The importance of standard setting – Part 1

Armand Capisciolto:

The accounting standards are applied by accountants, they're audited by accountants, but they're not really for accountants. The accounting standards are for the users of the financial information. They're for the public who's using financial statements to make decisions.

Narrator:

Welcome to Accounting for the Future, a BDO Canada podcast for financial leaders to navigate change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday, but will definitely have to manage for the future.

Anne-Marie Henson:

Hello and welcome to Accounting for the Future. I'm your host, Anne-Marie Henson, and I'm really happy to welcome back our guest and friend of BDO, Armand Capisciolto. He's the chair of Canada's Accounting Standards Board now and leads the development of accounting standards for use by all Canadian entities outside the public sector. Canada's Accounting Standards Board serves the public interest by establishing standards for financial reporting by all Canadian private sector entities and by contributing to the development of internationally accepted financial reporting standards. Armand also happens to be a BDO alumni, someone I'd consider great friend and mentor, and worked for 15 years at BDO as the National Accounting Standards partner. So Armand, welcome back as the guest this time.

Armand Capisciolto:

Yes, Anne-Marie. I'm really excited to be back chatting with you, and as the previous host of this podcast, I have to say, I now know what David Letterman feels like when he is on the Colbert show.

Anne-Marie Henson:

Exactly.

Armand Capisciolto:

Yeah. And just for your listeners, it's only going to go downhill from here.

Anne-Marie Henson:

I think you're better than Letterman, so I think the listeners are in for a great session today. I just find your experience really interesting. You spent many years on the professional practice side of accounting standards and trying to find ways to apply those standards, advise companies and auditors in terms of what it means for them when changes are coming, and now you're on the standard setting side of things. So I think it's really cool and I'm looking forward to your insights.

Armand Capisciolto:

Okay. I'm glad to be here.

Anne-Marie Henson:

Great. We'll start you off with an easy question. For listeners who maybe don't fully understand sort of what is the landscape of standard setting, especially in Canada, what it means for us here, could you just share what accounting standard setting means to you and what you want our listeners to take away from that?

Armand Capisciolto:

Yeah, no, it's a great question and when I get asked this question, I always start off with what it isn't. Because I think a lot of people think accounting standards is a bunch of accountants sitting around a table, maybe a virtual table sometimes now, but sitting around a table making standards for the benefit of accountants. And that is not what standard setting is.

Our focus is very much on the financial statement user. So when we talked about a new standard, when we talked about an amended standard, will the new standard, will the amendment provide better information to an investor, to a creditor, to a funder who's making a decision on where to put their money? When I think about that and think about who financial statement users are, most of them aren't accountants, right? The average banker for private companies is not an accountant. When you think about your portfolio managers, they're not accountants by trade, a lot of them, which I think creates an interesting dynamic that really has changed my perspective since being involved in standard setting.

The accounting standards are applied by accountants, they're audited by accountants, but they're not really for accountants. The accounting standards are for the users of the financial information. They're for the public who's using financial statements to make decisions. So that to me, again, when I think about what standard setting is and what it is, it's all about who's using the financial information. It's not about you, Anne-Marie, it's not about the person, or previously me, the person who's applying the standards.

Anne-Marie Henson:

Right. So I guess that controversial statement we might've heard through the grapevine that standard setting and changes in accounting standards that happen are for auditors to charge more money would be false, right?

Armand Capisciolto:

That would be false.

Anne-Marie Henson:

Okay.

Armand Capisciolto:

It might happen because there's new information and different things that audit, but that isn't the purpose. The purpose is giving the user more information. The reality is we always have to consider cost versus benefit. So if the cost of applying that new standard, if the cost of auditing the new information exceeds the benefit that the users and others are going to achieve from it, then that's the path we're not going down. But the reality is we're always focused on the user first.

Anne-Marie Henson:

That's super interesting, honestly, maybe eye-opening even for myself. So I think it's great to hear that it's always with the end user in mind. And with that then, I guess I'll ask you a follow-up question about what exactly is the process of developing a new standard or making an amendment to a standard. Can you walk us through kind of how you make sure you consider users, but then I do know that there's consultation with accountants and accounting firms?

Armand Capisciolto:

I got to start off, Anne-Marie, as you know, to plug something. I have a little LinkedIn newsletter called Inside Standard Setting, and I think all your listeners should subscribe to it. What I try to do in this is describe standard setting and the topics we're talking about at the board or dealing with at the board in plain language so people can kind of get an insight that it isn't some bizarre thing that we're doing in standard setting. It's actually people talking about information. Now, answering your question. Get away from my plug…

Anne-Marie Henson:

Well, wait a second. Before you answer the question then, I'll support that. I've read your LinkedIn posts and I think they're fantastic and highly encourage them too because you use very fun analogies to sports and to pop culture and other things to describe accounting standard setting. So I find it really cool and it's also very accessible to even non-accountants. I agree with your plug.

Armand Capisciolto:

Thank you for that. From our standpoint at the Canadian Accounting Standards Board, we really have two distinct processes for standard setting. One related to part one, which is IFRS. Our process there is influence. Our job is to influence the International Accounting Standards Board. And we do this in a bunch of different ways, and a lot of it starts before standard setting even starts.

