C E R T I FI E D GE NE R AL AC C OU NTANTS AS S OC I AT IO N OF CANADA
The Case for
International Accounting
Standards in Canada
Table of Contents
Executive Summary ..........................................................................................................3
Introduction ......................................................................................................................5
Adopting FASB Standards Would be a Flawed Choice ..................................................5
Accepting FASB Standards Would be Shortsighted ........................................................7
FASB Standards Could Lead to Unnecessary Costs and Delays......................................7
Long-Term Considerations Should Take Precedence ....................................................8
No Country is an Island Anymore ....................................................................................8
Growing Influence of International Standards .............................................................. 9
Canadian GAAP Closer to IASC Standards ....................................................................9
IASC Standards More Open to Political Representation ............................................10
IASC More in Tune with Its Users ................................................................................10
IASC Standards Better for SMEs ....................................................................................10
Canada’s Contribution to the Influence of IASC Standards ........................................11
A New Role for Canadian Standard Setters Internationally..........................................11
Setting Local Standards When Needed ..........................................................................11
Canadian Standard-Setting Process Out of Step ............................................................12
Conclusions ......................................................................................................................12
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Executive Summary
With the dawning of the millennium close at hand, Canada has reached an important
crossroads in accounting standard setting. We are now faced with making a strategic
decision to ensure Canada’s continued leadership role in this field well into the
21st century.
The heart of the decision revolves around one important question: should Canada
preserve the status quo by continuing to establish its own national accounting standards,
or should it adopt standards more conducive to globalization and international business
co-operation?
CGA-Canada believes the status quo should be abandoned in favour of international
accounting standards.
Why is this decision so important? Harmonized global standards would ensure that
financial statements carry enormous credibility. Users could pick up statements originating from different countries secure in the knowledge that such documents were prepared
using a consistent approach.
Besides the obvious implications to management and shareholders of Canadian organizations, the choice of accounting standards drives many larger public policy issues with
implications for everything from government interests to trade and commerce, taxation
and economic planning.
Abandoning the status quo to adopt new standards for the next century will, however,
require an additional decision. Which set of standards should be used globally?
The choice on the international stage has boiled down to the standards set by the
International Accounting Standards Committee (IASC), or those set by the Financial
Accounting Standards Board (FASB), the body responsible for establishing generally
accepted accounting principles (GAAP) in the United States.
CGA-Canada believes that adopting IASC standards in Canada would be the correct
choice for several reasons, among them:
◆ In recent years, the IASC’s influence has been clearly and unmistakably gaining
momentum around the world. Its international standards have been accepted by
industrial and developing nations alike, and this trend is expected to continue.
◆ The adoption of IASC standards as the single dominant measure of financial results is
no longer a question of “if,” but “when.” Therefore, Canadian authorities would be
prudent to ensure we are part of a network with the greatest number of users.
◆ In this age of rapid technological growth and globalization, Canada must be prepared
to define its position on the international standards debate now or risk being thrust
into a marginal role.
Although Canada has a vital role to play on the international stage, it must also
continue to utilize a national standard-setting body capable of maintaining a domestic
focus when special occasions or local conditions dictate.
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The issue of accounting standards is, however, too important a matter for one private
body to administer, as is the case today. Users of financial statements come from the
community at large. Small business owners, financial planners and others are all affected
by decisions about the nature and quality of the information reported.
The ensuing debate on the most appropriate accounting standards for Canada must,
therefore, take place in the public realm, with parliamentary participation.
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The Case for International
Accounting Standards in Canada
INTRODUCTION
Standards are important to any society. They provide a means to measure, compare,
co-ordinate and protect. They can be applied to myriad functions, ranging from weights
and measures, to traffic control and monetary systems.
Accounting standards also fulfil an important function. For instance, they protect
third-party interests by providing financial statement users a common yardstick with
which to compare alternatives and come to reasonable decisions. These standards also
allow financial statement users, who compare the relative performance of different
companies, to feel confident that the methods used to prepare such financial statements
are consistent. They protect investors, shareholders and the government from biased
or inconsistent reporting by management.
