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Conversion checkup
Ticktock, time moves inexorably, and we are rushing headlong to the groundbreaking event. So, how far are you into preparations for IFRS?
By Jeff Buckstein
Illustration: Paul Wearing
January 1, 2011, is a date of great significance for accountants and publicly accountable enterprises (PAEs) in Canada. Less than two years away, it is of course the date for the much-anticipated switchover from Canadian generally accepted accounting principles (GAAP) to international financial reporting standards (IFRS). As this portentous date draws closer, how far have businesses in Canada travelled on the road to full preparedness for the change? A mixed picture emerges from the more than 4,000 PAEs publicly accountable enterprises in Canada. Most firms are fully immersed in conversion waters, but the turbulence created by the severe economic squall has made it a struggle for some to traverse the IFRS deeps.
Karen Higgins, partner and national director of accounting services with Deloitte & Touche in Toronto, sees three broad groups of companies when her firm makes IFRS presentations to clients. There are the “largest reporting issuers who started early, have the resources and are tracking on plan.” Then there’s a second group of companies that started with a good plan, but had to make “rational business decisions about how to allocate scarce resources. Some of those resources have been reallocated to deal with the current economic impact on their business, so I think they are lagging a bit behind.”
The third group is the small and medium-size public companies that “probably never really planned to get started until 2009. I think there is still quite a significant number of companies that have a level of awareness, but probably haven’t actually developed or executed a conversion plan yet,” says Higgins.
“We know from surveys that while very few people have finished the job, a great many are doing quite well in working toward the objective, and that’s what we would have expected at this particular point,” says Peter Martin, director of accounting standards at the Canadian Institute of Chartered Accountants (CICA).
For example, in the Q4 2008 CICA/RBC Business Monitor study, 81% of respondents who need to convert to IFRS indicated when surveyed in November 2008 that it is very likely they will be ready on time. Nearly half (44%) reported being in the process of assessing the potential impact on their organization and 12% have begun educating staff about the changes involved in converting to IFRS. Only 4% of respondent firms that need to convert have completed the process thus far.
“The extent to which training has caught on is very gratifying,” says Paul Cherry, chair of the International Accounting Standards Board’s Standards Advisory Council and former chair of the Canadian Accounting Standards Board. “The number of courses has multiplied. We’ve gone from the high-level overviews and general comparisons to people saying, ‘That’s not good enough.’ They want in-depth training.”
Huw Thomas, the Toronto-based executive vice-president of finance and administration and CFO of Canadian Tire Corp. Ltd., says the company’s IFRS implementation project is generally going well so far because it decided to start early to get on top of it. Canadian Tire, which began planning its IFRS conversion strategy in late 2007 and executing it in 2008, has put together a team consisting of accounting experts from within the organization, supplemented by chartered accountants who have been through the IFRS conversion process overseas. In addition, the company has hired consultants from the major CA firms to provide assistance with complex issues.
“There’s a lot of theory around what’s going to happen, but actually having had somebody who has been through it, and seen the good and bad and the issues that can come up, is going to be invaluable,” he says.
The knowledge gained by previous experience in the EU and Australia clearly illustrates that an IFRS conversion involves more than a mere accounting or finance exercise — thus the importance of engaging company-wide participation.
The awareness gained includes the need to obtain the cooperation and assistance of information technology specialists with respect to changes and/or upgrades necessary to internal systems and processes that impact financial reporting under IFRS.
An IFRS conversion may also necessitate the involvement of human resources to ensure the project availability of staff from key areas of the organization affected by new accounting standards, as everything such as loan covenants to banking agreements could be affected. Senior management, executives and the board of directors need to ensure that IFRS conversion efforts get high priority within the organization.
“We began education sessions with our audit committee and had an in-depth education session with them and with the board towards the end of last year,” says Thomas. “We’re now updating them every quarter at our regular meetings, and we’ll have another in-depth review with them in October.”
Other departments besides finance are involved in the conversion to IFRS at Canadian Tire. These include information technology (because of the project’s effect on information systems), treasury (because of its impact on banking relationships and debt governance), human resources, and the legal department(which will conduct contract reviews).
Other companies have been diligent about company-wide involvement as well. “I think the most important thing is the tone at the top,” says Eric Bouchard, director of financial reporting for Bombardier Inc. in Montreal, which kicked off its IFRS project in Europe during the spring of 2007 and in North America six months later. “We went straight to the board of directors and audit committee and told them what was required,” says Bouchard. They agreed it was a critical, organization-wide project and committed to supplying the necessary resources and bud-get to execute it. “We got that commitment right from the start, so that’s really helped us.”
At Agrium Inc. in Calgary, senior vice-president of finance and CFO Bruce Waterman is presiding over the IFRS conversion of the multioperational agricultural firm. Agrium’s core conversion team involves members of the controller’s group, along with other key people throughout the organization, including representatives from its information technology, wholesale and retail business units. All these units contain financial personnel who are spearheading a company-wide effort to make sure information is disseminated as required for IFRS purposes, says Water-man. In particular, Agrium’s information technology group is assisting with key architectural changes the company will be making to its IT processes or systems to generate the kind of information needed for IFRS, Waterman says.
