How IFRS will enhance your access to capital
Financial Performance Benchmarking made easier
Author: Carlo Mariglia and Duane Rogers
Date: September 2010
Publication: Canadian PLANT
International Financial Reporting Standards (IFRS): unless you operate a public company, these words may not mean much to you, but they will.
More than 110 countries are using IFRS and virtually all major countries are expected to do so within the next couple of years. As post-conversion benefits become apparent, more private companies will also adopt these standards, which provide better access to capital by allowing easier financial performance benchmarking among competing companies.
These standards establish how a company should report certain transactions in financial statements, eliminating the need to reconcile information reported under different national standards while providing consistent information for decision making.
They’ll replace Canada’s generally accepted accounting principles (GAAP) for most publicly accountable enterprises by Jan. 1, 2011, affecting first quarterly statements ending March 31 and first annual financial statements ending Dec. 31.
Canadian GAAP and the international standards are based on similar principles-based concepts rather than the rules-based concepts applied in the US. While this helps to address the reality of business transactions, such a system relies to a greater extent on the professional judgment of those applying the standards, and thus more disclosures are required.
Conceptually, IFRS and Canadian GAAP are similar. There are, however, significant differences in the details, which vary widely by industry and enterprise. Manufacturers would likely note some of the following:
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Properties held for rental or capital appreciation are treated the same as property, plant and equipment, whereas IFRS accounts for these separately.
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Both Canadian GAAP and IFRS require property, plants and equipment to be recorded at historical cost; however, there are different requirements for including or excluding expenditures.
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International financial reporting allows a company to record property, plant and equipment at a revalued (fair value) amount, something generally prohibited under Canadian GAAP.
Other significant changes relate to impairment of non-financial assets such as fixed assets and goodwill. Unlike Canadian GAAP, the international standards require companies to reverse previous impairment write-downs, other than for goodwill, if the conditions that caused the impairment no longer exist. This could make net income more volatile.
Mergers and acquisitions would also be affected by rules for different business combinations. For example, under GAAP, the portion of assets and liabilities a purchaser acquires under GAAP would be reported at fair value and the remainder at book value. IFRS reports acquired assets and liabilities at 100% of their fair value, even if a purchaser acquires less than 100% of the business. Costs related to the acquisition would be expensed, while Canadian GAAP includes such costs in goodwill. And when the fair value of acquired assets exceeds the fair value of the consideration paid, the difference is included in income, which has the potential to increase the value of assets. Under Canadian GAAP, any discount on acquisition is proportionately offset against the value of assets purchased.
Private enterprises must decide whether to adopt IFRS or new “made in Canada” standards for years beginning on or after Jan. 1, 2011. Canada’s Accounting Standards Board has issued Accounting Standards for Private Enterprises (ASPE) to simplify the recognition, measurement and presentation of information while reducing disclosure requirements.
Yet the international standards tend to be more appealing to companies that want to be effective global competitors, and there are other compelling reasons to opt for them, including the following:
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An initial public offering may be planned.
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To benchmark results against public company competitors using IFRS.
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Major customers or suppliers have adopted IFRS.
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A potential sale to a purchaser or investor who requires IFRS reporting.
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To participate in common financial reporting when the company is a subsidiary of a foreign company that uses IFRS.
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To create a common financial reporting system when the company has foreign subsidiaries already reporting under IFRS.
Analyze cost benefits
While short-term conversion costs may be significant, the longer-term benefits will quickly outpace them. Ultimately, adopting IFRS rather than the ASPE eliminates the need for expensive reconciliations when dealing with foreign markets while streamlining internal processes. Before undertaking IFRS conversion, conduct a thorough cost-benefit assessment that includes these considerations:
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Determine whether significant financing opportunities require IFRS financial reporting.
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Identify the organizations within your sector that are reporting, or intend to report under IFRS; and consider whether the financial performance of your company would benefit from comparisons.
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Identify information gaps between current accounting practices and those of IFRS and the required changes to financial reporting and controls.
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Determine the potential impact on policies, systems, processes, technology, controls, human resources, performance indicators, taxes and governance.
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Assess the impact on your business, such as how contracts might be affected.
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Determine the resources required for implementation.
Last fall BDO conducted interviews with CFOs of 22 companies n the European Union looking for advice to share with others contemplating conversion. One respondent in particular was emphatic about what to do: “This is a once in a lifetime opportunity for you to relook at your accounting policies. If you plan ahead, you will be able to be proactive and get the accounting policies that best fit your organization. Don’t leave it late like we did...We lost an opportunity by not planning accordingly.”
Any organization competing internationally should carefully weigh the advantages and disadvantages of IFRS conversion. This could be an ideal opportunity to enhance access to capital and to acquire a competitive edge.
Carlo Mariglia is a Toronto-based partner and Duane Rogers is a Calgarybased senior manager in the national risk consulting and advisory services practice of BDO Canada LLP (www.bdo.ca). E-mail cmariglia@bdo.ca or drogers@bdo.ca.
