International financial reporting standards will replace Canada’s GAAP.
International Financial Reporting Standards (IFRS): unless you operate a public company, these words may not mean much to you, but they will.
More than 110 countries are using IFRS and virtually all major countries are expected to do so within the next couple of years. As post-conversion benefits become apparent, more private companies will also adopt these standards, which provide better access to capital by allowing easier financial performance benchmarking among competing companies.
These standards establish how a company should report certain transactions in financial statements, eliminating the need to reconcile information reported under different national standards while providing consistent information for decision making.
They’ll replace Canada’s generally accepted accounting principles (GAAP) for most publicly accountable enterprises by Jan. 1, 2011, affecting first quarterly statements ending March 31 and first annual financial statements ending Dec. 31.
Canadian GAAP and the international standards are based on similar principles-based concepts rather than the rules-based concepts applied in the US. While this helps to address the reality of business transactions, such a system relies to a greater extent on the professional judgment of those applying the standards, and thus more disclosures are required.
Conceptually, IFRS and Canadian GAAP are similar. There are, however, significant differences in the details, which vary widely by industry and enterprise. Manufacturers would likely note some of the following:
• Properties held for rental or capital appreciation are treated the same as property, plant and equipment, whereas IFRS accounts for these separately.
• Both Canadian GAAP and IFRS require property, plants and equipment to be recorded at historical cost; however, there are different requirements for including or excluding expenditures.
• International financial reporting allows a company to record property, plant and equipment at a revalued (fair value) amount, something generally prohibited under Canadian GAAP.
Other significant changes relate to impairment of non-financial assets such as fixed assets and goodwill. Unlike Canadian GAAP, the international standards require companies to reverse previous impairment write-downs, other than for goodwill, if the conditions that caused the impairment no longer exist. This could make net income more volatile.