International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) will soon become the basis of financial reporting for public companies in Canada. This change, which was announced in January 2006 by the Canadian Accounting Standards Board (AcSB), will take effect on January 1, 2011.
Currently, regulatory instruments of the Canadian Securities Administrators (CSA) refer to Canadian generally accepted accounting principles (GAAP) established by the AcSB. The guiding instrument on this matter is National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107). As a rule, under the existing NI 52-107, a Canadian public company must use Canadian GAAP when preparing its financial statements. However, if a Canadian reporting issuer is also a reporting issuer with the U.S. Securities and Exchange Commission (SEC), it may use US GAAP. At the present time, only foreign issuers1 other than SEC reporting issuers are permitted to prepare financial statements using IFRS.
In a recently published concept paper,2 the CSA drew tentative conclusions and solicited comments from market participants on proposed amendments to IFRS which entail a mandatory changeover to IFRS for publicly accountable enterprises for financial years beginning on or after January 1, 2011. In its concept paper, the CSA addressed the following points:
- Use of IFRS by domestic issuers before January 1, 2011;
- Use of US GAAP by domestic issuers; and
- Replacing all references in securities rules to Canadian GAAP with references to "IFRS as issued by the International Accounting Standards Board" (IFRS-IASB).
On the first point, the CSA concluded tentatively that domestic issuers be allowed to adopt IFRS-IASB for a financial year beginning on or after January 1, 2009.
On the second point, the CSA is suggesting that a domestic issuer not be allowed to use US GAAP for a financial year beginning on or after January 1, 2009, with the exception that a domestic issuer filing US GAAP financial statements in Canada for its most recent financial year ending on or before December 31, 2008 could continue doing so for five years (i.e. 2009 to 2013).
On the third issue, the CSA is suggesting that a domestic issuer be required by law to prepare its financial statements in accordance with IFRS-IASB and that the audit report on annual financial statements refer to IFRS-IASB. Under such an approach, an issuer could disclose that its financial statements comply with both IFRS-IASB and Canadian GAAP. However, the CSA is proposing that NI 52-107 refer to IFRS-IASB only.
While the adoption of IFRS by Canada and other countries will harmonize accounting standards on a global basis, readers should be aware that such harmonization will have a profound impact on certain issuers.
First and foremost, cooperative entities, mutual or benevolent associations who have not de-mutualized, mutual funds, credit unions and other non-corporate or atypical issuers will be particularly affected by IFRS rules that require redeemable equity capital to be classified as debt rather than equity. This will have an impact not only on the technical solvency of such issuers, but also on their ability to raise capital. Indeed, these issuers may be disadvantaged when their balance sheets are compared by potential investors to those of their incorporated peers. Case in point, Groupe Desjardins, Canada's largest financial cooperative institution, announced recently that it may have to take an $800 M hit on its equity capital as a result.
Also, important differences exist between the current accounting treatment of insurance companies and that proposed under IFRS, for instance in respect of deposit-like savings products offered by life insurers and the recognition of unearned premiums.
If IFRS is integrally adopted in Canada, issuers such as the foregoing may need to use creative measures to circumvent its pernicious effects. For example, such issuers might restructure and adopt a two-tier capital structure allowing it to offer non-voting equity participations or consider incorporating a fully-controlled subsidiary for the purpose of raising capital.
Some countries like New Zealand have empowered their local Accounting Standards Board (ASB) by statute to enable their ASB to exempt classes of reporting issuers from any provision of IFRS when compliance might be materially misleading or likely to mislead. It is hoped that the AcSB, as well as the Canadian financial community at large, will consider such measures in order to sustain important sectors of our economy in the face of any disproportionate disadvantage that the IFRS rules might pose to them.
Footnotes
1. A "foreign issuer" is an issuer, other than an investment fund, that is incorporated or organized under the laws of a foreign jurisdiction, unless outstanding voting securities of the issuer carrying more than 50 per cent of the votes for the election of directors are owned, directly or indirectly, by residents of Canada and: (i) the majority of the executive officers or directors of the issuer are residents of Canada; (ii) more than 50 per cent of the consolidated assets of the issuer are located in Canada; or (iii) the business of the issuer is administered principally in Canada.
2. CSA Concept Paper 52-402, "Possible Changes to Securities Rules Relating to International Financial Reporting Standards" OSC bulletin, Issue 31/07 - February 15, 2008 online: http://www.osc.gov.on.ca/Regulation/Rulemaking/ Current/Part5/csa_20080215_52-402_cp-fin-rpt.jsp.
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