In contrast, financial statements prepared using different sets of ground rules run the
risk of reporting dramatically different financial results. Harmonized global standards, therefore, would ensure that financial statements are prepared consistently and carry credibility.
So, as the world becomes increasingly globalized, Canada has to come to a decision
about accounting standards. Should Canada preserve the status quo by continuing to
establish its own national accounting standards, or should it adopt standards more
conducive to globalization and international business co-operation?
CGA-Canada believes the future lies in internationally adopted accounting standards.
But which set of standards? From a public policy perspective, selecting the right set of
accounting standards is crucial because a number of issues, with implications for trade
and commerce, taxation and economic planning, hinge on the decision. As it stands, the
choice on the international stage has boiled down to the standards set by the
International Accounting Standards Committee (IASC) or the Financial Accounting
Standards Board (FASB), the body responsible for establishing generally accepted
accounting principles (GAAP) in the United States.
ADOPTING FASB STANDARDS WOULD BE A FLAWED CHOICE
Many interested parties are today proposing that Canadian standards be harmonized
with FASB accounting standards, especially because of Canada’s close ties with the
United States.
The United States is Canada’s predominant trade and investment partner. In 1997,
for instance, Statistics Canada reported that the United States accounted for 68% of all
Canadian imports and 82% of exports. In the short term, these statistics might seem to
favour the adoption of FASB accounting standards. Supporters of this view point out that
substantial progress has been made in recent years toward reducing some of the differences between U.S. and Canadian GAAP and that the two countries have worked closely
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together to develop joint standards in several key areas. There are, in fact, some Canadian
companies who benefit from and have chosen to apply FASB standards. However, these
represent only a very small minority who presumably will continue to apply a U.S.-style
approach, regardless of how Canada chooses to proceed on this issue.
Despite these economic ties between Canada and the United States, there are many
compelling reasons why it would not be prudent for Canada to adopt FASB standards.
FASB standards are, for instance, the result of a “closed process” designed to accommodate U.S. interests. Also, they have been established primarily for the benefit of investors
to the exclusion of other groups in society interested in corporate performance.
Moreover, FASB standards are designed to function within a very litigious environment.
From an auditor’s perspective, it’s best to have a set of standards that provide definitive
guidance as to what is acceptable and what is not as protection against undue risk and
potential lawsuits.
There are other differences, too. Historically, Canadian accounting standards have
provided more room for the application of professional judgment than those issued in
the United States, which are more rule-oriented and prescriptive. The government and
legal systems in commonwealth countries are designed to give auditors more leeway in
using professional judgment, provided the overall intent is to make things clearer to the
investing public. This amounts to a “true and fair” notion that can override standard
principles. If FASB standards are adopted in Canada, however, much of the flexibility
allowed under current Canadian and international rules would be lost.
The growing international acceptance of IASC standards also shows that FASB standards are not the right choice. Today, only 10 countries accept financial statements based
on FASB standards and nine of those (with the exception of Israel), also allow published
statements predicated on IASC standards. In contrast, no less than 46 countries have
formally committed to harmonize their national standards with IASs; this number does
not include countries with standards based on IASs, but which have not issued an explicit
policy statement to this effect, or countries that accept statements based on IASs along
with those based on domestic standards. In fact, Canada and the United States are currently the only major industrialized nations that do not accept financial statements prepared
using IASs.
This increasing support for IASC standards, coupled with the growth of foreign stock
exchanges, makes it unlikely that FASB will pick up further support in the future. Many
corporate executives question why they should have to go through the expense of listing
in the United States, then changing to accommodate international standards. Stock
exchanges around the world are growing in size and stature and doing a credible job
raising capital, which has contributed to shifting international patterns. The growth of
computerized stock trading also implies that investors will find the most efficient capital
markets, regardless of national regulatory structures.
