Mining companies must prepare for new accounting standards

IFRS (International Financial Reporting Standards) has been on the radar in Canada for a number of years. Now that it’s been confirmed that Canada will adopt IFRS, most Canadian industries are beginning to come to terms with what this transition really means.

Though adopting IFRS may sound like an issue only for the accountants, this transition is significant for many Canadian companies, and even more significant for certain industries, including mining.

The philosophy behind IFRS is to have the whole world speak one language when it comes to financial reporting and to make it easier to compare one company against another.

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.

However, IFRS poses unique challenges for Canada’s mining companies. It is “principles based,” meaning companies have a choice when it comes to accounting policies. Canadian GAAP, on the other hand, contains detailed guidance for the extractive industries. This leaves mining companies in unfamiliar territory, having to closely consider their accounting standards and policies and be prepared to justify their choices.

There are some important milestones looming; by the end of fiscal 2008, Canadian companies must disclose their plans for IFRS transition and by the end of fiscal 2009, companies must quantify the expected financial statement impact of the transition to IFRS. The Canadian Securities Administrators has recently confirmed that on a case by case basis, they may allow certain companies to adopt IFRS as early as 2009.

Mining companies around the world have already made the transition to IFRS and have been working with the new standards since 2005. Their experience highlights a number of 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 to develop some formal guidance for mining activities. However, decisions from this group is not expected in time to inform the Canadian industry before it begins its transition plans, leaving companies to rely on their own decisions when it comes to interpretation of the new accounting policies.

One thing is certain: financial state-ments will look different under IFRS than they do under Canadian GAAP, and senior management will need to be prepared to discuss the differences with shareholders, board members, lenders and the general investing public. Migration to IFRS will likely require training for many within the organization including investor relations, internal audit, legal and marketing personnel.

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 to assist in the transition may find themselves competing in a very tight labour market.

For companies that are just beginning to contemplate IFRS, PwC 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 to IFRS-conversion projects, including training for executives and board members on the impact and expected changes under IFRS.

For more information visitwww.pwc.com/ca/mining