Reflections on Canada’s changeover to IFRS

Eight years after the Accounting Standards Board decided to adopt international reporting standards in Canada, Canada has become a significant influencer for standard-setting on a global scale.

When the Accounting Standards Board (AcSB) decided to adopt international financial reporting standards (IFRS) in Canada back in 2006, some people worried about the loss of control over standard-setting domestically. But I believe our experience to date shows that by playing our cards right we gain rather than lose.

We gain by being able to shape global accounting standards used by Canada, as well as more than 100 other countries. The major changes in financial reporting standards in recent years have been driven largely by changing market conditions, especially that of the recent financial crisis. They are also driven by pressures by regulators to curb off-balance sheet financing and other techniques designed to conceal assets and liabilities. Those pressures are global in nature and require a globally coordinated response.

Significant change to old Canadian GAAP was therefore inevitable. By being a direct participant in the International Accounting Standards Board (IASB) fraternity, we are able to exercise greater influence on the future direction of those standards by having real skin in the game.

AcSB: Canada’s facilitator

Concerns about loss of control are sometimes expressed as needing a strong Canadian voice. This might give the impression that, prior to adopting IFRS, Canadians generally spoke to the AcSB with one voice. To the contrary, my experience as a standard-setter over nearly three decades is that views often differed on most important issues — and sometimes quite sharply.

The essence of standard-setting is balancing competing interests. The best you can sometimes hope for is what a politician friend calls “equalized unhappiness.” My experience in the international arena has been very similar.

In Canada, we can learn from Europe. For several years, the European Union has expended much time and effort seeking a single voice. Its experience to date shows this is often not achievable. In my view, it’s often not desirable either. When there is a difference of views, the standard-setter benefits from hearing the range of views. What the AcSB can — and is — doing is to act as a facilitator to help Canadian stakeholders fully engage in the IASB standard-setting process.

Was there an alternative to IFRS?

It is important to remember that the only real alternative to IFRS at the time the decision was made to adopt it was US GAAP. Even if Canada didn’t adopt US GAAP holus-bolus, the previous AcSB policy of harmonizing with US GAAP effectively meant that most key decisions were really being made by FASB.

FASB’s responsibility is to do what is in the best interests of US investors and the US capital markets. Meanwhile, IASB serves global investors and global markets, including North America, and is widely praised for its transparent, very open and inclusive processes and strong governance.

To me, this suggests that IASB is the better fit for Canada.

Especially critical for Canada was the US Securities and Exchange Commission’s decision to waive the requirement to reconcile national GAAP financial statements to US GAAP (provided those financials were prepared in accordance with IFRS as issued by IASB). This resulted in very substantial cost and time savings.

A common misconception in North America is that IASB is a European-dominated institution. On the other hand, many Europeans feel North Americans have too much influence with IASB.

In reality, great care is taken to balance the membership of all key bodies in terms of geographic regions and stakeholder groups. These key bodies include IASB itself, IFRS Trustees, which ensures IASB adheres to rigorous due process and promote IASB’s work and the rigorous application of IFRS; the IFRS Interpretations Committee, which reviews widespread accounting issues that arise with IFRS; and the IFRS Advisory Council, a formal advisory body to IASB and Trustees.

The right people are around the table

AcSB and the Accounting Standards Oversight Council (AcSOC), which oversees AcSB’s activities to ensure it adheres to a rigorous due process, are to be commended for their efforts to identify highly qualified Canadian candidates as members. The fact that not everyone who applies to AcSB or AcSOC gets appointed simply reflects the keen interest and fierce competition worldwide to fill vacancies as they arise and the need to maintain an appropriate balance of membership.

I don’t want to give the impression that there aren’t any challenges lying ahead. Although more than 450 foreign companies listed on US markets now report using IFRS, the US seems unlikely to require IFRS for domestic issuers in the near future. Few of us expected it would. IFRS remains appropriate for Canada regardless of what the US decides. That said, the US is not immune to the economic reality of the global markets and so the pressure will continue unabated on it to adopt global financial reporting standards.

Meanwhile, the important point is that FASB and other major national standard setters, including AcSB, are working with IASB more closely than ever through the recently established Accounting Standards Advisory Forum (ASAF), which has the objective of providing a forum where members from around the world can constructively contribute towards the achievement of IASB’s goal of developing globally accepted, high-quality accounting standards. In addition to AcSB and FASB, ASAF includes standard-setters from Japan, China and Germany.

