August 28, 2008

Sign In

  3. Forgot Password? | New Account


Browse News by Topic

Data Products

To Do List

CT – Canada Traders Brace For Rule Changes

By Greg Bordonaro

Hartford Business Journal Staff Writer

06/23/08

James Kask, partner, Haggett Longobardi

As Canada joins all 27 members of the European Union and a host of other nations in adopting International Financial Reporting Standards, many Connecticut exporters that use generally accepted accounting principles, or GAAP, will need to make adjustments.

Canada, the state’s largest trading partner with more than $5.1 billion in bilateral exchange, will adopt IFRS by 2011. That means Connecticut companies that trade with Canada may need to adjust to differences in balance sheet items, income statements, cash flow, inventory valuation and other accounting matters.

State businesses that are owned by or are subsidiaries of Canadian companies, such as George Weston Bakeries of Cromwell and Waterbury, OdysseyRe and The Thomson Corp., of Stamford, and Bombardier of Windsor Locks will be most affected by the change in the short term. None of the four companies responded to calls before press time.

Canadian parent companies will require their subsidiaries to adhere to IFRS rules for the sake of consistency, experts said.

Later, trading partners such as major suppliers that grant credit are apt to demand that Connecticut companies provide them financial reports prepared under IFRS.

“This will present some challenges and adjustments in the state, but it should not be something that is overburdening,” said Barry Epstein, a partner at the Chicago accounting firm Russell Novak and Co. and an expert on IFRS accounting practices. “It’s not an insurmountable obstacle, but it is a new way of thinking.”

 

100 Countries

IFRS standards are the less-detailed financial reporting rules that have been developed by the London-based International Accounting Standards Board, and which recently been adopted by more than 100 countries, including all 27 members of the European Union.

James Kask, a partner at Glastonbury-based accounting firm Haggett Longobardi, a division of J.H. Cohn, said Canada’s adoption of IFRS standards could spur interest among Connecticut companies to adopt them as well. 

“As companies in the state continue to compete globally, it may be beneficial,” Kask said. “It will make doing business on a global basis less complex.”

The movement toward convergence between U.S. GAAP and IFRS has gained steam in recent years. The SEC is considering a proposal to give U.S. companies the option of filing under GAAP or IFRS.

That would enable U.S. companies to prepare financial statements that are accepted by many more countries, increasing their chances of forming foreign business relationships, Epstein said.

It would also allow U.S. companies to list their name on foreign stock exchanges, creating greater opportunities to raise capital in non-U.S. markets.

 

U.S. Firms May Switch

If the SEC approves the change, Epstein says “the more astute companies will want to get on board early, to remove one or more impediments to international trade.”

Connecticut companies that combine with Canadian companies now have more work to do reconciling the two accounting systems. In the past, foreign companies were required to convert their IFRS numbers into a GAAP statement. But a new SEC regulation excuses them from having to do so, leaving more work for the U.S. company.

“It will add another layer of administrative effort,” Epstein said.

It may also require a shift in how some companies record the value of their inventory. IFRS doesn’t permit the use of a last-in-first-out, or LIFO, system, that many Connecticut companies employ because of its favorable impact on taxes, especially in an inflationary environment.

If a Connecticut company is a subsidiary to a Canadian company, or becomes a subsidiary, then they would have to report in conformity with IFRS, and abandon the use of LIFO.

“As a result, not using LIFO for financial reporting would preclude a company from using it for tax purposes because of the SEC’s conformity rules,” Epstein said.

Such a shift could impact a company’s tax rate or earnings.

To prepare for the changes, Epstein and Kask suggest that companies simply learn about differences between the two reporting systems.

Companies will also have to rely on their accountants.

“There is plenty of information out there,” Epstein said. “Companies will just need to make a little bit of effort to become literate.”

Read more Entrepreneurs & The Economy stories