Miners must prepare for new accounting standards

The issue of International Financial Reporting Standards (IFRS) has been on the radar in Canada for a number of years, and it’s been an issue simmering on the back burner for many companies. However, now that it’s been confirmed that Canada will definitely adopt IFRS, the mining sector is beginning to come to terms with what this transition really means.

IFRS accounting standards will be adopted as Canadian generally accepted accounting principles (GAAP) in 2011. The Canadian Accounting Standards Board has decided that Canada will be joining almost 100 countries that have already moved to IFRS, including all of the European Union, Australia, New Zealand and South Africa.

The philosophy behind IFRS is to have the whole world speak one language when it comes to financial reporting, instead of whichever version of GAAP is used in their jurisdiction. In an era of global capital markets, the idea is that adoption of IFRS will make it easier to compare one company against another, even if one company is in Reykjavik and the other is in Regina. Given that Canada’s economy is relatively small — less than 4% of world capital markets — it’s easy to see how adoption of IFRS would help Canada’s public companies remain competitive in an increasingly globalized capital market.

So far, so good. But, as they say, the devil is in the details and IFRS poses unique challenges for Canada’s mining companies. IFRS is described as “principles based,” meaning it gives companies a choice when it comes to accounting policies. While Canadian GAAP contains detailed guidance for the extractive industries, IFRS does not. This leaves mining companies in unfamiliar territory, having to closely consider their accounting standards and policies and be prepared to justify their choices, as opposed to just sticking to the guidance.

There are some important milestones looming; by the end of fiscal 2008, Canadian companies must disclose their plans for IFRS transition and the expected impact on their financial statements. By the end of fiscal 2009, companies must provide a detailed implementation plan and quantify the impact on financial statements in a more precise way.

Mining companies in Europe, Africa and Australia have already made the transition to IFRS and have been working with the new standards since 2005. The experience in these countries has highlighted a number of interpretation and application issues that are unique to the mining industry. Under Canadian GAAP, for example, mining companies have often written down the value of their assets in times of falling commodity prices. Under IFRS, these writedowns may be reversed in future years when commodity prices recover. This is a very new concept for Canadian accountants, and it may lead to volatile income statements for mining companies.

The good news is that an extractive industries working group has been formed by the International Accounting Standards Board (IASB) to develop some formal guidance for mining activities. The bad news is that decisions from this group may not come in time to inform the Canadian industry before it is compelled to begin its transition plans, leaving companies to rely on their own decisions when it comes to interpretation of the new accounting policies.

From our perspective, dealing with our mining clients, there has been an initial tendency to underestimate the fundamental differences between Canadian GAAP and IFRS. Until now, many have worked under the assumption that there’s not much difference between the two. However, as companies begin to look closely at IFRS and peel back the layers, they are finding significant differences in the details.

Large, multinational companies with well-developed accounting functions tend to have a better understanding of the changes. Many have lined up the resources to manage the transition process and are well into implementation of their plans. Mid-sized companies, in general, are aware of the looming issue. Though the audit committees are starting to ask management about their plans, the plans themselves may still be fuzzy and lacking detail.

On the other end of the spectrum, junior mining companies have the furthest to go. On the whole, they’ve heard about it, but are less likely to completely understand it or have done anything about it. They are also less likely to have a large accounting function. While these companies may be tempted to wait on their planning, by the time they can see what their contemporaries are doing they may have waited too long. From our experience helping clients in other jurisdictions manage the transition, it’s not something that can be managed by a small accounting team on a part-time basis.

One thing is certain: financial statements will look different under IFRS than they do now under Canadian GAAP, and senior management will need to be prepared to discuss these differences with shareholders, board members, lenders and the general investing public. Migration to IFRS will likely require training for many within the organization — investor relations, internal audit, legal and marketing personnel will need to know about IFRS and its implications. Business units may need to provide new or different information in order to comply with IFRS, and they will need to understand how IFRS can and should affect their decision-making and business strategies. Budgets, forecasts, bonus structures, debt covenants, key performance indicators — anything that hinges on accounting results may change when the accounting standards change.

IFRS compliance may also demand that companies report new and additional data, which can have a direct impact on information technology systems and processes. Companies that need additional staff, particularly personnel with specialized skills and experience to assist in the transition, may find themselves fighting their competitors in a very tight labour market.

For companies that are just beginning to contemplate IFRS, PricewaterhouseCoopers recommends a three-phased approach. The first step is a diagnostic review to reveal key differences between Canadian GAAP and IFRS to determine the anticipated effect on your company’s financial reporting. Secondly, develop a culture of awareness, so staff and management have the resources and motivation to stay on top of transition issues and determine the impact of changes. And finally, assign appropriate resources, including human resources, to IFRS-conversion projects, including training for executives and board members on the impact and expected changes under IFRS.

Viable IFRS conversion approaches vary from one organization to another, but the mining sector faces a unique set of challenges. A well-planned, skilled implementation is what will set certain companies apart. –Dean Braunsteiner is a partner in the audit and assurance group at PricewaterhouseCoopers. He can be reached at dean.braunsteiner@ca.pwc.com.