News from the profession

A summary of current CICA projects and initiatives

Fair values: when the engine overheats, don’t blame the oil light

When your engine overheats, do you blame the oil light? That’s the argument that continues to place responsibility for the current financial crisis on fair value accounting standards. Fair value accounting, also referred to as mark-to-market accounting, requires companies to value assets as if they were to be sold by the owner in the open market. In the current economic climate, for a majority of companies the value of their assets is low or underwater.

The argument against fair value accounting goes like this: the markets are not always rational or perfect and exposing a corporation’s books to the roller-coaster ups and downs doesn’t capture a true picture of the value of all types of assets. The unusual spikes or troughs in market prices are unrepresentative of the true underlying value. Many bankers argue that some assets, such as mortgages, are not held for the purpose of reselling and that fair value accounting rules distort the value of these assets in a negative way. They say assets should be valued based on how they perform their intended function, not on the price they would sell for at a particular moment.

What’s at risk is the very thing that an oil light provides: a glimpse into the thrumming machinery under the hood. Fair value is the best measure that allows investors and other market stakeholders to clearly understand the current health of a company and make decisions based on that understanding.

Investors making informed decisions need unbiased, up-to-date information, in particular about the amount, timing and uncertainty of future cash flows. Fair value is unaffected by when or how an asset was acquired, by who holds the asset or by the intended future use of the asset. It is not entity-specific and is not dependent on management’s intentions. Fair values are comparable at any measurement date and they can be added together to produce a meaningful total.

In contrast, cost-based measures hamper the ability to compare because they make similar items look different and different items look alike. For example, Company A and Company B could hold identical assets, yet they are likely to report different cost amounts if the assets were acquired at different times. Adding costs from different acquisition dates produces totals akin to adding apples and oranges — there is no common basis for the items combined to make up a meaningful total.

Fair value relies on the capital markets to play their primary function and establish price in a fair and objective fashion. Fair value measures achieve this by portraying what is actually happening. In contrast, reporting an averaged or smoothed measurement when the underlying economics are highly volatile would be misleading.

In many circumstances, particularly regarding financial instruments, fair value accounting is the best solution. It can certainly be made better with additional guidance as to how to determine true fair value, especially in inactive markets. This guidance is being developed consistently and globally by bodies such as the International Accounting Standards Board (IASB), the Financial Accounting Standards Board, the US Securities and Exchange Commission and Canada’s Accounting Standards Board (AcSB).

In spite of fair value’s relevance, there are genuine practical concerns about how to measure fair value, particularly when an active market does not exist or significant market disruptions occur. In such cases, valuation techniques must be used. Valuation techniques that reasonably reflect market-pricing methods continue to improve. However, more guidance is urgently needed on how to make reasonable estimates of fair value on a cost-effective basis when no active market exists. Accounting standards-setters have developed some such guidance, and more is to come. Also, the AcSB has recently put in place enhanced disclosure requirements to explain the nature of the valuation techniques that have been used. These new requirements mirror those recently put in place by the IASB.

Financial reporting is designed to assist investors and creditors in making decisions. There is growing evidence that fair value provides investors with the most relevant information. For years, financial analysts have advocated the merits of fair value, through the Association for Investment Management and Research, and its successor body, the CFA Institute.

Fair value results in reporting of gains and losses when economic conditions change. This reduces the ability of management to manage the bottom line by controlling which assets are sold and in what accounting period. In contrast, a historical cost-based measure ignores the effects of decisions to hold an asset because it reflects the effects of changes in fair value only when assets are sold. Fair value reflects the highest and best use of an asset.

Capital markets need transparent, up-to-date reporting of underlying economic circumstances so investors and creditors can make informed decisions. The economy may have overheated and some disquieting sounds are coming from under the hood, but it would be deeply flawed logic to blame the oil light.

Paul Cherry, past chair, AcSB, and Ian Hague, principal, AcSB

CAs in the news

Unlike advertising, news coverage cannot be bought. This gives earned media coverage a degree of integrity and believability that can create enormous value for any organization that enjoys positive media attention. To achieve a similar measure of public exposure through paid advertising would demand substantial spending and still may not be as credible.

CICA is proud of the positive media attention it earns and wants to share this success with members. Because it wants to make it easy for journalists to obtain information on the CA profession, CICA has restructured the Media Centre on its website (www.cica.ca/mediacentre). The Media Centre is a one-stop location for journalists seeking information or comment from the CA profession. It lists CICA contact information and provides a lengthy list of resources, including news releases, facts on the profession and a link to our Decisions Matter ad campaign.

There is also a greater effort to incorporate video and audio features into the Media Centre. For example, the link to the mentoring project run in conjunction with the Martin Aboriginal Initiative features the original news release about encouraging aboriginal youth to pursue accounting careers. In addition, the special landing page offers a photo gallery, video clips and video of the entire news conference announcing the initiative.

