Executive Summary
The purpose of this report is to give our client-Sobeys Inc.’s board of directors and stakeholders a more in-depth understanding of the firms’ accounting standard conversion from Canadian GAAP to IFRS. This report intends to help the users by answering the four questions they may concern regarding this conversion. The report is divided into five sections in the same order of these four questions:
1. The major differences between GAAP and IFRS: The report analyzes the major differences uses the resources from Big 4 public accounting firms and accounting literature.
2. The necessity of Sobeys’ conversion from Canadian GAAP to IFRS: The report uses both PwC and Deloitte’s approaches to determine the necessity of Sobeys’ adoption of IFRS. Using two credible resources will increase the reliability of the report.
3. The cost of the conversion for Sobeys: The report analyzes and summarizes the relevant cost incurred to Sobeys Inc. because of the conversion. The cost information is obtained from Sobeys’ parent company- Empire Company Limited’s official audited 2010 annual report.
4. The advantages and the disadvantages of the conversion to IFRS for Sobeys: By analyzing both positive and negative sides of the conversion, the report will give readers a more objective view of the issue.
5. Conclusions and Summary: The report concludes the topic by taking into account all the determining factors discussed in the report.
The adoption of IFRS is an unavoidable decision made by Sobeys from the firm’s perspective because of both internal and external factors. The conversion will have positive impact on its future growth. In the report, it is also concluded that the overall benefit Sobeys gets from the conversion will be greater than the cost that the firm pays out.
Introduction:
As a fully owned subsidiary of Empire Company Limited- a public company, Sobeys Inc. switched to IFRS from Canadian GAAP after Jan. 1st, 2011. This report will be dedicated to the discussion of the topic “The conversion of accounting standards for Sobeys Inc. after Jan.1st, 2011”. The purpose of the report is to give our audience a more in-depth understanding of Sobeys’ conversion to IFRS and help them evaluate the cost and benefit of this conversion.
The target audience for this report is the Board of Director members and stakeholders of Sobeys Inc.- the no.2 national food retailer in Canada. According to The Globe and Mail article (Business Magazine-The Globe and Mail, 2012), Sobeys is ranked no.8 among the biggest private firms in Canada. Sobeys is a typical type of big private firm that is faced with the important decision of the conversion to IFRS. This report intends to help Sobeys’ Board of Director members and stakeholders to get a better understanding of the firm’s decision of adopting IFRS.
More detailed questions related to this topic are:
1. What are the major differences between GAAP, ASPE and IFRS?
2. Is it necessary for Sobeys to make the conversion to IFRS?
3. What are those costs Sobeys will incur for the conversion to IFRS?
4. What benefits will this conversion to IFRS bring to Sobeys?
According to the CICA handbook, all private entities in Canada have to choose a preferred reporting framework for financial years beginning January 1st, 2011. Options these firms have are: Accounting Standards for Private Enterprises (ASPE) and International Financial Reporting Standards (IFRS). ASPE is a specific version of accounting framework designed for Canadian private firms. The content and requirements in ASPE will be similar to existing Generally Accepted Accounting Principles (GAAP). It is also known as the GAAP for Private Enterprises after Jan 1st, 2011. However, those private firms that choose to adopt IFRS will have to go through substantial amount of conversion processes.
The Major Differences between GAAP and IFRS
During the past several years, numerous amount of accounting literature articles about the differences between Canadian GAAP and IFRS were issued. These articles were issued by the most professional and authoritative organizations in the accounting field such as the Big Four public accounting firms (E&Y, PWC, KPMG and Deloitte) and Canadian Institute of Chartered Accountants. One of the Chartered Accountants (CA) magazine articles (Chlala & Lavigne, 2009) summarizes the seven key differences between Canadian GAAP and IFRS, which are: Properties, Plant and Equipment; Revenue recognition; Impairment of assets; Provisions recognition; Presentation of Financial Statements; Related parties and Leases. The conversion to IFRS will cause the change in key calculation assumptions and estimations.
According to Deloitte’s article “Canadian GAAP at a crossroads” (Deloitte Canada), the main differences that exist among Canadian GAAP, ASPE and IFRS that are more relevant to Canadian private firms are:
1. More extensive disclosure requirements.
2. Opening balance sheet transitional provisions
3. Financial Instruments standards.
4. Investments in associates, joint ventures or subsidiaries
5. Goodwill and other intangible assets not subject to amortization – impairment testing
6. Disclosing management compensation.
The most important difference is that IFRS requires private entities to give more in-depth disclosure of their business operations and any essential current or contingent events related to the business. Some private firms will find it unnecessary to disclose their economic condition in depth since their small group of stakeholders can gain the access to these information directly, which means the cost incurred for the disclosure can be avoided.
In conclusion, IFRS requires the most in-depth and strict financial reporting framework. There are some differences between ASPE and Canadian GAAP but not that complicated comparing to IFRS conversion. Firms adopting ASPE will incur less cost and procedures. However, as Deloitte claimed in its article “Canadian GAAP at a crossroads” (Deloitte Canada), “Status Quo” is not an option for Canadian private firms after Jan.1st, 2011. Canadian private entities like Sobeys will have to make the decision about which accounting standards they will choose, ASPE or IFRS, by Jan.1st, 2011.
