In the transition to IFRS, PAEs will have to deal with a few common issues. Here's a comparison of the old way and the new way
By Nadi Chlala & Andrée Lavigne
Photographs: Paul Wearing
Canada’s publicly accountable enterprises (PAEs)have to give up Canadian generally accepted accounting principles (GAAP) and switch to international financial reporting standards (IFRS) for annual periods starting on or after January 1, 2011.1 Despite the fact that few PAEs have started moving on this — as some surveys have shown — such enterprises should have completed their transition planning and assessed the anticipated effect of the change on their financial reporting by the end of this year. In fact, the Canadian Securities Administrators want to see those plans discussed in management’s discussion and analysis covering fiscal year 2008.
Although Canadian GAAP has been moving toward being more principles-based, rules still carry the day in many instances. For its part, IFRS is almost entirely based on principles. Consequently, the answers to conversion questions may not always be as clear as those involved in financial reporting might like. Often, the application of IFRS standards will, in fact, require a change in mind-set. Those standards require preparers of financial statements to pick accounting policies that accurately reflect the economic substance of their particular transactions. Different entities applying IFRS to their specific operations, therefore, may well interpret the same standard quite differently.
Adopting IFRS does not only affect how items are accounted for but also calls for more extensive disclosures. To fully assess the impact of changing to IFRS,a PAE might want to consult IFRS-based financial reports published by other Canadian entities operating in the same business sector. Since very few Canadian companies are likely to be adopting IFRS prior to 2011, such reports might be difficult to find. A PAE could, however, refer to financial statements published in other countries that have already converted to IFRS. Such financial statements might provide useful insight for selecting key accounting policies. The recently released CICA publication Financial Reporting in Canada under IFRS (FRIC-IFRS) will also be of great assistance (go to http://www.knotia.ca/kStore/Catalogue/ProductPricing.cfm?productID=751). It contains annotated extracts from more than 200 companies that have adopted IFRS, laying out the issues likely to cause the most conversion difficulty.
Using a summary table, this article analyzes a few significant IFRS and Canadian GAAP differences, explains their origins and looks at one set of IFRS financial statements that illustrates those differences.
Sources of differences
Even though some Canadian accounting standards have been harmonized with IFRS, differences still persist between both sets of standards. Some IFRS standards differ significantly from Canadian GAAP requirements for recognition, measurement, presentation and disclosure of transactions and events. Moreover, some issues are addressed only in one of the two sets of standards. For example, Canadian GAAP does not cover accounting for agricultural activities, while there is a specific IFRS on that issue. Canadian GAAP has certain industry-specific standards, say, for investments companies, while IFRS does not have such standards.
Accounting literature now offers a number of detailed comparisons of IFRS and Canadian GAAP, including FRIC-IFRS, which covers IFRS standards and proposals issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretation Committee.
A good starting point for identifying significant differences is the Summary Comparison of Canadian GAAP and IFRSs as of July 31, 2008, issued by Canada’s Accounting Standards Board. This publication puts each Canadian standard and its IASB equivalent into one of three categories in terms of how different their requirements are: no conflicts, slight and significant. Based on that classification and given what we learned when we researched FRIC-IFRS, we believe that PAEs will pretty much all have to deal with the following four topics in their changeover to IFRS2:
We have also identified three other topics where we believe Canadian practice might differ fundamentally from that mandated by IFRS and that would likely affect most PAEs:
Following is a high-level overview of those seven topics. It discusses key issues and refers to certain sections of the 2007 annual report of GDF Suez, a French utilities company headquartered in Paris (see www.archives-suez.com/en/finance/annual-report/2007/reference-document-2007/reference-document-2007/), to cast additional light on IFRS requirements.
1 The AcSB omnibus exposure draft Adopting IFRSs in Canada, II collectively refers to entities required to apply IFRSs after January 1, 2011, as “publicly accountable enterprises.” The exposure draft also lists the types of Canadian reporting entities that are exempted from adopting IFRS on January 1, 2011. Pension plans, for example, will continue to follow current CICA Sec. 4100, Pension Plans instead of the pertinent IFRS (IAS 26, Accounting and Reporting by Retirement Benefit Plans).
2 We have not included business combinations and noncontrolling interests since these issues, which differed significantly as of July 2008, are now converged (with the issuance of CICA Sec. 1582 and CICA Sec. 1602). They are, however, key topics for PAEs considering business acquisitions before their transition to IFRS. Those topics will be discussed in a separate article.
This is a brief overview of some important differences between IFRS and Canadian GAAP. Readers are encourage to consult publications with greater detail and discussion, such as FRIC-IFRS.
When Canadian companies convert to IFRS, their particular circumstances may warrant making significant changes to their accounting policies even if differences with Canadian GAAP are initially perceived to be slight. In-depth analysis and planning could help PAEs avoid some unpleasant surprises when they actually come to adopt IFRS.
As well, IFRS is not static. The IASB has many projects outstanding, some of which will be accelerated in light of the current financial crisis. Consequently, IASB requirements that are expected to be effective when Canadian PAEs prepare their first interim financial statements in 2011 may well change before then. The participants in the financial reporting community need to keep a careful eye on the status of these projects so that they know what is going on and how it affects their changeover plans.
Nadi Chlala, FCA, FCMA, is a professor at ESG, Université du Québec à Montréal, and university associate director at Accelia and DMR, divisions of Fujitsu Canada Inc.
Andrée Lavigne, CA, is a principal in the CICA's research studies department in the knowledge development group