International Financial Reporting Standards for Canada by 2011
June 5, 2008
Robert D. Chapman
Edward P. Kerwin
The Canadian Securities Administrators (CSA) recently published CSA Concept Paper 52-402, which discusses issues and invites comment about the impending transition from the use of generally accepted accounting principles (GAAP) to the use of International Financial Reporting Standards (IFRS) by reporting issuers in Canada by January 1, 2011. GAAP are established by the Canadian Accounting Standards Board (AcSB) and published in the Canadian Institute of Chartered Accountants’ Handbook, while IFRS are issued by the International Accounting Standards Board (IASB). This paper is the CSA’s first step in addressing the changeover.
The CSA noted that the adoption by the AcSB of the 2011 implementation date for IFRS, as well as recent developments in the United States relating to acceptance of certain financial statements prepared in accordance with IFRS, have led to the need to address the implications from a securities law perspective.
Shortly after the CSA published its Concept Paper, the AcSB released its Exposure Draft of IFRS for Canada. This document will apply to "publicly accountable enterprises," including publicly listed companies, certain government corporations and enterprises with fiduciary responsibilities such as banks, insurance companies, credit unions and securities firms. The AcSB is also studying appropriate standards for private companies in Canada.
The move to IFRS will place Canada on the same reporting basis as more than 100 other countries, including the United Kingdom and other European Union (EU) countries, Australia and New Zealand. IFRS are described as principles-based and are similar to current Canadian GAAP in terms of conceptual frameworks and topics covered, in contrast with US GAAP, which is characterized as a more detailed, rules-based system.
Under National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), domestic issuers (those reporting issuers incorporated in Canada) must use Canadian GAAP. Two exceptions apply: (i) domestic issuers who are US Securities and Exchange Commission (SEC) registrants have the option to use US GAAP, and (ii) only foreign issuers who are not also SEC registrants may use IFRS.
The SEC has recently authorized foreign private issuers that file annual reports on Form 20-F to use IFRS without reconciliation to US GAAP in preparing their financial disclosures for the US market for years ended on or after November 15, 2007. As a result, under NI 52-107, foreign issuers who are SEC foreign private issuers may now also use IFRS without reconciliation to US GAAP for their Canadian filings.
In a similar vein, the European Commission recently announced that United States and Japanese companies with a stock market listing in the EU may continue to use their versions of GAAP, while Canadian and Korean companies may use their respective GAAP until 2011.
The CSA invited comments on three principal questions:
- Should domestic issuers be permitted to adopt IFRS before January 1, 2011 if they choose to do so?
- Should the CSA eliminate the use of US GAAP by domestic issuers who are also SEC registrants?
- Should the term "Canadian GAAP" be replaced by, and not simply redefined as, "IFRS as issued by the International Accounting Standards Board"(IFRS-IASB)?
The comment period for the CSA Concept Paper closed on April 13, 2008. Comment letters submitted to the CSA by leading participants in the Canadian capital markets have supported permitting domestic issuers to adopt IFRS before January 1, 2011 and replacing the term "Canadian GAAP" with "IFRS-IASB" in laws, regulatory rules and other requirements, but have opposed eliminating the use of United States GAAP by domestic issuers who are also SEC registrants until the US adopts IFRS.
On May 9, 2008, the CSA published CSA Staff Notice 52-320, which provides guidance to an issuer on disclosure of expected changes in accounting policies relating to an issuer’s changeover to IFRS as the basis for preparing its financial statements for each financial reporting period in the three years before the first year in which the issuer uses IFRS. The notice focuses on MD&A and recognizes that the disclosure will be incremental and provide more detail as the issuer approaches its changeover date.
In future issues of this publication, we will provide reports and commentary on the transition to IFRS in Canada.