IFRS Adoption in Canada:
An Empirical Analysis of the
Impact on Financial Statements
By: Michel Blanchette, François-Éric Racicot and Komlan Sedzro
Sponsors: Rock Lefebvre, MBA, CFE, FCIS, CPA, FCGA, Research and Standards, CGA-Canada
Elena Simonova, MA (Economics), MPA, Research and Standards, CGA-Canada
About the Authors
Michel Blanchette, FCMA, FCPA, CA is a professor of accounting with Université du Québec
en Outaouais.
François-Éric Racicot is a professor of finance with the Telfer School of Management at the University
of Ottawa.
Komlan Sedzro is a professor of finance with the School of Management at Université du Québec
à Montréal.
The authors wish to thank CGA-Canada for financial support and assistance in data collection,
particularly Elena Simonova and Kevin Girdharry, and Kamalesh Gosalia for peer review. They also
acknowledge helpful comments from Raef Gouiaa and participants at the 2012 annual conference of
the Financial Management Institute of Canada.
About CGA-Canada
Founded in 1908, the Certified General Accountants Association of Canada (CGA‑Canada) is a
self-regulating, professional association of 75,000 Certified General Accountants (CGAs) and students
in Canada and nearly 100 countries. CGA‑Canada develops the CGA Program of Professional Studies,
sets certification requirements and professional standards, contributes to national and international
accounting standard setting, and serves as an advocate for accounting professional excellence.
CGA‑Canada has been actively involved in developing impartial and objective research on a range
of topics related to major accounting, economic and social issues affecting Canadians and businesses.
CGA‑Canada is recognized for heightening public awareness, contributing to public policy dialogue,
and advancing public interest.
Electronic access to this report can be obtained at www.cga.org/canada
ISBN 978-1-55219-671-7
© By the Certified General Accountants Association of Canada, October 2013.
Reproduction in whole or in part without written permission is strictly prohibited.
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Certified General Accountants Association of Canada
Table of Contents
Executive Summary..........................................................................................................................5
1.Introduction................................................................................................................................7
2.
Implications of Adopting Ifrs in Canada.................................................................................9
2.1. Theoretical Differences between Cgaap and Ifrs.......................................................10
2.2. Impact of Ifrs on Financial Statements and Ratios........................................................14
2.3. Specific Effects.................................................................................................................15
3.
Methodology and Data...............................................................................................................19
3.1. Sample Selection...............................................................................................................20
3.2. Data Collection.................................................................................................................21
3.3. Research Design...............................................................................................................22
4.
Results and Discussion...............................................................................................................25
4.1. Descriptive Statistics.........................................................................................................25
4.2. Comparison of Means, Medians and Variances at the Aggregate Level..........................27
4.3. Big Picture of Differences in Financial Statements..........................................................31
4.4. Breaking Down Differences into Categories of Accounting Adjustments.......................39
4.5. Industry and Auditor Effects............................................................................................55
5. Concluding Remarks and Recommendations.............................................................................61
6.References..................................................................................................................................67
List of Tables
Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8: Table 9: Impairment of Assets in CGAAP.....................................................................................10
Fair Value Accounting in IFRS (excluding impairment)..................................................11
Non-controlling Interest under IFRS vs. CGAAP............................................................12
Categories of Accounting Adjustments............................................................................13
Financial Statement Figures and Financial Ratios...........................................................14
Classification of Industry Sectors.....................................................................................16
Classification of Auditors..................................................................................................17
Sample Composition.........................................................................................................20
Reporting Currency..........................................................................................................21
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
3
Table 10: Descriptive Statistics of Financial Statement Figures and Ratios.....................................25
Table 11: Tests of Equality................................................................................................................27
Table 12: Regressions with the Basic Model.....................................................................................30
Table 13: Overview of Differences in Financial Statement Figures.................................................31
Table 14: Breakdown of Differences into Categories of Accounting Adjustments...........................39
Table 15: Presentation of Non-controlling Interest in the Balance Sheet.........................................53
Table 16: Impact of Non-controlling Interest on the Debt-to-Worth Ratio.......................................54
Table 17: Industry Effects.................................................................................................................56
Table 18: Statistics on Auditors in the Sample..................................................................................60
List of Figures
Figure 1: Evolution of Canadian GAAP towards IFRS....................................................................... 9
Figure 2: Comparability of Financial Statements in IFRS and Local GAAP around Transition....... 19
List of Charts
Chart 1: Differences in Total Assets................................................................................................... 33
Chart 2: Differences in Total Liabilities.............................................................................................. 34
Chart 3: Differences in Shareholders’ Equity..................................................................................... 35
Chart 4: Differences in Sales (or Operating Revenues)...................................................................... 36
Chart 5: Differences in Profit/Loss and in Comprehensive Income/Loss.......................................... 37
Chart 6: Differences in Net Operating Cash Flow.............................................................................. 38
Chart 7: Breakdown of Differences by Accounting Measure............................................................. 41
Chart 8: Differences in Total Assets by Accounting Adjustment....................................................... 44
Chart 9: Differences in Total Liabilities by Accounting Adjustment................................................. 47
Chart 10: Differences in Profit/Loss by Accounting Adjustment......................................................... 49
Chart 11: Differences in Comprehensive Income/Loss by Accounting Adjustment............................ 52
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Certified General Accountants Association of Canada
EXECUTIVE SUMMARY
International Financial Reporting Standards (IFRS) has become the new dominant set of accounting
standards; however, the transition to the new regime may be fairly disruptive for users of financial
statements. Comparability and trend analyses may be impaired as the differences between IFRS and
local generally accepted accounting principles (GAAP) may impact figures presented in financial
statements and lead to variances in financial ratios computed under the two regimes. The objective
of this study is to impart evidence of the impact of IFRS adoption in Canada on financial statement
figures and key financial ratios of Canadian listed companies that adopted IFRS. The study likewise
seeks to identify the sources of differences in financial reporting experienced by companies due to the
changes in the regime.
The analysis is based on the comparison of accounting figures and financial ratios computed under
IFRS and pre-changeover Canadian GAAP (CGAAP) for the same period using a sample of
150 companies listed on the Toronto Stock Exchange which mandatorily adopted IFRS in 2011.
The differences observed in the figures and ratios are grouped into 18 categories of accounting
adjustments. Empirical tests are conducted to identify the main areas of differences and investigate
specific effects related to company’s industry affiliation and auditor. As the following pages reveal,
it can be reasonably contended that:
t the aggregate level, IFRS adoption does not significantly change the central values that
A
describe the financial position and performance of Canadian companies reported in financial
statements. Central values of IFRS financial statement figures and ratios are not significantly
different from those derived under CGAAP as the equality of means and the equality of medians
are not statistically rejected for all figures and ratios, except one – net profit/loss. These results are
potentially reassuring as they imply that databases built from aggregated accounting information
are generally consistent in IFRS and CGAAP.
Differences between individual IFRS and CGAAP values can be large, particularly in the
balance sheet, and represent a fairly material impact. For instance, total assets in IFRS are
less than half the total assets in CGAAP for the company that has the largest negative difference
in the sample, and more than double the total assets in CGAAP for the company with the
largest positive difference. Overall, assets and liabilities are higher in IFRS than in CGAAP;
however, the differences are mostly offset in shareholders’ equity. Sales or operating revenues are
reduced under IFRS compared to CGAAP, but profit is higher and other comprehensive income
(OCI) adjustments are predominantly negative. Fair value accounting for investment property,
consolidation and strategic investments, financial instruments, and derivatives and hedges are
the most important categories of accounting adjustments in the reconciliation of IFRS and
CGAAP figures.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
5
he volatility of financial statement figures is in most cases higher in IFRS than in CGAAP.
T
For instance, a much wider range of values of IFRS financial statement figures is observed when
compared to figures reported under CGAAP. The equality of variances of IFRS and CGAAP
figures is statistically rejected for three items from the balance sheet – total assets, current
liabilities and total liabilities – for which the variance in IFRS is higher than that in CGAAP.
Adjustments related to consolidation (including strategic investments), financial instruments
(including derivatives and hedges), and fair value for investment property emerge as the areas
with the most significant volatility.
Differences between IFRS and CGAAP values are not randomly distributed across industry
sectors; this indicates the presence of industry effects. For instance, Finance and Real Estate
sectors have significantly higher assets and profit in IFRS than in CGAAP arising from fair
value accounting; the level of assets and liabilities is noticeably higher in IFRS in the Management
sector as a result of accounting adjustments on financial instruments (including derivatives and
hedges), and in the Retail sector as a result of adjustments related to consolidation and strategic
investments; and comprehensive income is significantly reduced under IFRS in Information and
Manufacturing sectors due to pension and other employee benefits adjustments.
he choice of auditor within the “Big Four” firms is not associated with any particular type
T
of accounting adjustments in the context of IFRS adoption as differences in financial statement
figures are randomly distributed among the auditors.
It is worth mentioning that the real effects of IFRS adoption in Canada are likely to be larger than
those identified in this study due to certain limitations of the analysis that may have diluted observable
effects of differences between IFRS and CGAAP values. Those limitations are related to the process
of data collection, the gradual nature of transition from CGAAP to IFRS, inconsistencies in the
presentation of transition notes, the use of netting of accounting adjustments, the presence of one-time
adjustments, and the possible use of earnings management strategies to smoothen the transition.
A number of recommendations are provided based on the findings of this study. Those involved in the
analysis of financial statements are advised to accord attention to the trend analysis when comparing
pre-adoption data under CGAAP with post-adoption data in IFRS. The comparison of financial
ratios under both CGAAP and IFRS for the comparative year prior to IFRS adoption may be seen
as a prudent first step prior to undertaking a trend analysis of a particular company. It may also be
prudent to rely on cash flows to avoid the subjectivity inherent to accounting adjustments. Being aware
of the higher volatility of accounting figures under IFRS and understanding the main categories of
adjustments affecting accounting figures and ratios in IFRS may likewise be important.
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Certified General Accountants Association of Canada
1. INTRODUCTION
International Financial Reporting Standards (IFRS) is the new dominant set of accounting standards
developed under a rigorous due diligence process and now used in more than 120 countries around
the world, including Australia, Brazil, Canada, the European Union, South Africa and many others
(Deloitte Touche Tohmastu, 2013).1 Each country adopting IFRS undergoes a transition process in the
year of adoption. This process may be fairly disruptive for users of financial statements as accounting
treatments of analogous items may vary, and impair comparability and trend analyses. Since the
quality of financial statements is influenced by the quality of the underlying accounting standards,
users may benefit from understanding the impact of a shift from local generally accepted accounting
principles (GAAP) to IFRS. The objective of this study is to impart evidence of the impact of IFRS
adoption on financial statement figures and key financial ratios as it relates to Canadian companies
that mandatorily adopted IFRS in 2011.
The comparison of pre-changeover Canadian GAAP (CGAAP)2 to IFRS and the identification of
differences between the two regimes is an important issue for users of financial statements. Many
studies analyze and interpret the standards from a theoretical point of view, but there is a lack of
empirical evidence regarding the impact of the transition as it transpires in practice.3 Our study aims
to provide empirical evidence on differences in financial reporting experienced by companies due
to application of IFRS and sources of those differences. Results of the analysis will allow users of
financial statements to identify categories of accounting adjustments that may produce significant
differences between financial statements prepared under IFRS and CGAAP.
The balance of the paper is organized as follows; Section 2 reviews the recent literature on the impact
of IFRS adoption on financial statements and ratios; it discusses the main theoretical differences
between IFRS and CGAAP as identified in Canadian studies, and examines the findings related to
Canada and other jurisdictions having adopted IFRS. Section 2 also defines variables to be tested
and presents rational for their selection. The methodology of the analysis and the data sources are
described in Section 3 while Section 4 presents and discusses the key findings. The report concludes
by highlighting the most salient aspects of our findings and providing practical recommendations for
analysts and other users of financial statements.
1 Although the United States has not formally adopted IFRS, it is committed to converging its local GAAP with IFRS
(FASB, 2009).
2 In this study, pre-changeover Canadian GAAP (CGAAP) refers to accounting standards applied in Canada
before 2011.
3 Many resources examine issues related to the transition to IFRS in Canada. For example: IFRS Foundation (2013)
provides a list of IFRS-related resources including those that compare IFRS and national GAAPs (Canadian and other);
CICA (2009) and Blanchette and Desfleurs (2011) also compare CGAAP and IFRS; Lorinc (2012) discusses implementation
issues for Canadian companies; the Canadian Financial Executives Research Foundation (2013) examines the impact
of IFRS for Canadian companies in the context of goodwill impairment; Salman and Shah (2011) analyzes the impact
of IFRS on key metrics in the Canadian real estate industry.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
7
8
2. IMPLICATIONS OF ADOPTING IFRS IN CANADA
The development of accounting standards in Canada is influenced by various stakeholders. Since the
CICA Handbook was first published in 1968, a number of accounting practices have been developed
to address peculiarities of the Canadian environment. For example, CGAAP had adapted to fit
local market characteristics related to the treatment of foreign exchange gains and losses (using the
temporal method): until 2001, these gains and losses were amortized under CGAAP while they had
to be directly recognized in profit or loss under the U.S. accounting regime and of that used in other
countries. This distinctive Canadian practice was popular among Canadian companies as it reduced
the volatility of earnings and smoothed income. CGAAP contained a number of such “Canadianmade” accounting practices (Blanchette and Desfleurs, 2011). Nevertheless, CGAAP had been
highly influenced by U.S. GAAP; this continued up until 2006 when the direction of the Canadian
accounting standard-setting changed as the Accounting Standards Board (AcSB) announced its
intention to adopt IFRS (CICA, 2009). From then onward, CGAAP has evolved towards a greater
alignment with IFRS rather than with U.S. GAAP (Figure 1).
Figure 1: Evolution of Canadian GAAP towards IFRS
1968
2006
2011
IFRS adoption
Convergence toward IFRS
Decision to adopt IFRS
U.S. influence
Creation of the CICA Handbook
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
9
2.1. Theoretical Differences between CGAAP and IFRS
CGAAP and IFRS have many similarities. In general, the two sets of standards are considered
as principle-based and subject to similar conceptual foundations (CICA, 2009). However, certain
elements of application diverge and a number of individual standards are fundamentally different.
One major difference, that addresses investors’ needs, is the greater reliance of IFRS on fair value
accounting (Blanchette and Desfleurs, 2011; Chua and Taylor, 2008). Another key difference lies in
the conceptual framework underlying consolidation: in IFRS, non-controlling interests are considered
as owners and presented inside equity, whereas in CGAAP they are reported outside of equity.
Fair Value Orientation
The historical cost principle has long had a major influence on accounting measurement in Canada
and elsewhere in the world. This principle states that the carrying value of various financial statement
items does not change over time except for amortization or disposal. However, the option of measuring
at fair value has been gradually introduced in accounting standards. Initially, fair value could be
used instead of historical cost only when the market value of assets declined. In that case, assets are
written down and losses-in-value (or impairment losses) recognized immediately in profit or loss. This
accounting practice, extensively used worldwide, is based on the conservatism principle; it is applied
to almost every asset of the balance sheet in CGAAP (Table 1). In IFRS, the write-down of assets is
also existent although with a different approach in the application and with a requirement to write-up
when impairment losses are reversed.
Table 1: Impairment of Assets in CGAAP
Standard requiring write-down through an allowance for doubtful accounts
3020 Accounts and notes receivable
Standards requiring impairment write-down
3025 Impaired loans
3051 Investments
3063 Impairment of long-lived assets
3064 Goodwill and other intangibles
3855 Financial instruments – recognition and measurement
Standard requiring write-down to net realizable value
3031 Inventories
Subsequently, the measurement of financial instruments at fair value in both directions (write-down
and write-up) was introduced in accounting standards of several jurisdictions including Canada. This
treatment (called “fair value accounting” or “mark-to-market”) entails the recognition of unrealized
gains/losses. To avoid volatility of profit or loss in the income statement and to classify distinctly some
unrealized gains/losses not deemed representative of regular business, a new concept of financial
reporting was created: comprehensive income. According to this concept, a number of gains and
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Certified General Accountants Association of Canada
losses, which are recognized after applying fair value accounting, bypass the income statement
in a new category of accounting information called other comprehensive income (OCI). These
unrealized gains and losses generally remain in OCI until they are realized. Meanwhile, the annual
comprehensive income incorporates two components: profit or loss from the income statement and the
annual variation of OCI. CGAAP had introduced fair value accounting for financial instruments prior
to the changeover to IFRS in 2011, but with a few differences compared to IFRS (CICA, 2009). In
addition to financial instruments, IFRS allows several other items to be measured at fair value, some
of which are optional whereas others are compulsory; those are listed in Table 2.4
Table 2: Fair Value Accounting in IFRS (excluding impairment)
Fair Value Requirement
Type of Fair Value Accounting
Fair value compulsory
Financial instruments held-for-trading (IAS 39)
Financial instruments available-for-sale (IAS 39)
Derivatives other than used in designated
cash flow hedges (IAS 39)
Biological assets (IAS 41)
Agricultural produces at the point of harvest (IAS 41)
Non-controlling interest at initial recognition (IFRS 3)
Fair value optional
Property, plant and equipment (IAS 16)
Intangible assets (IAS 38)
Investment properties (IAS 40)
Derivatives used in designated cash flow hedges (IAS 39)
Selected items on IFRS transition (IFRS 1)
Fair value through profit or loss
Fair value through OCI
Fair value through profit or loss
Fair value through profit or loss
Fair value through profit or loss
One-time fair value
Fair value through OCI
Fair value through OCI
Fair value through profit or loss
Fair value through OCI
One-time fair value
Non-controlling Interest
Non-controlling interest represents the share of consolidated subsidiaries that is not owned by or
attributed to the parent company. In CGAAP, non-controlling interest is presented outside shareholders’
equity in the consolidated balance sheet.5 Accordingly, it is treated similar to creditors and presented
in liabilities, or alternatively presented in-between liabilities and equity. Under IFRS, non-controlling
interest is treated differently – based on the entity theory. According to this theory, owners have a
participating right or residual interest in a portion of the consolidated entity, and therefore non-controlling
interest is presented within the shareholders’ equity in the consolidated balance sheet.