Despite the FASB’s influence today, many experts believe IASC standards are destined
to become the global “standard” over the next 10 to 15 years. Joint efforts by both the
IASC and FASB, backed by other members of the G4+1 — which consists of the standardsetting bodies of the United States, United Kingdom, Canada, Australia/New Zealand
and the IASC — have led to substantial harmonization in several key areas over the past
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five years. The results have served to reinforce many expert opinions that IASC standards
will eventually emerge as the true backbone for international accounting.
Finally, ceding control of our accounting standards to the United States would not be a
popular political move. Is the federal government prepared to perpetuate what many feel is
already a case of U.S. domination? Will it let American accounting rules define a key starting point for the direction of Canadian tax measures and related public policy implications?
ACCEPTING FASB STANDARDS WOULD BE SHORTSIGHTED
If Canada chooses to limit its perspective to a North American context and go with FASB
standards, it would be ignoring a golden opportunity to seize a bold position on the international stage.
By electing to adopt FASB standards, we would be reinforcing the notion of isolated
trade, rather than integration between the major European Union and North American
trading blocs. This would make it more difficult for Canadian companies to compete in
the international arena during an era when both the public and private sectors are working feverishly to promote Canadian expertise overseas.
We would also be doing the international accounting community a disservice by
remaining confined to the North American “backyard” until the United States decides to
move on this issue. Considering its European heritage and close economic ties to the
United States, Canada has a role to play in building a bridge between the two continents.
Therefore, adopting FASB standards would be shortsighted. More specifically, it would:
◆ represent a serious blow to the prospects for achieving the international harmonization
of accounting standards;
◆ seriously undermine the credibility and influence of the Canadian accounting profession at the international level;
◆ limit the acceptance of Canadian financial statements outside of North America; and
◆ promote the view that Canada, which would never be in a strong position to exercise
control over the FASB process, lacks independence from U.S. standard setters.
FASB STANDARDS COULD LEAD TO UNNECESSARY COSTS AND DELAYS
The total cost of converting to a new set of standards must take into account Canadian
participation in the standard-setting process, as well as the costs of compliance faced by
financial statement preparers.
Harmonized standards that streamline financial reporting activities, such as those
developed jointly by the Canadian Institute of Chartered Accountants (CICA) and
IASC, tend to avoid cost duplication. Therefore, individual companies, especially small
Canadian businesses, may find it less costly to convert to IASC standards, particularly since
a concerted effort to further harmonize Canadian and international standards has taken
place in recent years.
Conversely, rigid standards that allow for little managerial discretion, such as those of
FASB, usually entail high compliance costs. Harmonization with the FASB model would
not only likely contribute toward a longer global transition period, but lead to unnecessary costs and delays as well.
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LONG-TERM CONSIDERATIONS SHOULD TAKE PRECEDENCE
Although Canada today is more economically dependent on the United States for trade
and capital than on any other country, the short-term benefits of adopting FASB standards
would be mitigated by several factors, including the much wider acceptance of IASC
standards by dozens of countries worldwide.
IASC standards are especially popular in Europe; several countries have adopted
international standards in place of, or alongside, their own. This reflects the trend of
European countries breaking down political and economic barriers in the past 25 years.
The international orientation of business is another compelling argument for harmonized international accounting and auditing standards. As globalization heralds a changing pattern of investment and capital formation, Canada should join and contribute
toward the same standard-setting regime that applies to the majority of its trading partners and capital suppliers.
Furthermore, if accepting FASB standards is merely an intermediate step on the
road to the eventual acceptance of IASC standards, as many believe it would be, Canada
should proceed directly to adopting international standards rather than chart a more
time-consuming and expensive interim course.
NO COUNTRY IS AN ISLAND ANYMORE
National standards worked well in Canada when it was a reasonably self-contained
economic unit and the accounting profession was small and culturally homogeneous.
