Canadian capital markets appear divided in their appreciation of the elimination of Canadian accounting rules in favor of international standards. according to the results of a survey and report released by Standard & Poor’s Ratings Services.

The commentary “IFRS: An Added Twist To The Globalization Of Canada’s Capital Markets” explores management, investor, and analyst sentiment toward Canada’s decision to adopt international accounting rules and do away with Canadian GAAP. Market sentiments were then compared to the specifics of the new rules to determine whether those sentiments pose undue risk in light of the changes to come.

International financial reporting standards, collectively known as IFRS, are a set of accounting rules that were adopted by the EU in 2005, but not without many contentious debates that continue to this day.

As the five-year overhaul of Canadian accounting standards ramps up in 2007 (it began the first quarter of 2006), S&P warns that without a reasonably sound appreciation for the conversion to IFRS, one might misinterpret ongoing or intermittent changes to reported numbers as being a product of the economic realities of a business when in fact, those changes might be caused solely, or in large part by conversion-related accounting policy shifts unrelated to a company’s core activities.

According to the results of S&P’s IFRS Preparedness Survey, respondents were well aware of the conversion to IFRS and its potential impact to their reported numbers. Accordingly, respondents felt it necessary for investors and analysts to revisit the way they interpret reported results and evaluate company performance. They also noted that the cost of IFRS preparedness will be meaningful to the bottom line — rivaling the cost of Sarbanes-Oxley rule 404 compliance in certain cases.

Respondents reserved their harshest criticisms for the fair value accounting requirements of IFRS, saying that it is inordinately difficult to determine the fair value of many balance-sheet items, results at times in confusing and unreliable figures, and provides the most potential for unwarranted financial statement volatility among all IFRS pronouncements. In stark contrast, financial statement users (ranging from institutional investors to buy- and sell-side analysts) tended to be unaware of the change to IFRS or at best, were aware of the change, but were unfamiliar with IFRS pronouncements and seemingly indifferent to its potential effect on their perceptions of earnings quality, valuations, and overall financial health.

“The change in accounting standards has certainly garnered our attention. While there is no consensus view on exactly what IFRS’ impact will be on our capital markets, what is clear from our survey results is that many CFOs will be closely monitoring its effects on their reported numbers — a telltale sign that maybe we, as users of their financial reports, should be doing the same,” said Kevin Hibbert, Canadian director of financial reporting.