IFRS: Perspectives on Convergence
Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
CICA Conference on International Reporting Standards
June 11, 2007
Good morning and thank you Ron for your introduction.
I am, of course, very pleased to be here and see so many
familiar faces and some new ones. Certainly, as the country's
largest bank, RBC is a complex organization with a significant
need for great accountants. In fact, RBC ranks as the top
employer of CAs in the country. So if you're one of the few
people here that I haven't met before, I'm sure it's only
a matter of time!
I last spoke at a CICA conference 19 months ago about a very
similar topic. At that time, I addressed the delicate balance
required to achieve good financial reporting among a myriad
That day, the substance of my remarks was devoted to the
principles of good disclosure. Naturally, my conversation
today is an extension of those comments as a discussion of
accounting convergence certainly relates to good disclosure.
Today, I am here to provide some perspective on the efforts
and decisions taken to align Canadian generally accepted accounting
principles, or GAAP, with International Financial Reporting
Standards, known as IFRS. My views are the product of years
of working both as a reviewer and preparer of financial reporting
- first as an auditor with Ernst & Young, and, for the
last 15 years, as a CFO, CEO or Chief Operating Officer with
three major public companies.
As I prepared for this session, I came across an old magazine
article headlined "New Math for a New Economy" from
Fast Company back in 1999.
The article lamented the gaps of today's accounting
standards - specifically the method of determining the value
of intangible assets that are central to New Economy companies.
In this story, Baruch Lev of New York University's Stern
School of Business, keenly observed that today's systems of
accounting and financial reporting date back more than 500
years. "These systems are not only part of the old economy,"
Lev says, "they're part of the old old economy."
And as our past can be helpful to understand our future,
I thought it might be worthwhile for a short history refresher.
As many of us are familiar, Luca Pacioli, the Franciscan
friar and Italian mathematician who lived in 15th century
Venice, wrote about a system used by local merchants to keep
track of their businesses.
Luca essentially described the accounting cycle as we know
it today. He described the use of journals and ledgers, and
he warned that a person should not go to sleep at night until
the debits equalled the credits!1
Luca's ledger included assets -- including receivables and
inventories -liabilities, capital, income, and expense accounts.
He demonstrated year-end closing entries and proposed that
a trial balance be used to prove a balanced ledger. Also,
his tome discusses a wide range of topics from accounting
ethics to cost accounting.
So what would Brother Luca, the Father of Accounting and
the original standardsetter say about convergence of
Living in the Italian Renaissance, as a teacher and friend
to Leonarda Da Vinci and a contemporary of Christopher Columbus,
Brother Luca would arguably be a very early observer to the
new world economy, to what has become broadly known today
I suspect that if he could see more than 500 years in the
future, he would have understood the importance of a common
language. And he would see value in a common set of principles
to evaluate and understand the financial well being of a company
regardless of whether it was located in Venice, Paris, Beijing
or the soon to be discovered New York.
While he might have been curious at the intricacies and minutiae
behind FIN 46 or AcG 15, I am reasonably confident Brother
Luca might have understood and agreed with arguments in favour
of a uniform set of high quality globally accepted financial
And given his writings and observations on accounting were
of Renaissance Venice and not from the corner of King and
Bay, he may also have agreed with the idea that accounting
standards should be organic and evolve to accommodate the
times and concerns of the day.
In 2007, the times and concerns revolve around a global economy
characterized by rapid, frequent and free flows of capital
across borders and markets. But our world has at least one
thing in common with Renaissance Italy: trade and commerce
are still pursuits of commonality:
- Common interests - you have goods to sell, I have a need
- Common currencies - payment in commonly accepted currency
makes for an easier transaction.
- Common measurement - the world, with one large notable
exception, uses a common system for weights and measures.
- Common languages - it's easier to trade when you understand
each other. How many kids are learning second, third and
fourth languages today compared with 40 years ago?
Financial reporting, it would seem, is only one of many areas
in trade and commerce being standardized.
Accounting convergence is a necessary reflection of the global
characteristics of our economies and capital flows. And ladies
and gentlemen, that train left the station, with the EU, Japan,
China and a number of other countries on board. Even the Americans
are considering the journey.
While there is some discussion on both sides of the Atlantic
about the faults of IFRS and the hardship it might cause companies,
there is little dispute about the merits of having a set of
universal standards for how the world's companies report on
their finances. At dispute is how we get there and how quickly.
The concept of converging Canadian standards with international
ones is not only a good idea, it is a necessary one that has
benefits for Canadian companies and investors in a globally
competitive market. Consider these factors:
First, Canada's very small share of global capital markets
makes it inefficient for us to maintain our own standards.
Second, our largest companies that are listed in multiple
jurisdictions, such as RBC, must now file financial statements
based on two or more sets of accounting standards. Convergence
will allow these companies to free up resources dedicated
to maintaining their accounts according to multiple standards.
Third, Canadian public companies stand to gain by simply
making it easier for international investors to understand
and compare their financial statements against global peers.
Making it easier for investors, regulators and other stakeholder
to compare the financial condition of a Canadian based company
to that of an Italian one can have tangible benefits to shareholder
value and efficiency.
For example, different accounting standards today force a
fund manager in the U.K. to make some additional effort to
compare the performance and condition of Canadian-based Company
XYZ with its Italian competitor Company ABC.
Arbitrary measures to make them comparable may result in
ABC being perceived as more attractive, and prompt management
of XYZ to resort to other, sometimes more costly, measures
to enhance its marketability, including higher dividends or
Greater clarity and comparability of information will help
reduce the cost of capital, making firms more efficient and
globally competitive. Undoubtedly these are compelling motives
for Canadian industry.
