A single set of global accounting standards has been under development for over three decades since the International Accounting Standards Committee (IASC) was first established in 1973. However, it wasn’t until 2005, with the advent of the European Commission’s requirement for public companies reporting within the European Union to prepare consolidated financial statements compliant with IFRS that IFRS began to be widely applied and accepted around the world. IFRS is already used by over 100 countries around the world including the European Union, Australia and South Africa. Other countries including Canada, Japan, Brazil, China and India are in the process of converging. Rationale for conversion The AcSB’s rationale for conversion to IFRS centres on the anticipated benefits to Canadian companies of reporting using a single global set of accounting standards. Some believe that the increased comparability of financial statements arising from applying IFRS will improve accessibility to global capital markets, possibly reducing Canadian companies’ cost of capital and thereby improving global competitiveness. (Canada makes up less than 3% of global capital markets) Harmonization strategy with the US was leading Canada too far into US detailed rules. When considering the alternate option of US GAAP the AcSB cited the following influences on its decision: A lower cost of compliance is expected with a principles-based accounting framework such as IFRS than with the rules-based US GAAP system. The joint partnership between the IASB and FASB means that, over time, the differences between IFRS and US GAAP will diminish as joint standards are issued.
SEC accepting IFRS for foreign companies was a very significant directional move by the SEC. Effective March 4, 2008 the SEC adopted rules to allow foreign private issuers to file f/s IASB IFRS without a reconciliation to US GAAP. This meant that Foreign Private Issuers could file IFRS f/s as early as F2007 financial statements. In August 2008 the SEC voted to publish for public comment a proposed ‘roadmap’ that could lead to the use of IFRS by US domestic filers (that file on Form 10-K) in 2014. The proposal suggests mandatory adoption by US domestic registrants phased in based on company size: Large accelerated filers (market cap > US$700 million) – in 2014 Accelerated filers (market cap > US$75 million but less than US$700 million) – in 2015, and Non-accelerated filers in 2016. Certain US domestic filers may adopt IFRS for fiscal years ending on or after December 15, 2009. Sir David Tweedie (Chair IASB) has predicted the US will adopt IFRS in 2013. Bob Herz (FASB Chair) has predicted US public companies will adopt IFRS in 2014. Increasingly becoming a case of “when” not “if” US will adopt IFRS. Under the SEC proposed roadmap- The US will finalize its plans with respect to IFRS in 2011. MOU- Increasing sharing of resources between IASB and FASB related to developing new standards. Many of the changes to standards (“improvements to IFRS”) will take place by 2011 (which coincides with the date that the US will finalize its plans with respect to IFRS). Credit crisis has also led to increased cooperation between accounting standard setters globally (IASB & FASB)
Converting to IFRS will not merely be a technical accounting exercise but a more widespread change management exercise that will impact many areas of the business. Financial accounting and reporting- impacts fixed assets, leases, intangibles, impairments……. Ratios and Bank Covenants [Finance and Treasury] Key ratios/indicators now determined under IFRS- may need to change compensation plans. [ Investor Relations, Finance and Human Resources] Legal- contracts may need to be redrafted (e.g. debt agreements, acquisition agreements, employment agreements, sales agreements etc.) [Legal] Internal controls and processes [Finance] / IT & Data Systems [IT] Corporation Income Taxes (Tax returns based upon IFRS). Tax planning and structured products- SPE’s, Debt/Equity classification [Finance & Taxation] Foreign exchange and Hedging Activities [Treasury]
Required effective Jan 1, 2011. For the first set of financial statements prepared under IFRS an entity is required to use the same accounting policies for both the first year of adoption of IFRS and the comparative period. Therefore January 1, 2010 will be the date of the IFRS opening balance sheet. Given that we are less than 2 months away from 2009 January 1, 2010 is not that far away when you think about it.
Note- Others may choose to adopt IFRS
CSAs released concept paper Feb 13, 2008 proposing to allow Cdn RI to early adopt and also prohibiting continued acceptance of US GAAP F/S 42 comment papers received – most aimed at proposal to discontinue allowing US GAAP June 2008 CSAs released final notice which sets out: Staff are prepared to recommend exemptive relief on a case by case basis to permit a domestic issuer to prepare its financial statements in accordance with IFRS-IASB for financial periods beginning before January 1, 2011. Staff also expect an issuer contemplating the possibility of adopting IFRS before 2011 would carefully assess the readiness of its staff, board of directors, audit committee, auditors, investors and other market participants to deal with the change. A RI should also consider the implications of adopting IFRS before 2011 on its obligations under securities legislation including those relating to CEO and CFO certifications, business acquisition reports, offering documents, and previously released material forward-looking information. As a condition of exemptive relief RI wishing to adopt will have to file all interim F/S in year of adoption accordance with IFRS, re-filing as necessary Staff propose retaining the existing option in NI 52-107 for a domestic issuer that is also an SEC issuer to use US GAAP. 3. Staff concluded it is preferable for securities rules to require a domestic issuer to prepare its financial statements in accordance with IFRS-IASB after the mandatory changeover date, rather than Canadian GAAP, and require an audit report on such annual financial statements to refer to IFRS-IASB. However, staff continue to consider issues relating to the availability of an appropriate French translation of IFRS and reference to both IFRS-IASB and Canadian GAAP.
