By Dwarka Lakhan

Public companies in Canada are set to change the way they report their financial information by switching from Canadian accounting rules to globally accepted financial reporting standards.

This move will allow for easier comparison of the financial information issued by public companies in an increasing number of countries that are adopting global reporting standards in favour of their domestic accounting rules.

“The change will allow for greater comparability of financial information issued by companies in countries that use international financial reporting standards,” says Doug Cameron, Professional Practice Director of Ernst & Young Canada in Toronto. “Financial statements will be more compatible”, he adds.

The proposed change was announced on January 10th by Canada's Accounting Standards Board (AcSB) which ratified a new strategic plan that proposes to phase out the use of Canada's Generally Accepted Accounting Principles (GAAP) for financial reporting by public companies and introduce International Financial Reporting Standards (IFRS) established by the London, UK-based, International Accounting Standards Board.

The AcSB's strategic plan also addresses reporting for private businesses and not-for-profit organizations but these entities will most likely not be affected by the reporting change. “Our fundamental premise and experience is that one size does not necessarily fit all when it comes to meeting the divergent needs of the full range of Canadian reporting entities and stakeholders,” says Paul Cherry, Chair of the AScB in a press release. He adds, “For example, developments in global capital markets are important for public companies and their investors, but not so important for private businesses and not-for-profit organizations.”

The announcement followed an extensive consultative process which started in March 2004 that culminated in the publication of Accounting Standards in Canada: Draft Strategic Plan. A final version of the plan is expected to be available by March 31, 2006. Once finalized, the new rules will be implemented over a five year transition period.

Typically, the foundation of accounting consists of a set of generally accepted accounting principles which are usually followed by most companies, although they are not legally obligated to do so. However, since public companies are audited by professionals who must adhere to GAAP or IFRS, they are obliged to report any incidence where the rules are not followed. This catch-22 situation forces companies to adhere to the accepted accounting standards and therefore out of necessity would have to implement IFRS.

Indeed, the US Securities and Exchange Commission (SEC) requires that all companies listed on a national stock exchange or traded over-the-counter file accounting reports that conform to US GAAP standards. Currently, Canadian companies with significant exposure to the US market use US GAAP and would most likely continue to do so in spite of the rule change. The Canadian Securities Administrators currently allows Canadian public companies that are SEC registrants to use US instead of Canadian GAAP.

Whether or not Canadian standards should been have aligned to US GAAP instead of the IFRS was the subject of much debate. However, according to the AScB press release, “the vast majority of Canadian companies and, more important, their investors, have little or no interest in our copying the very detailed, rulesoriented US GAAP system.”

Cameron says that there have been discussions with the SEC to facilitate the use of IFRS but so far no decision has been made. In addition the adoption of the IFRS may help avoid the scandals that have plagued the accounting industry in recent years.

Some of the countries that have adopted IFRS include the European Union, Australia, Hong Kong, Russia and South Africa, while several countries are in the transition phase.