4It is to be noted that the International Accounting Standards Board (IASB) and the Financial Accounting Standards
Board (FASB) have jointly undertaken a project intent to rewrite the requirements for accounting and reporting of
financial instruments; comprising also of a number of ancillary projects. The objective of this project is to replace the
requirements of IAS 39 Financial Instruments: Recognition and Measurement with a renewed standard that reflects a
comprehensive reconsideration of the requirements of accounting for financial instruments.
5 It should be noted that Canadian standards for consolidation and non-controlling interest changed in December 2008,
to converge with IFRS. These changes became effective in 2011; however, an earlier adoption of the new standard was
permitted. This section discusses the standard that was in place prior to December 2008.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
11
Furthermore, in CGAAP, the share of profit/loss attributable to non-controlling interest is treated as
an expense/revenue within the consolidated income statement (as the interest expense on debts) while
under IFRS, the share of profit/loss attributable to non-controlling interest is a capital attribution.
The difference between the treatment of non-controlling interest under CGAAP and IFRS has two
major implications. First, the difference has a direct impact on the financial structure reported on the
balance sheet, in particular on leverage ratios such as the debt-to-worth ratio. Second, the difference
affects the bottom line reported in the income statement and several profitability ratios such as the
return on assets and the net profit margin (Table 3).
Table 3: Non-controlling Interest under IFRS vs. CGAAP 6
IFRSCGAAP
Share of net assets
attributable to
non-controlling interest
Presented in the
consolidated shareholders’
equity
Presented in the consolidated
liabilities or in-between
the consolidated liabilities
and equity
Share of profit/loss
attributable to
non-controlling interest
Treated as a capital
adjustment after the
calculation of consolidated
profit/loss
Treated as an expense/revenue
within the calculation of
consolidated profit/loss
Other Differences
Many other differences exist between CGAAP and IFRS apart from fair value orientation and
non-controlling interest. Those include differences related to revenues, property, plant and equipment,
intangibles, financial instruments, hedges, asset retirement obligations, employee future benefits,
share-based compensation, leases, income tax, foreign currency translation, and strategic investments
(CICA, 2009).7
This study is based on a positive/inductive approach: differences in the application of standards
are inferred through the examination of differences that transpire in actual financial statements of
reporting Canadian companies. Variations in the application are possible due to the principle-based
approach underlying both IFRS and CGAAP, as professional judgment plays a major role in the
process of interpreting and applying principles. For example, the theoretical rational for impairment
write-down (i.e. conservatism) is similar in IFRS and CGAAP, however the criteria used for
identifying situations that require such a write-down differ. Since the amount of impairment losses
6 Ibid
7 It is to be noted that the IASB has undertaken a comprehensive project in relation to the Conceptual Framework focusing on the elements of financial statements, measurement, reporting entity, presentation and disclosure and that may
impact the extant standards under IFRS.
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Certified General Accountants Association of Canada
may be material in practice (especially during a financial crisis such as that occurred in 2008), the
recognition versus non-recognition of impairment losses has the potential to significantly affect
profit/loss reported in the income statement. This is why empirical evidence in the application of
standards is necessary to assess the real impact of differences between IFRS and CGAAP. This
holds true not only for differences considered to be fundamental (such as those related to fair value
accounting and non-controlling interest), but also for those considered as accessory or minor from a
theoretical point of view.
Taking into account the theoretical differences discussed above, 18 categories of accounting adjustments
were selected for the purpose of this study (Table 4). Grouping of these categories is designed to
preserve as much as possible the format of information presented in the transition-related notes of
IFRS compliant statements.
Table 4: Categories of Accounting Adjustments
Category of Accounting Adjustments
Operating revenues
Variable Used
in this Study
CAT1
Property, plant and equipment, including mining properties
- Impairment (including reversals)
- Capitalization (including component accounting and
depreciation/amortization)
- Fair value accounting
Intangibles
- Impairment (including reversals)
- Fair value accounting
Investment property (fair value accounting)
CAT5
CAT6
CAT7
Asset retirement obligations
CAT8
Financial instruments (including onerous contracts; excluding derivatives
and hedges)
CAT2
CAT3
CAT4
CAT9
Derivatives and hedges
CAT10
Foreign currency translation
CAT11
LeasesCAT12
Pension and other employee benefits
CAT13
Share-based compensation
CAT14
Consolidation and strategic investments (including measurement of
non-controlling interest)
CAT15
Presentation of non-controlling interest (excluding measurement)
CAT16
Income tax
CAT17
Other or unclear
CAT18
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
13
2.2. Impact of IFRS on Financial Statements and Ratios
IFRS adoption can affect several items of financial statements. In this study, we focus the analysis on
items that have a direct impact on the measurement of liquidity, leverage, profitability and cash flow.
Accordingly, we use figures from the balance sheet (current assets, total assets, current liabilities,
total liabilities, shareholders’ equity, non-controlling interest), income statement (sales or operating
revenues, net profit/loss), statement of comprehensive income (comprehensive income/loss) and
statement of cash flows (net operating cash flow). These figures allow constructing a set of financial
ratios that includes the current ratio, debt ratio, return on assets (ROA), comprehensive-ROA, net
profit margin, asset turnover, and the operating cash flow ratio (Table 5).
Table 5: Financial Statement Figures and Financial Ratios
Figures and Ratios
Source or Formula
Financial statement figures
Current assets
Total assets
Current liabilities
Total liabilities
Non-controlling interest (NCI)
Shareholders’ equity
Sales (or operating revenues)
Net profit or loss
Comprehensive income or loss
Net operating cash flow
Balance sheet
Balance sheet
Balance sheet
Balance sheet
Balance sheet (within liabilities or
shareholders’ equity or in-between)
Balance sheet
Income statement
Income statement
Statement of comprehensive income
Statement of cash flows
Financial ratios
Current ratio
Debt ratio
Return on assets (ROA)
Comprehensive-ROA
Net profit margin
Asset turnover
Operating cash flow ratio
Current assets divided by Current liabilities
Total liabilities (excluding NCI when presented
in-between equity and liabilities) divided by
Total assets
Net profit/loss divided by Total assets
Comprehensive income/loss divided by Total assets
Net profit/loss divided by Sales
Sales divided by Total assets
Net operating cash flow divided by Current liabilities
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Certified General Accountants Association of Canada
Only few Canadian studies provide preliminary empirical evidence of differences between IFRS
and CGAAP as they transpire in company’s financial reporting. Blanchette, Racicot and Girard
(2011) report a significantly higher variance of several ratios in IFRS compared to the same ratios in
CGAAP for a sample of companies that adopted IFRS before 2010 (i.e. early adopters). Interestingly,
the report also finds that a ratio based on cash flow figures does not show a significant difference,
consistent with the idea that cash flows are generally not affected by variations in the application of
accounting standards.
A study based on information published by Canadian real estate companies in 2011 confirms that
IFRS adoption has created volatility in earnings and variability in key metrics (Salman and Shah, 2011).
This study reports that real estate assets increase in IFRS with the use of current market values;
and debt balances are likewise higher in IFRS. But since assets have generally increased more than
liabilities under the new reporting regime, the impact of IFRS adoption manifests through a reduced
level of the average debt-to-worth ratio. Furthermore, net earnings of real estate companies are higher
on average in IFRS while no significant impact on cash flows is found.
The European Union adopted IFRS in 2005. Lantto and Sahlström (2009) examine the impact of
IFRS adoption on key financial ratios of a continental European country – Finland. They find that
liquidity ratios decreased under IFRS, while leverage and profitability ratios increased. Additional
liabilities arose mainly from lease accounting, employee benefit obligations and financial instruments,
and higher profits were primarily due to business combinations. A study undertaken by Marchal,
Boukari and Cayssials (2007) examines the impact of IFRS adoption in France and finds small
variations of shareholders’ equity following the adoption of IFRS, but an increase in financial
leverage and profitability. The study notes that fair value accounting was not adopted for long-lived
assets except for one-time adjustments on transition (according to IFRS 1), investment property and
financial instruments.
2.3. Specific Effects
The impact generated by the differences between IFRS and CGAAP on financial statements and ratios
may be influenced by a number of specific effects. Some of those effects are induced by decisions
made by managers whereas others result from the environment in which companies operate.
Industry Effects
One important potential effect may be associated with industry practices. To account for that, data
is classified into ten sectors, based on the North American Industry Classification System (NAICS)
(Table 6).
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
15
Table 6: Classification of Industry Sectors
Industry Sector
1
Mining, quarrying, and oil and gas extraction
NAICS
Codes
2Utilities
3Manufacturing
4
Retail trade
5
Transportation and warehousing
6
Information and cultural industries
7
Finance and insurance
8
Construction, real estate and rental and leasing
9
Professional, scientific, and technical services 10 Management of companies and enterprises
22
31-33
44-45
48-49
51
52
23, 53 54
55
21
Variable Used
in this Study
Mining
Utilities
Manufacturing
Retail
Transport
Information
Finance
Real Estate
Professional Services
Management
Source: Statistics Canada (2012)
Enforcement Mechanism: Auditing
The quality of financial reporting is closely related to the enforcement mechanisms in place;
enforcement is a key factor to ensure uniformity in the application of accounting standards (Alali and
Cao, 2010; Chua and Taylor, 2008). Ball (2006) identifies several enforcers that monitor financial
reporting, including auditors, courts, regulators and boards. While all companies may be subject to
similar enforcement mechanisms in a given country, there might be some regional disparities and
variations in particular situations. The potential effect of one of the enforcement mechanisms –
auditing – is addressed in this report.
Annual financial statements issued by listed companies must be audited by an independent external
auditor. Auditors’ reports are meant to provide some degree of reliability to financial statements by
giving an external opinion on their fairness in respect to accounting standards. As a result, auditors’
reports provide signals to market participants regarding reliability and robustness of financial
statements. The quality of signals depends on the quality of audits.
In practice, listed companies are primarily audited by the “Big Four” auditing firms (i.e. Deloitte,
Ernst and Young, KPMG, and PricewaterhouseCoopers) and occasionally by smaller firms. In this
study, the intention is not to assess the quality of auditors’ reports, or their impact on the quality of
financial statements. Rather, the investigation is focused on examining the existence of a correlation
between accounting differences caused by the adoption of IFRS and the auditors involved. Assuming
auditors’ reports represent a valid signal of financial statements’ reliability, the analysis verifies
whether the frequency and magnitude of actual differences in financial statement figures and financial
ratios under IFRS and CGAAP are randomly distributed across auditors. Auditors are classified into
five categories as detailed in Table 7.
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Certified General Accountants Association of Canada
Table 7: Classification of Auditors
Auditor
Deloitte
Ernst and Young
KPMG
PricewaterhouseCoopers
Other
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
17
18
3. METHODOLOGY AND DATA
To capture the effects of IFRS adoption on financial statements, accounting figures computed under
IFRS are compared, at a company level, with accounting figures computed under CGAAP at the same
date or period. IFRS 1 specifies the requirements for an entity that adopts and applies IFRS for the
first time. This includes the requirement that an entity’s first financial statements in IFRS include at
least one year of comparative information restated to IFRS. This rule allows for the comparison of
accounting figures in IFRS and CGAAP for the year prior to the transition to IFRS. As a result, the
comparison between IFRS and CGAAP can be done using the original 2010 financial statements
in CGAAP and the 2010 statements retrospectively adjusted to IFRS which are presented as part of
financial statements published in 2011 (in cases when the shift to IFRS occurred in 2011). Figure 2
depicts the logic of the comparison.
Figure 2: Comparability of Financial Statements in IFRS and
Local GAAP around Transition (assuming transition occurred in 2011)
Financial statements published
in 2010 under local GAAP
2009
Current year
2010
Comparison
is possible
Comparative year
2010 (restated)
2010
Period Mean
Comparative year
2009
2011
Current year
2011
Financial statements published
in 2011 under IFRS
IFRS 1 also requires an entity to explain how the transition from GAAP to IFRS affected the reported
financial position, financial performance and cash flows. In practice, this is done in a transition note
attached to financial statements which contains reconciliations and explanations. The present study
uses these transition notes to identify differences between financial statement figures derived under
CGAAP and IFRS.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
19
3.1. Sample Selection
The sample used in the analysis consists of 150 companies that are listed on the Toronto Stock
Exchange (TSX) and mandatorily adopted IFRS in 2011. To form the sample, Canadian companies
listed on the TSX are ranked based on their market capitalisation8 as of December 31, 2011. Within
each of the ten industry sectors specified in Table 6, the 15 largest companies are identified using the
following criteria:
1. The company mandatorily adopted IFRS in 2011.
2. 2011 financial statements in IFRS and 2010 financial statements in CGAAP were available on
SEDAR.9
3. The company fiscal year-end is December 31st (or the closest to that date if unable to satisfactorily
collect 15 companies with a December 31st year-end).
Table 8 provides details on the composition of the final sample. The “Other” category of the industry
sectors is excluded from the sample as it represents only a small (2.9%) portion of the total number of
companies listed on the TSX.
Table 8: Sample Composition
Industry Sector
(NAICS code)
Number of
Companies
Listed on
the TSX
Weight of the
Sector in Total
Number of Listed
Companies
Number of
Companies
Included in
the Sample
Finance (52)
Mining (21)
Manufacturing (31-33)
Professional Services (54)
Information (51)
Management (55) Utilities (22)
Retail (44-45)
Transport (48-49)
Real Estate (23, 53)
Other (11, 42, 56, 61, 62, 71, 72, 81, 92)
606
512
177
56
43
42
29
25
25
24
46
38.2%
32.3%
11.2%
3.5%
2.7%
2.7%
1.8%
1.6%
1.6%
1.5%
2.9%
15
15
15
15
15
15
15
15
15
15
0
Total
1,585 100%150
Source: TSX Inc. (2011)
8 TSX Inc. (2011) was used as a source of information on market capitalization.
9 SEDAR (System for Electronic Document Analysis and Retrieval) is a filing system developed for the Canadian Securities
Administrators that provides access to public securities documents filed by public companies and investment funds
(Canadian Securities Administrators, 2012).
20
Certified General Accountants Association of Canada
3.2. Data Collection
Annual audited financial statements were retrieved from SEDAR for each company in the sample: the
financial statements in IFRS were retrieved for the year of transition to IFRS while those in CGAAP
were retrieved for the prior year. The data collection followed a three-step process: first, IFRS figures
which correspond to comparative figures presented for the year prior to the shift were collected
from IFRS financial statements (i.e. balance sheet, income statement, statement of comprehensive
income/loss, and statement of cash flows). Second, CGAAP figures were collected from original
CGAAP statements (published in the year prior to the shift) for the same date and period. Third, the
reconciliations and explanations provided in the transition notes to IFRS statements were used to
further detail differences observed in the values collected through steps 1 and 2, and categorize them
into the accounting adjustments identified in Table 4.10
Two currencies are used in the financial statements of companies: the Canadian dollar (CAD) and the
United States dollar (USD). The figures expressed in USD were converted into CAD using exchange
rates reported by the Bank of Canada (2012).11 The majority of companies (83%) in the sample
reported their financial statements in CAD while 17% did so in USD (Table 9).
Table 9: Reporting Currency
Industry Sector
Number of Companies in the Sample (%)
CAD USDTotal
Real Estate
15 (10.0%)nil
15(10.0%)
Transport15
(10.0%)nil
15(10.0%)
Finance14
(9.3%)1
(0.7%)15
(10.0%)
Management14
(9.3%)1
(0.7%)15
(10.0%)
Retail13
(8.7%)2
(1.3%)15
(10.0%)
Information13(8.7%)2
(1.3%)15
(10.0%)
Professional Services
12 (8.0%)3(2.0%)15
(10.0%)
Utilities11
(7.3%)4
(2.7%)15
(10.0%)
Manufacturing10
(6.7%)5
(3.3%)15
(10.0%)
Mining8(5.3%)7
(4.7%)15
(10.0%)
Total 125 (83.3%)25
(16.7%)150
(100.0%)
Source: SEDAR
10 To better align the reconciliations, reclassifications made by some companies in their transition notes were not
considered. For example, if a company presented non-controlling interest in liabilities under CGAAP and in
shareholders’ equity under IFRS, then a difference was computed and attributed as “presentation of non-controlling
interest” (CAT16) even in the case where the transition note did not identify this as a difference. Any unexplained or
unclear difference was attributed to the category “other or unclear” (CAT18).
