Winter term 2009
15/16 January, 2010
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
• 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
• 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
• 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
• 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
IFRS reporting date
(opening balance sheet)
• 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.
• 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
GAAP or IFRS?
• 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
• 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
• 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 – 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
• 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
International Canadian GAAP
True and fair override Required when Not allowed although
compliance would be note disclosure always
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
Approximately 15 that
will have significant
impact upon few firms
What IFRS standards are likely
changing pre/circa 2011?
• Financial statement presentation
• Employee benefits
• Liabilities and equity
• Joint venture arrangements
• Earnings per share
• Business combinations (joint FASB/IASB)
• Financial instrument commentary
• Income taxes
• 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.