Guidelines help investors adjust to new financial reporting standards

The switch to International Financial Reporting Standards means investor relations teams have some heavy lifting ahead of them

October 01, 2009

Scrap that image of corporate accounting as repetitive bean counting. Thanks to the mandatory switch to IFRS, the International Financial Reporting Standards, the investor relations challenge over the next couple of years can be compared to the monumental public affairs task of rebranding the oil sands as respectable.

The Canadian Association of Petroleum Producers and the Small Explorers and Producers Association of Canada have crafted guides for the perplexed, intended to make the switch comprehensible. They also serve to illustrate the scale and complexity of energy company accounting in the months ahead. Consider the following extracts:

On the extent of the change: Canadian upstream oil and gas companies have traditionally accounted for exploration and development costs using either the “full cost” or “successful efforts” accounting method. With the adoption of IFRS, full cost oil and gas companies will be expected, for the most part, to abandon or significantly change their current accounting policies.

Or consider this stab at an explanation for accounting dummies:

What are the top two or three issues facing the Canadian O&G [oil and gas] industry in relation to the transition to IFRS? Why are they a concern?

The top issue is the sheer volume of work required to be done prior to conversion in an already challenging environment. Every accounting policy and procedure needs to be reviewed to determine compliance with IFRS. Information technology needs to be assessed for its ability to adapt to the necessary procedural changes and determine if all the information required for IFRS is being captured. Compliance with regulatory requirements must be monitored and internal controls over accounting processes and disclosure controls need to be maintained. We are the first jurisdiction to be adopting IFRS in a SOX or C-SOX environment.

[SOX is accounting-speak for Sarbanes Oxley, the legislation enacted in the U.S. and copied elsewhere to prevent a repetition of the Enron and WorldCom accounting disasters of the early 2000s, and C-SOX is short for the Canadian version. With variations in details, most countries followed the U.S. lead.]

Another significant undertaking will be communication specifically tailored to each financial statement user group – investors, creditors, and analysts – of the changes to key performance indicators, earnings per share, equity and debt covenants, indicating the impact to the pertinent ratios.

What will be the biggest impact noticed on financial statements and why? Is there potential for increased volatility of results and if so, why?

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