11The exchange rate for each company was determined based on the balance sheet date; in most of the cases this date
was December 31, 2010.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
21
In addition to the figures from financial statements, non-financial information was collected. The
identities of auditors along with their opinions (e.g. qualified or not; with remark or not12) were
obtained from the auditors’ reports forming part of the audited financial statements.
3.3. Research Design
Tests of Equality
To analyze the impact of IFRS adoption on financial statements, we first compare means, medians,
and variances of selected accounting figures and financial ratios computed under IFRS and CGAAP.
Equality of means, medians and variances are tested using t-tests, Wilcoxon/Mann-Whitney tests
(tie-adjusted), and F-tests respectively. The study tests the following hypotheses:
Hypothesis 1: Mean of IFRS values is equal to mean of CGAAP values
Hypothesis 2: Median of IFRS values is equal to median of CGAAP values
Hypothesis 3: Variance of IFRS values is equal to variance of CGAAP values
Tests are performed using CAD-equivalent values and weighted values to control for the size effect.
The weighted values are calculated by dividing financial statement figures by total assets computed
under CGAAP.
Analysis of Differences
The distribution of differences between IFRS and CGAAP values is analyzed for each financial
statement figure by looking at the range of values (i.e. minimum and maximum differences) and the
number of observations within that range where differences are below and above zero. This analysis is
done for each figure from financial statements.
Furthermore, the grouping of differences into the 18 predefined categories of accounting adjustments
(as outlined in Table 4) is analyzed for four accounting measures: total assets, total liabilities,
profit/loss and comprehensive income/loss. First, the sum of all differences expressed in absolute
value is computed for each category to identify the most important ones; values weighted by total
assets in CGAAP are used to control for the company size. Absolute values are used to avoid negation
when summing up positive and negative differences. Then the data distribution of the most important
categories (i.e. those with the largest differences in absolute value) is reviewed to identify the number
of positive and negative values, their magnitude and range.
12 Auditors’ reports are required to highlight the existence of a material going concern risk when there is a material
uncertainty about the entity’s ability to continue as a going concern (Ontario Securities Commission, 2010).
22
Certified General Accountants Association of Canada
Regressions
The least-square regression is used to study the extent to which figures computed under IFRS are
statistically explained by the corresponding figures derived under CGAAP. The study hypothesizes that:
Hypothesis 4: IFRS values are fully explained by CGAAP values
The basic regression model is as follows:
IFRSi = intercept + g CGAAPi + e
Where:
- IFRSi is the IFRS value for company “i” (as transpired in figures and ratios)
- CGAAPi is the CGAAP value for company “i”
- “i” refers to ith company in the sample of 150 companies
- “g” is the coefficient of the variable CGAAPi
- e is the error term
This basic model reflects the correlation between IFRS and CGAAP values. If there were no
differences between the two, then the intercept would be zero and the coefficient of the independent
variable CGAAP would be 1, with a R2 of 100%. Otherwise, the analysis can be extended further to
include additional variables.
The following model is adapted to test specific effects that may be caused by company’s industry
affiliation and auditor:
Hypothesis 5: Differences between IFRS and CGAAP values are randomly distributed
across industry sectors
Hypothesis 6: Differences between IFRS and CGAAP values are randomly distributed
across auditors
The dependent variable corresponds to the difference between IFRS and CGAAP values and the
explanatory variables are dummies reflecting the industry sector or auditor.
DIFFi = sk EFFECTSki + e
Where:13
- DIFFi is the difference between IFRS and CGAAP values (as transpired in figures, categories
of accounting adjustments, ratios)
13 There is no intercept included in this model because it is run with all dummy variables for all industry sectors and
auditors respectively.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
23
- EFFECTSki corresponds to dummy variables that reflect the effects of the industry (as identified
in Table 6) or auditor (as identified in Table 7). The dummy variable has the value of 1 when
company “i” meets the effect “k”, and 0 otherwise.
- sk is the coefficient of the variable EFFECTSki
- e is the error term
24
Certified General Accountants Association of Canada
4. RESULTS AND DISCUSSION
4.1. Descriptive Statistics
The general characteristics of financial statement figures and ratios tested are presented in Table 10.
The size of companies in the sample varies considerably: total assets range from $8.6 million
to $425 billion in IFRS ($8.6 million to $418 billion in CGAAP) while sales range from zero to
$38 billion in both IFRS and CGAAP. Total liabilities range from $1.6 million to $400 billion in
IFRS ($1.6 million to $391 billion in CGAAP) whereas the level of shareholders’ equity extends
from negative $1.3 billion to positive $35.2 billion in IFRS (negative $109 million to positive
$36.7 billion in CGAAP). Other company characteristics likewise present considerable range in
values. Net profit/loss varies from negative $1.5 billion to positive $3.8 billion in IFRS (negative
$312 million to positive $3.6 billion in CGAAP) while the figures for comprehensive income/loss
extend from negative $2.4 billion to positive $3.2 billion in IFRS (negative $1.1 billion to positive
$3.1 billion in CGAAP). Finally, net operating cash flow ranges from negative $946 million to
positive $11.6 billion in IFRS (negative $105 million to positive $11.6 billion in CGAAP). Overall,
the range of values is larger in IFRS compared to that in CGAAP. As mentioned above, figures are
to be weighted by total assets in CGAAP to control for the company size during analyses.
Table 10: Descriptive Statistics of Financial Statement Figures and Ratios
Panel A IFRS
JB
N Mean Median Min
Max
SD Skew Kurt
JB
FINANCIAL STATEMENT FIGURES
($M)
($M)
($M)
($M)
($M)
(p-value)
Current assets 124 1025.67
302.05
3.29
10967
1783
3.18
14.68
913
0.0000
Total assets 150 14478.33
1471.42
8.59
424767
50876
5.69
38.03
8480
0.0000
Currrent liabilities 124
859.27
207.97
1.59
11068
1610
3.43
17.70
1359
0.0000
Total liabilities 150 11538.13
822.55
1.64
400092
47081
5.94
40.75
9789
0.0000
0.00
-0.41
15210
1461 8.60
81.99 40847 0.0000
Non-controlling interest a)150 250.65
Shareholders' equity 150 2940.17
590.93
-1288
35192
5661
3.00
12.83
830
0.0000
Sales150 3753.79 826.25
0.00
37618
7517 2.97 11.38
660 0.0000
Net profit/loss 150
314.10
71.92
-1526
3829
616
2.43
11.56
605
0.0000
Comprehensive income/loss 150
282.98
65.81
-2353
3225
577
1.52
11.21
479
0.0000
Net operating cash flow 150
680.52
111.97
-946
11559
1568
3.88
21.18
2442
0.0000
***
***
***
***
***
***
***
***
***
***
FINANCIAL RATIOS
Current ratio 124
1.9523
1.4751
0.0801
22.6932
2.26
6.68
59.35
17326
0.0000
Debt ratio 150
0.5561
0.5325
0.0132
2.5673
0.29
2.48
18.13
1584
0.0000
ROA150 0.0042 0.0489 -1.3430 0.3871
0.21 -4.25 24.93
3455 0.0000
Comprehensive ROA 150
0.0032
0.0443 -1.3430
0.3971
0.21
-4.02
23.42
3010
0.0000
Net profit margin 148
-1.0323
0.0727 -151.311
1.8181
12.46 -11.97
144.77 127468
0.0000
Asset turnover 150
0.7298
0.4839
0.0000
3.8256
0.70
1.78
6.94
177
0.0000
Operating cash flow ratio 124
0.5604
0.5475 -3.0963
6.1970
1.01
0.50
12.15
437
0.0000
***
***
***
***
***
***
***
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
25
Table 10: Descriptive Statistics of Financial Statement Figures and Ratios (Continued)
Panel B CGAAP
N
Mean
Median
Min
Max
SD
Skew
Kurt
JB JB
FINANCIAL STATEMENT FIGURES($M)($M)($M)($M)
($M)(p-value)
Current assets 124 987.24
323.20
3.29
10513
1635
3.09
14.67
901
0.0000
Total assets 150 12359.78
1507.41
8.59
417729 42867
6.90
58.73
20602
0.0000
Currrent liabilities 124 777.53
214.88
1.59
8526
1361
2.93
13.17
712
0.0000
Total liabilities 150 9260.63
796.22
1.64
390602 38878
7.50
67.11
27099
0.0000
276.01
0.00
-0.41
14858
1469
8.11
74.40
33513
0.0000
Non-controlling interest a) 150 Shareholders' equity 150 2870.46
729.58
-109.02
36721
5561
3.18
14.79
1122
0.0000
Sales 150 3779.89
832.27
0.00
37633
7566
2.99
11.46
670
0.0000
Net profit/loss 150 275.04
64.42
-312.00
3571
542
2.99
13.59
923
0.0000
Comprehensive income/loss 150 259.30
61.30 -1058.00
3120
534
2.64
11.35
609
0.0000
Net operating cash flow 150 692.10
106.87
-104.51
11562
1571
3.88
21.07
2417
0.0000
***
***
***
***
***
***
***
***
***
***
FINANCIAL RATIOS
Current ratio 124 2.0765
1.5108
0.1968
22.7138
2.63
5.77
41.30
8265
0.0000
Debt ratio 150 0.5389
0.5419
0.0187
2.5673
0.27
2.77
22.46
2559
0.0000
ROA150 -0.0018 0.0392 -1.3464
0.3837 0.21 -4.35 25.63 3672 0.0000
Comprehensive ROA 150 -0.0015
0.0389
-1.3474
0.3837
0.21
-4.18
24.59
3350
0.0000
Net profit margin 148 -1.0608
0.0578 -150.024
1.1961 12.35 -11.98
144.97 127823
0.0000
Asset turnover 150 0.7241
0.4777
0.0000
3.6881
0.67
1.76
7.05
180
0.0000
Operating cash flow ratio 124 0.5031
0.5321
-7.2115
6.1973
1.19
-1.72
20.52
1648
0.0000
***
***
***
***
***
***
***
Note: IFRS: International Financial Reporting Standards
CGAAP: pre-changeover Canadian Generally Accepted Accounting Principles
N: number of observations
$M: millions of Canadian dollars or CAD-equivalent when applicable
SD: standard deviation
JB: Jarque-Berra test
*** observations do not follow a normal distribution according to the JB test at the 1% level of confidence
a)
Non-controlling interest is the figure from the balance sheet (liability, shareholders’ equity, or in-between)
Financial ratios likewise show a wide range of values. The current ratio ranges from 0.08 to 22.7 in
IFRS (with a mean of 1.95 and a median of 1.48), and from 0.2 to 22.7 in CGAAP (with a mean of
2.08 and a median of 1.51). The debt ratio ranges from 0.013 to 2.6 in IFRS (with a mean of 0.56
and a median of 0.53) and from 0.019 to 2.6 in CGAAP (with a mean and a median of 0.54). ROA in
IFRS ranges from negative 134% to positive 39% (with a mean of 0.4% and a median of 4.9%) while
ROA in CGAAP is at a somewhat lower level. The operating cash flow ratio ranges from negative
3.1 to positive 6.2 in IFRS with a mean of 0.56 and a median of 0.55; this is compared to a range of
negative 7.2 to positive 6.2 in CGAAP, with a mean of 0.50 and a median of 0.53. Finally the net profit
margin in both IFRS and CGAAP shows somewhat similar levels ranging from negative 151 and 150
respectively to positive 1.8 and 1.2, with means hovering around negative 1.05 and medians around
positive 0.065. It is however clear that the mean of net profit margin is not reliable for testing as a
small denominator effect amplifies the statistics (for example, losses under the numerator divided by
low sales under the denominator biases the ratio downward).
It should be noted that most of the data does not follow a normal distribution; there are large
differences between means and medians; minimum and maximum values also differ noticeably in
some cases; skewness and kurtosis are high and p-values of the Jarque-Bera test are all significant
at the 1% level of confidence. Therefore, minimum and maximum values of data as well as their
variance in addition to parametrical and non-parametrical tests on means and medians are analyzed to
account for the apparent non-normality.
26
Certified General Accountants Association of Canada
4.2. Comparison of Means, Medians and Variances at the Aggregate Level
Tests of Equality
Overall, no significant differences are found between financial statement figures and ratios prepared
under IFRS and CGAAP when the analysis is based on the comparison of means and medians. As
presented in panels A and B of Table 11, the equality of means and the equality of medians are not
statistically rejected for all figures and ratios, except one – net profit/loss;14 as such, Hypotheses 1
and 2 are not rejected. This suggests that IFRS adoption does not change significantly, at the aggregate
level, the central values (means and medians) that describe the financial position of Canadian companies
as it is reported in financial statements.
Table 11: Tests of Equality
PANEL A – MEANS
Means
IFRS
CGAAP
Differences Differences
N
FINANCIAL STATEMENT FIGURES
($M)
($M)
($M)
(W.)
Current assets 124 1025.67
987.24
38.42
-0.09%
Total assets 150 14478.33
12359.78
2118.55
3.25%
Currrent liabilities 124
859.27
777.53
81.74
0.77%
Total liabilities 150 11538.13
9260.63
2277.50
4.69%
a)
276.01
-25.36
-0.29%
Non-controlling interest 150 250.65
Shareholders' equity 150 2940.17
2870.46
69.71
-0.35%
Sales150 3753.79 3779.89
-26.10
-1.13%
Net profit/loss 150
314.10
275.04
39.06
0.73%
Comprehensive income/loss 150
282.98
259.30
23.68
0.59%
Net operating cash flow 150
680.52
692.10
-11.58
0.34%
t-tests
Equality of
Equality of
means $M
means W.
(p-value)
(p-value)
0.860
n.s.
0.977
0.697
n.s.
na b)
0.666
n.s.
0.724
0.648
n.s.
0.202
0.881
n.s.
0.621
0.914
n.s.
0.912
0.976
n.s.
0.885
0.560
n.s.
0.763
0.713
n.s.
0.806
0.949
n.s.
0.883
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
FINANCIAL RATIOS
Current ratio 124
1.9523
2.0765
-0.1242
---
0.690
n.s.
---
Debt ratio 150
0.5561
0.5389
0.0172
---
0.593
n.s.
---
ROA 150
0.0042
-0.0018
0.0060
---
0.803
n.s.
---
Comprehensive ROA 150
0.0032
-0.0015
0.0046
---
0.849
n.s.
---
Net profit margin 148
-1.0323
-1.0608
0.0285
---
0.984
n.s.
---
Asset turnover 150
0.7298
0.7241
0.0057
---
0.943
n.s.
---
Operating cash flow ratio 124
0.5604
0.5031
0.0573
---
0.684
n.s.
---
PANEL B – MEDIANS
MediansWilcoxon/Mann-Whitney tests (tie adj.)
Equality of
Equality of
Differences
medians $M
medians W.
CGAAPDifferences
N IFRS
FINANCIAL STATEMENT FIGURES
($M)
($M)
($M)
(W.)
(p-value) (p-value)
Current assets 124
302.05
323.20
-1.02
-0.12%
0.926
n.s.
0.897
n.s.
Total assets 150 1471.42
1507.41
-0.54
-0.08%
0.960
n.s.
na b)
Currrent liabilities 124
207.97
214.88
0.00
0.00%
0.963
n.s.
0.736
n.s.
Total liabilities 150
822.55
796.22
3.37
0.30%
0.911
n.s.
0.612
n.s.
a)
0.00
0.00
0.00
0.00%
0.992
n.s.
0.990 n.s.
Non-controlling interest 150
Shareholders' equity 150
590.93
729.58
-2.89
-0.45%
0.979
n.s.
0.876
n.s.
Sales150 826.25
832.27
0.00
0.00%
0.930
n.s.
0.855 n.s.
Net profit/loss 150
71.92
64.42
0.18
0.04%
0.416
n.s.
0.099
*
Comprehensive income/loss 150
65.81
61.30
-0.12
-0.02%
0.529
n.s.
0.300
n.s.
Net operating cash flow 150
111.97
106.87
0.00
0.00%
0.821
n.s.
0.639
n.s.
FINANCIAL RATIOS
Current ratio 124
1.4751
1.5108
-0.0209
---
0.751
n.s.
---
Debt ratio 150
0.5325
0.5419
0.0046
---
0.670
n.s.
---
ROA 150
0.0489
0.0392
0.0012
---
0.108
n.s.
---
Comprehensive ROA 150
0.0443
0.0389
-0.0001
---
0.307
n.s.
---
Net profit margin 148
0.0727
0.0578
0.0007
---
0.146
n.s.
---
Asset turnover 150
0.4839
0.4777
0.0000
---
0.835
n.s.
---
Operating cash flow ratio 124
0.5475
0.5321
0.0007
---
0.900
n.s.