But the increased flow of international trade in today’s global economy represents a
break with the past. The issue at present is how Canada can best integrate itself into a
global realm, while maintaining the representational gains made on a domestic level.
The case for a wholesale set of “distinctively Canadian” standards has been significantly
weakened in recent years. Unique Canadian standards in a country whose stock
exchanges only account for about three per cent of total (listed) global market capital
can be expected to become increasingly rare as international standards are accepted on
a global basis. It doesn’t make sense to continue spending inordinate amounts of time
and money to maintain our own standards if they aren’t going to provide much in the
way of original content.
Therefore, the potentially significant costs of complying with different reporting requirements to maintain the status quo can no longer be justified. Nor does the speed of international business permit the luxury of standard setting at a “Canadian” pace in this day and age.
In the future, the number of standards-related issues unique to Canada is expected to
decrease even further. Potential participants are increasingly likely to opt out of “made in
Canada” solutions because they won’t see the justification or philosophical need for
maintaining a different set of accounting standards in a global economy.
With a growing demand for a common financial reporting “language” to accommodate
globalization of financial markets, different sets of national reporting standards will be
perceived as creating competitive disadvantages that work against the free flow of
capital across international borders.
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GROWING INFLUENCE OF INTERNATIONAL STANDARDS
Until recently, Canada and the United States were considered world leaders in the
establishment of sophisticated standard-setting capabilities and processes. The IASC, on
the other hand, operated as a technical body primarily concerned with eliminating bad
practices, particularly during its formative years.
But the international landscape has changed dramatically in recent times — other
countries have developed accounting processes and standards comparable in quality
to those in North America. The IASC has become very influential, both in playing a
leading role and in emerging as a credible body for creating new international standards. It has also reached sensible working arrangements with securities regulators
around the world.
In 1996, the World Trade Organization, a body Canada was instrumental in helping to
establish, provided a significant boost to the international effort to harmonize accounting
standards by issuing a statement of support for the International Federation of
Accountants (IFAC) and the IASC.
CANADIAN GAAP CLOSER TO IASC STANDARDS
Canada has always worked in conjunction with the IASC to minimize differences between
international standards and Canadian GAAP. In recent years, for instance, Canadian and
IASC officials have worked jointly on the financial instruments project, ensuring the
broad comparability of section 3860 of the CICA Handbook and IASC Standard 32.
Also, section 1501 in the CICA Handbook recognizes the importance of international
harmonization by allowing Canadian firms to take advantage of benefits derived from
situations where Canadian and international standards are in agreement.
Adapting to U.S. standards, on the other hand, may entail a whole new paradigm.
For instance, Canadian GAAP allows certain development expenditures associated with
research and development projects to be capitalized and apportioned over the life of a
project, whereas under U.S. GAAP those costs are immediately expensed.
With respect to business combinations, Canadian and international standards both require
that the purchase method of accounting be used. There is some allowance for the pooling of
interests method, but only under exceptional circumstances such as when an acquirer cannot
be identified and the transaction represents a “true” pooling of business interests.
Historically, a large percentage of business mergers in the United States have been
accounted for using the pooling of interests method, although FASB recently announced
it intends to ban this process.
International standards also exhibit a greater degree of compatibility with Canadian
standards because of the level of disclosure involved. For example, IASC rules require
financial statements to be “true and fair,” while FASB standards are more technical in
nature, with a heavier emphasis on conformance to GAAP.
IASC and Canadian standards also allow more leeway for professional judgment.
Under IASC rules, an auditor can use discretion to determine that certain rules and
procedures (i.e., those that unnecessarily disclose competitive information) might not
apply under special circumstances.
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Given the greater flexibility and compatibility of IASC benchmarks, Canada could
probably adopt most without major changes. By comparison, the adoption of FASB
standards might entail major modifications before they would work in Canada.
Clearly, since IASC standards are already more similar in style and content to Canadian GAAP,
it makes more sense for Canada to harmonize with international, rather than FASB standards.
