Many firms slow to communicate transition progress
Canadian companies are only months away from their changeover to reporting under IFRS in 2011. Yet all indications are that many companies’ progress has been dismal, with scant attention paid to communicating about transition progress and the new regime’s ultimate effect on their business and financial statements.
An Ontario Securities Commission (OSC) review of issuers’ prescribed IFRS transition disclosure in 2008 and 2009 management discussion and analysis discovered that 40 percent don’t even mention the process while half the remainder provide only vague boilerplate. The regulator was particularly concerned over the dearth of information relating to disclosure controls and procedures. Warning of future regulatory action, the OSC suggested firms providing no information were telling the market they hadn’t begun to prepare for IFRS and those that furnished no updates were implying they hadn’t done anything worth talking about.
Still, Brian Fiedler, vice president of finance and administration at Canadian Tire Corporation, cautions against any precipitous quantification of financial numbers. ‘It is important not to whipsaw market participants,’ he says. ‘Within many companies, different conversion teams are working on different timelines. For example, one may be working on revenue recognition and another on acquisitions. One team may reach a conclusion before all numbers are definitively in, so you may have a situation where you tell investors revenue will be up and then have to retract that statement later on. By all means be directional in your guidance but make sure you’ve done due diligence and consulted with your auditors first.’
At the same time, accounting policies are not yet locked in to how they will appear in 2011. ‘We are in economically volatile times with industry groups still discussing how various issues should be approached,’ explains Chris Hicks, principal for guidance and support at the Canadian Institute of Chartered Accountants (CICA). ‘The likelihood for many organizations is that they won’t be coming to much of a conclusion about accounting policy choices until very close to the changeover date.’
Rational rationale
The OSC and the Canadian Securities Administrators have published extensive commentaries on their increasingly rigorous expectations for 2009 and 2010 IFRS-related disclosure. For its part, the Canadian Performance Reporting Board recommends best conversion communication practices and cautions that while much of the education burden can be borne among accountants, companies must take a proactive approach to communicating with stakeholders. At the tip of that spear is, of course, the IRO.
‘As the year progresses, investors and analysts will start asking more questions about IFRS’ effects, and companies will be obliged to provide more quantitative and robust information,’ notes Jeff Ellis, managing director at management consultant Huron Consulting Group. ‘IR professionals will play a critical role in helping investors understand the new financial statements and communicating to management the type of information users are looking for.’
Ellis cautions that while the Canadian conversion may seem technically simpler in comparison to the European experience, the current economic, regulatory and IR climate makes this change in reporting basis an especially difficult challenge. In a report published earlier this year, Ellis warned of shaken and skeptical investors being especially concerned about the reasons behind a company’s accounting choices along with the effects on the new financials and future reported results. ‘They will wonder whether some accounting policy changes were made to embellish results,’ he says.
The CICA suggests using tables to graphically illustrate the distinction between elective and mandatory accounting changes. While employing this technique, Canadian Tire has attempted to maintain consistency throughout its choices.
‘In cases where one could go either way, we tried to choose the option most appropriate to our business,’ says Fiedler. ‘If two alternatives were considered equally appropriate, we would choose the one that does not introduce inappropriate volatility unconnected to the underlying business performance. If you have a consistent set of criteria, investors can simply reference that and aren’t always calling you up asking why you made one choice or another. We also worked with other retailers to help ensure comparability – which is, after all, a key objective of doing all this work.’
One way or another, however, the investment community will expect to see firms compliant with IFRS in the first quarter of 2011. ‘Any delays getting it over the finish line will be viewed as a knock on a company’s credibility and management’s ability to get its act together and meet deadlines,’ says Dave Mason, president of IR consultant Equicom Group.
Mason advocates a proactive and transparent communication strategy to minimize investor uncertainty. ‘Each company should have a checklist, a strategy for conversion,’ he says. ‘Companies that don’t yet have a plan can expect a few very busy months ahead of them.’
One eye on the future
Geoff Leverton, partner in the advisory services practice of PricewaterhouseCoopers and leader of its Canadian Capital Markets Group, says IROs should be looking past transition disclosure and discussing with management how key performance indicators will be explained and communicated to investors beginning in 2011. ‘Line items on the income statement may look quite different,’ he cautions. ‘Finance and the IR department must work closely together to ensure investors understand the differences.’
Some companies, such as those with significant pension fund deficits, are likely to see rather dramatic changes. ‘The change could wipe out their entire equity,’ says Anthony Scilipoti, executive vice president of Veritas Investment Research, a Toronto-based independent research and forensic accounting firm. ‘But that doesn’t mean they are bankrupt and people will stop buying their products. It just means there was an accounting change. If the precise numbers aren’t yet at hand, it is important for IROs to be directional and provide as much color and commentary as possible to ensure there are no surprises.’
One way of mitigating surprises, says Scilipoti, is to provide as much historical comparative analysis as possible. ‘Firms are only required to make IFRS comparisons to 2010 available but those that go back three to five years will let investors see trends, and that will be extremely helpful,’ he concludes.
Does IFRS work?
Plenty of ink, tears and intellectual resources have been – and will continue to be – shed in the move to harmonize accounting standards. But will all that effort actually result in more reliable, relevant and comparable corporate financial statements?
According to Michel Magnan, a professor of accounting at Concordia University in Montreal, the evidence from other countries is less than encouraging, and the impact on Canadian capital markets is likely to be modest, at best. ‘IFRS might enhance information quality and usefulness but whether that results from the accounting or because more detailed disclosure is mandated in footnotes remains to be seen,’ he says.
When it comes to comparability, Magnan points to little change in the relative quality of financial reporting among European companies pre and post-changeover. ‘Management already has a wide range of discretionary choices under IFRS and those that have aggressive financial reporting now will likely have the same in the future,’ he explains.
Magnan also says that, beyond its adoption, effective institutional and market enforcement is critical to any benefit accruing from IFRS conversion.