Some firms are thus making good progress. However, the global economic tsunami of the latter half of 2008 made an already difficult situation even worse for smaller PAEs that don’t have the comparable financial or personnel resources to devote to IFRS as their larger peers.
“Typically our client base right now consists of nonprofit organizations and junior resource public companies, and IFRS implementation really couldn’t have come at a worse time for them,” says Bridget Noonan, senior manager with D&H Group LLP, a chartered accounting firm in Vancouver. “They’ve been severely affected by the economic conditions to the point of having to worry about corporate survival because their cash flow has been severely impacted by the credit crunch.” And with their remaining staff engaged in survival mode, it is virtually impossible to get a company-wide response to IFRS, sparking fears there’s going to be a push at the last minute, far beyond the optimal time when important choices need to be made, Noonan says.
The economic downturn is unfortunate because 2009 is a critical year. “A lot of this year has to be in the planning and preparation stage,” says Gord Beal, principal of financial reporting and governance and project leader for the transition to international standards at the CICA.
“Liquidity has really tightened up, affecting the ability of companies to cope with the operations side, specifically financing,” says Cherry. “It’s tough for many companies. We’re sensitive to that. We’re continuing to keep our ears open and listen to the practical concerns that people have.”
Notwithstanding the tough market conditions, however, Cherry says firms should not deviate from their IFRS conversion strategy.
One area where the economic crisis is affecting the Toronto Dominion Bank Financial Group is in terms of IFRS staffing, sometimes stretching available experts thin. “Because we’re a bank, we need people who understand capital markets as well as people who understand the business. There are very few of these individuals,” says Kelvin Vi Luan Tran, the bank’s senior vice-president and chief accountant. “Although we have a team dedicated to IFRS, many of the internal experts who are consulted by the team are also dealing with these market issues. So from that perspective, it’s really stretching their time,” Tran says.
While staffing for the IFRS conversion has thus far gone smoothly at Bombardier, like other major long-term projects where there is competition for resources, Bouchard anticipates the economic crisis — among other issues — will at times stress the staffing situation as members are asked to deal with other pressing financial matters.
“When I talk to people, they still say January 1, 2011, is a long way away,” says Beal. But he and other experts stress that key decisions with respect to IFRS require early attention. While January 1, 2011, may loom as the official cutoff date for PAEs to switch to IFRS, like the sign in the side-view mirror, things are sometimes closer than they appear. For example, 2010 is when firms need to begin collecting comparative IFRS information while at the same time continuing to report under Canadian GAAP. Thus, for companies with calendar year ends, an opening IFRS balance sheet needs to be prepared as of January 1, 2010.
IFRS 1 — First-time Adoption of International Reporting Standards is a key source for the decision-making processes that will guide financial executives and other professionals through their IFRS conversion process.
“IFRS 1 is there to facilitate first-time adoption. You only have those options available once when you apply for the first time, so it is very, very important to understand IFRS 1, decode it, and make sure people understand what those options are so they can take advantage of all of them,” says Ron Salole, vice-president of standards at the CICA.
One of the choices being considered under IFRS 1 at Agrium, for instance, is whether the firm should write up the value of certain assets. There are accounting implications associated with such moves relating to factors such as depreciation or amortization — and ultimately profitability — says Waterman.
One of the activities Bombardier is considering concerns what to do about off-balance-sheet pensions. “You have an option to take your off-balance-sheet pension and bring it on-balance sheet,” says Bouchard. “For us that would be a very significant adjustment because we have a very significant pension deficit off-balance sheet. In terms of dollar impact, that could be one of the biggest, most visual impacts for the readers of our financial statements, because that’s more than $1 billion that would come on the balance sheet, based on current numbers,” he says.
Karyn Brooks, senior vice-president and controller of BCE in Montreal, reports IFRS conversion work at her firm is progressing well. About a year into the project, the company has completed its gap assessment of the applicable differences between Canadian GAAP and IFRS and is now well into phase two of its project, which involves reaching conclusions about how those differences should be bridged, and the business process and systems implications associated with them. However, Brooks also acknowledges a nagging feeling that “we’re a little behind where we should be.”
Brooks, who emphasized the importance of a full-company buy-in to the IFRS conversion process when interviewed by CAmagazine in April 2008, notes that the corporate services group, including financial staff at BCE, has received very good support from the IT group. However, she says, “We still have an awful lot of work to do in terms of getting further out into the business.”
Staffing has also presented challenges. “There are no incremental resources assigned to this particular effort,” she says. “Given the recent management staff reduction that BCE went through last summer [moves not related to the recession], it’s a question of reallocating resources to the extent we can. When you’re in a cost containment/cost reduction environment, something like the implementation of IFRS puts an incremental burden on the organization in terms of workload.”
Financing for the IFRS conversion has not been a problem at BCE. “Because this is regulatory compliance work, funding is not an issue. We’re trying to keep costs as low as possible, but it’s recognized in the organization that this is not optional work,” Brooks says.