For Canadian investors, the benefits could mean potentially
more issuers in the Canadian market. For a country that accounts
for less than four per cent of global market capitalization,
we should embrace every opportunity to make our markets more
attractive to new and international public company issuers.
This is an area that I know something about, having traveled
the planet to promote our market and our country. It's clear
to me that international investors have become or are rapidly
becoming comfortable with IFRS.
But don't just take my word for it, listen to John Thain,
head of the New York Stock Exchange. In his mind, four factors
have conspired to cause a significant decline in the number
of European issuers on Wall Street:
- the lack of accounting standards convergence with U.S.
- the effects of SOX 404,
- the U.S. litigation environment and
- the success of the Euro2.
The development of international standards will allow a single
company to file the same statements in multiple jurisdictions,
an option that largely doesn't exist today. Conceptually,
commonly accepted international accounting standards would
have an impact on financial reporting similar to the impact
the multijurisdictional disclosure system had on making it
easier for Canadian and U.S. companies that wanted to raise
capital in each other's markets. To be sure, MJDS was not
without its problems, but it was a massive step in the right
Now I'm not going to pretend there aren't some headaches
that need to be cured before we have seamless accounting convergence.
While IFRS promises users greater transparency and comparability,
preparers will take the brunt of the convergence blow by having
to rework systems and retrain their staff with respect to
the new standards.
IFRS also demands preparers provide significantly more information
than they do now. This increase in information will, in turn,
require even more work so that investors can clearly see what
they need to see. But I agree with those that say that is
not a reason for giving up. As the FT noted in its Lombard
column, "Users need a year or two to adapt to the system
before significant change is contemplated. You generally grow
through teething problems."
Many have pointed out that there are several aspects of IFRS
that do not enhance disclosure or provide a clearer3 picture
of a company's financial position. But I have to assume any
new pathway will develop obstacles that can be smoothed over
For example, while I readily admit the methods need sharpening
and fine-tuning, it is logical that the concept of fair value
accounting, which we recently adopted, can more fairly represent
current economic reality - and is therefore closer to what
investors, regulators and management teams require for their
purposes. However, it has required us to educate and help
some of our stakeholders to understand these disclosure changes
as certain historical figures are no longer comparable.
A year ago, Marc Lackritz, the President of the U.S. Securities
Industry Association, told a U.S. Congressional subcommittee4
just that. He said: "We believe the greater use of fair
value accounting, and the simplification and convergence of
accounting standards would further assist issuers in providing
better quality information to investors."
Other features of IFRS should help make boards pause for
thought when considering the price they are paying for takeovers;
for issuing share options to employees; and for properly funding
their pension obligations.
These are all important aspects of economic reality.
The critics of convergence - and their numbers appear to
ebb and flow - have not come up with a better way. Even the
critical and cynical Financial Times has admitted that "If
there is to be global convergence, IFRS is the only ship leaving
port.5" Obviously the SEC gave the IFRS ship
a massive tailwind when it said last month that foreign issuers
would no longer be required to reconcile financial statements
to U.S. GAAP by 2009.
So if we agree that we need a set of standards accepted in
all jurisdiction and that IFRS is the only, if not the natural
choice, let me return to the question I referred to earlier.
How should we converge and how quickly?
I won't presume to second guess the Accounting Standards
Board or the CICA for the work they have done or for the strategy
they have laid out for convergence. Instead, I would like
to take this opportunity to congratulate them for demonstrating
the leadership that can help ensure Canadian companies, Canadian
markets and Canadian investors are on equal footing with the
rest of the world.
The leadership of the two bodies has balanced the need for
a swift timetable with the capacity of the profession, especially
in the context of other equally pressing regulatory reforms,
notably Sarbanes-Oxley and the Basel II Framework. With a
similar spirit of balancing change and stability, I expect
that the Accounting Standards Board will have a continually
keen and diligent view of ongoing IFRS developments to ensure
that whatever cutover date is chosen, there would be minimal
disruption to the profession.
Indeed, simple accommodations have already been made to ease
the burden on the profession. For example, I want to applaud
the AcSB for observing the basic principle of not imposing
changes to standards that may require extensive systems changes
or information gathering that would later become obsolete
at the cutover date.
I also want to note the extensive communication and methodical
consultation being done - sometimes tedious, but always necessary
-- to get the consensus required for a smooth changeover.
At RBC, we are in the early stages of discovering and planning
the changes we'll need to make from our systems and information
gathering processes to performance management framework and
staff training. The work required is the responsibility of
a diligent and exceptional set of CAs and I'm pleased to be
able to count on their advice.
I note that there are some people here from our team today
and I'm quite sure their attendance has little to do with
my presence. More importantly, it is the content of the next
two days that likely motivated their registration - again
hats off to the CICA for creating a topical and interesting
I'll close now with one final reference to Brother Luca,
who not only created our discipline but inspired all accountants
toward excellence. "If you cannot be a good accountant,
he warned, "you will grope your way forward like a blind
man and may meet great losses."
I wish you all the best of sight and clarity and a successful
Thank you for inviting me this morning.
1L. Murphy Smith, D.B.A., CPA, Professor of Accounting,
Texas A&M University. http://acct.tamu.edu/smith/ethics/pacioli.htm
2Interview with John Thain by John Authers, FT.com, March
3FT.com "Lombard: Rentokil's choices for restructuring,"
August 25, 2005.
4Statement of Marc E. Lackritz, President, Securities Industry
Association, Congressional Testimony, Committee on House Financial
Services Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises, March 29 2006.
5FT.com "Lombard: Rentokil's choices for restructuring,"
August 25, 2005