Outlook 2008 (The watch list): Accounting

Accountants are bracing for a migraines as Canada most to replace its current accounting rules.

There’s no doubt implementing Sarbanes-Oxley was a headache, but accountants are bracing for a migraine as Canada moves to replace its current accounting rules and adopt new international financial reporting standards (IFRS). The transition away from Canadian generally accepted accounting principles (GAAP) should take place in 2011, and it may force most public companies to recalculate nearly every line of their financial results, as well as company contracts, financial agreements and even the size of executive compensation. “This change could have a massive impact on just about every company in Canada,” says Rafik Greiss, a Montreal-based partner at Ernst & Young LLP and leader of the accounting firm’s IFRS practice in Canada.

Some investors might not even recognize the companies they have invested in once the changeover is complete. For example, there are significant differences in the way GAAP and IFRS treat M&As and asset valuations. There are also some holes still to be filled in. Currently, IFRS doesn’t have specific guidance on accounting for exploration spending or valuing oil, gas or mineral reserves.

Adopting IFRS is intended to increase the transparency of Canada’s financial reporting and make the results of Canadian public companies more easily comparable to those of other countries. More than 100 countries — representing about 45% of the world’s capital markets — have adopted or stated their intention to switch to IFRS, but the United States is not on board yet.

Greiss is urging companies to start transitioning now. They’ll need to completely retrain accounting staff, change financial operating systems and may have to begin collecting different financial data to comply with the new rules. It sounds expensive, and it is. The process could cost many Canadian companies several million dollars, Greiss says. Over the next three years, the total bill for this could easily reach $1 billion in total. Such a complex and expensive task might make accountants — and investors — nostalgic for the good old days, when all they had to worry about was just Sarbanes-Oxley.