Thursday, May 29, 2008

International Financial Reporting Standards and Canada

Canada and International Financial Reporting Standards
Canadian GAAP and IFRS


Globalization of Capital markets has spurred the acceptance of International Financial Reporting Standards. The term “IFRSs” refers to standards approved by the International Accounting Standards Board (IASB) or its predecessor body, the International Accounting Standards Committee, as well as interpretations originated by the IASB’s interpretations committee, the International Financial Reporting Interpretations Committee (IFRIC) or its predecessor body, the Standing Interpretations Committee. In essence a global set of accounting standards facilitates international commerce and transactions around the world.

In Canada the Accounting Standards Board (AcSB) has recently confirmed January 1, 2011 as the changeover date (i.e., the date IFRSs will replace current Canadian standards and interpretations as GAAP for this category of reporting entity). As a result, except as noted in “Scope” below, publicly accountable enterprises are required to prepare their financial statements in accordance with IFRSs for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Some may choose to adopt IFRSs earlier.

Scope
The AcSB (Accounting Standards Board) proposes that all Canadian reporting entities, except the following, be required to apply IFRSs after January 1, 2011:
Private enterprises, that is, profit-oriented entities that:(a)
(i) have not issued (and are not in the process of issuing) debt or equity instruments in a public market; and
(ii) do not hold assets in a fiduciary capacity for a broad group of outsiders. Entities with fiduciary responsibility, such as banks, credit unions, insurance companies, securities brokers/dealers, mutual funds, and investment banks, stand ready to hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity.
Not-for-profit organizations, as defined in (b) FINANCIAL STATEMENT PRESENTATION BY NOT-FOR-PROFIT ORGANIZATIONS, Section 4400.
Public sector entities to which the standards contained in the CICA Public (c) Sector Accounting Handbook apply. The Introduction to the CICA Public Sector Accounting Handbook states that for purposes of their financial reporting, government business enterprises and government business-type organizations are deemed to be publicly accountable enterprises and should adhere to the standards applicable to publicly accountable enterprises in the CICA Handbook – Accounting, unless otherwise directed to specific public sector standards. Accordingly, the changeover to IFRSs applies to these two categories of public sector entity.

Entities required to apply IFRSs after January 1, 2011 are collectively referred to as “publicly accountable enterprises.”

IFRS is big, but it’s not a revolution. The fundamental financial reporting premise is the same and the standards cover almost identical areas. There’s no difference in the basic concepts, the difference is in the details.

The three important and widely applicable differences between IFRS and Canadian GAAP are the treatment of i) impairment, ii) securitization and iii) revaluations.

The following are only a few significant differences between Canadian GAAP and IFRS and does not include all of the differences that might arise in a particular entity’s circumstances.

Historical Costs Principle: Historical cost is the main accounting convention. Under GAAP items are usually accounted for at their historical cost. However, the IFRS permits the revaluation of intangible assets, property, plant and equipment, and investment property to fair value. IFRS also requires certain categories of financial instrument and other biological assets to be valued at fair value. All items, other than those carried at fair value through profit or loss, are subject to impairment. The best evidence of fair value is a quoted price in an active market (also termed ‘mark to market’). It is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
IFRSs provide guidance on determining when the economy of an entity’s functional currency is hyperinflationary. When an entity’s functional currency becomes hyperinflationary, it makes price-level adjustments retrospectively. The financial statements of a foreign operation whose functional currency is hyperinflationary are adjusted before being translated for consolidation purposes.

Going Concern Assumption: General Standards on Financial Statement Presentation has been amended to include requirements to assess an entity’s ability to continue as a going concern and disclose any material uncertainties that cast doubt on its ability to continue as a going concern.

The Statements: IFRS does not require a statement of retained earnings. If an entity chooses the same can be incorporated as a part of the income statement. In IFRS financial statements a 'Statement of Changes in Equity' is now required. The statement of changes in equity presents a reconciliation of equity items between the beginning and end of the period.
The following items are presented on the face of the statement of changes in equity:
(a) profit or loss for the period;
(b) each item of income or expense recognized directly in equity (for example, revaluation gains on PPE, currency translation differences arising on the translation of the financial statements from the functional to the presentation currency) and their total;
(c) total income and expense for the period (the sum of (a) and (b)), showing separately the total amounts attributable to equity holders of the parent and to minority interest; and
(d) for each component of equity, the effects of changes in accounting policies and corrections of material prior-period errors. Details of distributions, the balance of retained earnings and a reconciliation of the carrying amount of each class of equity and each item recognized directly in equity are presented either on the face of the statement of changes in equity or in the notes to the financial statements. (review sample following this article)

Inventory Evaluation Methods: The cost of inventories used is assigned by using either the first-in, first-out (FIFO) or weighted average cost formula. Last-in, first-out (LIFO) is not permitted. The same cost formula is used for all inventories that have a similar nature and use to the entity. Where inventories have a different nature or use, different cost formulas may be justified.

Sample Reports of Independent Audit and Review under IFRS

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERS
We have audited the accompanying financial statements of Good Group (International) Limited and its subsidiaries (‘the Group’), which comprise the consolidated balance sheet as at 31 December 2007 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2007, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Chartered Accountants & Co.
Date City:

REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION.

Introduction
We have reviewed the accompanying consolidated condensed balance sheet of ABC Corporation as of 31 May 2006 and the related consolidated condensed statements of income, changes in equity and cash flows for the six-month period then ended. Management is responsible for the preparation and presentation of this consolidated condensed interim financial information in accordance with International Accounting Standard 34, ‘Interim financial reporting’3. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope of review
We conducted our review in accordance with International Standard on Review Engagements 2410, 'Review of interim financial information performed by the independent auditor of the entity'. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the accompanying consolidated condensed interim financial information is not prepared, in all material respects, in accordance with IAS 34.

[Accounting Firm]
Date
City

Sample ‘Statement of Changes in Shareholders’ Equity


Adapted from an article written by:
Puru Grover
General Manager
Credit Guru Inc
Financial Statement Analysis Course: http://www.creditguru.com/education/seminar-UFS.html