Introduction of International Financial Reporting Standards for Reporting Issuers – David J. Lowdon

The Canadian Accounting Standards Board recently confirmed January 1, 2011 as the date International Financial Reporting Standards (“IFRS”) will replace the use of Canadian generally accepted accounting principles (“Canadian GAAP”) for publicly accountable enterprises (which include investment funds and other reporting issuers).  In addition, Canadian private enterprises will be permitted, but are not required, to adopt IFRS.  Changing from Canadian GAAP to IFRS will be a significant undertaking that may materially affect a reporting issuer’s reported financial position and results of operations. It may also affect certain business functions. In some cases, the differences may be material.

Form 51-102F1 Management’s Discussion & Analysis (the “MD&A Form”) requires a reporting issuer to discuss and analyze any changes in the reporting issuer’s accounting policies that the reporting issuer has adopted or expects to adopt subsequent to the end of its most recently completed financial year, including changes due to a new accounting standard that the reporting issuer does not have to adopt until a future date. Changes in a reporting issuer’s accounting policies that a reporting issuer expects to make on changeover to IFRS are changes due to new accounting standards and therefore fall within the scope of section 1.13(a) of the MD&A Form. That section specifies that the discussion and analysis should include:

•          a description of the new accounting standard,
•          disclosure of methods of adoption permitted and the method the reporting issuer expects to use,
•          discussion of expected effects on the reporting issuer’s financial statements, and
•          potential effects on the reporting issuer’s business.

The MD&A Form requirements apply to both the annual and interim MD&A filed by a reporting issuer in compliance with National Instrument 51-102 Continuous Disclosure Obligations as well as MD&A Form material that is included in a prospectus filed in compliance with Form 41-101F1 Information Required in a Prospectus.

The disclosure requirements for IFRS extend start three years prior to the first day of the financial year for which financial statements are prepared in accordance with IFRS (the “Changeover Date”).  However, a reporting issuer will likely be able to provide only limited information on the topics specified in section 1.13(a) in its MD&A three and two years before the Changeover Date. However, as it moves closer to its Changeover Date, the reporting issuer should be able to make available meaningful quantified information to allow investors to understand the impact of IFRS on, for example:

• Accounting policies, including decisions that either have been made or will have to be made
• Information technology and data systems
• Internal control over financial reporting
• Disclosure controls and procedures
• Financial reporting expertise, including training requirements
• Implications of IFRS beyond financial reporting, such as changes to financial covenants, reporting obligations, executive compensation metrics, the effect of IFRS on reported financial results, etc.

In short, for publically traded companies, planning for the implementation of IFRS and the disclosure of such planning starts now!  Your lawyer can help you with that. 

This article was orginally published in the October 8, 2008 edition of the Ottawa Business Journal.