The Canadian utilities industry—which includes electricity, power generation, gas distribution, pipelines and water utilities—is characterized by the need for large upfront investments, often with great uncertainty about outcomes over the long-term. On the one hand, the fact that Canadian Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are both principles-based is a definite advantage; on the other hand, without a definitive “rulebook,” management needs to spend more time explaining their judgments on how to apply the principles. The sector’s geopolitical, environmental, energy and natural resource supply and trading challenges, combined with complex stakeholder and business relationships, means the transition to IFRS will require some complex judgments about how to implement the new standards. As a regulated industry, the Canadian utilities sector faces an additional layer of complexity.
Highlights of differences between IFRS and Canadian GAAP
- Contracts. The variety and complexity of contracts in the industry present some key IFRS reporting challenges.
- Rate-regulated accounting (RRA). Canadian GAAP previously permitted certain accounting treatments for rate-regulated assets and liabilities that are not allowed under IFRS. How will regulators view IFRS statements that do not apply RRA? Utility companies need to review their rate-regulated assets and liabilities to determine whether or not they should remain on the balance sheet.
- Emissions rights and credits. The pace of regulatory action to curb emissions is intensifying around the world but accounting standards have yet to be established. The impact of the various acceptable accounting treatments for emission rights and credits may differ depending on the treatment adopted—this could ultimately have significant impact on the company’s financial performance.
- Components approach. Large network or infrastructure assets typically found in the utilities sector comprise a significant number of components, many of which have differing useful lives. Under IFRS, the cost of significant components must be separately identified and depreciated to their residual values over their useful lives. The application of the IFRS model may require more rigour than Canadian GAAP, and the manner in which component depreciation is applied.
- Impairment testing. Canadian GAAP’s two-step approach uses undiscounted cash flows while IFRS uses discounted cash flows. Testing under IFRS could therefore lead to more frequent recognition of impairments and to differences in the amount of impairment loss.
Other industry-specific areas of concern include elimination of proportionate consolidation and accounting for the decommissioning of plants or installation.
Implementation of the accounting changes resulting from the move to IFRS may have significant impacts on business processes and underlying IT systems. The impact of the changes is dependent on the precise manner in which IT systems have been designed, implemented and maintained. For example, two otherwise very similar utilities both running SAP may have implemented the systems very differently and be affected in very different ways.
How PwC can help
For a more in depth analysis of the industry-specific issues
Our IFRS team has worked with some of the world’s largest energy and utilities companies. Contact us to find out how we can help make your transition to the new reporting standards as smooth as possible.
