Canadian asset management industry

The conversion from Canadian GAAP to IFRS is particularly challenging for the asset management industry. Unlike US GAAP, which provides a set of industry specific accounting standards and practices, neither IFRS nor Canadian GAAP provide industry specific standards for investment funds. This means the transition from Canadian GAAP to IFRS will require acute knowledge of both sets of reporting standards coupled with an in depth understanding of financial reporting in the Canadian investment funds industry. IFRS will also have significant implications for the way the investment sector does business.

Key differences between IFRS and Canadian GAAP

For investment funds:

• Accounting Standards/Industry Practice: IFRS does not provide specific standards or requirements for investment funds, neither registered nor non-registered, while Canadian GAAP provides guidance on how investment funds (that meet the definition of an investment company) should account for investments.

• Classification of financial assets: Under IFRS, there are many options for classifying financial instruments. An investment fund typically classifies its investments as financial instruments at fair value through profit or loss. Under Canadian GAAP, investments are generally valued at fair value through profit or loss as required by Accounting Guideline 18.

• Fair value: IFRS defines fair value for quoted investments in an active market as the bid-price of the investment in the case of a long position and offer-price in the case of a short position. However, under relevant constitutive documents, many continue to value their investments on the last-traded or mid-price.

• Functional/reporting currency: The functional currency under IFRS is the currency of the primary economic environment in which an investment fund operates. Determination of the functional currency is based on a hierarchy of indicators. When the presentation currency is different from the functional currency, disclosure of both is required. Currently under Canadian GAAP investment companies determine functional currency based on facts and circumstances using judgement.

For investment managers:

• Fee recognition and trail commissions: The recognition of various fees may need to be revisited to take into account the type and duration of service provided. Some trail commissions may fit the definition of financial liability, which may require them to be recognized on the balance sheet upon sale of the investment product and the associated revenue recognized over the lifetime of the contract. How these are recognized will impact a company’s cost and incentive structures.

• Consolidation: Where control exists, consolidation is required. Under IFRS, control could exist even if an entity holds less than 50% of the shares in a fund.

• Taxable income: Adoption of IFRS may impact net profit and therefore may affect the starting point for the calculation of taxable income.

For a more detailed look at IFRS and Canadian and US GAAP for the asset management industry

• Download Similarities and differences: a comparison of International Reporting Standards, US GAAP and Canadian GAAP for investment funds.

How PwC can help

PricewaterhouseCoopers is a leading provider of services to the asset management industry in Canada. Our clients include not only some of the largest retail mutual fund companies but also many niche-driven asset managers, which offer unique and diversified products to investors through alternate investment strategies such as hedge funds, structured products and private equity funds.

Contact one of our experienced asset management professionals to find out how we can help with your IFRS conversion process today.