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Accounting Standards

Are accounting standards public enough?

CA Magazine might be freely giving away their content for the benefit of all stakeholders in the CA profession and public accounting in general, but the goodwill doesn’t extend to the CICA when it comes to Canadian accounting and auditing standards.

The CICA, through the Accounting Standards Board (AcSB), develops public accounting standards through a remarkably public process of consultation and comment, but once the standard makes it into the Handbook, it is rarely seen in public again. The Handbook is available online, if you’re a member of the Institute. That is, only if you’re a CA do you get access to the goods.

Additionally, when one Googles “CICA Handbook”, the first result is a link to “Enhanced online access to CICA Handbook”! (This the access available only to CICA members.) A link to the protected Handbook is featured prominently on the CICA homepage. “Great,” a new visitor thinks, “the Handbook is only a mouse click away!” But that click takes you again to the paywall.

I posed the question directly to the Institute, and later in the day received my response: “The CICA Handbook is only granted to members as a part of their annual dues thru their Provincial Institute. You may be able to come across a copy in print in a local Library, assuming the Library has one for public use.” Pay the dues, get access to the public standards.

The profession exists to protect the public interest, so I have to question whether access to the fruits of the profession’s labour, the standards themselves, are holding up this ideal. What do you think?

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Accounting Standards

Inching towards international accounting standards in the US

In Canada, the Accounting Standards Board (AcSB) has already taken the first steps of convergence with international standards by outlining the plan under which publicly accountable enterprises will transition completely to IFRS. The change will occur over the next 5 years, and the Board expects the changeover process to be complete by fiscal years beginning in 2011, although it could still be pushed back if circumstances require it.

In the US, the SEC has recently proposed that foreign companies will not have to reconcile their IFRS financial statements to US GAAP:

If the current SEC proposal is approved, foreign companies registered with the SEC that use IFRS, which is published by the International Accounting Standards Board, wouldn’t have to provide a separate reconciliation report starting in 2009.

This is a great development and real progress towards convergence. Foreign companies will likely jump wholeheartedly on this proposal, as it will allow them to save significant costs. This means less work for the professionals, but so be it. The work is redundant and does not add value in the slightest. It is inefficient to have to present financials in two different sets of GAAP.

The SEC seeks comment on the proposal, in particular regarding the possible need for additional disclosure or information on areas where the two sets of GAAP don’t agree, and whether this might require too much knowledge on the part of users of the IFRS statements.

In particular:

Should issuers and auditors consider guidance related to materiality and quantification of financial misstatements?

This struck me, because if there are significant differences on these two very fundamental audit issues, perhaps convergence is farther off than I’d originally hoped.

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Accounting Standards

7 quick facts about the new financial instruments standard

The Canadian Accounting Standards Board (AcSB) has finalized some new sections of the Handbook which include guidance on accounting for financial instruments. Financial instruments include investments, hedges, derivatives, and loans and receivables.

  1. The Canadian standard attempts to harmonize our GAAP in a way with FASB Statement 133, “Accounting for Derivative Instruments and Hedging Activities,” and IAS 39, “Financial Instruments: Recognition and Measurement.”
  2. The standard is balance sheet focused: It is an attempt to get the financial position right and flow the change through the statement of operations (income statement). It is expected to result in new assets and liabilities for most businesses implementing the standard.
  3. The default measurement basis is fair value. There are exceptions: Loans, receivables and investments intended to be held to maturity should be recorded at amortized cost, and equity investments for which no market value is readily available should be recorded at cost.
  4. The Canadian standard has been modeled closely on the IFRS, which is more comparable to Canadian GAAP in general and newer than the US standard.
  5. The new standard will require companies to reassess existing contracts as well as explicit hedges. A previous standard on hedge accounting has been in effect since 2003. The new standards may require changes to the way certain hedges are accounted for.
  6. The new standard is effective for periods beginning on or after October 1, 2006 for public companies and non-profits, and October 1, 2007 for private companies.
  7. The standard will improve, as an example, comparability between companies that are approaching their foreign exchange risk differently. Clearly there is a possibility that a company hedging the risk is in a different position than one not.
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Accounting Standards

Scots tout principles in the Big Apple

The Scotsman:

The Institute of Chartered Accountants of Scotland will tell high-powered US financiers at a conference in New York that individual judgment should play a bigger role than strict adherence to a rule book.

Ah, this old classic. Once again the rules-based US system is coming under attack by external sources, this time from Scottish accountants enjoying their visit to the Statue of Liberty and Times Square with a sharp admonishment of the US accounting hegemony post Sarbanes-Oxley.

The debate over principles and rules goes to the heart of the profession as it begs questions about the type of training given and the way that accountants interpret accounts.

“We want to make accounts more accessible and we want a greater place for judgment and common sense in the way that opinion is given on the financial position of a company.”

Canadian GAAP is principles-based. International accounting standards are principles-based. US GAAP is the exception to the rule (no pun intended). Did rules prevent Enron from happening? No. Will they prevent something like it from happening again? Of course not.

Crooks are crooks regardless, and audits are not designed to detect fraud. Management fraud, like the kind at Enron, is even tougher because management can override the internal controls that are the focus of Sarbanes-Oxley!

Yes, there’s something to be said for principles. Principles allow greater judgment, which in turn allow auditors to get their way when management attempts to put an overly rosy glow on their financial reporting. If there are rules, then you can structure transactions to be just within those rules, even if the spirit of the deal is clearly out of bounds. Judgment, and principles-based accounting standards are really the only way to address this concern.

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Accounting Standards

Income trust standards (or lack thereof) and risk

So everyone and their grandpa is still upset about the recent change to income trusts introduced by the Canadian federal government. The change was, of course, to implement a tax on trust income similar to corporate income tax.

The outrage epicentre is Bay Street, Canada’s version of Wall Street, in the heart of the financial district in downtown Toronto. But in the radiating waves of anger from that focal point, senior citizens seem to be most upset. Could that be because they are more likely to be Conservative party supporters, the party that pledged no trust tax in the last election? Possibly, but it also has to do with retirement savings and poor investment advice.

The most apoplectic are the ones who concentrated their investments in the risky vehicles.

This violates the sacred first rule of investing – diversify your holdings. Unfortunately, it seems that the only diversification many people paid attention to was in the underlying nature of the trust business – i.e. natural resources (oil and gas trusts are huge). It didn’t occur to anyone to diversify amongst vehicles – some trusts, some equities, some bonds, some derivatives, etc.

The risky nature of trusts is related to the relative lack of policing by either securities regulators, or accounting standards setters. Distributable cash is a key metric for trusts, because they are by design supposed to distribute nearly all cash generated, and one that has to this point been ignored by both parties above.

The accounting standards body in Canada, the AcSB, has no guidance on trust disclosure, and the national securities regulator, the CSA, has only suggestions as to disclosing that distributable cash is estimated based on reasonable assumptions. As Al Rosen, a popular Canadian accountant and frequent contributor to various business publications, points out: “Is any company about to admit that their predictions of distributable cash are completely unrealistic?”

Trusts need more attention from accounting standards setters and securities regulators, that much is certain. But investors also need to be aware that diversification should be done across investment vehicles, as well as industries. Both carry different types of risks.