Wednesday, January 7, 2009

EU IFRS "equivalence decision"

There was an interesting development at the EU just prior to the Christmas holidays. I received an e-mail from Edith Orenstein on the weekend before the annual holidays concerning a development at the EU. Edith is on the case and a vigilant as usual. She seems to operate 24/7 without downtime. Certainly she does a great job of monitoring financial reporting developments and blogging on them for the Financial Executives Institute (FEI) in the US.

Here is a copy of the release from the EU - the COMMISSION DECISION on the use by third countries issuers of securities of certain third country's national accounting standards and International Financial Reporting Standards to prepare their consolidated financial statements.

Edith published a very comprehensive post dealing with the issues. I will not spend a lot of time going over the issues here. I will just note a few points.

I am certainly not a securities lawyer or a lawyer of any stripe and I have had no experience with an issuer filing in the EU jurisdiction. I did read the document as an informed lay person and Edith included my comments in her blog. I really appreciated her remarks about me and my blog and a link is everything in the blogosphere. Please click on the link and read her comments.

Essentially the gist of this is that Canadian companies will be able to file Canadian GAAP financial statements under EU jurisdiction until December 31 2011 (a big oversimplification - read the document). There are similar positions for reporting by US, and a number of other countries on trajectory to conform or comply with IFRS. There will be a monitoring of the progress of IFRS convergence in the countries cited in the document.

My first question on reading this was what about non calendar year companies? My second reading was that they were covered by this dispensation. If you are in a company with a non calendar year reporting please check the situation carefully. Better not to have surprises.

Another question discussed in the FEI blog is whether the EU might ask for a reconciliation to IFRS as a "remedy"after further review of progress to IFRS (or perhaps lack of it?). I suppose that you would also consider if you might want to provide investors some IFRS information voluntarily in any case?

Presumably, if you are in a company where there has been approval to adopt IFRS early you would be filing under IFRS in the EU. There would have to be the disclosure of unreserved compliance with IFRSs required by IAS 1 in order to be on side. No partial compliance allowed.

Will there be a move for early adoption of IFRS as a result of this document and other pressures? The major banks in Canada have October 31 year ends and would be among the last to file IFRS financial statements. However, they are not currently permitted by the Regulators to adopt IFRS early (Currently they would be required to produce financial statements under IFRS in respect of the financial year ending October 31, 2012). Will this change? We do not know.

If you file financial statements in the EU my advice is to discuss the situation with a qualified securities lawyer. What are the correct interpretations of the EU release? Is there a possibility that IFRS reconciliations may be required prior to IFRS conversion in Canada? What is the situation for non calendar year end companies? Please let me know of any interpretations that may be at variance with my impressions here and in the FEI blog.

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