Changes in accounting standards never attract broad public attention, but the big move this year to the international financial reporting standards by all Canadian publicly traded companies could catch the attention of your clients.

The switch to IFRS from Canadian generally accepted accounting principles means that financial measures — such as return on equity — and how some data are presented will be markedly different. However, understanding the accounting changes is not easy.

You need to use the notes accompanying the first quarter in which a company switches to IFRS to reconcile the current figures with the data for the previous year. As well, you need the notes that explain each of the items that are treated differently under IFRS.

Further complicating the picture: the changes are partly in presentation and partly in the different way of treating the various components of financial statements.

For any particular company, you will want to look at the reconciliation of shareholders’ equity and net income, and zero in on the biggest items. You can also calculate ROE for the previous year using both systems of standards, which will give you a feeling for how significant the changes are for a company.

Twenty-seven financial services companies in Investment Executive’s quarterly profit survey (above) had made the switch as of the first calendar quarter of 2011. The change is mandatory for fiscal years that start in 2011; for most Canadian banks, that is not until Nov. 1.

Of the 27 companies, 17 had higher ROE in 2010 using IFRS than under GAAP. Of the others, two had no change in ROE and six posted lower numbers. ROEs for two firms couldn’t be calculated because the companies were in a loss position that year. The differences in ROE were at least 0.5 of a percentage point higher or lower for all but 11 of the firms.

Here’s a look at some of the major changes under IFRS:

> Segregated Fund Assets. Un-der IFRS, these must be included on the balance sheet, a difference in how financial data is presented under Canadian GAAP. Including these assets on the balance sheet does not have any impact on the income statement.

However, this IFRS method does result in huge increases in total assets under management for life insurers — a 95% increase for Manulife Financial Corp. , 94% for Great-West Lifeco Inc., 74% for Sun Life Financial Inc. and 69% for Industrial Alliance Insurance & Financial Services Inc.

The reason behind the IFRS’s inclusion of seg fund assets is that the insurance contracts included in seg funds make them both an asset and a liability of the issuing insurer.

> Securitized Loan Assets. These, too, must now generally be included on the balance sheet. This not only increases assets but also affects the way gains and losses from these loans are treated on the income statement. The income and expenses associated with these loans must now be included on the income statement; and there are changes in the accounting methods for the hedging used by companies to lower their risk exposure on the loans.

The reasoning is that the originator of a securitized loan retains control over the loan. Under GAAP, loans were deemed to have been sold when they were securitized.

This change can affect interest margins. For example, Home Capital Group Inc. had $8.6 billion, or 64% of its residential mortgages securitized on March 31. Many of these are traditional mortgages that have lower interest rates than the alternative, non-securitized mortgages that Home Capital offers to consumers who can’t qualify for a mortgage at a bank. The result for Home Capital is a lower interest margin under IFRS: 2% in the quarter vs the 2.6% for unsecuritized mortgages.

> Fair Market Value. Com-panies have a choice when switching to IFRS: they can value many of their assets at fair market value or stay with the “historical cost” approach required under GAAP. Many firms are choosing FMV because it increases the value of their assets and, thus, their reported shareholders’ equity. In some cases, the difference can be huge. For example, Brookfield Asset Management Inc. ’s shareholders’ equity jumped to $23.9 billion under IFRS for Dec. 31, 2009, vs $7.5 billion under GAAP.

FMV does, however, introduce a good deal of volatility in earnings, as the assets have to be repriced every quarter, with the gains and losses appearing on the income statement.

— CATHERINE HARRIS