The International Accounting Standards Board (IASB) issued today an International Financial Reporting Standard (IFRS) designed for use by small and medium-sized entities (SMEs), which are estimated to represent more than 95 per cent of all companies. The standard is a result of a five-year development process with extensive consultation of SMEs worldwide.

For non-public companies, the development of IFRS tailored to their needs is good news. (Get the IFRS for SMEs at the IASB website.) For Canadian non-public companies, move along — there’s nothing for you to see here.

The reason is because despite the full embrace in my country of IFRS for public companies (they’re making the transition as of Jan. 1, 2011), our governing body has decided that for private, we’re going to go it alone. All the good reasons to join the international community when it comes to accounting standards for public companies get thrown out the window when it comes to private. Apparently, Canadian private companies are a special beast that no one outside our borders can comprehend, and thus the job of maintaining a separate set of accounting standards is preserved.

The decision to develop a separate set of standards for Canadian private companies is the wrong one, and I hope it won’t be long before the powers that be see it as such. At the very least, the AcSB should allow private Canadian companies to use IFRS for SMEs. (Currently they have the option to implement IFRS when public companies do, but no word on the SME variant.)

What do you think?

In 2002 differential reporting became available for private companies which allowed management, with the unanimous consent of shareholders, to choose how they accounted for certain financial statement items from among options. For example, subsidiaries and joint ventures can be accounted for using the equity or cost method, in addition to full consolidation.

IFRS presented the next challenge. Canada will adopt IFRS for public companies for years beginning on or after January 1, 2011. But what about private companies? The AcSB decided to tailor existing Canadian GAAP to the needs of private companies.

The following removed sections, for example, didn’t apply to private companies:

• Earnings per share, as the measure is primarily used by public companies
• Interim and segment reporting, for the same reason
• Most EICs, which are mostly very detailed rules for special, specific situations

Differential reporting options were maintained for the most part, including:

• Income taxes, which can be accounted for under the future income taxes or taxes payable method
• Subsidiaries, joint ventures and investments, which can be accounted for under the equity or cost method

Note disclosure is being simplified. For example, property, plant and equipment, which previously required more detail in the notes, will no longer require it. The reasoning was that most third party users of private company financial statements look to key ratios calculated from the financial statement numbers to judge a company’s financial health rather than details on line items.

Financial instruments have been significantly simplified. All will be measured at historical cost, with two exceptions measured at fair market value:

• Equity investments for which market price is readily available
• Derivatives not qualifying for hedge accounting

IFRS adoption will be optional for private companies, and will make sense for those that plan to go public in the near future and possibly for those that compete against public companies to aid investors looking to compare their figures. Of course there are already private companies in Canada that are subsidiaries of European entities and have been reporting under IFRS for years now. (I work for one.)

All these changes should lower compliance costs for private companies, which should include lower audit fees. An article on private company GAAP in the current CA Magazine mentions lower costs three separate times. These will be realized primarily thanks to easier to audit information (cost vs. fair value) and lower disclosure requirements.

I hope all the accounting firms are getting ready to lower their prices now that the audit costs will be reduced.

After pressure from European Union finance ministers, the International Accounting Standards Board (IASB) has agreed to revise its fair value rule faster so it starts taking effect by year end.

[…]

“We desire to get to a common good answer with the IASB and we will make best efforts to do so, but some of the directions we are currently headed in are not to the liking of our board,” FASB chairman Bob Herz [said].

I think this boils down to the IASB wanting to delay reform of the impairment rules around financial instruments, and FASB believes any reform should include impairment changes right away. The IASB’s plans are to alter the rules around measurement and classification first before tackling the biggest issue with the standard.

I don’t think the rules need changing but if you’re going to do it anyway, you should include impairment. That being said, maybe the sluggish bureaucracy will allow cooler heads to prevail, at least for IFRS, while there’s still time.

A year ago I had broken free of the shackles of public accounting and taken on a new challenge in internal audit at a global building materials company. My adventures over the past year will provide the material for many blog posts in the future.

