Summary of Comments Received from Roundtable Discussions

The following is summary of comments received from participants in public roundtables and private meetings held between July and October 2004.  A total of 10 roundtable meetings were held in Vancouver, Calgary, Winnipeg, Toronto, Ottawa, Montreal and Halifax.  The sessions were attended by 106 participants (excluding AcSB members and staff), who provided input based on the Invitation to Comment, “Accounting Standards in Canada: Future Directions,” issued by the AcSB in May 2004.

The demographics of respondents whose comments are reflected in this summary are as follows:

Individuals/small and medium-sized practitioners

23

For-profit entities

37

Academics

3

Government/Crown corporations

9

Provincial institutes/professional organizations

16

Provincial auditors

1

Industry associations

3

Regulators

6

Stock exchanges

1

“Big 4” & 2 CA firms

7

Total

106


This summary is organized based on the four main questions asked in the Invitation to Comment, and includes all comments made, without regard to how many participants expressed them. No attempt has been made to identify any consensus in the views expressed. Other issues, not within the mandate of the Invitation to Comment, were raised. Other bodies are being notified of comments on issues outside the mandate of the AcSB (such as auditing or governance issues).

A. Should Canada maintain its own standard-setting capability?

Participants made the following comments:

  1. It is in Canada’s best interest to set and maintain its own standards.  Canada needs a standard-setting body; therefore, the Canadian Accounting Standards Board (AcSB) should still exist.  This will result in Canada having a greater level of influence in setting international standards, in particular on a principles basis.
     
  2. Canadian entities need time to see how matters evolve before “shutting down” Canadian standard setting.
     
  3. It is not certain whether a Canadian standard-setter is needed, but there needs to be leadership that will guide the profession through change and assist entities in reaching the target. The role of the AcSB should be to provide resources for the education of financial statement users, preparers and other stakeholders, which includes guidance on the interpretation of US standards in Canada. The education provided by the AcSB should take into account unique Canadian circumstances, as the US regulatory requirements and tax structure are different.
Many respondents cited the need for more education, guidance and communication from the AcSB.  One participant suggested a country-wide project to provide education on the interpretation of International Financial Reporting Standards, if they were adopted.

 

B. Should Canada maintain its own generally accepted accounting principles (GAAP) or adopt either US GAAP or International Financial Reporting Standards (IFRS)?

Participants made the following comments:

  1. Separate GAAPs or bases of accounting lead to poor comparability between industry peers and within a single North American market.
     
  2. There is no reason to support a separate Canadian GAAP.  Canadians would be marginalized if global developments were not taken into account.
     
  3. Full US GAAP convergence should be supported. US GAAP is not perfect, but is certainly predominant in global accounting standards; therefore, Canada should move to US GAAP as soon as possible in order to eliminate unnecessary work involved in reconciling Canadian GAAP information to the US GAAP equivalent. Decisions made today often take practitioners to a US solution — to the extent an issue is not addressed in detail under Canadian GAAP, there are many who refer to US GAAP to obtain further insight. Markets dictate the financial reporting, hence US GAAP should be adopted in Canada.  The influence of the US should not be ignored, but at the same time its influence should not dictate the accounting standards that smaller entities are required to apply.  Large companies should follow US GAAP in order to obtain access to the markets they intend to participate in.
     
  4. Adopting US standards is “force-fitting” foreign requirements into the Canadian context, in particular with regards to small private companies.  US rules are not relevant and should not be imported.  The cost and benefit of importing a standard should always be assessed.  Consideration should also be given to the fact that small companies vastly outnumber public companies.
     
  5. Adopting US GAAP is impossible due to lack of expertise. There is a shortage of expertise in small and medium-sized companies, as well as larger companies, to handle changes to US GAAP. Independence concerns also compound the issue, since a public practitioner cannot prepare a client’s financial statements and then review or audit them.  There is a lack of expertise at the senior level. US GAAP should be avoided and the Canadian standard-setting system should remain autonomous.
     
  6. US literature is voluminous and extremely complex. There is a lack of familiarity with US GAAP.  Canadian GAAP should therefore be preserved.
     
  7. US GAAP places a heavy emphasis on the balance sheet, which does not produce “better” financial reporting.  There should be more focus on the income statement, which reflects the effects of management’s strategy.
     
  8. US financial reporting is perceived as rules-based. There is a lack of support for rules-based standards in Canada.  The risk is that the standards would be treated like laws.
     
