Goodbye to Canadian GAAP? Canada's announcement that it would move to converge its accounting standards with international rules by 2011--and not with U.S. GAAP--was surprising. And, while the changeover shouldn't be too difficult, CFOs are advised to get started soon.

"Good morning, ladies and gentlemen. I've rarely seen such a cheerful
bunch of people gather to discuss accounting. I think maybe the title of
the presentation may have had something to do with it. Well, don't get
your hopes up too much."
--Paul Cherry, Chairman, Canadian Accounting Standards Board (AcSB)

[ILLUSTRATION OMITTED]

A gasp heard around the world? Not exactly, but a few jaws did indeed drop over the title of FEI Canada's last National Breakfast Seminar Series, "Say Goodbye to Canadian GAAP" [generally accepted accounting principles]. Does this mean that after much effort to harmonize Canadian standards with U.S. GAAP, the Canadian Accounting Standards Board (AcSB) has decided that Canadian companies might just as well adopt U.S. GAAP? Not exactly.

As of 2011, Canadian companies will begin reporting under International Financial Reporting Standards (IFRS), the standards developed by the International Accounting Standards Board (IASB). This begs the question: has Paul Cherry, after many distinguished years at the helm of the Canadian AcSB, finally cracked under the pressure? That's highly unlikely. So, what possible rationale could the board have for making companies adopt IFRS, after all the efforts to harmonize with U.S. GAAP?

A Small Fish in a Big Pond

The first reason for giving up a home-grown set of standards is that Canadians need a "global passport" to capital markets. Cherry said: "[With] Canada's marketplace being not more than 4 percent of the global scheme, it is unaffordable for us, the 4 percent, to go around selling our quirks and idiosyncrasies to the other 96. The choice was simple. There are only two passports in existence. It was either U.S. GAAP or international standards."

The interesting part here, he goes on to say, is that "this was not a tough decision, and the thing I want to emphasize is, this is not driven by technical considerations. The important decisions underlying this strategy have strong consensus from all of the major stakeholders in the public interest. We have the support of the securities regulators [and] banking supervisors. We have the support, as best we can determine, of government and of the investment community."

International Conversion

Second, it's not really as big a leap as some might think. The U.S. Financial Accounting Standards Board (FASB) and IASB have been working hard, and will continue to do so, to converge U.S. GAAP and IFRS. In fact, depending on what the U.S. Securities and Exchange Commission (SEC) does, IFRS may make it easier for both Canadian and European companies to access American capital markets.

The SEC has been making noises about eliminating the IFRS-U.S. GAAP reconciliation requirement altogether by 2009, which would make IFRS the preferred GAAP for Canadian firms that now have to go through the trouble of reconciling to U.S. GAAP to list on U.S. exchanges. For those inter-listed companies that are currently reporting in Canada under U.S. GAAP, it's business as usual. They will still be able to file on Canadian securities exchanges under U.S. GAAP.

Canadian Companies Don't Want U.S.-Style GAAP

Third, according to Cherry, Canadian stakeholders felt that U.S. GAAP was just not suitable to their business environment. "Our sense was that the system was being drawn inextricably into the U.S. GAAP network. Now, you could say that's a fine outcome. But the board had to ask ourselves and our stakeholders, 'Is that an outcome that you would choose for all public companies in Canada?' The view was, remains, and I think was absolutely right, that U.S. GAAP is not an affordable proposition for the Canadian marketplace. It is right and affordable for some, but not as a general standard."

Canadian companies, particularly smaller public and private companies, are concerned that by adopting U.S. GAAP, they would have limited access to accounting expertise that would be able to advise them on the intricacies of the rules that go along with it.

Additionally, Cherry said, "We found that even the very largest companies in Canada were telling us they were having serious problems" and couldn't access the resources. He went on to say, "The risk to people--a CFO, a CEO and others in our environment--was untenable. IFRS, at this point in time, is a better fit in terms of the amount of literature and the infrastructure that it would take to support it. This, in my mind, is another compelling reason for Canada to get solidly into the international camp."

