Top 100 Lists: Accounting for Change

Accounting changes | BCBusiness
A change in accounting requirements has shifted public companies’ financials, thereby shaking up 2012’s Top 100 lists.

New reporting standards shake up this year’s Top 100 lists. (Return to B.C.’s Top 100 of 2012.)

You may not have noticed it, but reporting requirements for public companies underwent a seismic shift last year. The impact is silently, but visibly, shaking up the numbers on this year’s Top 100 lists.

In the 2011 fiscal year, International Financial Reporting Standards (IFRS) replaced Canadian Generally Accepted Accounting Principles, a standard with roots extending back to the 1930s. While preparations for the transition began in 2008, this year’s lists reflect the result of the shift. Those exempt from the transition include local companies that report in the U.S., which hasn’t embraced IFRS, such as Lululemon Athletica Inc., Lions Gate Entertainment Corp. and PMC-Sierra Inc. Private companies are also exempt from adopting the standard, which aims to establish common reporting and disclosure criteria for companies, regardless of sector.

But the shift has meant changes in how some companies operate, with the province’s credit unions – organizations that seldom come to mind when one thinks “public companies” – experiencing some of the most significant changes.

IFRS principles require tighter documentation of assets, liabilities and loan losses, which meant trouble for Central 1 Credit Union, a federally regulated entity that must heed specific leverage ratios. During the financial crisis of 2008, Central 1 began engaging in mortgage securitization on behalf of its member credit unions. IFRS forced it to re-examine the practice.

“Under Canadian accounting standards, if we sold a pool of mortgages, we were able to get sale accounting, and sale accounting would allow you to de-recognize or remove those assets from your balance sheet,” explains Dan Blue, vice-president of financial reporting for Central 1.

Under IFRS, this isn’t possible. The mortgage itself may be sold, but borrowers are still paying down the mortgage and Central 1 is handing those payments over to the mortgage’s new owner. While the asset is the cash received when the mortgage is sold, the transfer of funds is accounted for through a liability reflecting incoming payments over the life of the mortgage and an asset offsetting those payments.

The change boosted the credit union’s reported assets by about $3 billion from what it reported in 2010 – extra capital that reduced its room to manoeuvre under federal regulations. “It’s not a good thing to attract capital, because the capital standards didn’t change,” Blue says. “It means that we have less room to operate.”

To address the issue, Central 1 is now assisting its member credit unions in securitizing mortgages themselves. There are no special capital requirements for its members, which are provincially regulated, but the net effect is the same: someone buys the mortgages, and the credit unions don’t have to deal with them. “The system has performed quite well through 2011,” Blue notes.

Other companies impacted by the change in standards were income trusts that made the transition from trust to corporate status as of January 1, 2011. Trust units, rather than being accounted as share capital, were accounted as liabilities. This led to equity vaporizing, not because the company lacked value, but because it was accounted for in a different manner under IFRS. “It’s a confusing thing because it doesn’t make sense – it doesn’t make sense to suddenly have no share capital and no retained earnings,” says Jack Peck, the affable CFO of Coast Wholesale Appliances Inc., formerly Coast Wholesale Appliance Income Fund. When that trust converted to corporate status in 2011, the balance sheet showed a dramatic increase in equity from 2010.

“Those non-equity items suddenly become equity items again, and they float into the equity value at the share value at that point in time,” Peck explains. “Our balance sheet looks quite nice now.”

The biggest challenge for most of the companies assisted by Mark Patterson, a partner in the audit and assurance group of international accounting firm PricewaterhouseCoopers, was identifying the issues that would require greater disclosure in the notes sections of their financial statements.

“Given some of the varied practice under IFRS . . . you do need more information to ensure that you’re making a direct comparison,” Patterson says. “For every company, even those with very minimal business activities, there was definitely a substantial increase in the volume of disclosure provided in the financial statements.”

For example, Canfor Corp. identified property, plant and equipment as a significant area for extra disclosure. “Previously, we just showed the total for cost, accumulated depreciation and net book value. Now, we have to do a full reconciliation,” explains Rob Broad, director of corporate reporting and analysis for Canfor. “It’s been a challenge in making sure that all the stakeholders – everyone who’s interested – understand our changes and how this has impacted us.”

Broad also believes the change, despite requiring significant work to achieve, is in the long-term interest of shareholders and the company. “People from Europe obviously would understand our statements a lot better if they were to look at them now, because they’re prepared under a reporting framework that they understand,” he says. “As everyone gets used to IFRS and gets used to seeing it consistently applied across all the different companies, it will have a benefit.”