IASC STANDARDS MORE OPEN TO POLITICAL REPRESENTATION
Standards generated at the international level must be flexible enough to allow a sovereign nation to continue doing what it needs to do. IASC accounting standards are more
compatible with Canadian interests in that sense because they are more open to political
representation and social choice.
IASC standards allow for direct representation of national interests and are funded by
professional accounting associations representing several countries. They are rooted in a
consultative parliamentary approach, which lends itself to decisions achieved by consensus
and co-operation in a global environment.
Having a number of national standard setters proactively involved in the international
standard-setting arena also encourages healthy debate. Something that may be perfectly
acceptable in Britain, for example, may not be acceptable in Canada, Germany or Japan.
The process invites compromises and sensitivity on political issues.
In contrast, the current FASB structure is designed with little room for non-U.S.
involvement at the board level. It is funded by the independent Financial Accounting
Foundation, whose members are drawn from U.S. industry, academe and the profession.
Members are expected to act in a nonpartisan manner, formally severing ties with previous employers upon joining the standard-setting body.
IASC MORE IN TUNE WITH ITS USERS
Over time, standard setters have been faced with an increasing diversity of constituents
and changing social values.
According to Canadian GAAP, the financial statements of profit-oriented enterprises
must focus on the information needs of investors and creditors, while the statements of
not-for-profit enterprises should address the information requirements of members,
creditors and contributors.
To that end, the standard-setting process must now seek legitimization from the wider
community on grounds that may not always be entirely consistent with technical criteria.
The flexibility of IASC standards, as compared to the more rigid standards established by
FASB, better reflect the wider audience of financial statements users.
IASC STANDARDS BETTER FOR SMES
A complaint often levied against both Canadian and U.S. rules is that they tend to be
designed more for the benefit of large businesses, whereas a more consensus-oriented
body would better represent the interests of small and medium-sized enterprises (SMEs).
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For SMEs, such as a retail store with $500,000 in assets, existing rules sometimes lead
to a serious issue in terms of regulatory overload. The relative flexibility of IASC standards
would better service SMEs by being more sensitive to their needs and interests.
CANADA’S CONTRIBUTION TO THE INFLUENCE OF IASC STANDARDS
The IASC was established by the accounting profession in Canada and eight other
countries in 1973 in recognition of the need for the international harmonization of
accounting standards. Canada, with its established standard-setting experience, has contributed greatly to the increased quality of international standards.
As far back as 1988, for instance, CICA and IASC representatives teamed up on a joint
project examining financial instrument recognition, measurement and disclosure standards.
Canada has earned a great deal of respect at the IASC level over the past 25 years as a
middle power broker or facilitator. And we are much more likely to be able to influence
the international process by continuing in that capacity than we are to influence FASB
standards in any meaningful way.
Adopting international standards would also allow us to continue in a high profile
role and remain actively involved in setting the IASC agenda. The international standardsetting process has much to gain in the future from Canadian knowledge and expertise.
A NEW ROLE FOR CANADIAN STANDARD SETTERS INTERNATIONALLY
Canada has a long and reputable history of accounting standard setting and, though it is
important for us to maintain our autonomy, the time has come for us to accept a new
role. As international standards gain widespread acceptance, it no longer makes sense
for Canadian standard setters to independently research and debate accounting issues as
they have in the past.
Today, we must be prepared to work with other nations in developing a single set
of internationally accepted accounting standards. Establishing a common accounting
language will also help facilitate the free flow of capital within and across national
boundaries in the global economy.
SETTING LOCAL STANDARDS WHEN NEEDED
Unique situations and circumstances are always bound to arise in any country, whether
for political, economic or other reasons. Professional accounting is no exception. There
will be situations where a Canadian standard, dealing with the effects of Canadian law or
purely Canadian economic, legislative or regulatory issues, must be accommodated.
