Canadian debt ratings unscathed by IFRS: Moody’s

TIM KILADZE

Globe and Mail Blog

Canadian companies outside the financial services sector won’t see their debt ratings slashed upon conversion to International Financial Reporting Standards (IFRS) in 2011, according to Moody’s.

“A change in the medium of communicating financial results does not normally have a significant impact on the economic position of an entity,” the rating agency noted in its latest report on the subject. Moody’s is confident with its position, too. Not only have they surveyed a slew of Canadian businesses, they also noted that the single largest transition to IFRS to date, in the European Union in 2005, went off without a ratings hitch.

When meeting with Canadian firms, Moody’s found that for the most part they offered up sufficient disclosures in their pre-transition financial statements that helps readers understand the expected impact on reported results.

However, Moody’s noted the transition won’t be completely rosy. Once complete, it will be more difficult to compare Canadian companies who have U.S. firms in their peer group because they will still use U.S. Generally Accepted Accounting Principles (GAAP).

Examples of the biggest differences between the two systems include changes to reporting depreciation of property, plant and equipment. Going forward companies may report different fixed asset balances and different depreciation expenses, leading Moody's to believe the transition to IFRS will result in higher depreciation expenses being reported in earlier periods. Sales and leasebacks will also differ, as some transactions will be recognized immediately under IFRS and deferred under GAAP.

Although this may seem like a big change for Canada, we’re late to the party. Since 2005, listed companies in the European Union, Australia, and Hong Kong have used IFRS.