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									   BU 697V
Winter term 2009
 15/16 January, 2010
    IFRS Session
Objectives of this Session
• Status report on IFRS in Canada
• Impact of IFRS on financial statement
What we are not doing is learning the details
  of the mechanics of IFRS.
The IFRS Decision
13 February, 2008:
“Canadian Accounting Standards Board has
   confirmed that use of IFRS will be required in
   2011 for publicly accountable profit-making
   enterprises…. The official changeover date is for
   interim and annual financial statements relating
   to fiscal years beginning on or after January 1,
It was very clear about a year earlier that this
   would occur.
            The Decision
• No surprise as there had been
  considerable public discussion and
  debate. The AcSB included this objective
  in their January, 2006 strategic plan.
• However, the implications of the change
  didn’t surface until afterwards when
  people had the opportunity to reflect.
• Stakeholders are still very much in a
  reactive mode. (WLU Accounting Area)
Publicly Accountable Profit Making
Enterprises (PAE)
• Issues (or in the process of issuing) debt or
  equity instruments that are or will be outstanding
  in a public market (all public companies) About
  4,500 entities in Canada.
• Holds assets in a fiduciary capacity for a broad
  group of outsiders as its primary business (i.e.
  where there are a large group of users such as
  banks, insurers, broker/dealers, mutual funds,
• Public sector GBEs/GBTOs
• Others may choose to use IFRSs
Who will not use IFRS?
• Not required at this time for NFPOs and
  this overrides other criteria.
• Private companies (third tier)
• Governments do not currently use regular
  GAAP and there are no plans for use of
  IFRS or for adaptation of IFRS for
  government use.
Private Companies
• Some may elect to use IFRS
• Others may continue to use existing GAAP.
• It is not evident how much “maintenance” will be done for
  GAAP. The ASB is looking about about 10 “problem”
• Most changes in accounting standards are driven by
  needs of large public firms.
• The changes that do occur in existing GAAP will likely be
  in conjunction with changes made to IFRS or
  alternatively, towards IFRS.
• End result is likely formalized big firm/little firm GAAP.
• IFRS does not explicitly deal with NFPOs.
• Canadian standard setters need to deal
  with this issue.
• Possible outcomes: (Size of reporting unit will
  drive this)
      • Use of IFRS with addition of NFPO guidance
      • Private enterprise GAAP with addition of NFPO
      • Specialized sector GAAP evolves (hospitals, post
         secondary education institutions, etc).
Implications of 2011 adoption

 There isn’t much time!

    11 month              Jan 1,                 Jan 1,
    preparatory            2010                   2011

                   Start of
                                      IFRS reporting date
                   (opening balance sheet)
Implications continued
• There is obviously huge interest in the topic from those
  who are impacted.
• The large accounting firms have been very proactive
  with clients who need to report in IFRS.
• It is generally reported that most PAEs are reasonably
  well prepared which is perhaps not a surprise given size.
• Endless educational programs, seminars, short courses,
  etc. have emerged.
• Some accountants and users (particularly those
  removed from the “action”) have been very concerned
  over the looming loss of intellectual capital.
• There is serious concern at educational institutions as
  the implications are recognized.

Recent Developments
• National GAAP is becoming rare. When Canada starts
  using IFRS, it will join 130+ other countries.
• National carve outs are disappearing – Australia case.
• By 2011, there will be basically be two forms of GAAP –
  US and IFRS.
• Final US decision to adopt IFRS is up in the air. A year
  ago, it was expected in 2009.
• However, preliminary decision is past due – is delay
  result of financial crisis, administration change in
  Washington or something else? What if the US doesn’t
  change or creates major carve outs?