Because national bodies have an important role to play in disseminating national
standards and providing support for international standards, an open standard-setting
process should be maintained at both levels. A move to international standards does not
undermine the legitimacy or importance of Canadian standards.
Commitments to the use of international accounting standards can be modified as
necessary to meet local needs. Investment tax credits, for example, are currently treated
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differently in Canada than in the United States. Any international standard on investment
tax credits would have to reflect local laws, regulations and recommendations.
The national regulatory apparatus will continue to play a valuable role, both in developing and enforcing financial reporting and auditing standards, as well as in regulating
the competency of individuals who practise public accounting. A full-time board with the
authority to set standards and deal with emerging issues would also be poised to deal with
special Canadian problems.
Where the Canadian-established practice appears to be the best solution, it should
then be promoted as a model for other international standard setters.
CANADIAN STANDARD-SETTING PROCESS OUT OF STEP
Canada is the only nation in the industrialized world where a single, private accounting
organization, which excludes about half the profession, has been delegated quasilegislative authority to set standards. Other countries traditionally maintain this process
at arm’s length from the accounting profession.
Membership in standard-setting bodies in many countries includes representatives of
interest groups from a number of sectors including, but not limited to, the accounting
profession. The same should be true in Canada. In today’s complex society, the development of accounting standards should no longer be the sole domain of a single group of
professionals, let alone a solitary body.
CGA-Canada recommends that Canada join the ranks of nations like the United
Kingdom and Australia in establishing an independent, publicly accountable and broadly
based accounting standard-setting body. The U.K. Accounting Standards Board, for
instance, is mandated by legislation and comprises representatives from various accounting bodies, academia and others, for an open standard-setting process. A new standardsetting body in Canada could, for instance, be composed of key stakeholders, including
representatives from the banking and legal community, government and businesses that
would be impacted by the process.
A move to international standards could therefore provide Canada with unique
opportunities to bring our standard-setting process in line with that practised in other
countries. For instance, multiple body representation would not only provide Canada with
better representation at the IASC level, but also an opportunity to establish accounting
standards with a greater degree of independence.
Moreover, having a diverse group participating in the standard-setting process would
eliminate the possibility of real or perceived conflicts of interest. It would also facilitate a
broader response to emerging issues, interpretations or other guidance required.
CONCLUSIONS
To put it simply, choosing the right set of accounting standards is analogous to selecting
a telephone system. Naturally, one would prefer to be connected to the one with the
greatest number of users in order to maximize the number of direct connections.
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So, when selecting the appropriate accounting standard-setting regime, Canadian
authorities would be prudent to choose the international standards published by
the IASC, in order to ensure we are part of the network with the greatest number
of users.
Although distinct cultures and political systems still exist in the world, overall differences are on the decline as nations become more socially and economically integrated
with one another. Global ties only serve to reinforce the argument that international
accounting standards will eventually dominate.
Global harmonization of accounting standards would also provide financial statements
with an enormous amount of credibility in the eyes of financial statement users. Users
could pick up financial statements originating in different countries, secure in the
knowledge that such statements were prepared using an approach endorsed by comparable principles.
Flexible accounting standards, such as those put forth by the IASC, would also make
it easier for capital markets and other users to obtain comparable financial information.
Under a more rigid set of accounting rules, such as those of FASB, it would be more
difficult and expensive to gather and present such information.
Failure to adjust Canada’s standard-setting model to deal with the new global realities
could seriously hamper our ability to compete internationally. Although Canada has an
important role to play in establishing international standards, we must continue to support a national standard-setting body to maintain a domestic focus when appropriate.
The issue of accounting standards is, however, too important a matter for Canada to
leave to a single private body. Accounting standards are a matter of public policy that
should reflect community standards. An increasingly broad range of financial information
users are demanding that their views be represented in the standard-setting process.
In conclusion, a broad public discussion on the issue of Canadian and international
accounting standards is warranted, involving both the federal government and various
constituents within society at large.
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