Small and medium firms must choose
Jim Middlemiss
Sun
As of Jan. 1, 2011, small and medium Canadian companies will have to decide what standard to use in reporting their financial statements.
They must choose whether to stick with Canadian Generally Accepted Accounting Principles (GAAP) or adopt a global initiative known as the International Financial Reporting Standard (IFRS).
Publicly-traded companies don’t have an option: They will be required to use IFRS.
While 2011 might sound far away, it’s not. The real legwork for those who want to — or must — adopt IFRS will take place in 2010, say lawyers and accountants.
That’s when companies must start tinkering with their accounting systems and preparing to produce statements that meet the seal of approval created by the International Accounting Standards Committee and adopted by the International Accounting Standards Board in a bid to bring harmony to the world in financial reporting.
“The next six months is pretty crucial for a lot of private companies,” said Tahir Ayub, leader of the Alberta private company services practice at PricewaterhouseCoopers.
“A lot of private companies who haven’t really thought about this should be talking to service providers to discuss which option best fits their circumstance.” Robert Young, a partner in KPMG’s national assurance and professional practice, said the changes will be noticeable.
“IFRS is going to be a more expansive accounting framework to maintain. There are more fair value measurements. It’s more complex and expensive to generate financial statements under IFRS. They are much more detailed than they are under private Canadian GAAP.” Whether or not a company should convert depends on who it does business with and who uses its financial statements, experts say.
“If you are doing business domestically only at this point in time, I don’t see any economic or business factors that would drive you to adopt IFRS,” Mr. Young said.
If you have operations across the globe or are doing business offshore, the standard provides “a common accounting language that is streamlined and makes it easier to assist you,” said Sal Bianco, a partner at PwC in Toronto.
“If you expect to be accessing capital from lenders other than in North America, there is a much stronger probability that the only accounting framework they will find suitable is IFRS,” Mr. Young said.
Adopting the standard may also be beneficial to firms that benchmark themselves against public companies or European or Asian companies, he added.
Simon Romano a lawyer at Stikeman Elliott in Toronto, said a company’s holdings should also be a consideration. Adopting IFRS now “may assist with the future sale of a business by a buyer who uses IFRS,” he said. It may also help if “you later go public.” Mr. Romano also noted that companies may be required to adopt IFRS if they want to continue doing business with lenders, customers, suppliers or credit parties that are adopting it.
But he warned that adopting IFRS is complex and companies will incur transitional costs.
Mr. Young agreed, adding that companies might need to renegotiate some contracts or bank covenants. For example, a company bonus plan for employees could be affected.
“Net income will probably be more volatile than under historic Canadian GAAP,” he said. “I would only go there if I perceive a business benefit of doing it.” In the end, the switch might be inevitable even for small businesses, Mr. Young said.
“In 10 years, I would expect that Canadian private companies will be using an accounting framework that is going to be a lot closer to IFRS than it is today.
How close, time will only tell.”
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