---
14 The equality of medians for the weighted values of the net profit/loss figure is rejected at the
10% level of confidence.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
27
Table 11: Tests of Equality (Continued)
PANEL C – VARIANCES
Standard deviation (SD)
F-tests
Equality of
Equality of
N IFRS
variances W.
CGAAP DifferencesDifferences variances $M
FINANCIAL STATEMENT FIGURES
($M)
($M)
($M)
(W.)
(p-value)
(p-value)
Current assets 124
1782.84
1634.66
263.97
3.09%
0.337
n.s.
0.872
Total assets 150
50875.84 42867.08
14119.00
20.11%
0.037
**
na b)
Currrent liabilities 124
1610.49
1360.85
339.55
4.36%
0.063
*
0.821
Total liabilities 150
47081.15 38877.56
14200.66
17.96%
0.020
**
0.001
220.68
2.42%
0.950
n.s.
0.181
Non-controlling interest a)150 1461.18 1468.73
Shareholders' equity 150
5661.34
5561.29
1580.26
13.18%
0.828
n.s.
0.622
Sales150 7517.40 7566.48
181.10
5.23%
0.937
n.s.
0.968
Net profit/loss 150
615.64
542.18
225.13
4.28%
0.122
n.s.
0.957
Comprehensive income/loss 150
576.88
534.44
237.15
3.91%
0.352
n.s.
0.905
Net operating cash flow 150
1568.08
1571.34
340.25
2.93%
0.980
n.s.
0.850
FINANCIAL RATIOS
Current ratio 124
2.2608
2.6270
1.0963
---
0.097
Debt ratio 150
0.2859
0.2710
0.1055
---
0.515
ROA 150
0.2095
0.2077
0.0414
---
0.920
Comprehensive ROA 150
0.2109
0.2081
0.0372
---
0.871
Net profit margin 148
12.4635
12.3501
0.3292
---
0.912
Asset turnover 150
0.7046
0.6738
0.1506
---
0.585
Operating cash flow ratio 124
1.0123
1.1897
0.4705
---
0.075
n.s.
n.s
***
n.s.
n.s.
n.s.
n.s.
n.s.
n.s.
*
---
n.s.
---
n.s.
---
n.s.
---
n.s.
---
n.s.
---
*
---
Note: IFRS: International Financial Reporting Standards
CGAAP: pre-changeover Canadian Generally Accepted Accounting Principles
N: number of observations
$M: millions of Canadian dollars or CAD-equivalent when applicable
W.: figures weighted by total assets in CGAAP
Null hypothesis for test of equality: means/medians/variances are equal
*** null hypothesis rejected at the 1% level of confidence
** null hypothesis rejected at the 5% level of confidence
* null hypothesis rejected at the 10% level of confidence
n.s.: null hypothesis not rejected significantly
a)
Non-controlling interest is the figure from the balance sheet (liability, equity, or in-between)
b)
The test on values weighted by “total assets” (W.) are not applied to “total assets” as asset divided by
asset equals 1 for all observations in CGAAP
While means and medians of IFRS items do not differ significantly from those in CGAAP, the
volatility (measured as variance) of several figures and ratios does reflect a significant difference.
In particular, the equality of variances of IFRS and CGAAP figures is statistically rejected for three
items from the balance sheet – total assets, current liabilities and total liabilities – for which the
variance in IFRS is higher than that in CGAAP.15 The variance of all other figures from financial
statements is also higher in IFRS than in CGAAP, except for non-controlling interest, sales and net
operating cash flow for which the variance in IFRS is lower than in CGAAP but by a small margin.
This is consistent (though less pronounced) with the results of a previous study that examined early
adopters of IFRS in Canada and showed higher volatility of financial ratios in IFRS compared to
those in CGAAP (Blanchette, Racicot and Girard, 2011).16
15 The tests on financial statement figures are run using two methods: (i) with values in CAD-equivalent ($M) and (ii) with
values weighted by total assets in CGAAP (W.). The equality of variances is rejected significantly for total liabilities
by both methods (at the 5% level of confidence with values in CAD-equivalent and at the 1% level of confidence
with weighted values); the equality is also rejected at the 5% level of confidence for total assets with values in CADequivalent (not testable in weighted values due to the construction of data – see Note for Table 11 (item “b)”)); the
equality is rejected at the 10% level of confidence for current liabilities with values in CAD-equivalent (but not rejected
with weighted values).
16 Blanchette, Racicot and Girard (2011) reported a significantly higher volatility in IFRS for 10 out of
16 ratios tested for a sample of early-adopters in Canada.
28
Certified General Accountants Association of Canada
Financial ratios also show some volatility. The equality of variances of IFRS and CGAAP metrics is
statistically rejected for two ratios – current ratio and operating cash flow ratio. While the variance of
most financial ratios is higher in IFRS than in CGAAP, for these two ratios the variance is significantly
lower in IFRS. This apparent contradiction should be taken with caution. The two components of the
current ratio show a higher volatility in IFRS than in CGAAP (standard deviation is $1,783 million in
IFRS versus $1,635 million in CGAAP for current assets in the numerator; and $1,610 million versus
$1,361 million respectively for current liabilities in the denominator). Therefore, the lower variance of
the current ratio in IFRS is caused by the combination of adjustments that offset each other.17 For the
second ratio, the operating cash flow in the numerator refers to cash flows from the statement of cash
flows. In Blanchette, Racicot and Girard (2011), the operating cash flow ratio was one of the few ratios
for which the equality of variances computed under IFRS and CGAAP was not rejected significantly.
This is consistent with the fact that cash flows are generally not affected by accounting methods.
Given that the variance of several IFRS figures is significantly higher than the variance of CGAAP
figures (as discussed above), Hypothesis 3 is rejected, at least partially, with a note that mixed effects
are observed on ratios.
Basic Regression Model
Results from the basic regression model18 suggest that CGAAP values have a high level of explanatory
power of IFRS values (adjusted-R2 ranges from 76% to 99.9%, see Table 12) and confirm the high
correlation between IFRS and CGAAP values at the aggregate level. This is not surprising as the
equality of means and medians of financial statement figures and ratios is generally not rejected.
However, the coefficients of CGAAP variables vary between 0.80 and 1.17 for regressions of financial
statement figures (all of which are significant at the 1% level of confidence), reflecting divergences
between IFRS and CGAAP values that range from negative 20% to positive 17%. For financial ratios,
coefficients of CGAAP also vary between 0.78 and 1.02. Therefore, Hypothesis 4 is rejected as IFRS
values are not fully explained by CGAAP ones.
17 Results are consistent when weighted values are used (not reported).
18 We run the basic model with and without an intercept.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
29
Table 12: Regressions with the Basic Model
Basic model with intercept
Basic model with no intercept
Dependent variable
N Adj-R2DW CGAAP- t-stat
N Adj-R2DW
(IFRS) Interceptt-stat CGAAP- t-stat
coeff. (g)
coeff. (g)
Financial statement
figures in $M
Current assets-42.3-1.760
* 1.082 85.786
***124
0.984
1.940 1.070 98.423
***1240.9831.932
Total assets264.1 0.246
n.s. 1.150 47.716
***150
0.939
0.812 1.152 49.902
***1500.9390.814
Current liabilities-49.8-1.918
* 1.169 70.397
***124
0.976
1.854 1.153 79.200
***1240.9751.822
Total liabilities735.0 0.690
n.s. 1.167 43.657
***150
0.927
0.812 1.171 45.131
***1500.9280.815
Non-controlling
n.s. 0.984 80.117
***150
0.977
2.001 0.981 81.234
***1500.9771.985
interest a)-20.8-1.139
Shareholders' equity133.5 0.918
n.s. 0.978 41.991
***150
0.922
1.766 0.988 47.788
***1500.9221.769
Sales -0.6-0.037
n.s. 0.993526.221
***150
0.999
1.595 0.993590.587
***1500.9991.595
Profit/loss 23.0 1.122
n.s. 1.058 31.323
***150
0.868
1.959 1.076 35.687
***1500.8681.944
Comprehensive
income/loss
27.8
1.288 n.s.
0.984
26.997 ***
150 0.830 1.896
1.005
30.586 ***
150 0.829 1.880
Net operating
cash flow
6.1
0.201 n.s.
0.974
55.134 ***
150 0.953 1.992
0.976
60.562 ***
150 0.954
1.987
Financial statement
figures weighted
by total assets
in CGAAP
Current assets
-0.003-0.686
n.s. 1.007 88.959
***124
0.985
2.072 1.000156.590
***1240.9852.086
na b)
Total assets
na b)
Current liabilities0.010 1.599
n.s. 0.988 42.475
***124
0.936
2.542 1.017 72.107
***1240.9352.538
Total liabilities
-0.035-1.091
n.s. 1.152 21.721
***150
0.760
1.866 1.100 46.272
***1500.7591.855
Non-controlling
a)
n.s. 0.801 24.253
***150
0.798
2.130 0.806 25.991
***1500.7992.122
interest 0.001 0.476
Shareholders' equity0.030 1.473
n.s. 0.924 23.461
***150
0.787
1.698 0.974 47.779
***1500.7851.678
Sales
-0.007-1.071
n.s. 0.994156.125
***150
0.994
1.961 0.989228.337
***1500.9941.933
Profit/loss0.007 2.069
** 0.983 58.226
***150
0.958
1.945 0.983 57.579
***1500.9571.890
Comprehensive
income/loss 0.006
1.847 *
0.992
64.256 ***
150 0.965 1.968
0.992
63.731 ***
150 0.965
1.924
Net operating
cash flow 0.003
1.279 n.s.
1.005
83.159 ***
150 0.979 1.911
1.009
85.962 ***
150 0.979 1.886
Financial ratios
Current ratio0.3263.022
*** 0.783 24.260
***124
0.827
2.008 0.844 32.320
***1240.8152.045
Debt ratio0.028 1.433
n.s. 0.981 30.695
***150
0.863
1.723 1.022 71.116
***1500.8621.717
ROA0.006 1.775
* 0.989 60.503
***150
0.961
2.066 0.988 60.058
***1500.9602.022
Comprehensive ROA0.005 1.509
n.s. 0.998 67.812
***150
0.969
2.127 0.997 67.514
***1500.9682.094
Net profit margin 0.038
1.476 n.s.
1.009 484.901 ***
148 0.999 1.775
1.009
484.635 ***
148 0.999
1.747
Asset turnover
-0.010-0.565
n.s. 1.022 55.883
***150
0.954
2.122 1.014 81.761
***1500.9552.115
Operating cash
flow ratio
0.166
4.302 ***
0.784
26.142 ***
124 0.847 1.975
0.834
28.282 ***
124 0.826 1.860
Note: IFRS: International Financial Reporting Standards
CGAAP: pre-changeover Canadian Generally Accepted Accounting Principles
N: number of observations
DW: Durbin-Watson value
$M: millions of Canadian dollars or CAD-equivalent when applicable
Model with intercept: IFRS = intercept + g CGAAP + ε
Model with no intercept: IFRS = g CGAAP + ε
*** coefficient significant at the 1% level of confidence
** coefficient significant at the 5% level of confidence
* coefficient significant at the 10% level of confidence
a)
Non-controlling interest is the figure from balance sheet (liability, shareholders’ equity, or in-between)
b)
The regressions on values weighted by total assets in CGAAP are not applied to “total assets” as asset
divided by asset equals 1 for all observations in CGAAP
30
Certified General Accountants Association of Canada
4.3. Big Picture of Differences19 in Financial Statements
Overview
An overview of the differences between IFRS and CGAAP figures from the face of financial
statements is presented in Table 13. When differences are computed based on data weighted by total
assets in CGAAP, the median values of all differences throughout financial statements are rather
small (not exceeding ±0.5%) and often close to zero. However, there are clear size effects as the
mean values of most differences are much larger than the median values. For instance, the mean
and median are 3.25% and negative 0.08% respectively for total assets, and 4.69% and 0.30%
respectively for total liabilities. Moreover, when differences are expressed in absolute value, the
mean of all differences represents 8.69%, 7.31% and 6.91% respectively for total assets, total liabilities
and shareholders’ equity, and is above 2% for profit/loss and comprehensive income/loss (Table 13,
Column ABS). Since these statistics are weighted by total assets in CGAAP, they reveal fairly
important impacts overall.20
Table 13: Overview of Differences in Financial Statement Figures
Current assets
Total assets
Current liabilities
Total liabilities
Non-controlling interest
Shareholders' equity
Sales
Profit/loss
Comprehensive income/loss
Net operating cash flow
N<0 N=0N>0 N=tot MIN
MEAN MEDIAN MAX ABS
71
26
27
124
-12.64%
-0.09%
-0.12%
17.62%
1.32%
77
11
62
150
-56.78%
3.25%
-0.08%
101.22%
8.69%
44
28
52
124
-10.70%
0.77%
0.00%
33.44%
1.65%
50
13
87
150
-22.20%
4.69%
0.30%
102.70%
7.31%
28
101
21
150
-22.08%
-0.29%
0.00%
8.52%
0.59%
89
8
53
150
-58.12%
-0.35%
-0.45%
61.09%
6.91%
53 6334 150-49.59% -1.13% 0.00% 4.37%1.40%
66 282 150 -13.10% 0.73% 0.04%24.30%2.21%
80
2
68
150
-10.90%
0.59%
-0.02%
17.80%
2.11%
62
23
65
150
-5.90%
0.34%
0.00%
31.55%
1.01%
Note:The table refers to differences between IFRS and CGAAP values, weighted by total assets in
CGAAP (Difference = (IFRS – CGAAP) ÷ total assets in CGAAP)
N<0: number of observations with a negative value
N=0: number of observations with a value of zero
N>0: number of observations with a positive value
N=tot: total available observations
MIN: minimum value of differences
MEAN: mean of differences
MEDIAN: median of differences
MAX: maximum value of differences
ABS: mean of all differences in absolute value
19 The differences discussed in this section refer to differences in values of financial statement figures and ratios
computed under IFRS and CGAAP. Differences are computed using the following formula: IFRS value minus CGAAP
value divided by total assets in CGAAP (i.e. Difference = (IFRS - CGAAP) ÷ total assets in CGAAP). The term “negative
difference” refers to the situation when the result of subtracting CGAAP value from IFRS value is negative; the term
“positive difference” refers to the situation when the result of subtracting CGAAP value from IFRS value is positive.
20 It should be noted that a difference in profit/loss or in comprehensive income/loss of 2% weighted by total assets
in CGAAP may represent a very large difference in profit/loss or in comprehensive income/loss per se. In fact, the
average ROA of our sample is within ±0.5% in IFRS and CGAAP (median at 4.9% and 3.9% respectively; Table 10), so
that a 2% difference in profit/loss weighted by total assets represents more than four times the average profit/loss or
more than 40% the median profit.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
31
Although central values (means and medians) of financial statement figures are similar at the
aggregate level, the differences between individual values are very large in the balance sheet. For
example, the largest negative individual difference in total assets shows an IFRS value 57% lower
than that in CGAAP while the largest positive difference displays an IFRS value of total assets 101%
higher than that of CGAAP. In other words, total assets in IFRS are less than half the total assets in
CGAAP for the company that has the largest negative difference in the sample, and more than double
the total assets in CGAAP for the company with the largest positive difference. We also observe broad
ranges of differences for other balance sheet figures; specifically, from negative 22% to positive 103%
for total liabilities, from negative 58% to positive 61% for shareholders’ equity, from negative 13%
to positive 18% for current assets, from negative 11% to positive 33% for current liabilities, and from
negative 22% to positive 9% for non-controlling interest. Again, since these statistics are weighted by
total assets in CGAAP, they represent a fairly material impact.
In the income statement, the largest negative individual difference in sales shows an IFRS value
50% lower than that in CGAAP while the largest positive difference amounts to just 4%. This
means that the recognition of sales can be significantly reduced in IFRS (down to 50% of total
assets in CGAAP for the company with the largest negative difference in the sample); however, the
possibility to increase the recognition of sales is much more limited (i.e. up to 4.4%). Profit/loss and
comprehensive income/loss also show a relatively wide range of differences: from negative 13% to
positive 24% and negative 11% to positive 18% respectively. Since these statistics are weighted by
total assets in CGAAP, they represent an important variation that impacts such ratios as the ROA and
the comprehensive-ROA. Even differences in the net operating cash flow range from negative 6% to
positive 32% (weighted by total assets in CGAAP).
Chart 1 to Chart 6 show the full distribution of negative and positive differences between IFRS and
CGAAP figures. The charts display the magnitude of differences relative to the number of negative
versus positive values.
32
Certified General Accountants Association of Canada
Assets and Liabilities
As was seen in Table 13, the number of companies reporting lower assets under IFRS exceeds that of
companies reporting lower assets under CGAAP. Specifically, total assets of 77 companies are lower
in IFRS as opposed to 62 companies for which total assets are lower in CGAAP. For current assets,
the respective number of companies is 71 in IFRS and 27 in CGAAP. However, the mean of overall
differences in total assets is a positive 3.25%; this is so because in a number of cases, individual
positive differences are more pronounced than negative ones (Chart 1).
