Canada IFRS Canada\'s Dilemma: IFRS

Canada IFRS

Canada's Dilemma: IFRS or U.S. GAAP

Today, the global economy is becoming increasingly unified, both for better and for worse. The patterns of globalization and free trade have created a scenario where there is a clear necessity for the mutual fund industry to adapt its orientation in accommodation of a changing landscape. The International Financial Reporting Standards (IFRS) have emerged as the primary doctrine in bringing about this accommodation. However, this is not occurring without its conflicts. The nature of the global economy, combined with the vulnerability demonstrated by this same global economy to corruption of financial reporting in recent years, helps to inform this brief discussion. Indeed, Canada is a context in which this conflict can be detected even as the nation works hard to achieve convergence to IFRS from its own Generally Accepted Accounting Practices (GAAP). So denotes the source provided by Ramanna & Cheng (2009), which delineates a case scenario in which a consultant has been asked to comment on the general implications of Canada's prospective convergence toward International Accounting Standards.

Before proceeding to consider the implications of the specific case scenario, which carries a broad set of implications for Canada's accounting future in a more general sense, it is useful to consider the some of the basic conditions implied by the IFRS. A consideration of some of the implications of the IFRS illustrates that its implementation is rife with challenges that are philosophical, practical and economical in nature. Namely, among the objections which have been routinely raised since the inception of IFRS, "individual companies have cited conversion costs; there have been disagreements over individual standards; the timeframe was imposed by 'Europe'; the companies concerned were not consulted; the future direction of standard setting has become the subject of increasingly voluble concerns." (Dilks, 1)

The numerous obstacles which stand in the way of implementation call into question not just the practical realities of IFRS but, in some instances, even the rationale for the uniformity there aspired to. In particular, we note that at the heart of its complexity is the understanding of international accounting as an ambition which is naturally beset by difficulty in a global community where certain differences and even inequalities remain deeply entrenched in areas of governance, private industry and infrastructural development. This calls into question whether it is even reasonable to seek a financial reporting standard that suits all users. Indeed, this seems to be a primary question at issue for Canada. And as the article by Ramanna and Cheng seems to argue, this is directly connected to the relationship between the United States and International Financial Reporting Standards. In many ways, Canada must struggle with a question as to whether its interests are better served by convergence to the U.S. GAAP which has long had a determinant impact on its own accounting practices. Based on the common interests between the neighboring states, as well as the apparent level of divergence between Canada's GAAP and that proposed by the International Accounting Standards Board (IASB), the two nations seem to present a shared case against global adoption of IFRS.

One of the primary arguments against it may be the degree to which IFRS convergence would actually weaken the level of transparency already imposed upon Canadian firms. According to the text by Ramanna & Cheng, "Canada in 2005 was widely regarded as having some of the best corporate governance practices in the world. The active state of Canada's equity and debt markets indicated that investors, both domestic and foreign, had a strong sense of confidence in the ability of Canadian market institutions to protect their capital. In 2004, the World Bank's Doing Business report ranked Canada at the top of 181 countries for disclosure practices." (Ramannna & Cheng, 4)

This is to indicate that the adoption of international standards carries with it a set of implications for universal application that, while a step forward for many converging nations, would actually represent a step back for Canada's regulatory approach to corporate behaviors. Considering the degree to which poor accounting standards were responsible for the catastrophic corporate meltdowns of the last decade, particularly in the United States, this appears as counterintuitive to the goals of Canadian regulatory culture. And quite to this point, the primary article points to the events in the United States and the resultant implementation of such regulatory legislation as the Sarbanes-Oxley Act (SOX) as processes that seem to offer a counterpoint to that which is accomplished by IFRS. In other words, with respect to the dilemma between IFRS and U.S. GAAP, the view provided by the article is that recent changes have actually manifested a far more intensive process of oversight in the latter than is proposed by the former.

To the point, Ramanna & Cheng report that "despite the attempts at convergence, as of 2005, significant differences between U.S. GAAP and IFRS remained. The differences were due in large part to the attendant capital market institutions in the U.S. that had shaped the nature of U.S. GAAP over the course of the 20th century. For example, a strong tradition of civil litigation and criminal liability had given rise to an extensive body of GAAP interpretations in the U.S." (Ramanna & Cheng, 6) This highlights an issue of primary importance not just where Canada is concerned but also where the credibility of an International Accounting Standards Board is concerned altogether. Certainly, the incapacity to this juncture of a nation with the influence and geo-economic impact of the United States to make IFRS work is damaging to its prospects in nations so closely tied to the U.S. As Canada.

The resistance cited here in the periods preceding the issuance of the IFRS remains today a prominent challenge. Private entities, public officials and accountancy professionals who differ from proponents of an international reporting standard offer a host of pertinent arguments against the mandate of uniform standards, or at least in some cases, against the standards as they are presented in the IFRS. Namely, among the objections which have been routinely raised since the inception of IFRS, "individual companies have cited conversion costs; there have been disagreements over individual standards; the timeframe was imposed by 'Europe'; the companies concerned were not consulted; the future direction of standard setting has become the subject of increasingly voluble concerns." (Dilks, 1)

Still, perhaps the greatest overarching challenge in the implementation of IFRS is captured in the philosophical discourse relating thereto. The parallels to the process of globalization which have been addressed throughout this account render the same fundamental barriers for the IASB in its desire for outright standardization. An article by Ball (2006) makes the argument, in fact, that it remains unclear today and will remain unclear for some time to come whether there are truly benefits to imposing a universal accounting language. Essentially, Ball expresses concern "that there inevitably will be substantial differences among countries in implementation of IFRS, which now risk being concealed by a veneer of uniformity." (Ball, 1) This is a concern which permeates all discourse concerning the seeming inevitability of internationalization and its intended universality of reporting policy conditions.