The necessity of Sobeys’ conversion from Canadian GAAP to IFRS
CGA magazine article “The end of Canadian GAAP” (JEFFREY, 2007) states that “It may be that the bigger private companies will self-select themselves into the public company group and follow the same standards.” Sobeys Inc. is definitely included in the category of “the bigger private companies”. Nevertheless, Sobeys still retains the option to follow ASPE since it is a Canadian private firm despite of its nation-wide operations. Sobeys’ most important competitor –Loblaw, is a publicly accountable firm that is required to switch to IFRS after Jan.1st, 2011. Basically, these two firms are very similar in their business nature. Sobeys is a 100% owned subsidiary of Empire Company Limited, which is a Canadian public firm. This takeover back in June 2007 creates a special prelude and ideal environment for Sobeys’ conversion to IFRS. Empire Company Limited is required to adopt IFRS after Jan.1st, 2011 since it is a Canadian publicly accountable firm.
Analysis uses Deloitte’s approach:
According to “Canadian GAAP at a crossroads”(Deloitte Canada), when a private firm is deciding whether to adopt IFRS or not, it should take the following factors into account:
1. Usability: IFRS requires extensive disclosures in financial statements. The private firm should consider the cost and benefit analysis of the adoption since the extensive disclosures will usually incur substantial amount of extra expenses for the firm. It is worthy to incur these extra expenses only when the benefits from the disclosures are in line with the stakeholders’ interest. Empire Company Limited is the only shareholder of Sobeys Inc. However, Sobeys is the most important and sophisticated business that is operated by Empire Company Limited. Empire Company Limited’s shareholders may want to know as much details about Sobeys’ operation as possible. IFRS will provide more detailed financial information for Sobeys’ stakeholders.
2. Cost: The conversion to IFRS will require the private firm to put more investment and extra cost up-front. However, if the company needs to compete with other big public companies or has the potential to go public in the future, it will be beneficial for the firm to take the cost up-front. Sobeys is a 100% wholly owned subsidiary of a public firm, which means Sobeys’ financial information, would be part of Empire Company Limited’s consolidated financial reporting. It will incur even greater cost and complexity for Empire Company Limited to transfer Sobeys’ financial information into IFRS later in the future. Making a direct path to IFRS will actually reduce the overall cost for the entire business group.
3. Agility: The conversion to IFRS will cause many changes inside a private firms’ internal control process and other structural transform. The firm should consider the adoption of IFRS when the firm actually has that ability and resources to make the change. Undue cost should not be incurred due to the transition. As a big private firm and being supported by its parent company, Sobeys has both the capability and resources to make the transition.
4. Other specific considerations: Management of the private firms may have specific consideration regarding the technical accounting changes that IFRS will bring to the firm which will be beneficial to them as determined by the firm. For example, the management might prefer the new revenue recognition rules in IFRS for specific reasons. Sometimes specific considerations will override other factors when the management is making the conversion decision.
Analysis uses PriceWaterhouseCoopers (PwC)’s approach:
In the report “GAAP or IFRS- an important choice to be made by private firms”(PriceWaterhouseCoopers, 2009), PwC introduced a summary of factors to be considered when private firms are making the IFRS conversion decision. The factors in the report that are relevant to Sobeys’ situation are as following:
A Canadian private company should consider IFRS as its best alternative when:
a) There is possibility that the firm will go public in the future. Sobeys’ operation is nation-wide and has been successfully operated by its management team since it was founded. Going public will help Sobeys’ growth in many aspects such as attracting investment and financing.
b) The firm is a subsidiary of a Canadian public firm that will be converted to IFRS. Sobeys’ is a fully owned subsidiary of Empire Company Limited. To be consistent with the parent company’s accounting standards, it is better for Sobeys to convert to IFRS. The complexity can be reduced when it comes to preparing the financial reporting for the whole business entity.
c) The firm has competitors using IFRS. The biggest competitor of Sobeys, Loblaw, is a public company that will adopt IFRS practices after 2011. Converting to IFRS will increase the comparability and understandability of Sobeys’ financial reports. These two qualitative factors are essential when the users need to assess the overall quality of the financial reporting.
In conclusion, Sobeys’ conversion to IFRS is driven by its business nature. On the other hand, Sobeys also have the capability to take this initiative. Its parent company, ICAO and the Big Four public accounting firms are also supporting Sobeys’ conversion to IFRS.
The cost of the conversion for Sobeys
In Empire Company Limited’s 2010 annual report (Empire Company Limited, 2010), a clear roadmap and detailed description of the conversion activities were stated. After acquiring Sobeys back to 2007, the Empire Company Limited gained 100% control of Sobeys. The actions the firm takes will have significant impact on Sobeys’ financial reporting and will incur cost to Sobeys. Detailed examples of cost are as following:
1. Cost to prepare new financial statements: Detailed differences between GAAP and IFRS need to be defined, especially for those policies related to Sobeys’ operations. Some accounting assumptions and calculation methods need to be revised. In addition, the more extensive note disclosure requirements in IFRS will cost Sobeys extra time and expenses. All these steps taken towards the finalization of the conversion will cost time, professional personnel and economic resources to be spared.
