Compliance Blog

In working with companies in Canada as they begin their journey toward IFRS in 2011, it is apparent that a large shift in the way accounting is performed and the way financial statements are presented will require revisions to internal controls as well.

This is due to the change toward an even more principles based accounting methodology - IFRS and because accounting policies must all be reviewed and many must be revised slightly or completely. This definitely depends on the industry and complexity of a company.

But like an internal controls review, the careful analysis and review of a company's accounting policies can yield benefits.

1. For example, many policies may have been suitable at some point of a company's development but may be out of date. So change can be good.
2. Further, IFRS allows companies to make some changes to their balance sheets that can be beneficial for presentation of future financial statements. For example on Property Plant and Equipment, companies have the option to either use a cost basis or a revaluation method. Depending on the industry, revaluation could make sense and "clean up" the balance sheet.

The other reason internal controls will require changes is the completely different outlook that IFRS utilizes compared to Canadian or US GAAP, in that capitalization looks very strongly on whether the asset will produce future cash flows. Additionally, IFRS has more of a balance sheet orientation than income statement. This will force changes in management reporting and in internal controls.

An excerpt from a recent article on this topic is here:

"...One could certainly argue that the controls check the processes that create the financial data that end up being reported. They will still do that. The resulting data will merely be repurposed for IFRS.

But not so fast says D.J. Gannon, Partner at Deloitte & Touche, who maintains, "A shift to a judgment-based framework, such as IFRS, requires that not only the accounting policies, but also the internal processes and controls be adjusted."
An example: lease accounting. "Under U.S. GAAP, there are a number of rules governing how leases should be classified," Gannon says. "Company controls are designed to ensure compliance with those rules. IFRS takes a more holistic approach to classifying leases looking to the substance of the agreement. Therefore, a company's control structure may need to be fine-tuned to focus on applying principles consistently to reflect the economic substance of the transactions with more extensive disclosure."

So it will be an interesting journey - the road to IFRS and then revision to internal controls. There are pluses and minuses to IFRS but convergence of accounting standards in global markets only makes sense as the world increases integration through more global trade.