Contents

Introduction ..................................................................................................................................... 2 Why IASB ....................................................................................................................................... 3 Change ............................................................................................................................................ 5 Scope ........................................................................................................................................... 6 Recognition ................................................................................................................................. 7 Initial and subsequent costs ........................................................................................................ 7 Depreciation ................................................................................................................................ 9 Conclusion ...................................................................................................................................... 9 Works Cited ...................................................................................Error! Bookmark not defined.

Discuss recent developments in, and influences on, financial reporting in a country of your choice. This cannot be your country of origin.

Introduction

The new global economy requires that organizations continuously adopt and adapt to the ever changing global climate. Investors and analyst are also becoming global. It is very common practice for investors to hold portfolios with securities based in many different economies. Thus international financial institutions have expanded into many different markets and economies. A very good example is of the Big 4 audit firms operating all around the globe. Thus it becomes very difficult for these investors and firms to practice many different reporting standards. Investors and analyst both rely on information and the more they can understand the information being provided to them by an organization the lower they would consider the risk is. Therefore national accounting bodies are continuously changing their accounting standards to make them more global. This global approach increases the reliability, understanding and comparability for analyst and stockholders.

The recent financial crisis has also encouraged the national accounting bodies to take a more stern approach to reporting standards. The general risk averse environment can lead to more sterner reporting requirements by accounting bodies in order to safeguard interests of users of

this financial information. One significant movement in this regard is the movement towards fair value accounting methods. The aim is to use a more realistic approach towards reporting balance sheet items. The focus is being shifted from reporting historical prices of balance sheet items to reporting the expected future benefits received from the item (e.g. PV of expected future cash flows). This would enable users of financial information to better assess the value of company assets and thus value the entity more accurately. However this would also lead to increased volatility in value of assets. This is because the fair value of an asset is more volatile as compared to historical cost. A potential impact of these rules would be companies looking to invest in less volatile assets to reduce the risk with their holdings.

The recent economic turmoil in international markets, along with factors mentioned aboveencouraged Canada financial institutions to bring major changes to its reporting standards. Canada has used GAAP (Generally Accepted Accounting Principles) for many decades. The Canadian GAAP however would now be abolished in order to shift to the IFRS (International Financial Reporting Standards). Private, Public and non-profit entities all are affected by this major shift in accounting standards. The Accounting Standards Board (AcSB) of the CICA after realizing the magnitude and importance of this major shift gave a time period of 2007-2011 for organizations to transition. During this time period all entities affected by the changes were supposed to understand the implications of the transition process and adapt accordingly. Thus a target date of 2011 January was set, by which time all affected entities had to report their results according to IFRS (including the restatement of one previous year).

Why IASB

The primary decision for ASCB was to choose between IASB and FASB. The likely choices would have been to adopt FASB (GAAP) because it is being used in United States. United States is the biggest trading partner of Canada. Therefore many users of Canadian Financial Information are located in the United States and vice versa. So much so that some Canadian organizations already follow FASB, however they are still in a significant minority. Following are some of the reasons for not adopting FASB :

One of the primary reasons for not adopting FASB is the primary focus on United States markets during development of GAAP.

They focus mainly on investors and relatively focus less on other users of financial information. GAAP is designed for an environment which is very litigious, i.e. United States.

Auditors always prefer standards which give definitive information the acceptable and otherwise, to give protection against undue risks and lawsuits.

On the other hand in recent years international influence of IASC has increased. Not only the developed nations but also the emerging markets are adopting IFRS. The increased growth of foreign exchanges is one of the major reasons for the growth of IASC. These stock exchanges are increasingly becoming more and more powerful. They are raising more and more capital thus shifting the international focus away from only American capital markets. These exchanges are mostly computerized and are therefore efficient despite the individual regulatory requirements of the country they operate in. Thus the question arises why the expensive process of translation from GAAP to IASC be conducted, when the statements can simply be published using IASC.

Moreover the Canadian economy has been largely dependent on American markets in the past. Shift IFRS provides them with an opportunity to expand into the global credit markets. FASB hinders any such opportunities by restricting it to the American markets. Adopting FASB would only increase the Canadian dependency on United States and it would only wait until United States decides to move to IASC. American bodies on the other would never accept an active Canadian role in development and harmonization of GAAP. Thus adopting FASB does not only limit Canada from the international markets but only gives them a limited role in FASB. Moreover on a strictly cost basis it is less expensive to convert to IFRS as compared to GAAP. This is because over the last few years Canadian GAAP has undergone minor changes, making it more similar to IFRS. Thus for smaller companies the of cost transition to IFRS would much lower as compared to changing to GAAP.

Change
An understanding of the different changes which have transpired is important for users of financial data being prepared by Canadian companies. To cover all the differences would be beyond the scope of this report. Therefore a few selective IAS have been selected which provide an example of the impending change. These selected IAS also reflect the importance of fair value accounting under the new system. The changes with respect to reporting Property, Plant and Equipment will be discussed in order to give a fair idea of differences. There are 4 primary changes in the methodology of reporting Property, Plant and Equipment. These four changes can be broken down into four suitable subheadings:

Scope
Investment properties are treated differently in the new system (IFRS) as compared to Canadian GAAP. Investment properties are properties that organizations hold for the purpose of rental or capital appreciation. In the older system there was no separate treatment for these properties and they were treated similar to other items Property Plant and Equipment items. In the new system financial entities are required to report them under IAS 40:

I.