The news conference was held at the CICA in November 2008 with former prime minister Paul Martin among the participants. The joint project generated positive coverage with stories in both the print and broadcast media (The Globe and Mail, Brantford Expositor, CBC radio and Canada AM). In fact, the Expositor ran a very positive editorial supporting the initiative: “While increasing the number of aboriginal accountants in Canada might not seem like a pressing issue, the more economic opportunities First Nations people have, the better their chance to break the cycle of poverty. That’s why we applaud the efforts of former prime minister Paul Martin to head up a pilot project that will pair promising aboriginal high-school students with accountants as mentors.”

The mentoring project continues to attract positive coverage. This year’s federal budget provided an excellent springboard for outstanding media penetration. Third-party media analysis indicated that CICA federal budget commentary in January reached a cumulative audience of more than 2.9 million (print and electronic media) and CICA commentary captured an increased share of budget media coverage over the previous year.

Positive media coverage is essential to reinforcing the CA profession’s position as the leading Canadian voice on accounting issues. The refurbished Media Centre now provides reporters with a valuable information source when working on stories impacting the CA profession.

MAPP survey provides firms with benchmark compensation data

All CA firms are encouraged to take part in the latest Managing a Public Practice (MAPP) survey, conducted by the CICA and the provincial institutes/ordre. Part 1 of the survey will be launched mid-June and will focus on billing rates, compensation and benefits. The survey is part of a broader three-part survey. Firms that completed Part 2 received a report in January covering firm revenues, expenses, billing practices and productivity. In April, firms completing Part 3 received a report on technology used by CA firms, including hardware, software and security.

MAPP survey results are not available to nonparticipants. Only partners and sole practitioners of CA firms that participate in the survey gain access to this valuable information. Invitations to take part in MAPP surveys are sent by e-mail to CA firm partners and sole practitioners from our research provider, iTracks. MAPP surveys are hosted on a secure site and all information entered is kept strictly confidential. Results are reported in aggregate form only.

For more information regarding the MAPP survey, or if you did not receive your invitation, please contact MAPPSurvey@icao.on.ca.

IIN delivers value during these challenging times

In today’s economic climate, accounting institutes worldwide are facing the same challenge — how to deliver more with less. The 16 member institutes of the International Innovation Network (IIN) are demonstrating that by sharing ideas and collaborating on the development of products and services, it is possible to gain efficiencies and reduce costs while benefiting the accounting profession around the world.

Earlier this year, Cairine Wilson, CICA vice-president, Member Services, became the new chair of the IIN. Wilson is making it her priority to build on the momentum that exists in the organization and to reinforce the many benefits member institutes receive for their support and participation.

“Since we established the IIN seven years ago, I have been continually impressed with its ability to grow and evolve in response to the changing needs and priorities of our members,” she says. “This organization has clearly become a major source of rigorous global knowledge sharing and networking.”

One of IIN’s areas of focus is conducting collaborative research. The network has carried out surveys of practices, business members and younger members, collecting data that provides valuable insights to help effectively target products and services.

“Those of us from the many different countries involved in this research were surprised at the number of similar challenges faced by our institutes. This commonality of issues underscores the tremendous benefits of information sharing of all kinds and we can build on each others’ ideas,” Wilson says.

The CICA is a founding member of this global collaborative forum, which has provided thought leadership since 2002.

Helping you plan a seamless transition to IFRS

The CICA is making three new resources available to help publicly accountable enterprises prepare for the adoption of international financial reporting standards (IFRS) on January 1, 2011.

A publication entitled 2009 Financial Reporting in Canada under IFRS examines and explains IFRS requirements and illustrates their application. It will help preparers of financial statements, practitioners and students obtain a better understanding of IFRS (see “Seven key differences,” page 36).

The CICA and Deloitte have released a timely publication to help entities that are currently determining how best to provide IFRS-related disclosures in management’s discussion and analysis. IFRS-Related Disclosures in December 31, 2008 MD&A of Canadian Companies sets out examples of how companies are meeting the Canadian Securities Administrators (CSA) disclosure expectations for the years preceding the transition to IFRS. The CSA requires each entity affected by the adoption of IFRSs to discuss the status of the key elements and timing of its transition plan no later than in its annual MD&A for the year beginning three years before its changeover date. Issuers will be expected to provide more detail about the impact of IFRS as they move closer to transition.

For the most part this will be narrative information, but the CSA also envisages that issuers will become progressively better able to provide quantified information about the impact of IFRS on their financial statements. IFRS-Related Disclosures in December 31, 2008 MD&A of Canadian Companies provides a sampling of related disclosures from 23 firms across a range of industry sectors. The resource is available in the IFRS Transition Resources section of the CICA’s designated IFRS website, www.cica.ca/IFRS. This supplements October 2008 guidance, Pre-2011 Communications about IFRS Conversion.

The 2009 edition of The CICA’s Guide to IFRS in Canada is now available. It includes a comparison of Canadian standards to the related IFRS (as at July 31, 2008) prepared by the AcSB. The comparison highlights key differences and notes any work in process that may affect the standard in the future. The guide is useful for those in the initial stages of transition planning or those requiring a general understanding of the new standards. It is available for free download at www.cica.ca/ifrsguide (English) and www.icca.ca/guideIFRS (French).