Changeover to IFRS falls within the scope of the MD&A Form of NI 51-102. Which requires an issuer to discuss and analyze any changes in the issuer’s accounting policies that the issuer has adopted or expects to adopt. The MD&A form requirements apply to annual and interim MD&A filings. Source Literature: CSA 52-320 “Disclosure of expected changes in accounting policies relating to changeover to IFRS” issued May 9 2008. Three years before changeover to IFRS - An issuer should discuss the status of the key elements and timing of its IFRS changeover plan. Key elements include- accounting policies (including accounting choices), IT data systems, internal controls over financial reporting, financial reporting expertise, including training requirements and business activities such as foreign currency and hedging activities, as well as matters that may be influenced by GAAP measures such as debt covenants, capital requirements and compensation arrangements. Two years before changeover to IFRS - Provide an update on the plan. In addition, Issuer should describe the major identified differences between the issuer’s current accounting policies and those the issuer is required or expects to apply in preparing IFRS financial statements. Such information may be only narrative at this stage. Year before changeover to IFRS - Provide an updated discussion of the IFRS changeover plan. By this time an issuer will generally be able to discuss in more detail the key decisions and changes the issuer has made relating to changeover to IFRS. If an issuer has quantified information about the impact of IFRS on the key line items in the issuer’s financial statements available when it prepares its interim and annual MD&A for the financial year beginning one year before an issuer’s changeover date, an issuer should include this information in the MD&A. Note- Disclosure of changeover to IFRS by Investment Funds is similar.
Impairments- Currently Canada has 2 GAAP standards for assessing impairments (3063- Long-lived assets/Finite life intangibles and 3062- Goodwill/Indefinite Life Intangibles) – Under IFRS there is one standard. 1 step approach to impairments. Discounting required in evaluation stage. Impairments more likely under IFRS. Have choices- PPE- revaluation is optional. (For investment property – fair value is optional) PP&E- components approach (purpose is to identify depreciation)- e.g. for an aircraft (engines, fuselage, electronics etc..costs are allocated). No longer just depreciating an aircraft. Greater impact on capital intensive companies- e.g telecom, mining. Securitizations- More difficult to get Off- Balance sheet treatment under IFRS. JV accounting- Canada is last bastion for proportionate consolidation. Full cost accounting not permitted under IFRS (applied in oil and gas industry)- moves to successful efforts method Rate regulated operations- certain rate regulated assets recognized under existing Cdn GAAP will no longer qualify for capitalization under IFRS. Pension accounting- Actuarial gains/losses- can choose to recognize immediately in equity OR use corridor method OR another systematic approach to recognize faster [required to apply policy consistently] Do not blindly assume that revenue recognition policies are consistent with IFRS- e.g. use of completed contract method is prohibited under IFRS No explicit guidance under IFRS for insurance and extractive industries- cannot just default to US GAAP. Overall- Key Message from companies that have already adopted in other countries- “DEVIL IS IN THE DETAIL”
Presentation to Cassels Brock
International Financial Reporting Standards Presentation to Cassels Brock By Kenneth J.A. Vallillee, FCA November 13 , 2008
Agenda <ul><li>CPAB and its Mission </li></ul><ul><li>Why move to IFRS? </li></ul><ul><li>Business Impact of IFRS </li></ul><ul><li>Timeline for IFRS Adoption in Canada </li></ul><ul><li>CSA Developments/MD&A Disclosures </li></ul><ul><li>IFRS versus Canadian GAAP </li></ul>November 13, 2008
CPAB’s Mission <ul><li>CPAB’s Mission is to contribute to public confidence in the integrity of financial reporting of public companies in Canada by promoting high quality, independent auditing. A major means to accomplish this is through the inspection of audit files. </li></ul>November 13, 2008
CPAB Registrant Firms/RIs - June 30, 2008 November 13, 2008
Why move to IFRS? <ul><li>What are they? </li></ul><ul><li>- Single set of globally-accepted, high quality accounting standards </li></ul><ul><li>- Used in 100+ countries </li></ul><ul><li>Rationale for Canada’s move to IFRS: </li></ul><ul><li>- Improve access to global capital markets </li></ul><ul><li>- Improve comparability </li></ul><ul><li>- Move to principles-based standards and away from rule-based U.S. standards (costly / difficult to apply) </li></ul><ul><li>- More cost effective than maintaining Canadian GAAP </li></ul>November 13, 2008