What does it mean to adopt IFRS?
• Reporting entities adopt IFRS without modification as
  Canadian GAAP (for PAEs) disappears.
• Focus of attention becomes IASB in London rather than
• Interpretations emanate from London and not Toronto.
• Canadian influence won’t be large and will be function of
  staff and revenue contributions.
• Status and cost impact on CICA.
• Continued role for CICA in standard setting but not for

Benefits to Canada
• Canadian GAAP as a distinct product had by the late
  1990s become problematic.
• Question became whether Canada should adopt US
• At first, the decision was to align Canadian GAAP with
  US GAAP. New standards would be compatible and
  some joint projects were undertaken. A timetable was
  set to eliminate significant differences.
• IFRS are generally principles based rather than the US
  rules based standards. Change easier than to US
• Creates efficiencies for Canadian PAEs operating
  elsewhere and foreign firms operating in Canada.
  (minimize the accounting “tax”)
Opposition to IFRS
• Most knowledgeable Canadians believed
  that Canadian GAAP was untenable for
  reasons of cost, efficiency, etc.
• Profession based standard setting lingered
  on in Canada likely due to politics of
  divided accounting profession. This
  created issues such as actual value
  added, cost sharing, etc.
• The issue in Canada was US or IRFS.
Opposition to IFRS in USA
• The change to IFRS much more difficult in the US.
• Move to a principle based system from a rules based
  approach difficult although this is what occurred in
  Europe and elsewhere.
• National GAAP is a product of culture, the business
  environment and the legal system. Introduction of a
  principle based system will potentially conflict with US
  legal climate.
• There is a widely held American belief that US GAAP is
  the “highest quality” in the world. The underlying logic is
  typically emotional circular reasoning. Events Enron
  onwards have impaired that position.
• A move to IFRS represents an acknowledgement of US
  loss of power and prestige. (Why isn’t the shift the other
Quality of IFRS
• A superficial analysis of income under US
  and IFRS will usually display a systemic
  pattern of higher income using IFRS.
• This is usually due to prohibition against
  LIFO in IFRS. LIFO is used primarily to
  reduce taxes in an inflationary era but
  there is logic in its use assuming a “Hicks”
  approach to determination of income.

Quality of IFRS
• Numerous researchers have tackled the issue.
• First step is determining measures of accounting
  standard quality.
• Measures used in papers include degree of
  earnings management (smoothing), timely loss
  recognition, correlations between income and
  cash flows and associations between accounting
  measures and security valuations. Note that
  some measures incorporate US values.
• The data base for studies are typically cross
  listed firms and full disclosure of both US and
  IFRS results are not common.
Quality of IFRS
Barth (Stanford) , Landsman, Lang &
  Williams (all UNC), March 2006.
• “We find that IAS accounting amounts are
  of similar quality to reconciled US GAAP
• A long time span was used and there are
  indications that IFRS standards have
  improved in quality.
Woolworths Ltd.
• Woolworths – large retailer operating in Australia and
  New Zealand. Comparative statements include both
  AGAAP and AIFRS for 2005.
• No connection to US firm (that operates several retail
  specialty chains) or with failed UK firm with the same
• Operates supermarkets (86% of revenue), general
  merchandise retailers (11%) and hotels and
  miscellaneous (3%). Information disclosed on P & L and
  in Five Year Summary.
• Total sales in 2005 were $31,325 billion Australian or
  about $28 billion Canadian.
• Large annual report (155 pages) of which over half is
  financial reporting. Major difference with N. America.
Impact of IFRS upon Financial
Statement Analysis
• This section should give you a head start
  on the group assignment.
• Evaluate the degree of diversification
  achieved by Woolworths.
• Perform a financial size-up on Woolworths
  Ltd. to degree possible using 2005 IFRS
  and AGAAP data.
What are Major Current Differences
with IFRS?
                              International        Canadian GAAP
True and fair override   Required when          Not allowed although
                         compliance would be    note disclosure always
                         misleading             possible
Extraordinary items      Not reported           Required

Fixed and intangible     Revaluation to FV less Not allowed under
assets                   subsequent             Cdn. GAAP but was
                         amortization or cost   allowed in Australia
Impairment losses        Allows reversals of    No reversal possible
                         previous losses
Approximately 15 that
will have significant
impact upon few firms
What IFRS standards are likely
changing pre/circa 2011?
•   Financial statement presentation
•   Leases
•   Employee benefits
•   Liabilities and equity
•   Joint venture arrangements
•   Earnings per share
•   Business combinations (joint FASB/IASB)
•   Financial instrument commentary
•   Income taxes

Differences continued:
• The current differences are not major but
  the “devil is in the details.”
• The changes to IFRS that are underway or
  planned are likely no greater than might be
  expected from an activist standard setter
  in a turbulent era.


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