As well, the world was a much different place a year ago. Credit had already begun drying up, but things hadn’t quite gone completely sideways yet. Risky, greed-driven lending, opaque, incomprehensible derivatives, and the absence of my unique take on accounting have led to housing, credit and banking crises, plunging the entire world into recession.

The FASB is expertly highlighting its growing irrelevance by agreeing to change mark-to-market to mark-to-sorta-market-but-not-really-because-banks-don’t-like-having-to-write-down-their-worthless-derivatives-to-fair-value. Because letting powerful bankers and the supine politicians beholden to them determine accounting standards is a great idea.

In short, I’m returning to blogging during an interesting time.

I haven’t begun working on public company clients yet, although I have a couple equivalent-to-public companies currently. I have made it known in the office that I want to work on public companies in the future, so hopefully I will be scheduled on one or two soon.

Canada is moving towards international accounting standards (IFRS) for publicly accountable enterprises. The decision has been made and the process of reconciling Canadian GAAP to IFRS is in motion. Word around the office is that IFRS is very similar to Canadian GAAP in terms of the financial statements, but much more developed (read: verbose) when it comes to note disclosure.

But back to small business, or Owner Managed Enterprises (OMEs) as the framework calls them. The framework’s Foreword offers a glimpse into the thinking behind the endeavor:

Such a system could share some of the basic requirements of GAAP financial reporting … but expressed in a basic fashion.

You aren’t going to hear me complain if we can make accounting standards more understandable and accessible. In fact, I would consider it a prime concern if we want to create a more robust, entrepreneurial economy, here and around the world in the future. Such a milieu would help developing countries pull themselves up and improve their lot the only surefire way: through the expansion of trade.

A non-GAAP solution opens up a wide range of possibilities. A tax basis of accounting, a modified cash basis of accounting, a less complex version of GAAP – all are possible.

This is really interesting. I can’t say as I think these bases would provide better information, but they would be easier in many ways. The tax basis would obviously make filing a snap, and minimizing taxes is a key concern for small business owners. As for modified cash basis, there’s not enough information here to comment. Modified how?

Concerns were about the loss of a well-known frame of reference for financial statements [due to the transition to IFRS].

IFRS is great for the global economy. You want to tap into the global markets, you gotta play by the global rules (regardless of how dubious the model for the setting of those rules happens to be at this point in time). The conclusion of the CICA stems from the above quote – keep the accounting standards we know, just cut out the complicated stuff that small businesses don’t need. In their words (again):

The existing financial reporting framework in the Handbook represents … the collective intellectual capital of the accounting profession in Canada.

That is the best reason I can think of for reusing the standards for Owner-Managed Enterprises.

The CICA sought comment from interested parties on the framework by January 31, 2008. They recently posted an update on those consultations.

The announcement is available in PDF format.

It sounds like we’re going to have to know and be able to apply two sets of principles, as private companies and non-profits won’t be required to switch that early, if at all.

A proposal being looked at right now is having a Framework for Owner-Managed Enterprises, which is based on a pared-down version of current Canadian GAAP. Either know both or limit your possible clients.

At least we won’t have to learn two sets from scratch, but hopefully down the line there’s a more elegant solution to the problem.

The newsletter is provided by The Finance Group, headed up by Gordon Heard, CA, and all three issues to date are available for download (in PDF format).

The site is a solid resource for IFRS materials produced by the AcSB, Canada’s Accounting Standards Board, and the CICA as well.

IFRS is too weak in its current form for investors to accept on par with current Canadian standards. Nonetheless, we are on course to implement IFRS in just three years.

He quotes and agrees with Arthur Levitt, who spoke out against IFRS and principles-based standards, claiming they will increase risk to investors, conceal fraud longer than current standards, and increase, not decrease, the cost of capital.

He believes that rules are necessary and argues that Canadian GAAP is largely rules-based:

In actuality, court cases have shown that Canadian auditors automatically gravitate towards a rules-based mentality. Published materials provide extensive appendices, interpretations, industry tabulations and other comparative guidance that are nothing more than rules.

I can see where he’s coming from, but I don’t agree that we should abandon plans to adopt IFRS and go back to what is essentially accounting isolationism. The standards are new and evolving, just as standards have done in individual countries before them, because that is just their nature.

