How would International Financial Reporting Standards affect the quality of Canadian accounting information?
Globalization has a great impact on today’s economy. The differences of accounting regulations and practices in various countries have become a noteworthy obstacle to globalization and economic development. International Financial Reporting Standards (IFRS) mitigates global business barriers. In order to adapt to the increasingly global business environment, public companies in Canada will move to IFRS by 2011. This movement will have a significant influence on Canadian business such as capital markets, financial statement preparers, the accounting profession, and even accounting students. Investors are eager to understand the differences between IFRS and Canadian GAAP. The public companies should be ready to follow IFRS in January, 2011. Even private companies should fit their businesses into the new environment. Therefore, most Canadian companies care about what issues IFRS deals with.
In our report, we will only focus on how IFRS affects the four qualitative characteristics of Canadian accounting information—relevance, reliability, comparability and consistency. The discussion will help investors to better understand accounting information. Generally, IFRS and Canadian GAAP have the same objective: providing useful information for decision making. Both of them are principles based and have the same conceptual frameworks. However, there are still some significant changes from Canadian GAAP to IFRS: the implementation of fair value, going concern exposure, revenue recognition, disclosure of “extraordinary items”, costing techniques, and segment reporting. (See Appendix)
This change from IFRS to Canadian GAAP will benefit investors because increasing relevance allows them to better evaluate the firm’s future prospects. On the other hand, it may bring disadvantages to the management since decreasing reliability may make income statement more volatile.
1.1 Definition of comparability
According to Canadian GAAP, the definition of comparability is “Financial information measured and reported in a similar manner among different companies. Comparability allows analysts to identify real economic similarities and differences among companies, because those differences and similarities are not obscured by changes in accounting methods or disclosure practices.”
In September 2007, the IASB issued a revised IAS 1 “Presentation of Financial Statements”, in which the definition of comparability was expanded to include consistency with regard of the definition of Canadian GAAP. The definition of comparability in IAS 1 is “Users need to be able to identify differences between the accounting policies for like transactions and other events used by the same entity from period to period and by different entities.” In this paper, we focus on the real economic similarities and differences among companies with...