The private company dilemma…

Gordon Heard – Principal, The Finance Group

Canadian private companies have a decision to make: either adopt the new Canadian-based accounting standards for private companies, or adopt IFRS. For most, implementing the Canadian-based accounting standards will much easier than IFRS; they are essentially a scaled down version of the standards currently being followed. Therefore, for many private companies, the choice is an easy one. For some however, there may be some very compelling reasons to make the switch to IFRS – the key is to consider the owners’ exit strategy, and the needs of the current and future users of your financial statements.

If your company is considering an IPO in the next five years or so, you will be required to adopt IFRS as a public company. Alternatively, if being acquired is a potential objective, the purchaser may prefer to see IFRS compliant financial statements. It may be easier to make the switch now: generally speaking, the bigger and more complex your company is, the more difficult the transition to IFRS. In addition, it may be preferable not to add the conversion process to all of the other other efforts required for an IPO or acquisition, and the conversion process may be more challenging when your financial statements are under the scrutiny that an IPO or acquisition bring. 

The level of resources required to adopt IFRS varies greatly depending on the industry and the complexity of the business. Straight-forward software companies, for example, may have a relatively easy time making the switch to IFRS. I recommend talking with someone knowledgeable about the effort required for an IFRS adoption so that you can make an informed decision. 

 

Gord Wyse – CFO, Overlay.tv

Private enterprises need to choose from three possible accounting standards by Jan 1, 2011 but depending on the choice, as early as Jan 1, 2010.
The three choices are:

1. IFRS
2. New Accounting Standards for Private Enterprises(PE)
3. US GAAP

Choosing the right one for your enterprise is based on accurately predicting your company’s future. The future considerations can be summarized by:

1. Stay a private enterprise- New Accounting Standards for PE
2. Go public in Canada or be acquired by a non US company-IFRS
3. Be acquired by a US Company-US GAAP

From a low cost and complexity point of view we are looking at moving to New Accounting Standards for Private Enterprises but to hedge our possible future we will tag all transactions going forward that have different IFRS treatment so we can easily restate in the future if needed.

 

Peter Low – CFO, Halogen Software

So here at Halogen, we have started the process of transitioning to IFRS.  It just makes sense if you are serious about ever becoming a public company, whether in Canada, the US or both.  While our friends south of the border have not made any firm decisions as of yet, I can’t believe that they won’t be adopting IFRS within the next 4-7 years.  There will just be too much pressure on them to switch over.  Here in Canada, if you want to be a public company, then my advice is to start working on this significant under-taking sooner rather than later – you can’t afford to have IFRS hold up a pending IPO just because you were short-sighted.  My advice is this: 1) hire an experienced accounting firm to provide you with a high level diagnostic of what the project is going to entail and the more significant issues you might be facing, 2) set up a project plan on attacking the issues based on that diagnostic, 3) get internal team commitment to the project as it is imperative that you understand it within the organization – it’s not about hiring someone to just do it for you, and 4) put your head down and start working on it.  While it sounds like a big project, and may in fact be for some, I believe that many private companies out there today are better equipped to deal with it than they think.  Treat it like any another finance project and you’ll be just fine.

 

Russ Jones – CFO, Xambala

My vote is for NOT re IFRS compliance for private companies. The main reason is that for most private high tech firms it is more critical that they produce statements based on US GAAP then on IFRS due to their investor base and potential exit opportunities. Also given that the US adoption (original targeted for 2014) is now unclear, the additional effort may never result in any benefit. I for one would not be at all surprised if IFRS adoption by the US adheres to the same time horizon as the adoption of the metric system. For non-high tech private firms, IFRS adoption goes against the recent effort by the CICA to introduce Private Company GAAP in response to a requirement to reduce the burden on these firms of full GAAP compliance.