I'll give you an example. We just completed some research at the Canadian Accounting Standards Board on issues related to accounting for carbon credits. We know the IASB is considering a project, they haven't started, they're considering a project on what they're calling pollutant pricing mechanisms, which carbon credits are a pollutant pricing mechanism. So we've done this research.

So then what we do is we present the results of our research at various meetings that are attended by other national standard setters, attended by the IASB. And that's really important because we're presenting our research, so we're influencing the IASB. What's also important about that is the IASB isn't going to take on an issue just because the issue exists in Canada. They need to know that it exists in various jurisdictions. So when we're at these international standard setting events with standard setters from all over the world, part of our goal is to present the research for other jurisdictions to realize, "We have the same problem as well," or, "We have the same issue as well." And then it's a bunch of us, a bunch of national standard setters going to the IASB saying, "You really should take on this project." So that influence starts there, and that's really important.

Once the IASB is in standard setting mode, that's when we do more of our formal process. We comment on their exposure. Just like we ask people to respond to our exposure drafts, we comment on theirs. And to comment on theirs, we do a lot of outreach. We talk to our committees that we have, like our IFRS Accounting Standards Discussion Group, our user Advisory Committee, we do outreach events here in Canada, we have IASB members come to our committee meetings, come to our outreach events so they're also hearing directly from Canadians, and then we incorporate these comments in our comment letters. So that happens.

The IASB then redeliberates all the comments they receive, and they receive a lot of comments from all over. That's one of the things about international standard setting. It's always going to be slow because you have so many different perspectives feeding into it. 150 jurisdictions apply IFRS. One of the things we do in addition to responding to theirs, we issue something called a wraparound exposure draft, which is basically just issuing the IASB exposure drafts in Canada and asking a simple question, "Is there any reason this won't work in Canada?"

We don't often get many responses to that. So then when the IASB finalizes their exposure draft, we look at, okay, did we get any comments to our wrap-around? What comments did we make on our exposure draft? And then we actually look at every response from Canadians directly to the IASB and say, "What did Canadian respondents say to the IASB?" And we look at all those and then consider, "How did the IASB address those comments?" And I think this is the important part. We aren't going to say we're not, because again, it's not Canadian GAAP until we at the Accounting Standards Board vote on it and say, "Incorporate it into our handbook." But we're not going to do that just because they didn't necessarily address one of our comments.

We're going to look and say, "Well, did they at least consider our comment? Did they debate it? They follow their due process and make a decision that it may not be the decision we wanted, but when they take all of the feedback that they receive from all the jurisdictions, it was the right decision by following their due process." And if they do that, we then include it in Canadian GAAP. And we know full well we're not always going to get our way. And that's fine. That's, again, one of the challenges. You're striving for global comparability when you talk with IFRS, which means there has to be some compromises.

Anne-Marie Henson:

What I find really interesting about what you said, and I've seen it as well in terms of Canada on the global landscape, we're not the most populous country by far, large in landmass, but that's it. And yet what I see, and I hope our listeners take away is that Canada actually is quite influential in the global standard setting process because of the active engagement of our constituents, the stakeholders, the Accounting Standards Board, the accounting firms. Anyway, I think that's really phenomenal to hear. I've heard before, "Canada will influence or try to influence international standard setting”, but you don't quite understand how in-depth that is until I hear you talk about all the things you do.

Armand Capisciolto:

And this is my predecessor who's now the vice chair of the International Accounting Standards Board, used to always use a line, "Canada punches above its weight." And I do think we do punch above its weight. I think it's because we have such engaged people in Canada. When the IASB comes here and we arrange for them to meet with the interested and affected parties in Canada, whether it's investors, whether it's the Canadian Bankers Association, whether it's just preparers and the auditors in the various industries that are prevalent in Canada, they get such great constructive feedback. And that just helps with our ability to influence. So it's all about influence when it comes to part one.

When it comes to other parts of the standards from being ASPE, our not-for-profit standards and our pension plan standards, we follow a process as well there, which is monitoring issues. We speak, we have various committees for every one of our GAAPs and we talk to the people who are on those committees, which are auditors, they're preparers, they're users, they’re academics, and we ask them, "What are the issues you're seeing?" And then we go through an annual planning process. We're about to start our annual planning process for next year, right now our fiscal year is April to March, and prioritize the projects. We consider them and then we do research. We issue documents for comments, we re-deliberate those comments and issue a standard.

Again, one of the things I've learned over the years in being a member of the Accounting Standards Board and now the chair, and then your listeners might be very surprised to hear this, is the process of influence for part one for IFRS is much more difficult than writing our domestic standards. Some people might say, "Well, how can you do it? You don't hold the pen. You hold the pen on the domestic standards." Well, holding the pen makes it easier. It's a lot easier to hold the pen and do what you want or what you think is best for your constituents versus trying to influence someone else who holds the pen. And so that's what we often get questions, "What do you do? You're just adopting IFRS standards. How can that be difficult?" It is very difficult because you're trying to make sure our concerns in Canada are heard by the IASB and they're addressed, and we're one voice out of 150 voices. I like to think we have a very loud voice. My Italian heritage, I definitely have a loud voice. It's not just the volume that matters.