Regionalization trend

However, there is a trend toward regionalization. Besides what Europe is doing, Asia-Oceania and Latin America are also aggressively developing new regional infrastructures. While some may see these developments as posing the risk of balkanization, the reality is that countries in these regions are often at very different stages in their economic development and often struggle to sort out their differences and provide effective input to IASB. However, I believe we should welcome and encourage regional initiatives, provided they aim to complement and support — rather than compete with — IASB.

Canada’s obvious regional partner is the US, the world’s largest equity market with a long history of standard-setting and a well-developed infrastructure. The time is ripe to expand the working relationship between AcSB and FASB in furtherance of global standards. Senior representatives of FASB and Financial Accounting Foundation, the Trustees who oversee FASB, recently met with their counterparts at AcSB and AcSOC in Toronto. The Canadians reciprocated with a visit to Norwalk, Conn., early in 2014 and the two boards now have informal exchange of views prior to each ASAF meeting, furthering the building of this regional relationship.

One of the biggest challenges will be setting priorities on a global basis. The primary function of the IFRS Advisory Council, which I chaired for the past five years, is to advise IASB on its strategic direction and priorities. Most council members today are appointed as representatives of organizations with an interest in financial reporting. As a result, it constitutes a large and diverse worldwide network of influential individuals and organizations, including several from Canada. National and regional bodies are also well-positioned to provide input on issues of particular concern and high priority in their jurisdiction.

Priorities will, of course, differ from region to region. Given capacity constraints and a desire to avoid excessive standard-setting, some high priority items locally are unlikely to make it onto the IASB agenda for years — and perhaps never.

There will inevitably be pressure on national standard-setters to fill the gap. While well-intentioned, this could defeat the objective of a single set of global standards. The use of nonauthoritative discussion groups and educational material could help. AcSB’s IFRS Discussion Group, which maintains a regular public forum to discuss issues that arise in Canada when applying IFRS, is a splendid example and is becoming a model for similar initiatives elsewhere around the world.

Last year, FASB and IASB announced the formation of a joint transition group for the new revenue recognition standard. This innovative step is intended to provide nonauthoritative guidance as reporting entities transition to the new standard. The new standard is a triumph of convergence and a watershed shift by the US away from highly detailed, industry-specific rules.

Looking ahead, insurance contracts might be another prime candidate for a similar discussion group when new standards are finalized by these two boards.

Staying ahead of the curve

A major challenge facing standard-setters is how to stay ahead of the curve on issues likely to affect the evolution of financial reporting. Standard-setters are chosen primarily for their technical skills. The main objective is to achieve and maintain high-quality financial reporting in the current financial reporting environment. As a result, and rightly so, there tends to be incremental changes that build on what is already in place.

The IFRS Advisory Council identified forward-thinking as an area that needs to be addressed rigorously and systematically. The council has embarked on discussions with various interested parties, including valuations experts, XBRL specialists and representatives from the International Integrated Reporting Council, in an effort to stimulate a broad-based exchange of views. But a lot more needs to be done. While the council has a role to play, it may not have the necessary mandate or resources.

Having IASB conduct research and muse publicly about potential radical changes could alarm and confuse the marketplace. Such work might be misconstrued as signalling an intention to change current standards. This might actually discourage rather than encourage rigorous analysis and debate of some issues. We are seeing some evidence of this in the discussion paper outlining potential changes to the IASB Conceptual Framework. Perhaps a separate body — that is, separate from IASB but under the same strong governance of the IFRS Foundation — should be responsible for the research program and other forward-looking initiatives.

Important challenges lie ahead, but I am confident of a positive outcome. The question is not whether Canada can influence IASB, but whether Canadians are prepared to continue to contribute as global citizens – to work with IASB and AcSB for the standards we believe will best serve the global capital markets. I believe the answer is a resounding yes.

Paul Cherry, OC, FCPA, FCA, was appointed as an Officer of the Order of Canada in 2012, for “his commitment to improving financial reporting, notably through his leadership in developing international accounting standards.” He has served as chairman of the IFRS Advisory Council and chair of the AcSB, when he spearheaded Canada’s work on adopting IFRS. He is currently a member of Canada’s Accounting Standards Oversight Council.

Technical editor: Glenn Rioux, MM, CPA, CA, vice-president, Standards, CPA Canada