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IFRS: Perspectives on Convergence

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Barbara G. Stymiest
Chief Operating Officer
RBC Financial Group
CICA Conference on International Reporting Standards

June 11, 2007
Toronto, Ontario

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 of interests.

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 accounting standards?

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 as globalization.

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 reporting standards.

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 to buy.
  • 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 share issuances.

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. standards,
  • 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 direction.

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 time.

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 agenda.

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 conference.

Thank you for inviting me this morning.

1) L. Murphy Smith, D.B.A., CPA, Professor of Accounting, Texas A&M University.
2) Interview with John Thain by John Authers,, March 5, 2006.
3) "Lombard: Rentokil's choices for restructuring," August 25, 2005.
4) Statement 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.
5) "Lombard: Rentokil's choices for restructuring," August 25, 2005