accounting areas. For instance, one of the first areas of focus evaluated in January 2008 was accounting for fixed assets, and so IFRS 1 considerations relating to fixed assets were evaluated at that time. When it came time to work on the IFRS 1 workstream in detail in June 2008, OPG understood which elections were relevant, so it could proceed on a detailed evaluation of the standard.

• Prioritize: determine which elections to focus on and evaluate in detail. Identify marginal and/or irrelevant elections
The first step in OPG’s detailed review of IFRS 1 was to list all the exemptions available. Then, one by one, it identified those that were not applicable. From the remaining exemptions, it identified those that could be significant given the preliminary analysis when it evaluated IFRS 1 in conjunction with other IFRS standards, and those significant elections were the ones it focused its efforts on. The March 2009 edition of IFRS 1 lists 15 exemptions to choose from. These exemptions to retrospective application apply to specific sections of specific standards, not IFRS standards in their entirety. It is important to be familiar with the many paragraphs devoted to each exemption (see table on page 32) in IFRS 1 to fully understand the specific section that is exempted.

• Devote specialized resources to the working team
Once you determine which elections are applicable to your company, determine the resources with specialized knowledge of the specific accounting area that you need for your team. It is good to have a single resource responsible for leading the analysis of IFRS 1, and your team may be comprised of financial instruments specialists, fixed assets specialists and pension experts.

• Consider the interrelation between the IFRS 1 elections. Don’t assume they are mutually exclusive just because each election makes reference to a different IFRS standard
A main reason why OPG spent a significant amount of time on IFRS 1 was the way certain elections impacted other elections. There is a pecking order in approaching how the impact of all the elections can best be analyzed and quantified. For instance, if the business combinations exemption is elected, then any retrospective application of the IFRS standards relating to the acquired business would only need to be restated under IFRS retrospectively to the acquisition date. This is a significant impact on any of the other exemptions. For example, if you acquired a business with a defined benefit plan then decide not to elect the employee benefits exemption, the interrelation between these two elections will drive a transition adjustment that could be quite different from the transition adjustment resulting from electing the employee benefits exemption.

IFRS 1 allows a first-time adopter to elect to recognize all cumulative unamortized actuarial gains and losses at the date of transition to IFRS, even if it uses the corridor approach for later actuarial gains and losses. If your company chooses not to elect this exemption, then you must evaluate all your pension assets and obligations retrospectively for the IFRS and Canadian GAAP differences and restate these pension amounts under IFRS. Restating amounts may require actuarial valuations and information that may not be readily available from your actuary or custodian. Although you would only need to retrospectively go back to the acquisition date of that particular business and determining these accounting differences in principle may be easy, quantifying them may not be.

Another example of an interrelation between IFRS 1 elections is the option to elect the valuation of certain fixed assets at fair value on the transition date to be deemed as cost and the option related to changes in the decommissioning of liabilities included in the cost of property, plant and equipment. The latter exemption refers to IFRIC 1, and so this may appear unrelated to the former exemption; however, both elections impact property, plant and equipment. How each election interrelates will drive how the opening balance sheet numbers are derived, so these elections must be considered collectively when deciding whether or not to apply them.

• Involve the right people in the decision-making of the elections
Successful implementation of IFRS 1 involves considerations outside the technical accounting details. When OPG established a formal project governance structure in 2007, the inclusion of a technical review committee was important. In addition, the steering committee of senior management from finance, and representatives from all business units and IT proved very useful in some decisions and considerations involved in making the IFRS 1 choices. Also keep your auditors informed of your key decisions as you are contemplating them, especially if you decide not to take an election. In addition, regularly update your audit/risk committee of the board of directors for IFRS, and in particular, IFRS 1 implications on the opening balance sheet.

• Leverage external resources
IFRS 1 is not new. More than 100 countries have already adopted IFRS, and many of the companies in these countries were eligible to make choices under IFRS 1. Therefore, there are many financial statements available that illustrate those companies’ IFRS 1 note disclosures. The IFRS 1 note disclosures OPG looked at ranged from three pages in length up to 24 pages, so some navigation may be necessary. To complement research of IFRS 1 disclosures, you may wish to retain the services of an external IFRS consultant with European IFRS conversion experience and knowledge of the supporting reasons behind certain IFRS 1 decisions. In addition, direct contact with European companies can provide first-hand information of their IFRS 1 decisions. If so, your discussions may exceed the benefits of simply attending IFRS 1 training sessions. One word of caution with leveraging the European experience: it can take time to coordinate and don’t always expect to receive thorough documentation in support of positions taken. Also, what was significant for European companies differs from what is significant for Canadian companies, financial instruments being one of the main ones. Canadian companies have already adopted much of the IFRS financial instruments standards given the change in Canadian standards to be more aligned with IFRS ahead of transition, and so Canadian companies only need to focus on the differences that remain relating to financial instruments.

Canadian industry groups are another resource available to most companies. They provide opportunities to discuss best practices, implementation difficulties and emerging issues amongst members, especially when members get together regularly and compare notes. Most industries have that outlet, but not all members make use of it. A company’s external auditor can also provide assistance by connecting with European counterparts for practical guidance. Such resources and connections helped OPG in its overall transition to IFRS, not just in implementing IFRS 1. As a result, it has become an automatic response at OPG over the past 18 months to ask, So what did they do in Europe? What are others doing in Canada?

• Communicate with stakeholders
Communication about preliminary opening balance sheet numbers and the effects of IFRS 1 is necessary to determine if there is anything else that needs to be considered. Don’t forget to consider tax impacts of the opening balance sheet. Business planning will need to know of opening balance sheet impacts in order to plan future income statement changes, especially for five- or 10-year business plans. If your company is regulated, such as a bank or utility, the regulator may establish reporting requirements that may result in additional record-keeping. It is essential to work with the regulator to minimize these additional requirements. Communication with external stakeholders should include your bank. If you need to provide awareness training to stakeholders to put your IFRS 1 discussions into context, an introduction course is available. The CICA website offers a three-hour computer-based training session, which gives a high-level overview of IFRS and spends approximately five minutes on IFRS 1, providing good context as to how IFRS 1 fits with the rest of the IFRS standards.

• Prepare or update the opening balance sheet on the transition date
The conversion to IFRS is a significant project, and it may be easy to get lost in the details or be tempted to postpone its implementation. As there are many aspects of IFRS 1 to be considered, waiting to implement this standard may be a mistake. Yes, there are potential changes in IFRS on the horizon that could impact transition adjustments, and yes, a process will be needed to track and implement these, but they should not be cause for delaying the conversion effort. If you devote the right amount of time and resources to this workstream, you may be in a good position on the transition date. You may only have to update the opening balance sheet and finalize the related IFRS 1 note disclosures because all your processes have been put into place to capture adjustments for IFRS and IFRS 1. The opening balance sheet and related disclosures will be one of the factors that will help you gauge your company’s success in the implementation of IFRS 1.

Joanne Barradas, CA, is acting director of accounting and former manager of IFRS conversion at OPG, an Ontario-based electricity generation company

Technical editor: Ron Salole, vice-president, Standards, CICA