  9. We cannot adopt US GAAP without also adopting some of the US tax regime, judicial processes, etc.  Many Canadian companies prefer not to get involved with the US complexity.  Not all Canadian companies aspire to participate in international capital markets (e.g., income trusts).
     
  10. Many enterprises simply do not care about US GAAP. There would be a significant cost to changing to US GAAP, including the education and maintenance, which would not be worth it. (Similar views were expressed with regards to adopting IFRS.)
     
  11. The principle of a single global GAAP should be supported, but on a practical level, one should be concerned about the feasibility of such a change.
     
  12. Canada should adopt IFRS. One standard is essential if you want the free flow of capital around the world and to avoid entities having to apply multiple GAAPs, which is confusing to the public. Industry-specific or other issues should be brought to the IASB and should be addressed in terms of their specificity and uniqueness. Adopt IFRS, but without ignoring US GAAP. Global harmonization should be encouraged. Canada should not “speak its own language” or have separate requirements as there are not enough resources to support them.
     
  13. Canada should follow Europe with the “IAS 2005” requirements, but for listed companies only.
     
  14. Canada should learn from experiences with implementing IFRS in Europe and Australia in 2005.  The principles may sound fine in theory, but practice is another matter. One respondent expressed concern with IFRS, in particular IFRS 41, Agriculture
     
  15. We may be creating more confusion by going to IFRS. Some of the standards implemented have been driven by political motives, in particular IAS 39, Financial Instruments: Recognition and Measurement.  The problem with IAS 39 is that banking in Europe is different.  There are other factors that can create differences.
     
  16. The US will not converge globally, hence consider whether IFRS is the appropriate option for convergence.
     
  17. Any changes made to adopt US GAAP or IFRS should be phased in, but the goal should first be communicated clearly to stakeholders.
     
  18. Gradations of financial reporting should be considered, wherein IFRS, US or Canadian GAAP are required, recommended or permitted for certain entities, depending on size, reporting requirements, capital needs, etc.  Entities would be required to disclose the options they have selected.

 

C. Should Canada maintain the current strategy of working to support international convergence of accounting standards while harmonizing with US GAAP?

Participants made the following comments:

  1. The AcSB should keep its current strategy, although views varied on the degree of emphasis to be placed on each “leg” of that strategy.
     
  2. There should be harmonization, but there should also be a national structure to highlight the differences. The AcSB should continue to work with the US to ensure Canadian circumstances are taken into consideration. 
     
  3. The AcSB should keep moving toward IFRS until the “final changeover” to provide a staged evolution and minimize the “big bang” effect. We need Canadian GAAP in the short term for smaller public companies and SMEs.
     
  4. The AcSB should maintain its current strategy except in instances where the existing Canadian standard is “better” and the new standard may provide lower quality information. It should be considered that in some instances, there are political motivations underlying standards specific to a country or region, which results in entities being required to adopt a sub-optimal standard.
     
  5. Principles-based accounting applied with professional judgment is preferable, hence there is some concern about the movement toward US GAAP.
     
  6. Regardless of whether Canadian GAAP moves closer to or further away from US GAAP, there needs to be a long-term plan as to how we can get there.  Many participants expressed concern about the pace at which changes were taking place and “standards overload”.

 

D. Should Canada consider modifying current GAAP requirements to provide better information to the users of financial statements of various different types of entities through, for example, a wider application of differential reporting?

Participants made the following comments:

  1. There was some support for the differential reporting options currently permitted in the Handbook, with some individuals encouraging the AcSB to expand the number of options. Others were of the view that differential reporting was unacceptable, citing reasons such as loss of comparability between financial statements or a failure to go “far enough” in accommodating smaller companies’ needs.
A GAAP that is built onto for larger/public companies is perceived as far better than a GAAP from which things are taken away for smaller/private companies. Differential reporting treatments are derogations from mainstream GAAP, which can create the impression that it is inferior (“dirty GAAP”).There should be a good-quality set of “core GAAP” requirements for small to medium-sized private enterprises, with add-ons for public entities. GAAP is currently perceived as catering to large public companies with differential reporting serving as a “band-aid add-on”. The result has been expanded use of Notice to Reader financial statements for small companies (i.e., non-GAAP financial statements accompanied by a report from the public accountant that prepared them indicating that the accountant provides no assurance as to the credibility of the financial statements).
  1. Differential reporting may have helped, but it has not solved the problem.  There was concern that differential reporting was being used to avoid what is perceived as irrelevant or excessively costly requirements of GAAP.  Users are being disserviced because they are deprived of the assurance that review or audit reports would provide.
     