Principles can work, and in theory are better than rules. Two additional changes should be made to the profession in order to fully realize the benefit, however. Mandatory audit firm rotation and even tighter restrictions on the ancillary services a company’s auditor can provide will help principles work.

Those steps could also increase competition for audits, helping to keep costs associated with switching auditors manageable. Although the effect is uncertain, they could make it easier to find fault in fraud cases, whereas rules may provide management or the auditors to make the case they followed the letter, if not the spirit, of the standards.

In a perfect world we wouldn’t need more rules, but history has shown that in this one we do.

History has also shown that rules don’t always work and often open a new loophole for each it closes. We can either try to find a better way or just make more rules.

The benefits of a strong set of international standards based on principles is a worthy goal and will require eternal vigilance. Perhaps the standards today need improvement in areas. This shouldn’t derail the whole process.

What do you think of Al Rosen’s position? Have rules been unfairly criticized? Could international standards be improved with greater specificity? Or should we just forget the dream entirely?

Too many in accountancy see their role to be increasing the wealth of the wealthiest in our society… and they’re politically cynical enough to pander to their clients and ignore the ethics of their duty to society as a whole.

That’s part of a scathing response to the New York CPAs recommending a flat tax, which always will favour those currently paying at the top rate of tax. When it comes to tax advocacy, the profession as a whole is entirely too focused on their bread and butter.

The One World Trust promotes education and research into the changes required within global organisations in order to achieve the eradication of poverty, injustice and war.

They recently published their Global Accountability Report 2007, which assesses thirty global organizations “according to the four dimensions of accountability as defined by the Global Accountability Framework: transparency, participation, evaluation, and complaint and response mechanisms.”

One of the organizations they reviewed was the IASB, the international accounting standard-setting body, and they laud the organizations efforts to engage with stakeholders when setting those standards. The problem is they didn’t test the process. And the process clearly broke down when it came to IFRS 8, which deals with segment reporting.

I find it maddening that One World Trust spouts off about eradicating poverty, injustice and war, but would then turn around and commend an organization that went out of its way to avoid creating a standard that is pretty much integral to doing just that. Back to one of Richard Murphy’s original posts about the report (he’s made many since):

In reality the IASB entered into a sham consultation on IFRS 8 and never once had intention of changing its proposal. Far from being congratulated on their procedure the IASB should be condemned for their profound cynicism and contempt for consultation.

Richard is a real leader in the profession and a role model for young people just entering it such as myself. And he understands just how much power he has, and how he can wield it to effect positive change:

The way to make sure that mistake is noticed is to get it onto Google so that when someone looks for the One World Trust and Accountability they’re likely to find these comments as well.

Here’s a little more Google juice for you, Richard.

The term ‘distributable cash’ generally refers to the cash that an income trust could potentially distribute to unit holders. Investors use this information when assessing the entity’s ability to fund future distributions and to help value their investments.

But the problem with the measure is that investors had no way of knowing where the cash had come from: general operating activities, or selling off productive assets and related future capacity. There was no way to compare across trusts since they all defined the term differently, or even to compare the same trust year over year. The CICA recommendations seek to remedy this:

The CICA guidance recommends that income trusts report a new measure called “Standardized Distributable Cash” to improve consistency of reporting and comparability between entities. Together with other disclosures recommended in the framework, the new measure gives the industry a common methodology for providing investors with information.

Standardized Distributable Cash is defined as cash from operations, after adjusting for capital expenditures, restrictions on distributions due to debt covenants, and minority interests.

The recommendations are not without criticism, however.

Independent investor advocate Diane Urquhart noted that the new CICA measure of distributable cash is not an addition to generally accepted accounting principles and will appear only as part of management’s discussion and analysis. […] “It’s ugly,” declared Al Rosen of forensic accountants Rosen and Associates. “When you needed this — and in a tougher form — would have been at least five years ago.”

I believe those are the biggest criticisms of it: the “standard” isn’t part of GAAP officially, but merely guidance to help trusts provide investors with higher quality information, and the recommendations are a little late in coming.

Better something than nothing, and better late than never.