May 2008

Switching to International Financial Reporting Standards

By M. Eisner

By 2011, all Canadian publicly owned companies will have to switch from the current Generally Accepted Accounting Principles to the new global accounting language known as International Financial Reporting Standards.

Four years ago, the Accounting Standards Board (AcSB) decided to review the current GAAP practice and see how the standard could be redirected and applied at a more global level. The thought behind the move can be likened to World Cup soccer; it only makes sense to have all the teams playing by the same rules.

The Canadian Institute of Chartered Accountants circulated their strategic plan in January 2006 citing IFRS as the best choice as a new accounting standard for Canada given globalization, since it is used in Europe, Australia, and more than 100 countries. It is also a principled-based approach, similar to the current Canadian accounting standard.

“The reality is, there was a consultation process on this strategic direction,” said Tom Whelan, Canadian mining industry leader for Ernst & Young in Canada.

“The AcSB talked to regulators, investors, the stock exchanges — there was a robust consultation process.”

Whelan confirmed that it is now official; public companies must ready themselves for January 1, 2011, when they will be obliged to adapt to the new standards. “The debate is over,” he said. “You have to be ready, and the sooner it’s done, the better.”

According to Whelan, there are a number of areas in the mining industry where this switch-over will have impact, some of which include exploration and evaluations costs, business combinations, impairment of assets, joint ventures and income taxes.

“Each of these changes has a financial statement impact and a business impact,” said Whelan. “Take business combinations, for example. There have been a significant number of acquisitions [in the mining industry]. The accounting rules under IFRS are significantly different from what they were under Canadian GAAP, because it’s a different framework. That means the financial statements will look different from the previous accounting model, which is something that needs to be explained. But there is also the impact on business. For example, does the company have the IT system to handle it? There’s an HR component as well to the extent that management bonus plans are based on earnings; have employee compensation plans been considered; does the investor relations group understand the impact and will they be able to explain the financial results to shareholders and analysts? Under the new framework, does it still make sense?”

Another example of how the new system will affect outcomes can be illustrated in the area of impairment of assets. If a company spends a billion dollars building a mine, is that billion dollar mine still worth a billion dollars?

“Under Canadian GAAP the test for impairment is very different than that for IRFS,” stated Whelan. IFRS requires the reversal of previous impairment losses. This is particularly unpopular with the mining sector and leads to earning volatility.

Whelan suggested three important ways that companies could begin to prepare for the implementation of the new accounting standards.

“Start early,” he said, by getting an idea of how big a project the switchover is going to be.

“Go through a scoping exercise. We like to help our clients prepare a diagnostic that produces an analysis of the technical accounting changes as well as the business impact that a company needs to consider.” This way, a company can get an overview of what the changes may be, and judge if they will be able to adopt the standards before 2011, or if there may be a risk of missing the deadline.

Once a company determines how big the project will be, they then have to calculate how many hours it will take, and if they have the right people in place to get it accomplished.

“A company may have all their IT and HR people, but may need accounting expertise, or visa versa,” explained Whelan. It makes business sense to have the diagnostic in place laying out all the options, but waiting until October 2010 would be problematic.”

Finally, Whelan suggested that the new accounting standards not be a head office issue, but rather, be embedded across the organization.

“They need to spread the gospel,” he said. “The lessons learned in Europe and Australia were that many companies tried to contain costs and meet the deadline and kept it as a head office exercise. They’re quickly fixing that.”

So, when change is not only inevitable, but has a predetermined deadline for its required implementation, preparation is key — and the sooner, the better.

Post a comment


PDF Version