With only 7 months remaining, half of public companies are less than 60% through their IFRS conversions
Changes in financial reporting will require companies to explain possible changes in earnings per share and increases in pension liabilities
TORONTO - With just over a half a year to go before converting to International Financial Reporting Standards (IFRS), many Canadian companies are making good progress, but others continue to lag behind, in a race to meet the January 1, 2011 deadline, according to a survey by the Canadian Financial Executives Research Foundations (CFERF), the research institute of FEI Canada, sponsored by PricewaterhouseCoopers (PwC).
The conversion to IFRS could result in some significant changes. For example, 28% of Canadian companies anticipate a decrease in reported net income, 22% expect earnings per share to fall and 28% expect an increase in pension liabilities in the first year of adoption. CFOs' communication with management, shareholders, analysts and other stakeholders will need to be robust during the next seven months to explain these changes to financial reporting and the transition process.
Canadian firms that are closer to completion include larger public companies and those in rate regulated sectors. Of executives responding from public companies, over half (53%) said their status of completion was 60% or higher. (This compares to last June where 80% of public companies remained short of the halfway mark in their overall conversion process.) Out of the top four industries responding to the survey who say they are more than 60% complete, utilities is the furthest ahead, with 73%, followed by the insurance sector (63%), mining and oil extraction companies (50%) and manufacturing (46%).
According to Diane Kazarian, PwC Canada's National IFRS leader, "The size of the company usually plays a big role in terms of expertise and available resources. Chief Financial Officers in smaller companies often have fewer personnel who are specifically dedicated to the conversion. Larger companies also started earlier due to the complexities of the transition process for them." Additionally, the survey indicates that nearly 30% of companies with revenues of less than $49 million said they did not have the resources required to implement the conversion.
The survey also shows that all respondents with annual revenues of more than $20 billion were more than 60% complete, compared to 41% in the $50-$249 million range who were more than 60% complete. One-third of private companies that will adopt IFRS had completed 60% or more of the transition. "Given that there is not a lot of time left, a number of companies may be challenged to meet the conversion date," adds Kazarian.
As IFRS is a new language of financial reporting, the adoption will directly impact the look and content of the financial statements. "As we move into the latter stages of the conversion, companies will need to spend more time to communicate the key changes," says Ramona Dzinkowski, Executive Director, CFERF. "The numbers, formats and notes that analysts and shareholders will see on financial statements will change and CFOs will have to make communication their priority," she says.
Overall, 51% of respondents say the new reporting will show a change in their company's asset values - either a decrease or an increase. "Under IFRS, greater volatility in financial statements is expected," according to Kazarian.
When asked what external stakeholders had been contacted to discuss the potential impacts of the IFRS conversion, only 23% of respondents said they had spoken to analysts. (A PwC survey of chartered financial analysts in 2009 also found that 74% of respondents to that survey had a poor to fair knowledge of IFRS.) "Clearly, this will have to be a communications priority in the coming months for CFOs and investor relations executives," adds Kazarian.
The survey further indicates that tax departments within respondent companies have begun to consider the potential impacts of IFRS on tax. Overall, 53% have considered the implications of IFRS on Canadian income tax compliance, 24% have looked at foreign income tax compliance, and 39% have discussed tax planning and 23% have considered transfer pricing.
On initial adoption, one year of comparative data is required to be presented on an IFRS basis. Accordingly, the majority of finance executives (61%) expect their preliminary IFRS opening balance sheet to be complete by the end of the second quarter of their 2010 fiscal year.
The survey also shows that close to two-thirds of respondents believe that IFRS conversion will leverage End User Computing (EUC) solutions (i.e. spreadsheets) on a more substantial basis. While spreadsheets can be a viable solution, risks associated with the use of spreadsheets must be understood and managed accordingly.
An important issue facing all companies is the consideration of key debt covenants impacted as a result of IFRS adoption. The survey showed that only 6% of respondents did not have awareness of the IFRS implications on their debt covenants. This included 31% of respondents who said they were extremely aware of the impacts, showing a good knowledge of how IFRS can impact a key external stakeholder group such as lenders.
"Overall, the survey results show that while considerable progress has been made in working towards January 2011 implementation, there is still work to be done with seven months remaining. IFRS can have significant implications on IT systems, processes within the finance department, and many other areas, such as training, communications and the business. Companies need to leave enough time in the transition timetable to prepare for contingencies should they run into unanticipated issues as they move to the conversion date of January 1, 2011," says Kazarian.
The study is a third in a series covering conversion activities in Canada. The results are based on responses from 146 senior financial executives across Canada who completed the survey in March and April of this year.