In the older system there was no separate section for investment properties. The section 3061 of CICA dealt with leased assets and no guidance was given for disposal of leaseholds, impairments/disposal of Property Plant and Equipment.

II.

All general PPE items are addressed in IAS 16. IAS 40 however only deals with investment properties. With regard to recognition only two methods are allowed, entities can chose between any of these two methods. However all investment properties must then be value using the same method to uphold consistency. These two methods are cost model and fair value model.

Recognition When it comes to recognition and valuation of assets, Canadian GAAP was not specific to the treatment which allowed room for misjudgment. IAS 16 on the other hand is more specific in this regard. The following major differences exist in the two systems:

I.

Canadian GAAP did not deal with loose tools and spare parts. There was no definitive recognition criteria required for defining or recognizing an asset.

II.

The new system deals with recognition of assets under IAS 16. The emphasis is more on fair value that is the present value of all the expected future benefits received for the asset. Most tools and smaller equipment is recognized as inventory under the new system. However the life of the equipment is important in this regard. If the equipment is being used for more than one period than it is recognized as part of fixed assets.

Initial and subsequent costs

The recording of initial and subsequent costs is an important factor in reporting Property, Plant and Equipment. This is because the different methods of recording these costs can have a significant impact on the size of an entitys financial statements. There are minor differences when it comes to reporting initial and subsequent costs between Canadian GAAP and IFRS. One of the major differences is that IFRS allows constructive obligations to be included, while Canadian GAAP didnt allow this inclusion.

Overall IFRS is more conservative in recognizing initial and subsequent costs as balance sheet items. IAS 16 excludes many costs which were recognized in the older Canadian GAAP system. Some of the costs which are excluded by IFRS include; expenditure on promoting new businesses ( product or services), expenses incurred when providing services to a new client requires more training and administrative costs incurred in the procurement and overheads incurred1.

Some other differences in recognizing initial and subsequent costs under the new system are as follow: I. Under IFRS Property, Plant and Equipment purchased for the purpose of environment or general safety purposes. They are recorded as costs of assets and included in the balance sheet. The older Canadian GAAP system did not have any separate system to deal with the costs incurred for safety and environment reasons. It only considered costs which were incurred in order to get the asset operational as part of asset costs. II. Under the old CICA system parts replaced by newer parts were carried on the balance sheet as part of asset costs. This is against the principle of fair value of assets. Therefore the newer IFRS system does not recognize the costs of assets replaced. Any such costs must be derecognized.

IAS 16.19

Depreciation There are not many differences when it comes to depreciating long term Property, Plant and Equipment Assets. The primary difference however is the different methodologies of determining the depreciation charge. Under the older CICA system depreciation charge was determined on Greater of cost less residual value over an assets estimated useful life. However under IAS 16 the charge for depreciation was determined by the Difference between the carry value and residual value of an asset over its useful life. Besides these major difference there are a few other minor differences between depreciation treatment of the old system with the new one:

I.

The objective of CICA is to give users a systematic and rational base for allocating depreciable value of PPE over its expected useful life2.

II.

The treatment of depreciation is more clear and less prone to manipulation under the new system. IAS 16 requires users to adopt a depreciation method which is more reflective of the economic pattern under which the asset would actually be used. This leaves a smaller room for use depreciation to reduces taxes or overstate balance sheet3.

Conclusion
The recent developments in financial reporting in Canada have been positive and in tandem with international reporting movement. Many more countries are now adopting IFRS as their primary reporting mechanism. The recent changes in the USA financial requirement have been detrimental in this regard. The United States also plans to replace USA GAAP gradually with

2 3

Section 3061.31 IAS 16.60 to IAS 16.62).

IFRS to ensure a global reporting standard. The transition process would being in 2015. Therefore in hindsight the decision by Canada to shift to IFRS instead of FASB was a right move. This would ensure that Canadian companies get access to international financial capital markets.

Bibliography

Arthur, P., Martin, P. 2002. Changes to Canadian GAAP for Insurance Companies Resulting from Worldwide Harmonization of Insurance Financial Reporting, Ernst & Young LLP Toronto The conversion of Canadian GAAP to IFRS: Volume one scoping the effort, 2007, Deloittes The Case for International Accounting Standards in Canada, CGA, Canada

Comparison of IFRSs and Canadian GAAP, 2008, CICA and AsCB The CICA's Guide to IFRS in Canada, 2009, Charted Accountants of Canada. Thiru, Y. 2004. IAS/IFRS, US-GAAP and others: What is next? Austria Fall 2004. Will IFRS help? Quality Check, 2009, VancouverSun Will IFRS experience boost Canadians pay?, 200,9 Financial Executive. Allbusiness