The Canadian Accounting Standards Board confirmed in 2008 that January 1, 2011 was the date at which the International Financial Reporting Standard (IFRS) would replace current Canadian Standards and Interpretation as Canadian Generally Accepted Accounting Principle (Canadian GAAP) for publicly accountable enterprises (which include investment funds and other reporting Issuers).
In its CSA Staff Notice 52-320 entitled Disclosure of Expected Changes in Accounting Policies relating to Change Over to International Financial Reporting Standards, the Canadian Securities Administrators (the CSA) (the umbrella group of all securities regulators in Canada) mandated that, during the period up to January 1, 2011, reporting Issuers had to disclose, discuss and analyze any changes in the Issuers' Accounting Policies that the Issuer had adopted or was expected to adopt subsequent to the end of its most recently completed financial year, including changes to a new accounting standard that the Issuer did not have to adopt until a future date. The discussion and analysis was to include a description of new accounting standards, disclosure of methods of adoption permitted and the method the Issuer is expected to use, discussion of expected effects on the Issuer's financial statements and potential effects on the Issuer's business in the Management's Discussion and Analysis (MD&A) form accompanying the Issuer's Quarterly and Annual Financial Statements.
KEY DATES AND MILESTONES
With the financial year ended December 31, 2008, the Issuer is now required to include in its MD&A disclosure his IFRS conversion plan including a description of the major identified differences between the Issuer's current accounting policies and those the Issuer is required or expected to apply in preparing IFRS financial statements.
Such differences include any differences due to an expected change in accounting policies even though the Issuer's existing policy on the Canadian GAAP is permissible under IFRS. The purpose of this latter disclosure is to enable investors to understand key elements of the Issuer's financial statements that will be affected by the changeover to IFRS. With the fiscal year ending December 31, 2009, the Issuer should be in a position to disclose in its MD&A discussion in more detail of key decisions and changes the Issuer has made, or will have to make, relating to the changeover to IFRS.
This discussion should include decisions about accounting policy choices available under IFRS 1 First Time Adoption of International Financial Reporting Standards and other individual IFRS standards that are relevant to the Issuer. To comply with this requirement, an Issuer will have to prepare quantified information about the impact of IFRS on each line item presented in the Financial Statements for interim and annual periods for the year preceding the changeover (e.g. for the year ending December 31, 2010).
As of January 1, 2010, the Issuer will be required to prepare an IFRS opening balance sheet, but will continue to prepare financial statements in accordance with Canadian GAAP. At the same time, the prudent Issuer should prepare parallel financial statements in accordance with IFRS for eventual comparison purposes during fiscal year 2011.
Beginning with fiscal year 2011, all financial statement of the Issuer will have to be prepared in accordance with IFRS.
TIME IS OF THE ESSENCE
On May 15, 2011, senior Issuers will be required to file with regulatory authorities the interim financial statements as at March 31, 2011, which will be fully comparable to the corresponding period of 2010, together with the MD&A relating thereto. This essentially will afford the Issuer only 4.5 months to complete its audit for the financial statements for the year ending December 31, 2010 pursuant to Canadian GAAP, restate the 2010 Annual Financial Statements and convert them to IFRS and file the interim financial statements for the first quarter of 2011 under IFRS with comparables to the first quarter of 2010 also under IFRS. (Venture issuers are afforded an extra 15 days to comply).
DUTIES OF THE DIRECTORS AND MANAGEMENT
In order to do so and in order for the directors to discharge their responsibilities and duties as directors of the Issuers, directors will have to be fully versed in (i) the IRFS standards, rules and policies, (ii) the implications of the changeover for the Issuer, (iii) be able to identify the principal risks of the Issuer's business and ensuring the implementation of appropriate systems to manage these risks, (iv) assess the Issuer's internal controls in management information systems and (v) review the Issuer's communications policies. In addition, in relating to the IFRS changeover, the Directors must and will play a supervisory role to make sure that the Officers, senior management, treasury and accounting personnel and other employees of the Issuer have been fully trained in IFRS and are able to make the changeover without hesitation, delays or material mistakes.
Directors and Management of an Issuer should now be embarked upon an educational mode in order to maintain and enhance their skills and abilities as well as to ensure that their knowledge and understanding of the Issuer's business remains current both under Canadian GAAP and IFRS during the interim period. Boards of Directors may even consider appointing new directors which have IFRS expertise in order to assist the Issuer in successfully changing over to IFRS.
WHAT ARE IFRS?
Conversion to IFRS is just not an accounting exercise. It is a high quality, principles-based framework, where fewer rules and exceptions are provided and/or permitted which allows the exercise of more professional judgement. It brings transparency to economic transactions, increases global comparability amongst companies by removing unnecessary differences in reporting results, enhances the efficiency of capital allocations and generates process and cost efficiencies. IFRS presents unique challenges for directors, senior management, investor relations, human resources, treasury and tax functions, legal, information technology and any other areas across the company. Along with shareholder reporting, IFRS will likely impact existing management reporting and other key process areas including, budgets, forecasts, performance measures, bonus structures, key performance indicators, acquisition analysis, structuring of transactions, debt covenance, legal agreements and even executive compensation.
Because IFRS is a fundamental change in management exercise at a company, the Issuer will have to change its methods and systems to collect, collate and understand IFRS numbers and disclosures to anticipate and plan for changes to reporting procedures, financial and management information systems, and the skills and knowledge of staff and to embed IFRS across the organization so as to enable the business to implement change in a smooth transition to a new way of operating.
As stated above, conversion to IFRS is not just a technical accounting exercise. It must be carefully planned, the needs of the company must be adequately assessed and the resources required must be clearly identified. To do so, directors, officers and senior management of a company cannot wait until January 1, 2011 to familiarize themselves with IFRS and the conversion thereto. During the two intervening years remaining before the conversion is to be implemented, directors, officers and senior management must train themselves and the company's employees in anticipation. Not only must they train themselves internally, they must also focus on communicating the expected consequences of such conversion to the market place, their shareholders and stakeholders in order to avoid sudden impacts on the financial situation of the company which will take the market place by surprise and potentially harm the company's standing in the market place.
Issuers must be proactive and not reactive. In order to be successful, IFRS will have to be embedded in the culture of the Issuer to avoid delays and minimize costs. Should they not be successful in making the conversion as smooth, transparent and seamless as possible, it is expected that the cost of failure will be significant not only in monetary terms, but also loss of standing and reputation.