Chart 1: Differences in Total Assets
76
71
66
61
56
51
46
41
Negative differences
(IFRS < CGAAP)
N=77
36
31
26
Positive differences
(IFRS > CGAAP)
N=62
21
16
11
6
1
-60% -50% -40% -30% -20% -10% 0%
10%
20% 30% 40% 50% 60% 70% 80% 90% 100%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
33
On the liability side of the balance sheet, more companies have higher liabilities in IFRS when
compared to CGAAP. Specifically, total liabilities of 87 companies are higher in IFRS compared to
50 companies for which total liabilities are higher in CGAAP. For current liabilities, the respective
number of companies is 52 in IFRS and 44 in CGAAP (Table 13). As such, liabilities are higher in
IFRS in both volume and value when compared to CGAAP (Chart 2).
Chart 2: Differences in Total Liabilities
86
81
76
71
66
61
56
51
46
Negative differences
(IFRS < CGAAP)
N=50
41
36
31
Positive differences
(IFRS > CGAAP)
N=87
26
21
16
11
6
1
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Differences weighted by total assets in CGAAP
34
Certified General Accountants Association of Canada
90%
100%
When examining the combination of the values of assets and liabilities, it becomes apparent that
the number of companies reporting lower equity in IFRS exceeds that of companies reporting lower
equity in CGAAP. Specifically, 89 companies have lower equity in IFRS versus 53 companies that
have lower equity in CGAAP (Table 13). This is reflected in the mean and median of differences
which are negative (-0.35% and -0.45% respectively) but close to zero. Although negative differences
are observed more frequently, the magnitude of individual differences varies on both negative and
positive sides of the scale (Chart 3).
Chart 3: Differences in Shareholders’ Equity
86
81
76
71
66
61
56
51
46
Negative differences
(IFRS < CGAAP)
N=89
41
36
31
Positive differences
(IFRS > CGAAP)
N=53
26
21
16
11
6
1
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
35
Profitability and Cash Flow
In the income statement, companies are more likely to report a noticeably lower sales figure in
IFRS rather than in CGAAP. Specifically, sales are lower for 53 companies in IFRS as opposed to
34 companies that report lower sales in CGAAP (Table 13). The magnitude of differences is much
larger when the difference is negative. In fact, many negative differences are below the 5% mark,
with the largest of them being at 50%. Positive differences, in turn, do not exceed 4.4%, as shown in
Chart 4.
Chart 4: Differences in Sales (or Operating Revenues)
51
46
41
36
31
26
Negative differences
(IFRS < CGAAP)
N=53
21
Positive differences
(IFRS > CGAAP)
N=34
16
11
6
1
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Differences weighted by total assets in CGAAP
At the bottom line of the income statement, the number of companies that show a higher profit
figure (or lower loss) in IFRS exceeds that of companies with higher figures in CGAAP. Specifically,
82 companies reported higher profit in IFRS compared to 66 companies that reported higher profit
in CGAAP (Table 13). The magnitude of differences is much larger for companies with positive
differences compared to those which experience negative differences (Chart 5 – Section A).
On the other hand, more companies have a lower comprehensive income (or higher comprehensive
loss) in IFRS than in CGAAP. Specifically, 80 companies have lower comprehensive income in
36
Certified General Accountants Association of Canada
IFRS versus 68 companies that have lower comprehensive income in CGAAP; however, the mean
of differences is positive at 0.59% (Table 13). This is explained by the fact that individual positive
differences are more pronounced than individual negative differences (Chart 5 – Section B).
Chart 5: Differences in Profit/Loss and in Comprehensive Income/Loss
Section A – Differences in profit/loss
81
76
71
66
61
56
51
46
41
36
31
26
21
16
11
6
1
-15%
-10%
-5%
Negative differences
(IFRS < CGAAP)
N=66
Positive differences
(IFRS > CGAAP)
N=82
0%
5%
10%
15%
20%
25%
Differences weighted by total assets in CGAAP
Secton B - Differences in comprehensive income/loss
76
71
66
61
56
51
46
41
36
31
26
21
16
11
6
1
-15%
-10%
-5%
Negative differences
(IFRS < CGAAP)
N=80
Positive differences
(IFRS > CGAAP)
N=68
0%
5%
10%
15%
20%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
37
The connection between the observations of the balance sheet and profitability figures implies that a
portion of the higher value of assets in IFRS would presumably lead to the recognition of gains in the
income statement, while the higher value of liabilities for several observations would lead to a number
of unrealized losses recognized directly in the OCI. The next section breaks down the differences in
categories of accounting adjustments to identify whether the above implications hold true.
Finally, the number of companies that report higher net operating cash flow in IFRS is about the same
as that for companies reporting higher figure in CGAAP. Specifically, 65 companies have higher
net operating cash flow in IFRS as opposed to 62 companies that have higher cash flow in CGAAP
(Table 13). As seen from Chart 6, most differences fall within the ±6% interval with the exception
of one company that has a positive difference of 32%. It should be noted that the differences between
IFRS and CGAAP observed for net operating cash flows are counter-intuitive: typically, it is expected
that cash flows are not affected by differences in accounting methods. This seeming contradiction is
addressed in the next section.
Chart 6: Differences in Net Operating Cash Flow
61
56
51
46
41
36
Negative differences
(IFRS < CGAAP)
N=62
31
26
21
Positive differences
(IFRS > CGAAP)
N=65
16
11
6
1
-10%
-5%
0%
5%
10%
15%
20%
25%
Differences weighted by total assets in CGAAP
38
Certified General Accountants Association of Canada
30%
35%
4.4. Breaking Down Differences into Categories of Accounting Adjustments
The next step of the analysis aims to identify categories of accounting adjustments that are important
in the reconciliation of IFRS and CGAAP figures. Data on the breakdown of differences by category
of accounting adjustments is presented in Table 14 with subsequent charts showing the adjustments
in order of importance. The data includes the number of negative and positive differences, their central
values and range (i.e. mean, median, minimum and maximum values weighted by total assets in
CGAAP), as well as the importance of differences calculated in absolute values. Absolute values are
computed in two ways: (1) ABS-18 reflects the weighting of all categories as collected, and (2) ABS-16
reflects the weighting of 16 selected categories. The categories CAT1 to CAT16 are selected in ABS-16
because they exclude the categories of adjustments that are vague or influenced by other adjustments.
Specifically, “income tax” category (CAT17) is excluded because it is mostly driven by adjustments
from other predefined categories while “other or unclear” category (CAT18) is excluded because it is
composed of unclear adjustments or adjustments that are not related to any predefined categories.
Table 14: Breakdown of Differences into Categories of Accounting Adjustments
PANEL A
TOTAL ASSETS
N<0
N=0
N>0 N=tot
MIN
MEAN MEDIAN
MAX
ABS-18
ABS-16
Overall difference
77
11
62
150
-56.78%
3.25%
-0.08%
101.22%
8.69%
1
133
16
150
-0.07%
2.01%
0.00%
97.06%
18.68%
20.78%
CAT 7 Investment property FV
1
139
10
150
-0.60%
1.65%
0.00%
103.18%
15.38%
17.12%
CAT10 Derivatives and hedges
28
103
19
150
-53.14%
-0.45%
0.00%
25.93%
14.08%
15.66%
CAT15 Scope of conso. and strategic inv.
12
122
16
150
-0.75%
1.43%
0.00%
72.10%
13.63%
15.16%
CAT9 Financial instruments
27
121
2
150
-33.23%
-0.58%
0.00%
9.02%
7.10%
7.90%
CAT5 Intangibles impairment
37
89
24
150
-6.66%
-0.17%
0.00%
9.63%
5.21%
5.79%
CAT 3 PPE capitalization
35
112
3
150
-8.49%
-0.43%
0.00%
2.66%
4.52%
5.03%
CAT13 Pension and other benefits
4
134
12
150
-11.70%
0.13%
0.00%
14.97%
3.32%
3.69%
CAT4 PPE FV
30
115
5
150
-5.83%
-0.22%
0.00%
5.62%
2.94%
3.27%
CAT2 PPE impairment
2
129
19
150
-0.90%
0.14%
0.00%
4.76%
1.43%
1.60%
CAT12 Leases
7
120
23
150
-0.97%
0.12%
0.00%
6.24%
1.33%
1.48%
CAT8 Asset retirement obligations
6
141
3
150
-9.19%
-0.10%
0.00%
0.16%
0.97%
1.08%
CAT11 Foreign currency translation
3
146
1
150
-13.04%
-0.09%
0.00%
0.02%
0.82%
0.91%
CAT14 Share-based compensation
4
142
4
150
-2.86%
-0.01%
0.00%
0.70%
0.32%
0.36%
CAT1 Operating revenues
1
148
1
150
-2.18%
-0.01%
0.00%
0.03%
0.14%
0.15%
CAT6 Intangibles FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT16 Non-controlling interest
51
66
33
150
-7.90%
-0.08%
0.00%
2.42%
3.68%
CAT17 Income tax
48
64
38
150
-7.26%
-0.08%
0.00%
9.18%
6.44%
CAT18 Other or unclear
Total100.00%100.00%
PANEL B
TOTAL LIABILITIES
N<0
N=0
N>0 N=tot
MIN
MEAN MEDIAN
MAX
ABS-18
ABS-16
Overall difference
50
13
87
150
-22.20%
4.69%
0.30%
102.70%
7.31%
12
94
44
150
-8.02%
2.10%
0.00%
72.10%
24.81%
31.30%
CAT9 Financial instruments
4
128
18
150
-0.06%
2.20%
0.00%
105.20%
24.24%
30.58%
CAT10 Derivatives and hedges
12
120
18
150
-21.87%
0.11%
0.00%
37.13%
11.89%
15.00%
CAT15 Scope of conso. and strategic inv.
7
99
44
150
-2.60%
0.50%
0.00%
27.29%
6.04%
7.62%
CAT13 Pension and other benefits
11
139
0
150
-21.03%
-0.47%
0.00%
0.00%
5.14%
6.48%
CAT16 Non-controlling interest
6
112
32
150
-0.44%
0.25%
0.00%
9.84%
2.87%
3.61%
CAT8 Asset retirement obligations
5
134
11
150
-16.28%
-0.08%
0.00%
1.38%
1.61%
2.03%
CAT1 Operating revenues
6
130
14
150
-1.63%
0.07%
0.00%
5.51%
1.22%
1.54%
CAT12 Leases
7
118
25
150
-0.92%
0.07%
0.00%
4.16%
1.01%
1.27%
CAT14 Share-based compensation
3
142
5
150
-1.70%
0.00%
0.00%
1.09%
0.38%
0.48%
CAT 3 PPE capitalization
4
145
1
150
-0.14%
0.00%
0.00%
0.36%
0.06%
0.07%
CAT11 Foreign currency translation
1
149
0
150
-0.01%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT2 PPE impairment
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT4 PPE FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT5 Intangibles impairment
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT6 Intangibles FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT 7 Investment property FV
66
49
35
150
-22.20%
-0.22%
0.00%
27.53%
13.52%
CAT17 Income tax
29
73
48
150
-7.22%
0.16%
0.00%
10.60%
7.20%
CAT18 Other or unclear
Total100.00%100.00%
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
39
Table 14: Breakdown of Differences into Categories of Accounting Adjustments
(Continued)
PANEL C
PROFIT/LOSS
N<0 N=0 N>0N=tot
MIN MEANMEDIAN MAX ABS-18 ABS-16
Overall difference
66
2
82
150
-13.10%
0.73%
0.04%
24.30%
2.21%
4
137
9
150
-2.52%
0.41%
0.00%
19.33%
13.44%
17.73%
CAT 7 Investment property FV
96
17
150
-12.27%
-0.23%
0.00%
5.97%
11.53%
15.21%
CAT15 Scope of conso. and strategic inv. 37
18
116
16
150
-5.08%
0.15%
0.00%
19.07%
10.04%
13.25%
CAT2 PPE impairment
33
88
29
150
-3.16%
0.08%
0.00%
8.54%
6.82%
8.99%
CAT 3 PPE capitalization
12
126
12
150
-10.90%
-0.21%
0.00%
0.66%
6.80%
8.97%
CAT10 Derivatives and hedges
29
97
24
150
-4.08%
-0.02%
0.00%
7.34%
6.46%
8.51%
CAT9 Financial instruments
8
109
33
150
-4.02%
0.11%
0.00%
3.14%
5.56%
7.33%
CAT16 Non-controlling interest
7
134
9
150
-2.78%
0.06%
0.00%
9.02%
3.94%
5.20%
CAT5 Intangibles impairment
12
124
14
150
-1.46%
0.07%
0.00%
4.84%
3.19%
4.21%
CAT11 Foreign currency translation
34
74
42
150
-3.06%
-0.01%
0.00%
0.94%
2.68%
3.54%
CAT14 Share-based compensation
19
95
36
150
-0.98%
0.03%
0.00%
1.41%
1.95%
2.58%
CAT13 Pension and other benefits
19
119
12
150
-0.32%
0.02%
0.00%
1.85%
0.98%
1.29%
CAT12 Leases
25
113
12
150
-0.95%
0.00%
0.00%
1.12%
0.85%
1.12%
CAT8 Asset retirement obligations
14
124
12
150
-0.20%
0.02%
0.00%
1.53%
0.84%
1.10%
CAT1 Operating revenues
6
137
7
150
-0.98%
0.01%
0.00%
0.94%
0.72%
0.95%
CAT4 PPE FV
0
149
1
150
0.00%
0.00%
0.00%
0.06%
0.01%
0.01%
CAT6 Intangibles FV
69
32
49
150
-7.34%
0.13%
0.00%
17.97%
19.20%
CAT17 Income tax
36
76
38
150
-0.73%
0.10%
0.00%
7.70%
4.98%
CAT18 Other or unclear
Total 100.00%100.00%
PANEL D
COMPREHENSIVE INCOME/LOSS
N<0
N=0
N>0 N=tot
MIN
MEAN MEDIAN
MAX
ABS-18
ABS-16
Overall difference
80
2
68
150
-10.90%
0.59%
-0.02%
17.80%
2.11%
Annual variation of OCI:
47
94
9
150
-5.21%
-0.17%
0.00%
5.50%
9.35%
47.06%
CAT13 Pension and other benefits
26
102
22
150
-6.50%
-0.08%
0.00%
1.54%
5.23%
26.33%
CAT11 Foreign currency translation
CAT15 Scope of conso. and strategic inv.1 143 6 150 -0.11% 0.11% 0.00% 17.05% 4.07%20.50%
12
129
9
150
-1.76%
-0.01%
0.00%
0.58%
0.97%
4.87%
CAT9 Financial instruments
6
136
8
150
-0.08%
0.00%
0.00%
0.10%
0.13%
0.63%
CAT10 Derivatives and hedges
0
149
1
150
0.00%
0.00%
0.00%
0.31%
0.07%
0.37%
CAT3 PPE capitalization
2
148
0
150
-0.13%
0.00%
0.00%
0.00%
0.03%
0.17%
CAT16 Non-controlling interest
1
148
1
150
-0.04%
0.00%
0.00%
0.02%
0.01%
0.07%
CAT12 Leases
0
149
1
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT 7 Investment property FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT1 Operating revenues
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT2 PPE impairment
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT4 PPE FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT5 Intangibles impairment
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT6 Intangibles FV
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT8 Asset retirement obligations
0
150
0
150
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
CAT14 Share-based compensation
10
120
20
150
-0.23%
0.02%
0.00%
1.36%
1.09%
CAT17 Income tax
12
127
11
150
-0.32%
0.00%
0.00%
0.39%
0.51%
CAT18 Other or unclear
Profit/loss transferred:
See Panel C
66
2
82
150
-13.10%
0.73%
0.04%
24.30%
78.55%
Total
100.00%
100.00%
Note: The table refers to differences between IFRS and CGAAP values, weighted by total assets in
CGAAP (Difference = (IFRS - CGAAP) ÷ total assets in CGAAP)
N<0: number of observations with a negative value
N=0: number of observations with a value of zero
N>0: number of observations with a positive value
N=tot: total available observations
MIN: minimum value of differences
MEAN: mean of differences
MEDIAN: median of differences
MAX: maximum value of differences
ABS-16: mean of all differences in absolute values, excluding Income tax (CAT17), Other or unclear (CAT18),
and Profit/Loss transferred when applicable (in Panel D)
ABS-18: mean of all differences in absolute values
PPE: property, plant and equipment
FV: fair value
Sections A to D of Chart 7 show the ranking of categories by accounting measure based on absolute
values of differences for the 16 selected categories (ABS-16, blue bars); the weighting for all
categories as collected is also presented (ABS-18, light blue bars).
40
Certified General Accountants Association of Canada
Chart 7: Breakdown of Differences by Accounting Measure
(based on differences in absolute value, weighted by total assets in CGAAP)
Section A – Total Assets
CAT7 Investment property FV
20.8%
CAT10 Derivatives and hedges
17.1%
CAT15 Scope of conso. and strategic inv.
