Secondment to the finance department

For the next couple months I’ll be in Kansas City getting some experience in one of the regional offices of a division of my company, helping with some year end tasks. It’s going to be pretty interesting to be on the other side of the table for once, liaising with the external auditors and working with finance staff located across the Midwest to put together the financials.

Anyway, what’s new with you? It’s been a while…

Changes to GAAP for private companies in Canada

Since the mid 90s there has been debate within accounting circles on whether there should be two versions of GAAP – one for public companies and one for private companies. Big GAAP and little GAAP. The logic is that there are sections of GAAP that do not apply to non publicly accountable entities, and time and money is wasted complying for little benefit.

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.

Accounting news roundup

Shell and reporting sustainability

This piece in the Globe and Mail was interesting:

Shell was early with “sustainability reporting” (their first annual sustainability report was published in 1998). They currently have a goal to have their (self-reported) greenhouse gas emissions 5 per cent below 1990 levels by 2010, similar to the Kyoto Protocols.

The story was about Shell’s CEO lauding the Kyoto Protocol and expressing his wish that there was a strong worldwide framework within which the oil industry could work with governments to control carbon emissions. But I’m interested in the standards:

The company is using the Global Reporting Initiative guidelines, the best known international standard for reporting on GHG emissions. So Shell is also more transparent than some. Shell claims to have invested $1-billion (U.S.) in renewables since 2000, notably in a major offshore wind project in the North Sea.

Is anyone auditing this report? Or Shell’s claim of investing $1B USD in renewable energy? I took a look at 2005’s Sustainability Report and found no auditor’s report. There is an impressive External Review Committee, with representatives from Transparency International and the Danish Institute for Human Rights. They describe their procedures and identify three guiding principles: materiality, completeness, and responsiveness to stakeholders.

Sounds like a great opportunity for an audit of both non-financial and financial information.