BCE won’t be able to conclusively determine the accuracy of its original budget estimates until a full assessment of the information technology implications of IFRS has been carried out. The big dollars are going to depend on the conversion’s impact on financial and other systems infrastructure, and if significant change is required, that will be very expensive, says Brooks.
At Bombardier, IFRS budgeting has been largely adequate, although there have been some extra, unforeseen costs that have not yet made a large difference compared with early forecasts. For instance, data collection has taken longer than originally anticipated, and furthermore, Bouchard notes, there are a lot more details to iron out before all costs become evident.
The company is establishing its training programs for staff, although to date, Bombardier has focused on finance, which has in turn worked closely with IT to determine what, if any, modifications are necessary to be able to run parallel statements under both Canadian GAAP and IFRS in 2010.
When training gets ramped up at Canadian Tire, all existing accounting staff will help the business staff understand the implication of what’s happening, says Thomas. And while that expense has already been included in the company’s budget, that’s one area he thinks will consume a lot of effort across the organization over the next couple of years.
Tran says the TD Bank is on track to meet its IFRS milestones. From a tactical standpoint, he says, “I think we did it alittle bit differently than some other organizations that plan, scope, and then do implementation.” TD’s IFRS conversion exercise started out with enterprise-wide, high-level training for staff in such areas as technology, risk and the bank’s various businesses. At the same time, the company started preparing a project plan, which was implemented through much of 2008.
Although there have not been any aggregate cost overruns so far, certain individual areas have ended up costing more than expected, Tran says. “We found in our planning that certain issues were actually quite costly to re-solve. For example, when we go live for IFRS, we need to provide comparative information, so we are spending a lot of time thinking about how we’re going to achieve the comparative year results — and this is costing more than we anticipated.”
The comparative fiscal year for TD Bank will run from November 1, 2010, to October 31, 2011, with its first year under IFRS commencing November 1,2011.
Waterman notes that Agrium’s IFRS budget is actually less than anticipated because of a decision to do the work in-house rather than hire outside consultants as originally planned. Implementing Sarbanes-Oxley requirements several years back also provided a few valuable lessons the company is drawing on now, such as knowing how to avoid getting buried in details or spending a lot of time and effort towards things that end up not really adding a lot of value. “You have to have a business overlay and look at what you are trying to do,” says Waterman.
Generally, companies are reporting that it is too early to be educating external shareholders and credit analysts, etc., and that there has not been a lot of demand to date in that area. But they expect that will change by the end of this year as firms begin to provide some indication of how IFRS will affect their financials.
Firms preparing for IFRS are also considering how a number of technical issues might uniquely affect them. “Whereas on the surface a lot of the standards may look alike, when you get down into the detail and apply them, you may identify some standards that impact your organization in a way that you may not have realized,” says Salole.
BCE, for instance, is closely considering the accounting treatment it will bestow on capital assets and revenue recognition. Substantial changes are anticipated with respect to pension accounting and possibly also consolidations, says Brooks.
“Canadian Tire is a large securitizer,” says Thomas, “so our current understanding would be that the off-balance-sheet financing structures that support securitization are likely to end up back on the balance sheet. That’s just one example of a change, but that would obviously be fairly significant for us.”
Securitization is the IFRS-related issue Tran believes will affect TD Bank the most — dealing with which assets should be treated on- and off-balance sheet.
Two of the major sections that will significantly affect Noonan’s clients are IFRS 6 — Exploration for and Evaluation of Mineral Resources, which is going to be fundamental for the majority of D&H Group’s client base, as well as the amendments under IAS 16 — Property, Plant and Equipment, which will allow for componentization of capital assets. “For public companies that are capital intensive, that’s going to be a serious undertaking,” she says.
With respect to IAS 16, the issue is concern over componentization, says Martin, whereby individual components of an object, such as the airplane engine or its fuselage, have a different lifespan, thereby affecting the way depreciation is calculated for the asset as a whole.
“This issue has bubbled up to the surface because people read IAS 16 and they encountered this discussion about components and perhaps didn’t realize there was a corresponding discussion already in the Handbook,” he says. “They started worrying about having to break down every asset they own into individual nuts and bolts and components, which is not what Canadian GAAP ever required, nor what IAS 16 requires either.”
Noonan is concerned that a final definition of what a PAE is (and therefore, by definition, what constitutes a non-PAE) has not yet been finalized. “We’re waiting for the publicly accountable definition before we can start looking through our client base and identifying everybody who’s going to have this application. We have clients asking if they’re publicly accountable, and we’re not sure what the answer is,” says Noonan, and this will affect the IFRS training D&H Group provides its staff. “Our clients are a little bit more dependent on us because they’re smaller entities with less staff, so they’re really looking to us for some guidance,” she says.
In March the AcSB published an IFRS exposure draft, which includes a revised definition of a PAE, and a final exposure draft will be issued later this year.
A Short History of the Move to IFRS Canadian standard-setters began the march that would eventually lead to the acceptance of international financial reporting standards (IFRS) in the mid-1990s — although at first it appeared that the road away from a unique set of Canadian generally accepted accounting principles (GAAP) would lead through the US. |
Jeff Buckstein is an Ottawa-based writer