15.7%
CAT9 Financial instruments
15.2%
CAT5 Intangibles impairment
7.9%
CAT3 PPE capitalization
5.8%
CAT13 Pension and other benefits
5.0%
CAT4 PPE FV
3.7%
Other categories combined
(CAT1,2,6,8,11,12,14,16)
8.9%
3.7%
CAT17 Income tax
6.4%
CAT18 Other or unclear
0%
5%
Mean of all differences as collected
10%
15%
20%
25%
Mean of all differences excluding CAT17 and CAT18
Section B – Total Liabilities
CAT9 Financial instruments
31.3%
CAT10 Derivatives and hedges
30.6%
CAT15 Scope of conso. and strategic inv.
15.0%
CAT13 Pension and other benefits
7.6%
CAT16 Non-controlling interest
6.5%
CAT8 Asset retirement obligations
3.6%
CAT1 Opening revenues
2.0%
CAT12 Leases
1.5%
Other categories combined
(CAT2,3,4,5,6,7,11,14)
1.8%
13.5%
CAT17 Income tax
CAT18 Other or unclear
7.2%
0%
Mean of all differences as collected
5%
10%
15%
20%
25%
30%
35%
Mean of all differences excluding CAT17 and CAT18
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
41
Chart 7: Breakdown of Differences by Accounting Measure (Continued)
(based on differences in absolute value, weighted by total assets in CGAAP)
Section C – Profit/Loss
CAT7 Investment property FV
17.7%
CAT15 Scope of conso. and strategic inv.
15.2%
CAT2 PPE impairment
13.2%
CAT3 PPE capitalization
9.0%
CAT10 Derivatives and hedges
9.0%
CAT9 Financial instruments
8.5%
CAT16 Non-controlling interest
7.3%
CAT5 Intangibles impairment
5.2%
Other categories combined
(CAT1,4,6,8,11,12,13,14)
14.8%
19.2%
CAT17 Income tax
5.0%
CAT18 Other or unclear
0%
5%
Mean of all differences as collected
10%
15%
20%
25%
Mean of all differences excluding CAT17 and CAT18
Section D – Comprehensive Income/Loss
(CAT1 to CAT18 correspond to annual variation of OCI)
CAT13 Pension and other benefits
47.1%
CAT11 Foreign currency translation
26.3%
CAT15 Scope of conso. and strategic inv.
20.5%
CAT9 Financial instruments
4.9%
CAT10 Derivatives and hedges
0.6%
Other categories combined
(CAT1,2,3,4,5,6,7,8,12,14,16)
0.6%
CAT17 Income tax
1.1%
CAT18 Other or unclear
0.5%
Profit/loss transferred from income
statement (Table 14, Panel D)
78.5%
0%
Mean of all differences as collected
42
10%
20% 30%
40%
50%
60% 70%
80% 90%
Mean of all differences excluding CAT17, CAT18
and profit/loss transferred
Certified General Accountants Association of Canada
Consolidation and strategic investments (CAT15) is ranked within the top-3 categories of adjustments
in all four major accounting measures of financial statements. Adjustments to financial instruments
(CAT9) and derivatives and hedges (CAT10) prove to be important as well, ranking in the top-6
categories in all four measures. It is also worth mentioning that fair value accounting for investment
property (CAT7) ranks first in adjustments to total assets and profit/loss whereas pension and other
employee benefits (CAT13) represent almost 50% of all OCI adjustments to comprehensive income.
Other categories have various levels of importance (shown in Table 14 and Chart 7 – Sections A to D).
Impairment of property, plant and equipment and intangibles (CAT2 and CAT5) affect total assets and
profit/loss and are ranked within the top-3 to top-9 categories. Capitalization and depreciation (CAT3)
also affects total assets and profit/loss and is placed in the top-6 and top-4 categories respectively.
In turn, fair value accounting for property, plant and equipment (CAT4) affects total assets and ranks
top‑8; however a closer look at the transition notes reveals that this category of adjustments only
relates to one-time transition adjustments (IFRS 1) as opposed to the revaluation model of IAS 16.
Asset retirement obligations (CAT8) affects liabilities (top-6 ranking), foreign currency translation
(CAT11) affects comprehensive income/loss (top-2 ranking), and the presentation of non-controlling
interest (CAT16) affects liabilities and profit/loss (top-5 and top-7 rankings respectively). The
adjustments that could not be attributed to any particular predefined categories of the study, grouped
in the “other or unclear” category (CAT18), constitute a relatively low proportion of all adjustments
in absolute value (6.4% for total assets; 7.2% for total liabilities; 5.0% for profit/loss; 0.5% for
comprehensive income/loss); this indicates that uncategorized adjustments are generally small.
Chart 8 to Chart 11 show the distribution of positive and negative differences between IFRS and
CGAAP figures for the identified most important categories of accounting adjustments. They display
the magnitude of differences relative to the number of negative versus positive values.
Differences in Assets and Liabilities
The top-4 ranked categories of adjustments to total assets account for 69% of all differences in
absolute value (21% (CAT7), 17% (CAT10), 16% (CAT15), 15% (CAT9); Chart 7 – Section A and
Table 14, Panel A, Column ABS-16). Differences due to fair value accounting for investment property
(CAT7) are one-sided21 and positive with the reported value of total assets in IFRS exceeding that in
CGAAP by up to 97% (Chart 8 – Section A). Differences due to adjustments in financial instruments
(CAT9) and derivatives and hedges (CAT10) are also mainly one-sided and positive; the value of total
assets in IFRS is higher than that in CGAAP by up to 103% (Chart 8 – Sections B and D). In turn,
differences due to consolidation and strategic investments (CAT15) are two-sided (although slightly
more negative) and occur more often compared to differences related to the other three top-ranking
categories (47 versus 17, 11 and 28 cases) (Chart 8 – Section C).
21 Some 16 of the 17 differences in total assets caused by fair value accounting for investment properties (CAT 7) are
positive; the only negative difference observed is very small at -0.07%.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
43
Chart 8: Differences in Total Assets by Accounting Adjustment
Section A – Differences Related to Fair Value Accounting
for Investment Property (CAT7)
16
15
14
13
12
Negative differences
(IFRS < CGAAP)
N=1
11
10
9
8
Positive differences
(IFRS > CGAAP)
N=16
7
6
5
4
3
2
1
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Differences weighted by total assets in CGAAP
Section B – Differences Related to Derivatives
and Hedges (CAT10)
10
9
8
7
Negative differences
(IFRS < CGAAP)
N=1
6
5
Positive differences
(IFRS > CGAAP)
N=10
4
3
2
1
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Differences weighted by total assets in CGAAP
44
Certified General Accountants Association of Canada
80%
90%
100%
Chart 8: Differences in Total Assets by Accounting Adjustment
(Continued)
Section C – Differences Related to Consolidation and
Strategic Investments (CAT15)
27
25
23
21
Negative differences
(IFRS < CGAAP)
N=28
19
Positive differences
(IFRS > CGAAP)
N=19
13
17
15
11
9
7
5
3
1
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Differences weighted by total assets in CGAAP
Section D – Differences Related to
Financial Instruments (CAT9)
16
15
14
13
12
11
10
Negative differences
(IFRS < CGAAP)
N=12
9
8
7
Positive differences
(IFRS > CGAAP)
N=16
6
5
4
3
2
1
-10%
0%
10%
20%
30%
40%
50%
60%
70%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
45
The next three categories of adjustments to total assets relate to impairment of intangibles (CAT5),
capitalization of property, plant and equipment (CAT3), and pension and other employee benefits
(CAT13) (Chart 7 – Section A and Table 14, Panel A). These categories account respectively for
7.9%, 5.8% and 5.0% of all differences in absolute value and are more likely to show lower assets
in IFRS than in CGAAP. For instance, total assets are lower in IFRS in 99 cases while only 29 cases
show lower total assets in CGAAP. Moreover, differences caused by these adjustments are fairly
broad: the minimum value of differences in assets is as low as a negative 33% while the maximum
difference is at a positive 9.6%.
Although the differences in current assets represent only 1.3% of total assets in CGAAP (Table 13,
Column ABS), it should be noted that the adjustments identified for these items primarily relate
to consolidation and strategic investments (CAT15). In fact, this category accounts for 67% of all
differences in current assets, generating both positive and negative differences (not reported).
The top-3 categories of adjustments to total liabilities account for 77% of all differences in absolute
value (31% (CAT9), 31% (CAT10), and 15% (CAT15), see Chart 7 – Section B and Table 14, Panel
B, Column ABS-16). These categories are the same as those for total assets, except for fair value
accounting for investment property (CAT7) which does not show any differences. Differences due
to adjustments in financial instruments (CAT9) and derivatives and hedges (CAT10) account for 62%
of all differences in total liabilities and are prominently one-sided and positive: liabilities reported
in IFRS are up to 105% higher compared to those reported in CGAAP (Chart 9 – Section A and B).
Differences due to consolidation and strategic investments (CAT15) account for 15% of all differences
in total liabilities and are two-sided similar to the differences in assets caused by this category
(Chart 9 – Section C).
46
Certified General Accountants Association of Canada
Chart 9: Differences in Total Liabilities by Accounting Adjustment
Section A – Differences Related to Financial Instruments (CAT9)
43
41
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
-10%
Negative differences
(IFRS < CGAAP)
N=12
Positive differences
(IFRS > CGAAP)
N=44
0%
10%
20%
30%
40%
50%
60%
70%
Differences weighted by total assets in CGAAP
Section B – Differences Related to Derivatives and Hedges (CAT10)
18
17
16
15
14
13
12
Negative differences
(IFRS < CGAAP)
N=4
11
10
9
8
Positive differences
(IFRS > CGAAP)
N=18
7
6
5
4
3
2
1
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100% 110%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
47
Chart 9: Differences in Total Liabilities by Accounting Adjustment
(Continued)
Section C – Differences Related to Consolidation and
Strategic Investments (CAT15)
18
17
16
15
14
Negative differences
(IFRS < CGAAP)
N=12
13
12
11
10
Positive differences
(IFRS > CGAAP)
N=18
9
8
7
6
5
4
3
2
1
-25% -20% -15% -10% -5%
0%
5%
10% 15% 20% 25% 30% 35% 40%
Differences weighted by total assets in CGAAP
The next two categories of adjustments to total liabilities relate to pension and other employee benefits
(CAT13) and non-controlling interest (CAT16) (Chart 7 – Section B and Table 14, Panel B). They account
for 7.6% and 6.5% respectively of all differences in absolute value. Differences due to pension and
other employee benefits (CAT13) are mainly one-sided and positive: total liabilities in IFRS are up to
27% higher than those in CGAAP. Differences due to non-controlling interest (CAT16) are also onesided but negative: in the most notable case, total liabilities in IFRS are lower than those in CGAAP
by 21%. The impact of adjustments to non-controlling interest is further discussed in the next section.
Although the differences in current liabilities represent only 1.7% of total assets in CGAAP (Table 13,
Column ABS), it should be noted that the adjustments observed within current liabilities primarily
relate to financial instruments (CAT9) and consolidation and strategic investments (CAT15). These
categories account for 58% and 22% respectively of all differences in current liabilities, with positive
differences prevailing (not reported).
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Certified General Accountants Association of Canada
Differences in Profitability Figures
The top-3 ranking categories of adjustments to profit/loss account for 46% of all differences in
absolute value (18% (CAT7), 15% (CAT15), 13% (CAT2); Chart 7 – Section C and Table 14, Panel C,
Column ABS-16). The top category of adjustments to profit is the same as the top category of
adjustments to assets (i.e. fair value accounting for investment property, CAT7) and is mainly onesided and positive: profit in IFRS is higher than that in CGAAP by up to 19% (Chart 10 – Section A).
This result provides internal consistency in the data as the revaluation method for investment
properties requires the recognition of gains in the income statement when assets are increased under
IFRS. Differences due to consolidation and strategic investments (CAT15) account for 15% of all
differences; although they are two-sided, negative differences tend to appear more often. In particular,
situations where profit is lower in IFRS than in CGAAP are observed more often in this category
(e.g. profit in IFRS is lower for 37 companies compared to 17 companies for which profit is lower in
CGAAP). Moreover, the magnitude of differences in this category is also fairly notable and ranges
from negative 12% to positive 6% (Chart 10 – Section B). Differences due to impairment of property,
plant and equipment (CAT2) account for 13% of all differences and are two-sided although in few
cases, positive differences are clearly pronounced (Chart 10 – Section C). The positive differences
imply that more impairment losses are recognized under CGAAP during the current year or that
more impairment losses were recognized in previous years under IFRS (restated figures), allowing
reversals in profit during the current year.
Chart 10: Differences in Profit/Loss by Accounting Adjustment
Section A – Differences Related to Fair Value Accounting
for Investment Property (CAT7)
9
8
7
Negative differences
(IFRS < CGAAP)
N=4
6
5
Positive differences
(IFRS > CGAAP)
N=9
4
3
2
1
-5%
0%
5%
10%
15%
20%
Differences weighted by total assets in CGAAP
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
49
Chart 10: Differences in Profit/Loss by Accounting Adjustment
(Continued)
Section B – Differences Related to Consolidation and
Strategic Investments (CAT15)
37
35
33
31
29
27
25
23
21
19
17
15
13
11
9
7
5
3
1
-15%
-10%
-5%
Negative differences
(IFRS < CGAAP)
N=37
Positive differences
(IFRS > CGAAP)
N=17
0%
5%
10%
Differences weighted by total assets in CGAAP
Section C – Differences Related to Impairment of
Property, Plant and Equipment (CAT2)
17
15
Negative differences
(IFRS < CGAAP)
N=18
13
11
Positive differences
(IFRS > CGAAP)
N=16
9
7
5
3
1
-10%
-5%
0%
5%
10%
Differences weighted by total assets in CGAAP
50
Certified General Accountants Association of Canada
15%
20%
The next four categories of adjustments to profit/loss relate to capitalization of property, plant and
equipment (CAT3), derivatives and hedges (CAT10), financial instruments (CAT9) and non-controlling
interest (CAT16) (Chart 7 – Section C and Table 14, Panel C). They account for a total of 34% of all
differences in absolute value (9% each for CAT3, CAT10 and CAT9 and 7% for CAT16). Differences
due to capitalization of property, plant and equipment (CAT3) are two-sided but slightly more on
the positive side of the scale and range from negative 3.2% to positive 8.5%. Differences due to
derivatives and hedges (CAT10) are mainly one-sided and span from negative 10.9% to positive
0.7%. Differences due to financial instruments (CAT9) are spread on both sides of the scale between
negative 4.1% and positive 7.3%. Finally, differences related to non-controlling interest (CAT16) are
also two-sided and fall between negative 4.0% and positive 3.1%; however the number of positive
differences prevails.
The top-3 ranking categories of adjustments to comprehensive income/loss account for 94% of all
differences in absolute value when only OCI adjustments are considered (47% (CAT13), 26% (CAT11),
and 21% (CAT15); Chart 7 – Section D and Table 14, Panel D, Column ABS-16). The top category
relates to pension and other employee benefits (CAT13) and accounts for almost half of all differences.
Its impact is mainly one-sided and negative as comprehensive income is predominantly lower in
IFRS than in CGAAP (Chart 11 – Section A). This is consistent with the higher liabilities in IFRS
due to adjustments in pension and other employee benefits discussed above. Differences due to foreign
currency translation (CAT11) account for 26% of all differences and are two-sided; however, negative
differences are greater in magnitude (up to 6.5%) and frequency when compared to the characteristics
of positive differences (Chart 11 – Section B). Although differences due to consolidation and strategic
investments (CAT15) account for 21% of all differences, they refer to only 7 observations of less than
±0.1% each, except for one case where a positive difference in profit is 17% (not reported).
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
51
Chart 11: Differences in Comprehensive Income/Loss
by Accounting Adjustment
Section A – Differences Related to Pension and Other Employee Benefits (CAT13)
46
41
36
31
Negative differences
(IFRS < CGAAP)
N=47
26
21
Positive differences
(IFRS > CGAAP)
N=9
16
11
6
1
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Differences weighted by total assets in CGAAP
Section B - Differences Related to Foreign Currency Translation (CAT11)
25
23
21
19
17
Negative difference
(IFRS < CGAAP)
N=26
15
13
Positive difference
(IFRS > CGAAP)
N=22
11
9
7
5
3
1
-7%
-6%
-5%
-4%
-3%
-2%
-1%
-0%
Differences weighted by total assets in CGAAP
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Certified General Accountants Association of Canada
1%
2%
Differences Attributable to Non-controlling Interest
As discussed in Section 2, the accounting treatment for non-controlling interest may represent a major
change for companies transitioning from CGAAP to IFRS. In the balance sheet, non-controlling
interest is normally included in shareholders’ equity under IFRS while it is excluded from equity
using CGAAP unless the company opted to adopt the IFRS-converged treatment (this option has been
available in CGAAP since December 2008 – see Footnote 5). In our sample, 57 of 150 companies
presented a figure for non-controlling interest in the balance sheet under CGAAP. Of these companies,
15 had early-adopted the IFRS-converged treatment in a previous year (there is no difference of
presentation in the balance sheet under CAT16 for these companies). For the remaining 42 companies,
11 presented non-controlling interest within liabilities and 31 in-between liabilities and shareholders’
equity (Table 15).