What about the U.S.? <ul><li>November 2007 – SEC announced proposal to allow foreign private issuers to file IFRS F/S without reconciliation to U.S. GAAP. This rule became effective March 4, 2008. </li></ul><ul><li>August 2008 – SEC issued proposed ‘roadmap’ for U.S. domestic filers to use IFRS beginning in 2014 </li></ul><ul><ul><li>Voluntary early adoption in 2009 for some large U.S. domestic registrants. </li></ul></ul>November 13, 2008
Business Impact of IFRS <ul><li>NOT just a technical accounting exercise </li></ul><ul><li>Areas impacted include: </li></ul><ul><li>- Financial accounting and reporting </li></ul><ul><li>- Key performance indicators/ Investor relations </li></ul><ul><li>- Legal </li></ul><ul><li>- Executive compensation </li></ul><ul><li>- Systems, policies, procedures and controls </li></ul><ul><li>- Treasury management </li></ul>November 13, 2008
IFRS Timeline 2006 2007 2008 2009 2010 2011 AcSB announces plan to replace Canadian GAAP with IFRS for publicly accountable entities (PAEs) November 2007: The SEC agrees to allow foreign private issuers to file IFRS financial statements without US GAAP reconciliation February 13, 2008: AcSB confirms IFRS changeover date as being January 1, 2011 for PAEs January 1, 2010 : First day of converted comparative balance sheet to comply with IFRS January 1, 2011: Date of conversion for PAEs AcSB to release new HB Q1 of 2009 June 27, 2008: CSA will consider allowing early adoption on case-by-case basis November 13, 2008
Publicly Accountable Enterprises (PAEs) <ul><li>Defined as: </li></ul><ul><ul><li>files, or is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; or </li></ul></ul><ul><ul><li>holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance entity, securities broker/dealer, pension fund, mutual fund or investment banking entity. </li></ul></ul>November 13, 2008
CSA Developments <ul><li>June 2008 CSAs released Notice 52-321 </li></ul><ul><ul><li>RI may early adopt IFRS if they seek CSA approval </li></ul></ul><ul><ul><li>RI may continue to file U.S. GAAP F/S instead of Cdn GAAP subject to NI 52-107 </li></ul></ul><ul><ul><li>Audit reports should state F/S have been prepared in accordance with IFRS-IASB </li></ul></ul>November 13, 2008
CSA Developments: MD&A Disclosure of Changeover to IFRS <ul><ul><li>Incremental approach </li></ul></ul><ul><ul><li>Limited information three years and two years before the changeover date (2008 and 2009) </li></ul></ul><ul><ul><li>More detailed information in interim and annual periods of the year before changeover date (2010) </li></ul></ul><ul><ul><li>Meaningful quantified information to understand impact of IFRS on the financial statements </li></ul></ul>November 13, 2008
CSA Developments: References <ul><li>References </li></ul><ul><ul><li>CSA Staff Notice 52-320, Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Financial Reporting Standards </li></ul></ul><ul><ul><li>CSA Staff Notice 52-321, Early adoption of International Financial Reporting Standards, use of US GAAP and reference to IFRS-IASB </li></ul></ul><ul><ul><li>CSA Concept Paper 52-402, Possible changes to securities rules relating to International Financial Reporting Standards </li></ul></ul>November 13, 2008
IFRS versus Canadian GAAP Similarities <ul><li>Comprehensive set of principles-based standards </li></ul><ul><li>Similar to Canadian GAAP in structure and form </li></ul><ul><li>Similar basic concepts and recognition/ measurement principles </li></ul><ul><li>Many standards in IFRS provide similar approach to Canadian GAAP </li></ul>November 13, 2008
IFRS versus Canadian GAAP Differences <ul><li>Fewer bright lines and rules </li></ul><ul><li>Some standards in IFRS differ considerably from Canadian GAAP </li></ul><ul><li>Less interpretive guidance </li></ul><ul><li>Applying IFRS requires more professional judgement and results in greater volume of disclosures </li></ul><ul><li>Need to be careful- The devil is in the detail! </li></ul>November 13, 2008
IFRS versus Canadian GAAP- Areas with more significant differences <ul><li>Impairment of assets </li></ul><ul><li>Components approach to depreciation </li></ul><ul><li>Securitizations </li></ul><ul><li>Consolidations, SPEs and JVs </li></ul><ul><li>Pension accounting </li></ul><ul><li>Accounting for tax uncertainties </li></ul><ul><li>Revenue recognition </li></ul><ul><li>(Note: The above is NOT a comprehensive list) </li></ul>November 13, 2008
IFRS - Specific Industries <ul><li>Financial services </li></ul><ul><li>Insurance </li></ul><ul><li>Oil & Gas </li></ul><ul><li>Mining </li></ul><ul><li>Regulated industries </li></ul><ul><li>Real estate </li></ul><ul><li>Construction </li></ul>November 13, 2008