Anne-Marie Henson:

Right, exactly. No, that's super interesting, actually, to hear about that process. I guess the way I see it is almost when you're dealing with 150 different countries, you're also dealing with politics again and different ways to influence and understanding where other countries or other standard setters are coming from and trying to see their point of view to be able to add your opinion to it and be heard and seen in that process. Whereas when you're standards setting in Canada for non-IFRS, I'd assume that you're looking at a smaller set of stakeholders, constituents, and things like that.

Armand Capisciolto:

That being said, I also think one of the reasons why we do a good job of influence from a Canadian standpoint is I always see Canada as kind of a microcosm of the globe, of the world.

Anne-Marie Henson:

Right.

Armand Capisciolto:

We have this huge landmass, you have completely different industries depending on what province you're in. We have Quebec with a different language, not just a different language, different laws. So you have the things that the IASB is dealing with, with 150 jurisdictions is different regulation, different laws, different language, different culture. We deal with that, to a certain extent, in Canada. So the experience of doing that in Canada is also helpful when we're on the global stage.

Anne-Marie Henson:

No, that's great to know, actually. To ask you a follow-up question to that, let's say I am a business owner in Canada or a CFO or I work as an auditor in an accounting firm that's maybe more local. Oftentimes I think there's a myth that, "Well, I have no control or no say. My opinion won't be heard. My opinion won't matter." So what would you say in terms of how individuals, companies, firms can get more involved in the process?

Armand Capisciolto:

Yeah. Well, first of all, the one that I said earlier focuses on users. That doesn't mean accountants, we don't want to hear from you. We definitely need to hear from the accountants, and we need to hear from them during the process. Because they are, the accountants, the auditors, they're the ones who are going to tell us... A user is always going to say, "I want more information. I want this information." The auditor, the accountant is going to tell us, "Well, what you're proposing, yes, we see the goal, we see what you're trying to achieve, but it's not going to achieve it for these reasons based on what we see from how our clients apply the current standards or the issues we see with our current standards." You're going to tell us what it's going to cost to do it. You're going to tell us, well, these are the extra costs that are going to incur. All of that is critical because cost benefit matters, so we definitely want to hear from people.

I think one of the things, again, myths, it's, "Oh, the big companies. Yeah, the banks are going to tell you what they want and you're just going to listen to the banks," or, "The big audit firms are going to tell you what they want. We're only going to listen." No, that's not the case at all. For us, from a domestic standpoint, is we consider every comment that comes in. Now, not every comment results in a significant debate at the board level, but the board sees every comment and we discuss the comments and we are always trying to say, "Okay, did we get it right?" When we go out and ask people, whether it's on an ED, whether it's on an outreach event, I always say to people, "I'm not here to sell you on the standard. It's not what I'm here to do at all. I'm here to hear from you. Because if we want to get the standard right, we need input."

So for me, it's like, what can people do to get involved? Pay attention, read the exposure drafts. You can comment. You don't have to send in a full letter. You can just send us an email and say, "These are the things I have concerns with." The outreach events, we're doing a lot of outreach, we used to do them in person, we do some in person now, but most virtually, which is fabulous because we can reach so many more people virtually than in person, I think is the best way to get involved. Because when someone gives us a comment at a virtual event, we can follow up. With a letter, it's like, "Okay, they made this comment, but I don't know really what they mean." We don't really have the opportunity to do the follow-up question. We can reach out to them, all that stuff. But in a virtual event, we can drill down. They make a comment, we can drill down, and we can improve the standards by doing that.

So my biggest thing, get involved. It doesn't matter what size company you work for. Yeah, we understand that there's resource constraints. Everybody has resource constraints. But if you want quality standards, we need to hear from you. That, to me, is the basic thing and there's so many ways to do it. And not to be intimidated by it. We're just people who think about accounting standards. We're not scary. And that's the other thing I want people to know. It's not an intimidating group to talk to. We're very open and want to hear from people.

Anne-Marie Henson:

Well, that's fantastic advice and great to know as well, I think. I'm sure smaller companies or smaller firms have had that thought process of wanting to get involved or wanting to provide comments, but thinking, "Well, I don't have time to write a fancy letter." But knowing that we can reach out in different ways, I think, is really great. So I do hope you get a bit of an uplift in the engagement. You probably already have a lot, but hopefully this helps other stakeholders start to get involved in the process.

Thank you so much for listening to today's episode. This discussion with Armand is part one of a two-part series, so please keep an eye out for our next episode where we get into some practical applications of standard setting and I get Armand's input on the future of accounting standards. I'm Anne-Marie Henson, and this has been BDO's Accounting for the Future. Please let us know if you found the topic interesting and useful, and remember to subscribe if you liked it. We'll see you next time.

Narrator:

Thank you for listening to BDO Canada's Accounting for the Future. Past episodes and related insights are available at www.bdo.ca/accountingforthefuture. Or you can go to Apple Podcasts, Spotify, or Google Podcasts to subscribe. For more information on BDO Canada, visit bdo.ca.