Table 15: Presentation of Non-controlling Interest in the Balance Sheet
IFRS
Non-controlling interest figure:
- Liability
- In-between
- Shareholders’ equity
CGAAP
0
1
58
11
31
15
59
57
No non-controlling interest figure
91
93
Total number of companies in the sample
150
150
To evaluate the impact of IFRS on the presentation of non-controlling interest in the balance sheet,
the debt-to-worth ratio is calculated for the sub-sample of companies presenting non-controlling
interest outside shareholders’ equity using CGAAP values. The one company that presented
non-controlling interest in-between in CGAAP as well as in IFRS is excluded, making the total
sub-sample size 41 (N = 11 + 31 – 1). This debt-to-worth ratio is compared to an adjusted version of
the ratio with the assumption that non-controlling interest is presented within shareholders’ equity,
as required by IFRS. As seen in Table 16, the results show that the debt-to-worth ratio calculated in
CGAAP is reduced by 20% (from 2.92 to 2.34) on average when adjusted to transfer non-controlling
interest into shareholders’ equity, ceteris paribus (the median is reduced by 12%).
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
53
Table 16: Impact of Non-controlling Interest on the Debt-to-Worth Ratio
CGAAP Treatment
IFRS Treatment
Numerator
Total liabilities
Total liabilities in CGAAP
in CGAAP
– NCI presented in liabilities in CGAAP
Denominator
Shareholders’ equity
Shareholders’ equity in CGAAP
in CGAAP
+ NCI presented in liabilities in CGAAP
+ NCI presented in-between liabilities
and equity in CGAAP
Mean2.92
2.34
Median1.55
1.37
Variation
–19.8%
–11.7%
Note: NCI: non-controlling interest
Based on the sub-sample of 41 companies presenting NCI outside shareholders’ equity in CGAAP
In addition to the balance sheet, non-controlling interest also has an impact on the income statement.
The share of profit/loss attributable to non-controlling interest is treated as an expense/revenue under
CGAAP, and as a capital attribution under IFRS. As mentioned above, differences in profit/loss due
to adjustments to non-controlling interest (CAT16) are more often positive than negative. Specifically,
33 companies show higher profit (lower loss) in IFRS than in CGAAP compared to only 8 companies
that report lower profit (higher loss) in IFRS (Table 14, Panel C). The range of differences for noncontrolling interest extends from negative 4% to positive 3%. This result provides internal consistency
in the data assuming a majority of the consolidated subsidiaries are profitable (as an expense is
required in the income statement under CGAAP when subsidiaries make a profit versus revenue when
they make losses), so that profit is increased when the CGAAP expense for non-controlling interest is
removed under IFRS.
Differences in Cash Flow
Cash flows are not affected by accounting methods. However, the statement of cash flows is subject to
a number of rules that may affect the value and presentation of reported cash flows. Our data includes
the net operating cash flow as it is reported in the operating section of the statement of cash flows. As
mentioned above, we observe several cases where operating cash flows differ under IFRS and CGAAP
with variations ranging from negative 6% to positive 32% (value weighted by total assets in CGAAP).
It should be noted though that all differences are within the range of ±6%, except for one case.
Our data does not include the breakdown into categories of accounting adjustments for the differences
in operating cash flows; however we identify two main explanations for such differences. First,
accounting adjustments related to consolidation and strategic investments (CAT15) represent one of
the top-3 most important categories of adjustments to assets, liabilities, profit/loss and comprehensive
income/loss (Table 14). Accordingly, cash flows reported in the consolidated statement of cash flows
differ under IFRS and CGAAP when the scope of consolidation is not the same. Second, some
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Certified General Accountants Association of Canada
operating cash flows under CGAAP may be presented in another section under IFRS (e.g. investing or
financing), or vice versa. The differences observed in operating cash flows do not reflect differences in
real cash flows but rather a different scope of consolidation and/or a classification adjustment.
4.5. Industry and Auditor Effects
This section aims to examine the presence of specific effects associated to industry or auditor. A
regression model is used to capture these effects where dummy variables representing industry sectors
(as outlined in Table 6) and auditors (as outlined in Table 7) are applied to explain the differences
between IFRS and CGAAP values. The regression model is performed using three types of data:
(1) accounting figures as reported on the face of financial statements (weighted by total assets in
CGAAP), (2) the most important categories of accounting adjustments22 associated to total assets,
total liabilities, profit/loss and comprehensive income/loss (weighted by total assets in CGAAP), and
(3) financial ratios. The analysis proceeds in three steps: first, the regression model is run with all
dummy variables representing industry sectors and then auditors. Second, significant variables are
identified (at the 10% level of confidence or less), and third, the regression model is re-run with the
significant variables only.23 The results of the analysis are reported in Table 17. These results focus
on industry effects only as Hypothesis 5 is rejected while Hypothesis 6 is not rejected (Hypothesis
5 tested whether the differences between IFRS and CGAAP values are randomly distributed across
industry sectors while Hypothesis 6 tested whether the differences between IFRS and CGAAP values
are randomly distributed across auditors).
22 The approach used in this analysis is similar to that described in Section 4.4 where the categories of accounting
adjustments tested exclude “Income tax” (CAT17) and “Other or unclear” (CAT18). The categories selected for testing
are those reflecting more than 10% of all differences in absolute value for each of the selected financial statement
figures (column ABS-16 of Table 14).
23 The model is not re-run when adjusted-R2 is negligible.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
55
Table 17: Industry Effects
Dependent variable (DIFF)
FINANCIAL STATEMENT FIGURES Independent variables (Dummies)
Industry sector
Coefficient (s)
t-stat
Other regression statistics
N
Adj-R2
DW
Total assets
overall
Management
Finance
Transport
CAT 7 Finance
Real Estate
CAT9 Management
CAT10Management
CAT15Transport
Retail
Management
0.242
0.164
-0.081
0.148
0.052
0.135
0.139
-0.047
0.033
-0.027
5.186
***
150
0.192
2.284
3.508***
-1.729*
6.458 ***
150 0.2042.500
2.263
**
6.058 ***
150 0.1790.674
4.728 ***
150 0.1142.317
-2.980 ***
150 0.0822.134
2.081**
-1.698*
Current assets
overall
Transport
Retail
CAT15 Retail
Transport
-0.015
0.015
0.019
-0.010
-1.956
*
124
0.049
2.219
1.885*
3.642 ***
150 0.1152.367
-1.945*
Total liabilities
overall
Management
CAT9 Management
Professional Services
CAT10 Management
CAT15 Retail
0.249
0.136
0.045
0.141
5.742
5.240
1.720
4.442
***
150
0.125
2.031
***
150 0.1331.046
*
***
150 0.0912.279
0.026
2.238
**
150 0.0322.077
Current liabilities
overall
Results not significant
124
CAT15 Retail
0.012
3.608 ***
124 0.1082.331
Transport
-0.006 -1.798*
Non-controlling interest a)overall
Shareholders' equity
overall
Management
Transport
Finance
Professional Services
Real Estate
-0.017
-0.126
0.110
-0.062
0.062
Sales
overall
Real Estate
Transport
Utilities
-0.049
-3.825
***
150
0.092
2.213
-0.033 -2.592**
-0.024 -1.845*
Profit/loss
overallFinance
CAT 7 Finance
Real Estate
Comprehensive
income/loss
overall
Finance
CAT13 Information
Manufacturing
CAT15Management
Net operating cash flow
overall
0.047
0.032
0.011
-2.784
***
150
0.035
2.029
-4.103
***
150
0.189
2.160
3.572***
-2.030
*
2.019
*
4.432 ***
150 0.091 2.156
6.231 ***
150 0.1942.516
2.104
**
0.045
4.761
***
150
0.112
2.213
-0.009
-4.929 ***
150 0.1252.035
-0.005 -2.577**
0.011
3.263 ***
150 0.0602.152
Results not significant
FINANCIAL RATIOS
Industry sector
Coefficient (s)
t-stat
Current ratio
Results not significant
Debt ratio
Transport
Professional Services
Finance
150
N
Adj-R2DW
124
0.105
4.098
***
150
0.118
2.023
0.063
2.458
**
-0.049 -1.905*
ROA
Finance
0.034
3.239 ***
Comprehensive ROA
Finance
Professional Services
0.033
-0.015
3.541
-1.673
***
150
0.074
*
150 0.0462.177
2.293
Net profit margin
Asset turnover
Finance
Transport
0.337
0.114
4.178
3.024
***
***
1.921
2.244
Operating cash flow ratio
Results not significant
148
150
124
Note: Regression model: DIFF = s SECTORS +
DIFF = IFRS Value – CGAAP value (weighted by total assets in CGAAP for figures from financial statements)
IFRS: International Financial Reporting Standards
CGAAP: pre-changeover Canadian Generally Accepted Accounting Principles
CAT: categories of accounting adjustments (see Table 4)
SECTORS: dummy variables for sectors (see Table 6)
N: number of observations
DW: Durbin-Watson value
*** coefficient significant at the 1% level of confidence
** coefficient significant at the 5% level of confidence
* coefficient significant at the 10% level of confidence
a)
Non-controlling interest is the figure from the balance sheet (liability, shareholders’ equity, or in-between)
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Certified General Accountants Association of Canada
0.099
0.056
Industry Effects on Assets
There is a statistically significant overall industry effect on total assets in three sectors. Total assets
in IFRS are significantly higher than those in CGAAP in Management and Finance sectors: by
24.2% and 16.4% respectively (at the 1% level of confidence; adjusted-R2 of 19.2%). On the other
hand, total assets are significantly lower in IFRS compared to those in CGAAP in the Transport
sector by 8.1% (at the 10% level of confidence).
By grouping the differences into categories of accounting adjustments, the analysis identifies four
categories with statistically significant industry effects on total assets. The Finance and Real Estate
sectors have higher total assets in IFRS in the category of fair value accounting for investment
property (CAT7) by 14.8% and 5.2% respectively (at the 1% and 5% levels of confidence respectively;
adjusted-R2 of 20.4%). The Management sector has higher total assets in IFRS in the categories of
financial instruments (CAT9) and derivatives and hedges (CAT10) by 13.5% and 13.9% respectively
(at the 1% level of confidence; adjusted-R2 of 17.9% and 11.4%). Finally, the category of consolidation
and strategic investments (CAT15) has a significant industry effect in three sectors: Transport has
lower total assets in IFRS by 4.7%, Retail has higher total assets in IFRS by 3.3%, and Management
has lower total assets in IFRS by 2.7% (at the 1%, 5% and 10% levels of confidence; adjusted-R2 of 8.2%).
A statistically significant overall industry effect is observed on current assets in two sectors.
Transport has lower current assets in IFRS by 1.5% while Retail has higher current assets in IFRS
by 1.5% (at the 10% level of confidence; adjusted-R2 of 4.9%). These effects come primarily from
the consolidation and strategic investments (CAT15) category of accounting adjustments; and are
consistent with similar effects on total assets observed for this category (but, of course, with a lower
magnitude than that for total assets).
Industry Effects on Liabilities
A significant overall industry effect on liabilities is found in one sector – Management. Total liabilities
in IFRS are significantly higher than those in CGAAP for that sector by 24.9% (at the 1% level of
confidence; adjusted-R2 of 12.5%).
The grouping of the differences into categories of accounting adjustments finds three categories with
significant industry effects on total liabilities. The Management sector has higher total liabilities in
IFRS than in CGAAP by 13.6% and 14.1% for the categories related to financial instruments (CAT9)
and derivatives and hedges (CAT10) respectively (at the 1% level of confidence; adjusted-R2 of 13.3%
and 9.1%). The Professional Services sector also has higher total liabilities in IFRS by 4.5% for the
financial instruments (CAT9) category (at the 10% level of confidence). The category of consolidation
and strategic investments (CAT15) has one sector that shows a significant industry effect: Retail has
higher total liabilities in IFRS than in CGAAP by 2.6% (at the 5% level of confidence; adjusted-R2 of
3.2%). It should be noted that we observe a similar effect from consolidation and strategic investments
(CAT15) on current liabilities for the same sector – Retail (at the 1% level of confidence; adjusted-R2
of 10.8%); this is consistent with observations on the asset side.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
57
Industry Effects on Shareholders’ Equity and Non-controlling Interest
A statistically significant overall industry effect on shareholders’ equity is identified in four
sectors. Shareholders’ equity in IFRS is significantly lower than that in CGAAP for the Transport
and Professional Services sectors by 12.6% and 6.2% respectively (at the 1% and 10% levels of
confidence; adjusted-R2 of 18.9%). On the other hand, shareholders’ equity in IFRS is significantly
higher than that in CGAAP for the Finance and Real Estate sectors by 11.0% and 6.2% respectively
(at the 1% and 10% levels of confidence). Only one sector, Management, has an overall statistically
significant industry effect on non-controlling interest, but with a low degree of explanatory power
(adjusted-R2 of 3.5%). Non-controlling interest in IFRS is significantly lower than that in CGAAP
for this sector by 1.7%24 (at the 1% level of confidence).
Industry Effects on Profitability Figures25
A statistically significant overall industry effect on sales is found in three sectors. Sales figures are
lower in IFRS than in CGAAP for the Real Estate, Transport and Utilities sectors by 4.9%, 3.3%
and 2.4% respectively (at the 1%, 5% and 10% levels of confidence; adjusted-R2 of 9.2%).
A statistically significant overall industry effect on profit/loss and on comprehensive income/loss
is observed in only one sector – Finance. Profit/loss in IFRS is higher than that in CGAAP for this
sector by 4.7% (at 1% level of confidence; adjusted-R2 of 9.1%) while comprehensive income/loss is
significantly higher in IFRS by 4.5% (at the 1% level of confidence; adjusted-R2 of 11.2%).
The grouping of the differences into categories of accounting adjustments finds one category with
statistically significant effects on profit/loss, and two categories with statistically significant effects on
comprehensive income/loss. The Finance and Real Estate sectors have higher profit in IFRS than in
CGAAP by 3.2% and 1.1% respectively (at the 1% and 5% levels of confidence; adjusted-R2 of 19.4%)
in the category of fair value accounting for investment property (CAT7). This is consistent with the
industry effect observed for this category in total assets. The Information and Manufacturing sectors
have lower comprehensive income in IFRS than in CGAAP by 0.9% and 0.5% (at the 1% and 5%
levels of confidence; adjusted-R2 of 12.5%) in the category of pension and other employee benefits
(CAT13). The Management sector has higher comprehensive income in IFRS by 1.1% (at the 1%
level of confidence; adjusted-R2 of 6.0%) in the category of consolidation and strategic investments
(CAT15).
Industry Effects on Cash Flows
No significant industry effect on cash flows is found.
24 It should be noted that the variables used in the regression model are weighted by total assets in CGAAP. Therefore,
a coefficient of 1.7% may seem small, but still important considering the lower value of figures such as non-controlling
interest in relation to total assets. For instance, 1.7% weighted by total assets in CGAAP corresponds to 76% when
weighting by the average value of non-controlling interest.
25 Similarly to the explanation provided in Footnote 24, it is worth underlining that the variables used in the regression
model are weighted by total assets in CGAAP. Therefore, coefficients below 5% may seem small, but are still important
for variables such as profit or comprehensive income.
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Certified General Accountants Association of Canada
Industry Effects on Ratios
When financial statement figures are incorporated into financial ratios, three sectors show significant
industry effects. The Transport sector has a higher debt ratio in IFRS than in CGAAP by 10.5%
and a higher asset turnover by 11.4% (at the 1% level of confidence; adjusted-R2 of 11.8% and 5.6%
respectively). This is consistent with the fact that the level of total assets is lower in IFRS compared
to CGAAP for that sector by 8.1% (as discussed above). Since total assets are at the denominator of
these ratios, a decrease in assets would increase the ratios.26
The Finance sector shows a lower debt ratio and higher profitability ratios in IFRS. The debt ratio
is lower in IFRS than in CGAAP by 4.9% (at the 10% level of confidence); this is consistent with the
higher level of total assets (by 16.4%) for that sector as discussed above. The ROA, comprehensive-ROA
and net profit margin are all higher in IFRS than in CGAAP by 3.4%, 3.3% and 33.7% respectively
(at the 1% level of confidence; adjusted-R2 of 4.6%, 7.4% and 9.9%). This is consistent with the higher
profit and comprehensive income in IFRS for that sector as discussed above (4.7%
and 4.5% respectively).27
The Professional Services sector has a higher debt ratio (by 6.3%) and a lower comprehensive-ROA
(by 1.5%) in IFRS when compared to CGAAP (at the 5% and 10% levels of confidence; adjusted-R2
of 11.8% and 7.4%). These results suggest that a number of variations in assets and liabilities (which
increase the debt ratio) are associated to gains/losses directly allocated to OCI (which decreases the
comprehensive-ROA); those include pension adjustments (CAT8), financial instruments available for
sale and cash flow hedges (CAT9 and CAT10), or foreign currency (CAT11). This is consistent with
the significantly higher level of liabilities that we observe for the Professional Services sector in the
category financial instruments (CAT9) discussed above (4.5%).