Not Exactly a Eulogy

So will Canadian GAAP be gone and forgotten? Not really. After all, IFRS resemble Canadian GAAP more than most people might think. It is generally recognized that Canadian GAAP is more principles-than rules-based, which mirrors the intent of IASB. Secondly, AcSB has had an important role in developing IFRS along the way. Under these circumstances, it would seem that Canadian CFOs don't have too much to fear in making the transition to IFRS.

The transition, however, won't exactly come with a zero price tag, and CFOs are advised to start soon. According to Rafik Greiss, Canadian IFRS Leader at Ernst & Young, LLP, "This is not just a technical exercise; it is a lot more than that. This is where the easy part ends." Greiss said Canadian CFOs should be asking the following questions now:

* What process changes will you have to make in order to be able to support the new GAAP?

* Will your information technology (IT) systems and data-gathering processes give you the right information?

* Will your debt-to-equity ratio remain the same, or will you have to renegotiate your bank agreement/s?

* What will be the impact of performance evaluation and management compensation?

* What will the flow of information to your treasury department be to allow it to continue doing its job?

* What information will you need to revalue your intangibles?

Also, Greiss said that "depending on company and industry specifics, our global experience has been that implications to these functional areas can be significant. The scope and complexity should not be underestimated." In addition to the functional areas, as well as the technical areas, finance will have to concern itself with changes to its policy manuals, training manuals, internal audit programs, system changes, modifications to internal controls and also to the audit support that it prepares on an annual basis. Of course, in doing all this, he noted, "your overriding concern would be to maintain reporting integrity and also to continue to run your business."

In other words, as Greiss summed up: "Over the next few years, as you start applying everything you need to do to convert, you simply cannot afford to fumble the ball. We all know that .... and these changes will be in addition to everything else that is part of your daily, weekly, monthly, quarterly and annual responsibilities."

Opportunity Knocks

Will the costs of conversion outweigh the benefits? Perhaps in the short term, but over the next four years, CFOs will need to keep the long-term benefits in mind. Among those benefits are: better access to capital markets, lower cost of capital, better transparency and better industry comparability.

Greiss is apparently viewing the AcSB strategy as an opportunity. "Based on our experience, and faced with this challenge, many CFOs have seen this opportunity. They use this opportunity to take their finance department to the next level." Reminding the CFO attendees at the meeting that they've probably had a lot of nagging little things in their finance departments that have needed fixing for a long time, he said that many companies have used this as a catalyst for change. "They've seen IFRS conversion as the reason to create that burning platform and fix a lot of things that have been nagging for a long time."

Seeking Implementation Advice?

Where can Canadian companies go for help? In addition to seeking the advice of the consulting community, Canadian companies can expect the active support of Canadian and international standard-setters. Cherry assured the audience that AcSB is still open for business, and that it will listen to any implementation or timeline issues companies may choose to bring to it.

"If, in your process, you come back and say 'there is a huge problem with this issue,' and can demonstrate why a reasonable effort can't do it in a five-year timeline, we are here to listen." Furthermore, he said they are particularly watching the implementation in the U.K., and asking, "Where are the tough nuts, and what can we do to make it easier?"

However, a word of caution to all Canadian CFOs: It must be understood that Cherry no longer has the final word and can't change the rules of the game. "Part of the deal here is that these are international standards, so if someone comes to me and says, 'I just don't like the answer,' I'm going to smile and say, 'Here's the contact information you need.'"

Ramona Dzinkowski is a Canadian economist and past Vice President of FEI Canada and Executive Director of the Canadian Financial Executives Research Foundation. She can be reached at [e-mail].

RELATED ARTICLE: takeaways

* In 2011, Canadian companies will begin reporting under International Financial Reporting Standards (IFRS), which were developed by the International Accounting Standards Board (IASB).

* IFRS were chosen over U.S. generally accepted accounting standards (U.S. GAAP).

* Many CFOs are viewing the convergence as an opportunity and catalyst for change in their finance departments, as a "burning platform" to fix "things that have been nagging," says E & Y's Rafik Greiss.