Accounting Standards

Changeover to IFRS confirmed for 2011

The Accounting Standards Board of Canada has confirmed recently the changeover date to IFRS for publicly accountable for-profit organizations, set for periods beginning on or after January 1, 2011.

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.

Accounting Standards

A little help for the transition to IFRS

A while ago I received an email informing me of a newsletter available for Canadian accounting professionals detailing the transition from Canadian GAAP to international standards, IFRS.

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.

Accounting Standards

IFRS and principles too weak to work?

Al Rosen, in the second of a three part series in the Financial Post about the transition from Canadian GAAP to IFRS:

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?

Accounting Standards

Protecting the public interest, Web 2.0 style

Richard Murphy’s on fire these days, taking it One World Trust, explaining the power of blogging and giving it to New York CPAs.

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.

Accounting Standards

Income trusts get distributable cash standard

Canada’s CAs have announced guidance for a key metric of income trusts, that of distributable cash.

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.