Auditor Effects
Descriptive statistics of auditors for each industry sector in the sample are provided in Table 18.
All auditors’ reports are unqualified although three include a remark on going concern (emphasis
of matter). This indicates that the financial statements respect accounting standards within the
framework of auditing standards. The “Big Four” firms audited 97.3% of the companies in the sample,
leaving only 2.7% for “non-Big Four” auditors. As such, data in the sample is not sufficient to test
the auditor effects caused by “Big Four” versus “non-Big Four” auditors. Nevertheless, the regression
model can be used to examine whether the differences in financial statement figures are randomly
distributed among the “Big Four”. We also note that three companies in the sample changed auditor
in the year of IFRS adoption; these three changes were within the “Big-Four” group (e.g. from one
26 The lower level of total assets for the sector Transport forces the asset turnover ratio to increase (denominator-effect)
while the lower level of sales brings the ratio down (numerator-effect). Since the denominator-effect (negative 8.1%)
surpasses the numerator-effect (negative 3.3%), the net variation is an increase.
27 The ROA and comprehensive-ROA increase in IFRS even though the increase at the denominator is 16.4% compared
to 4.7% and 4.5% at the numerator. The reason is that differences in accounting figures are weighted by total assets,
so that the proportional variation at the numerator exceeds the variation at the denominator.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
59
auditor within the group to another). Should this move be observed more frequently (especially
between a “Big Four” and a “non-Big Four” auditor), it could convey a change in the audit quality
of financial statements as suggested by the signalling theory (Barton, 2005; Beatty, 1989; Balvers,
McDonald and Miller, 1988).
Table 18: Statistics on Auditors in the Sample
Auditor of Financial Statements in the Year
of IFRS Adoption
Industry
Total as a Deloitte E&Y KPMG PwC OtherTotal
Sector
Percentage
Mining
50 370
1510%
Utilities
42 450
1510%
Manufacturing12 750
1510%
Retail
32 541
1510%
Transport
43 620
1510%
Information 44 331
1510%
Finance
64 140
1510%
Real Estate 34 341
1510%
Professional 13 641
1510%
Services
Management 44 250
1510%
Total
35 28 40 43 4150 100%
Total as a 23.3% 18.7% 26.7% 28.7% 2.7%100.0%
percentage
Note: E&Y: Ernst & Young
PwC: PricewaterhouseCoopers
A regression model run with dummy variables for auditors shows low explanatory power with
adjusted-R2 mostly negligible. Only two cases show adjusted-R2 above 2.6%, which is inconclusive.28
Therefore, Hypothesis 6 stating that the differences between IFRS and CGAAP values are randomly
distributed across auditors is not rejected. These results suggest that the choice of auditor, at least
within the “Big Four” firms, is not associated with particular types of accounting adjustments in the
context of IFRS adoption.
28 In the regression model with dummy variables for auditors, we obtain adjusted-R2 above 2.6% for the category of
accounting adjustments in financial instruments (CAT9) with regressions on total assets and total liabilities (adjustedR 2 of 4.5% and 6.6% respectively). A closer look at the underlying data reveals that a few large companies in the
Management sector are involved. As such, these effects may be driven by industry concentration (association between CAT9 and Management sector for total assets and total liabilities as reported in Table 17: adjusted-R 2 of 17.9% and 13.3% respectively) rather than an auditor effect.
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5. C
ONCLUDING REMARKS AND
RECOMMENDATIONS
Adoption of IFRS in Canada brings good and bad news. The overall good news is that the comparability
of Canadian financial statements internationally may improve since many other countries have
already adopted IFRS. There are, however, a number of pitfalls lurking for financial analysts and
other users of financial statements. In the short term, the outcome of trend analysis may be distorted
as current IFRS statements are compared to pre-changeover CGAAP statements. In the longer term,
it will be influenced by the application of IFRS which differs (to a larger or lesser extent) from that
found in CGAAP. In this study, we provide insights on actual effects of IFRS adoption on Canadian
companies. Using information from audited financial statements, the study compares accounting
figures and financial ratios computed under IFRS and pre-changeover CGAAP for the same period
for a sample of 150 companies listed on the TSX. Conclusions are formed at the three distinct levels;
aggregate, industry and micro/company.
At the aggregate level, means and medians of financial statement figures and ratios are not
statistically different under the two accounting regimes. For example, the median of the current
ratio is 1.48 in IFRS while it is 1.51 in CGAAP; for the debt ratio the median is 0.533 in IFRS and
0.542 in CGAAP; for the ROA it is 4.9% and 3.9% respectively; and for asset turnover it is 0.484 and
0.478 respectively. There is only one accounting figure – net profit/loss weighted by total assets in
CGAAP – for which the equality of medians is rejected and it is merely significant at the 10% level of
confidence. These results are potentially reassuring as they imply that databases built from aggregated
accounting information should generally be consistent in IFRS and CGAAP. However, the distribution
of data around the central values of means and medians is important in several cases. For instance,
the equality of variances in IFRS and CGAAP for total assets, current liabilities and total liabilities
in the balance sheet is statistically rejected. This result reflects higher volatility of financial statement
figures in IFRS compared to CGAAP and is consistent with prior research in Canada (Blanchette,
Racicot and Girard, 2011; Salman and Shah, 2011).
The analysis of the range and magnitude of differences between values computed under IFRS
and CGAAP finds that assets and liabilities tend to be higher in IFRS than in CGAAP; however,
these differences are mostly offset in shareholders’ equity. Sales or operating revenues are
clearly reduced under IFRS compared to CGAAP, but profit is higher and OCI adjustments are
predominantly negative (losses). This is explained by differences in categories of accounting
adjustments, particularly:
- Fair value accounting for investment property (CAT7) is ranked as a number one category that
increases assets and profit in IFRS (consistent with IAS 40 that allows fair value accounting
through profit);
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
61
- Consolidation and strategic investments (CAT15) ranks in the top-3 categories of adjustments
that affect total assets, total liabilities, profit/loss and comprehensive income/loss. This category
reduces profit in IFRS and has a two-sided impact (both decreasing and increasing) on total
assets and total liabilities (consistent with variations in the scope of consolidation);
-T
he categories associated to financial instruments including derivatives and hedges (CAT9 and
CAT10) rank in the top-4 categories that increase total assets and total liabilities (consistent with
IAS 32 and IAS 39 governing the measurement and presentation of financial instruments);
- Pension and other employee benefits (CAT13) ranks as a number one category that decreases
comprehensive income and is among the top-4 categories that increase liabilities (consistent
with IAS 19 which allows adjustments of liabilities through OCI);
-F
oreign currency translation (CAT11) is the second highest ranked category that decreases
comprehensive income (consistent with IAS 21 allowing the recognition of foreign exchange
gains/losses through OCI).
- Impairment and capitalization of property, plant and equipment (CAT2 and CAT3) are among
the top-4 categories that increase profit (consistent with IAS 16 and IAS 36 which require these
adjustments to be allocated through profit).
At the industry level, a number of sectors show significant effects of IFRS adoption on financial
statements and ratios. The most notable industry effects include the following:
-T
he Finance and Real Estate sectors have significantly higher assets and profit in IFRS arising
from fair value accounting with gains/losses recognized directly through the income statement,
due to fair value accounting in the context of investment property (CAT7). This result is
consistent with prior research on real estate in Canada (Salman and Shah, 2011).
-T
he level of assets and liabilities in the Management sector is noticeably higher in IFRS than
in CGAAP as a result of accounting adjustments on financial instruments (CAT9 and CAT10).
Although both sides of the balance sheet – assets and liabilities – are affected by the transition
to IFRS, the net impact on shareholders’ equity is not significant as adjustments counterbalance
each other. Significant effects of adjustments related to financial instruments on profitability
figures are not observed in this sector either.
- Assets and liabilities are both higher in IFRS than in CGAAP for the Retail sector as a result of
consolidation and strategic investments (CAT15), but the net impact on shareholders’ equity is not
significant, as many adjustments counterbalance each other. A similar situation is observed in
the Transport sector, but the direction of the impact is reversed: assets and liabilities are lower in
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IFRS than in CGAAP. These effects are consistent with adjustments of the scope of consolidation
where assets and liabilities are showed separately on the balance sheet instead of being presented
as a one-line investment (or vice versa).
- Pension and other employee benefits (CAT13) reduce the comprehensive income with significant
industry effects observed in the Information and Manufacturing sectors.
-T
he liability side of the balance sheet is affected by the presentation of non-controlling interest
that increases shareholders’ equity in IFRS. Although there is no industry effect, the impact on
the sub-sample formed by companies reporting non-controlling interest (N=41) manifests in a
20% reduction of the average debt-to-worth ratio in IFRS (12% reduction of the median).
Auditor effects are also tested to examine whether the differences in financial statement figures are
randomly distributed among the “Big Four” auditors. Results suggest that the choice of auditor is not
associated with any particular types of accounting adjustments in the context of IFRS adoption.
At the micro or company level, the situation is somewhat precarious as we observe substantial
variations in every part of financial statements and ratios, and in several categories of accounting
adjustments. In the balance sheet, central values (means and medians) of total assets, total liabilities
and shareholders’ equity are not significantly different in IFRS and CGAAP, but individual
differences can be considerable. For instance, total assets and total liabilities in CGAAP can both
become twice higher when computed under IFRS; they can also be reduced by more than 50%
and 20% respectively. Profitability shows a wide range of values as well. When CGAAP values are
subtracted from those computed in IFRS, differences in weighted values of profit/loss range from
negative 13% to positive 24%; for comprehensive income/loss, the range is from negative 11% to
positive 18%. Since these values are weighted by total assets in CGAAP, they represent important
variations considering that both medians of ROA and comprehensive-ROA are 3.9% in CGAAP.29
Although both positive and negative differences are observed in profitability figures, reported profit
is persistently higher under IFRS compared to CGAAP. Interestingly, differences in sales contrast
with differences in profitability as they are prominently negative (i.e. sales figures are higher in
CGAAP than in IFRS). In fact, the observed differences suggest that sales in IFRS can be reduced
by as much as 50% compared to CGAAP but can be increased only to a maximum of 4% (values
weighted by total assets in CGAAP). Finally, cash flows are subject to lower variations but a range of
differences is nevertheless observed (from a negative 6% to a positive 32%); partly due to differences
in the scope of consolidation.
29 The range of differences in profit/loss represents a range of -3.3 to +6.2 times the median value of ROA in CGAAP;
the range of differences in comprehensive income/loss represents a range of -2.8 to +4.6 times the median value of
comprehensive-ROA.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
63
The results are subject to limitations which include the following:
- Gradual convergence:
Transition from CGAAP to IFRS is not instantaneous. In fact CGAAP has gradually evolved
towards IFRS during at least five years, from the initial announcement in 2006 to actual
changeover in 2011. Therefore, the differences observed are based on partially converged
CGAAP, masking some aspects of the complete impact of IFRS over time.
- Data collection:
There is a risk of error as the data was collected manually. However, two levels of control
were applied to reduce this risk. First, all the data initially collected by a representative of
CGA-Canada has been cross-verified. Second, several statistical controls have been applied,
including reconciliation of liabilities, non-controlling interest when applicable and shareholders’
equity with total assets; reconciliation of profit/loss and OCI adjustments with comprehensive
income/loss; reconciliation of the sum of accounting adjustments collected from the transition
notes with the variation of underlying accounting figures from the original financial statements.
- Inconsistent presentation of transition notes:
There is no uniform format required by IFRS for the presentation of the transition note in
the year of IFRS adoption. Hence, the information is not presented in a consistent manner
by companies, reducing the comparability of the data collected. Moreover, reconciliation of
IFRS and CGAAP figures for the previous comparative year is required in the transition note
for shareholders’ equity and comprehensive income/loss (paragraphs 24 to 28 of IFRS 1) but
not necessarily for assets, liabilities, profit/loss and cash flows. Therefore, some accounting
adjustments were simply not reflected in transition notes, or presented in various and differing
manners. For example, accounting adjustments were presented separately by some companies
and combined by others (e.g. depreciation with impairment losses; property, plant and equipment
with intangibles; pension and other employee benefits with share-based compensation; fair value
adjustments for derivatives with other financial instruments). Nevertheless, the relatively low
proportion of uncategorized adjustments in the data (CAT18) mitigates this limitation.
- Netting:
Accounting adjustments on foreign currency translation (CAT11), non-controlling interest
(CAT16) and income tax (CAT17) are presented separately by some companies and netted with
the underlying items by others. Adjustments on consolidation (CAT15) involving assets and
liabilities, or revenues and expenses, are also presented separately by some companies and
netted by others. Therefore the effects that we observe on those categories are diluted when
the presentation is netted.
- Income tax:
Income tax adjustments driven by adjustments from other predefined categories could not
be differentiated from those solely due to differences in accounting standards on income tax
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Certified General Accountants Association of Canada
between IFRS and CGAAP (IAS 12 and section 3465 of the CICA Handbook respectively).
Therefore, the differences on income tax (CAT17) were excluded in some analyses and tests.
- One-time adjustments:
Some one-time adjustments in IFRS figures affect the differences with CGAAP figures as a
number of exemptions and exceptions are possible under IFRS. This results in IFRS figures not
being fully representative of the ongoing application of IFRS. For instance, all the fair value
adjustments related to property, plant and equipment and intangibles observed in the sample
come from one-time adjustments rather than ongoing fair value accounting.
- Earnings management:
There is often an acceptable range in the measurement of financial statement figures. Given the
fairly advanced notice ahead of the changeover, companies had the opportunity to apply earnings
management strategies to smooth the transition or manipulate financial statement figures. For
example, a company reducing profit (or increasing loss) through discretionary accounting
decisions or estimates in the comparative previous year presented in the year of IFRS adoption
could lure analysts that give more importance to current year reporting. This strategy, of course,
is possible only if it remains within the acceptable range tolerated by the standards. However it
should be noted that this range may be important as CGAAP and IFRS are both principle-based
and involve a lot of judgment in the application.
- Sample size:
The sample includes 150 observations, which was deemed reasonable by the authors for
statistical and testing purposes particularly considering that data was manually collected.30
But statistics and tests on sub-samples rely on smaller sample sizes: for example, each industry
sector had 15 observations in total and the “Big Four” auditors each had between 28 and
43 observations.
It is likely that the real effects of IFRS adoption in Canada are larger than those identified during the
analysis as the impact of many limitations outlined above may dilute observable effects of differences
between IFRS and CGAAP values. Therefore, the results of the analysis should be considered
as minimal.
Final recommendations to analysts and other users of financial statements:
- Those involved in the analysis of financial statements are advised to accord attention to the trend
analysis when comparing pre-adoption data under CGAAP with post-adoption data in IFRS.
30 S
ome sub-samples had less than 150 observations when particular information was not available in financial statements.
For instance, 26 companies did not provide current assets/liabilities; as such, 124 observations were available for all
variables involving current items, i.e. current assets, current liabilities, current ratio, and operating cash flow ratio.
A reduced sample size was also used in cases when a ratio would have zero at denominator. For instance, 2 companies
had zero sales; as such, 148 observations were available for the net profit margin.
IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements
65
- At the aggregate level, the analysis of medians and means of IFRS values is generally reliable
when compared to the analysis of CGAAP values. However, this is not the case at the industry
level. Analysts are encouraged to accord particular attention to the Finance, Management,
Professional Services, Real Estate, Retail and Transport sectors where differences in IFRS and
CGAAP values are particularly noticeable.
- Analysts should be aware that the volatility of accounting figures in IFRS is generally higher
than in CGAAP, ceteris paribus.
- The comparison of financial ratios under both CGAAP and IFRS for the comparative year prior
to IFRS adoption may be seen as a prudent first step prior to undertaking a trend analysis of
a particular company. If differences are important, analysts may wish to become aware of the
underlying reasons for the differences as they transpire from the transition note that accompanies
the first IFRS statements.
- The main categories of adjustments that affect the differences between financial statement figures
and ratios derived in IFRS and CGAAP are:
• Consolidation and strategic investments, in particular the scope of consolidation that can
significantly increase (or decrease) the level of assets and liabilities recognized on the
balance sheet (versus off balance sheet);
• Financial instruments, including derivatives and hedges that affect the measurement of
selected assets and liabilities at fair value with gains and losses directly recognized in
profit/loss or through OCI;
• Fair value accounting for investment property with gains/losses directly recognized in
profit/loss;
• Pension and other employee benefits that affect liabilities and OCI adjustments;
• Non-controlling interest presented within shareholders’ equity (instead of outside as done in
CGAAP); this adjustment affects leverage ratios when subsidiaries are not wholly-owned;
• Other adjustments such as capitalization and impairment with various effects on financial
statements.
- The analysis may rely on cash flows to avoid the subjectivity inherent to accounting adjustments.
In general, cash flows are not affected by accounting methods and estimates, except when there
is a change in the scope of consolidation.
For those who believe (or believed) accounting is an exact science, it is hoped that this study provided
some objective information and balanced insight on the practice of financial reporting. Accounting
is the language of business and a great way to communicate financial information. However, it is
essential for users of such information to be aware of its qualities and limitations.
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Certified General Accountants Association of Canada
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