  2. Public companies should not be permitted to use differential reporting.  It is difficult to permit a small public company to use differential reporting because unanimous consent will be difficult to obtain.
     
  3. It may be difficult to have add-ons to core GAAP in a principles-based system because the add-ons become rules.
     
  4. The AcSB should perform research into financial statement user needs, in particular the small business sector.
     
  5. The AcSB should not adopt the IASB’s proposed  SME approach because it does not contemplate differential treatments on recognition and measurement requirements.
     
  6. The volume of standards material applicable to small companies takes away judgment and the ability of public accountants to add value to their clients.  That is, the amount of time a public accountant must spend to apply current GAAP standards to their clients’ financial statements costs too much, relative to what clients are willing to pay — clients do not see the value to them of the GAAP financial information.
     
  7. Public companies should not be permitted to use differential reporting.  It is difficult to permit a small public company to use differential reporting because unanimous consent will be difficult to obtain.
     
  8. All public companies should report on the same basis.  Capital markets require comparable information to function properly.
     
  9. There should not be a “big GAAP/little GAAP” difference; there should be one set of standards for all entities.
     
  10. The challenge with simplifying requirements for differential reporters is that we live in a complex world.
     
  11. Financial statements should be either cash basis or GAAP basis.
     
  12. Maintain principles-based standards with illustrative examples as implementation guidance.
     
  13. Some of the AcSB’s actions have increased the movement toward rules — particularly in the case of the revisions to Section 1100, Generally Accepted Accounting Principles, which results in “rules-based” US standards being referred to as “other sources of GAAP”.  The changes made to Section 1100 are positive in some aspects, but also have some drawbacks.

E. Other

Participants made the following comments:

  1. The issue of standards overload was highlighted repeatedly.  Participants noted that this is particularly acute for small entities and small practitioners, but there are indications that this is also becoming a major problem for large entities. There was a general sense that collective resources are strained in the current environment and could persist indefinitely unless steps are taken by the AcSB and others to proactively manage the process.
     
  2. Significant resource constraints are a major problem regardless of whether US GAAP or IFRS is adopted.
     
  3. Section 1100 has exacerbated the push to US-style detailed rules even though this was clearly not intended by the AcSB.
     
  4. The US marketplace is different in many respects, notably, there is no statutory requirement for private companies to use GAAP and asset-backed financing for SMEs is extensively used, which means that GAAP financial statements are not as important in financing or credit-granting decisions.
     
  5. There was no support for abandoning the field and leaving SMEs to negotiate appropriate standards of financial reporting with their financial statement users or bankers.
     
  6. There was widespread support for more non-mandatory guidance and implementation aids.  This should be done on a more timely basis in order to assist constituents in understanding accounting requirements and the initial adoption of new requirements as they come out.
  7. The AcSB should conduct or sponsor research on user needs for a typical Canadian company.  Canada is quite different from the US, and may be unique in terms of the relatively small public companies that exist relative to our GDP.
     
  8. There was widespread concern about the timeframe provided between when a completed standard is issued and when adoption is required.  The time frame required should be dependent on the complexity of a standard and also the extent of changes (not just accounting standards) in play.
     
  9. There was widespread agreement that it is essential to establish a strategic direction, which should be communicated clearly to all affected parties, as significant “change management” issues would need careful planning and a lengthy transition.
     
  10. The Emerging Issues Committee is becoming increasingly US/rules-oriented.
     
  11. Several persons complained about the difficulty experienced in trying to understand Canadian GAAP pronouncements and pointed to issues such as the lack of plain English, excessive detail, and a lot of material that is narrow in application and hence irrelevant to most people.  Some noted that the IASB’s approach to publishing their standards, which includes appendices with defined terms, application guidance and application supplements, would be preferred.
     
  12. In the context of differential reporting, Canada should consider the UK approach, where changes to Financial Reporting Standards for Small Entities are only made once every two years.
     
  13. The AcSB should not alter the words in a harmonized standard adopted from the US or international Boards.
     
  14. There was general concern about the effect of changing financial statement numbers (due to changing standards) on income taxes.