Accounting Standards Go Global

You’ve likely heard that the Canadian Accounting Standards Board will require Canadian public companies to adopt International Financial Reporting

Standards (IFRS) as Canadian generally accepted accounting principles (GAAP) starting in 2011.

The move to international standards will fundamentally change the way Canadian public companies report their business results. These changes will affect not just investors in those public companies, but also other stakeholders.

The differences between Canadian GAAP and full IFRS can be complex. The key difference is that the focus of IFRS is mainly on the concept of fair value and less on historical cost. Also, IFRS is based very much on following principles rather than rules, which provides accountants with more room to exercise professional judgment.

Some of the areas of key importance to the engineering and construction sector that will change with the adoption of IFRS include accounting for:

• Property, plant and equipment

• Start-up costs

• Borrowing costs

• Impairment of assets

• Leases

• Revenue recognition

• Joint ventures

• Business combinations and subsidiaries

• Derivatives and hedging

• Asset retirement obligations

• Accounting for income taxes

Some government operations are converting to IFRS, but others are debating whether the conversion is required.

Canadian private companies, which include most consulting engineering companies, are expected to have the option of adopting IFRS. The International Accounting Standards Board has published an exposure draft of an IFRS specifically designed for private companies. However, the Canadian Accounting Standards Board (AcSB) is currently also developing a GAAP framework for private companies, which will mirror the IFRS GAAP but will be simplified in certain areas, including capital disclosures, future income taxes, employee future benefits, leases,

goodwill and stock-based compensations. Despite the Canadian Accounting Standard Board’s current position to maintain a Canadian GAAP framework, it is possible we could see a move towards complete harmonization with IFRS in the future.

For some organizations, implementing IFRS will go well beyond the finance and accounting functions. For example, an IFRS conversion plan could affect other business departments such as human resources, business development and information technology. Experience shows that it can take anywhere from two to three years for a company to undergo a full conversion to IFRS, depending on the complexity of the organization.

All companies are being impacted by the globalization of capital markets and supply chains. But there are many other reasons for considering implementing IFRS. Consider these options if you:

• have an exit strategy that could involve acquisition by an IFRS reporter or private equity interest

• are considering going public

• have suppliers or customers across jurisdictions

• are a subsidiary of a Canadian publicly accountable entity (PAE) and possibly face significant systems and internal control issues if you don’t adopt IFRS

• are a subsidiary of an IFRS parent

• have or will have in the near future international operations and multiple sources of financing

• have banking agreements that could evolve to require one common GAAP basis that most likely would be IFRS

• have competitors that use IFRS

• hold yourselves to PAE reporting standards voluntarily.

It is easy to underestimate the volume and complexity of the work involved with the implementation of IFRS. The scale of the transition means there are decisions to be made today. By planning ahead companies will not only ensure a smooth transition, but also a more efficient business structure going forward.

Sal Bianco is a partner and national IFRS leader for engineering and construction at PricewaterhouseCoopers LLP in Toronto. Michael Clifford is the national leader, engineering and construction at the company. See www.pwcifrs.caand www.pwc.com/ca/ec

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The focus of IFRS is mainly on the concept of fair value and less on historical cost.