Canada, the United States’ largest and most important trading partner, has decided to adopt International Financial Reporting Standards for its public companies—yet another feather for the fast-growing accounting standard, and a rebuke to U.S.-style Generally Accepted Accounting Principles.

Canada’s Accounting Standards Board said last week it will pursue separate strategies for public companies, private companies and not-for-profit organizations. For public companies, CASB chairman Paul Cherry said, the board chose IFRS over GAAP purely from a cost-benefit standpoint.

The board concluded that neither Canadian companies nor their investors wanted to adopt the heavy, prescriptive rules associated with U.S. GAAP, Cherry said, especially as rule makers around the world seek to converge to a single set of accounting rules. Canadian GAAP is more similar to IFRS than U.S. GAAP, making the transition more logical, Cherry said.


“IFRS is more user-friendly, both for the companies that are trying to comply and for investors who are trying to understand the financial statements,” said Cherry. “Only a handful of our companies would be capable of complying with U.S. GAAP right now.”

The IFRS system of accounting already exists in the European Union, where some 8,000 public companies made the mandatory switch to IFRS in 2005. Japan, Australia and China also have announced their intentions to adopt IFRS. That leaves the United States as the only major capital market still using GAAP, although U.S. rule makers have indicated they intend to work toward eliminating major differences between the two systems.

Canada will phase in IFRS over a five-year period, the Board said. For the handful of Canadian companies who already report in U.S. GAAP because of significant U.S. activity, the board noted that Canadian securities regulators already allow such companies to report in U.S. GAAP instead of Canadian GAAP.

According to Securities and Exchange Commission data, about 500 Canadian companies are listed on U.S. exchanges, representing about 40 percent of all non-U.S. filers (see box above, right). They are subject to SEC reconciliation rules regardless of whether Canada follows GAAP or IFRS, but the SEC has a history of accommodating Canadian filers, said Walter Van Dorn, an attorney with Thacher Proffitt and a former senior member of the SEC’s Division of Corporation Finance. In addition, the SEC has already outlined its “roadmap” toward eliminating reconciliation requirements over the next several years, described in an extensive plan disclosed last spring.

Dumbfounded By Rules

Some observers say Canada’s decision to follow IFRS is simply another step in the long, evolutionary process toward global adoption of a single system of accounting.

Ramona Dzinkowski, vice president and director of research for Financial Executives International in Canada, said she doesn’t see Canada’s decision as a rejection of GAAP but rather as a step toward convergence. “We’re all going in the same direction,” she said. “It’s a global effort to harmonize to one standard—not the international board’s, not the United States’, not Canada’s. It’s a very slow, evolutionary process.”


Dan Noll, director of accounting standards for the American Institute of Certified Public Accountants, said he doesn’t see Canada’s movement toward IFRS as adding any pressure or influence to the convergence process. “The IASB [International Accounting Standards Board] and FASB [Financial Accounting Standards Board] both have committed to converge not to each others’ standards, but to the best standards,” he said. “I think they remain committed to that.”

Other observers say Canada’s announcement applies new pressure on the United States to embrace the international movement—either by more closely aligning its standards with global standards or by stepping up the pace of change.


“It applies pressure to change the way the U.S. issues standards,” said April Mackenzie, director of international financial reporting for Grant Thornton. “Your closest neighbor—the one with the most vested interest in aligning itself with the U.S.—is saying those standards [GAAP] are not the way to go forward.”

Acknowledging the U.S. direction toward converged accounting rules, Mackenzie said, “The size of the U.S. market enough is not going to make markets around the world bend any longer. Outside the U.S., we’re dumbfounded by the volume of rules in U.S. GAAP. They’ve [Canadian standard setters] observed that there’s a better solution and they’ve decided to sign up for it.”

Van Dorn

Van Dorn said Canada’s decision increases the prominence of IFRS in the world compared with GAAP. “That’s a strength in the hand to companies that are reporting under the IFRS system,” he said. “It’s unlikely we’ll ever see the U.S. abandon GAAP, but it does increase the pressure on the SEC to accept IFRS without reconciliation and it increases the pressure on FASB and IASB to converge their accounting standards. IFRS is now in the mainstream. It’s not a small, insignificant reporting system.”

Mackenzie said she’s disappointed, though, that Canada plans to take five years to make the change. “There’s evidence that companies around the world have tackled it much faster, but it is a difficult challenge to throw out a whole bunch of GAAP and adopt IFRS,” she said.

Noll said he’s especially pleased to see Canada plan to consider different treatments for different kinds of organizations. Cherry said the board concluded one system may not be appropriate for the full range of Canadian reporting entities and investors. “The board is demonstrating an awareness that GAAP may not be the answer for every company of every type and size,” Noll said.

The Canadian board also said it plans to pay attention to the ability of Canadian companies to cope with the change that lies ahead.

In the United States, the SEC, FASB and the Public Company Accounting Oversight Board are fielding complaints, issuing guidance and considering rule changes in the aftermath of implementation problems with new rules, most notably Sarbanes-Oxley and stock option expensing.