Canadian companies are facing a 2011 deadline for the adoption of new international financial reporting standards, but investors need to start pushing now for information about the costs and logistics of the changeover, accounting experts say.

The significance of the switch from generally accepted accounting principles, or Canadian GAAP, to International Financial Reporting Standards is enormous — it will affect company financial statements, shareholders, lenders, auditors, employees and advisors — and the transition won’t be cheap. “I can say I know of companies whose costs are going to be in the millions,” says Rafik Greiss, a Montreal-based partner with Ernst & Young LLP. “The cost and effort could be onerous.”

The transition to IFRS has already been undertaken by more than 100 countries around the world with the goal of making companies in the increasingly borderless global marketplace easier to compare. In Canada, it will have a wide-ranging impact on companies and investors. In addition to altering financial reporting, the new rules could affect lending agreements, debt covenants, dividend policy, executive compensation, investor relations, profit sharing plans, accounting systems, taxation, employee incentive programs, and sales commissions.

About 4,500 “publicly accountable companies,” including Crown corporations and other organizations that are responsible to large or diverse groups of stakeholders, such as non-listed financial institutions and securities dealers, will also have to get on board.

Total costs of the mechanics of the switch are hard to estimate, but even if 100 major companies spent just $10 million on services such as accounting fees, training and new computer systems, the tab would come to $1 billion.

Investors can expect to see changeover costs begin to grow well before the deadline. Canada’s major accounting firms are already preparing for the switch. That means more outlays for companies still absorbing the costs of tightening up Canadian corporate governance and disclosure after the U.S. Sarbanes-Oxley Act of 2002.

Ben Kaak, a Toronto-based partner with PricewaterhouseCoopers LLP, says costs could range from $100,000 for a small-cap company to $20 million for a bank, insurance company or major oil and gas outfit. Officials in the number crunching community say companies should also be educating the markets about how the changes in accounting rules will alter the bottom line, such as increased volatility in financial results.

Under IFRS, companies will be able to choose a “fair value” system which would allow them to continually re-assess the value of an asset according to its current market value, as opposed to the purely historic cost measures used now.

This could result in major differences in how, for example, a company with real estate assets values the buildings from year to year, which would cause more volatility on the balance sheet. “If investors don’t understand where these things are coming from, they won’t be able to understand the valuations,” Greiss says.

Similar changes will apply to other types of charges. According to a report released in October by the Canadian Accounting Standards Board, a body with federal oversight that regulates accounting standards, “under IFRS, impairments [losses on both tangibles and intangibles] will generally be triggered more often, but unlike Canadian GAAP, impairments under IFRS can be reversed.”

Another difference is that so-called “extraordinary items” declared on financial statements, already restricted under Canadian GAAP to once in a lifetime types of events, such as a major fire destroying a plant, will be disallowed under IFRS. “Under IFRS there would be full disclosure of the item but it would be shown above the line and be part of annual earnings,” says Ron Salole, vice-president of standards for the Canadian Institute of Chartered Accountants.

It appears that oil and gas companies may have more bookkeeping changes than others — they will have to write off unsuccessful exploration costs at the time they were incurred, so that the full impairment charge hits in one fell swoop. That’s a change from today, when companies can carry the costs of the unsuccessful drilling forward. “It can have a huge impact on profitability in the oil patch,” Kaak says.

The new rules will also force rate-regulated enterprises, such as utilities, to rethink their methods. That’s because, unlike Canadian GAAP, there is no special guidance for them under IFRS, Greiss says.

The earlier companies start preparing for the change, the easier the switch will be, and national accounting gurus are warning all Canadian publicly-traded companies not to wait until the last minute, a hard lesson absorbed by some European companies which stalled in their preparations for adopting IFRS in 2005.

@page_break@Robert Waters, the CFO of Calgary-based trustEnerplus Resources Fund, said the CASB has put a lot of pressure on companies to move quickly. “They’ve got a really aggressive time frame,” Waters says. “It’s going to be a challenge and a bit of a scramble.”

Accountant Al Rosen, who prefers the rules-based U.S. GAAP, said Canada does not have the infrastructure to police principles-based accounting. “It’s a function of the honesty of the management,” he says. “The bottom line is that investors won’t be protected under IFRS. If you have an accounting and reporting system that allows you to cover up, then why would you disclose?”

But Salole says the switch is positive from an investor perspective since it will allow Canadian companies to be compared easily against their international peers, making the job of portfolio managers easier. Kaak agrees: “It’ll be very good from a capital management perspective.”

Kaak added that a PWC survey of 187 European fund managers published in 2006 showed that less than one year after the changeover to IFRS, about 66% reported having already noticed an impact on financial results, and almost 75% said the change had some impact on their opinion of the value of companies, since financial information was easier to compare. About one fifth said that information generated by the new standards had influenced their decision to either buy or walk away from an investment. IE