2. Training and communication cost to professional personnel: Sobeys has to hire professional personnel who are familiar with IFRS or provide training to its current employees to get the technical support for the conversion. Cost for training program and communication to stakeholders are always high.
3. Cost to update information system inside the corporation: All information system and accounting software need to be updated to be IFRS- compliant. Expenses will be incurred for hiring external consultant or purchasing of the new computer software.
4. Cost to implement the internal control processes for all accounting policies changes: When Sobeys converts the accounting standard, new internal control processes over the policies changes need to be designed, implemented and monitored. These activities will incur long-term cost for Sobeys since financial reporting needs to be monitored and controlled on a regular basis.
The advantages and the disadvantages of the conversion to IFRS for Sobeys
The report “Accounting Standards for Private Enterprises or IFRS?” (PriceWaterhouseCoopers, 2011) issued by PwC in 2011 summarized the advantages and disadvantages of the conversion.
The most important advantage of IFRS conversion for Sobeys is the improvement of comparability, understandability and the relevancy of its financial reports. If Sobeys wants to attract more investment into the firm or obtain extra financing from the banks, both domestically and globally, financial reports under IFRS will play a vital role in these business activities. It is possible that Sobeys will go public like its rival or consider expanding its operation overseas. The early adoption of IFRS will free these expansion activities from financial reporting burden and at the same time reduce the transition cost in the future. Given the situation that Sobeys is a subsidiary of a public firm, IFRS conversion will bring reporting consistency to the business entity as a whole. As one of the biggest private entities in Canada, adoption of IFRS will further differentiate Sobeys from other domestic companies. On the other hand, IFRS enables Sobeys to have more choices of accounting methods and provides Sobeys with flexibility in financial reporting. In addition, conversion to IFRS might bring fundamental changes to Sobeys’ internal control system, information system and even cooperate governance.
However, the conversion might incur significant cost and changes to the entire firm. Sobeys might need to spare time and extra funds for the transition program. The cost may include hiring extra staff and updating information and internal control system. The regular operation of Sobeys might be affected in some extent. The current staff of Sobeys needs to take time to adapt to the new changes inside the entire firm caused by the conversion. Training program needs to be conducted therefore the core business of the firm might be distracted. Contracts such as management compensation program need to be renegotiated.
Conclusion and Summary:
Making the conversion to IFRS is an inevitable evolution that Sobeys needs to take on. As we discussed in the above sections, the most important reason why Sobeys needs to make the conversion is that it is a wholly owned subsidiary of Empire Company limited. Internal forces such as the business nature of Sobeys and the potential probability of expansion, together with external forces such as the pressure from competitors, pushing Sobeys to adopt IFRS even earlier than other domestic companies.
Although significant cost will be incurred and substantive innovation procedures need to be conducted, the overall benefits from the conversion will override the cost. The internal control system inside the firm will be improved and the information system will be updated. All of the advantages we talked about in the above sections will increase Sobeys’ comparative advantages among its rivals. As one of the biggest private entities in Canada, Sobeys has adequate economic resources to implement these organizational changes.
In conclusion, it is a right decision for Sobeys to convert itself into IFRS and this conversion will open up a borderer business path for Sobeys Inc.
List of Reference
1. Business Magazine-The Globe and Mail. (2012, 6 28). 2012 Rankings of Canada’s 350 biggest private companies. Retrieved 11 /16, 2012, from The Globe and Mail: http://www.theglobeandmail.com/report-on-business/rob-magazine/top-1000/2012-rankings-of-canadas-350-biggest-private-companies/article4372009/
2. Chlala, N., & Lavigne, A. (2009, June-July). Seven key differences. Retrieved 11 /16, 2012, from CA Magazine: http://www.camagazine.com/archives/print-edition/2009/june-july/features/camagazine19845.aspx
3. Empire Company Limited. (2010). Empire Company Limited’s 201 Annual Report. Retrieved 11/16, 2012, from Sobeys’ Official Website: http://www.sobeyscorporate.com/App_Themes/SobeysCorporate/media/en/Empire_AR_10_ENG.pdf
4. Deloitte Canada. (n.d.). Canadian GAAP at a crossroads. Retrieved 11/16, 2012, from Deloitte Canada Official Site: http://www.deloitte.com/assets/Dcom-Canada/Local%20Assets/Documents/IFRS/ca_en_IFRS_PCS_GAAP_POV.pdf
5. JEFFREY, G. (2007, July-August). The End of Canadian GAAP? . Retrieved 11/16, 2012, from Certified General Accountants- CGA Magazine: http://www.cga-canada.org/en-ca/AboutCGACanada/CGAMagazine/2007/Jul-Aug/Pages/ca_2007_07-08_prof_feature.aspx
6. PriceWaterhouseCoopers. (2009). PriceWaterhouseCoopers-Official Site. Retrieved 11 16, 2012, from GAAP or IFRS? : http://www.pwc.com/ca/en/private-company/publications/gaap-or-ifrs-canada-2009-05-en.pdf
