The accounting pro-fession is warning investment dealers that they need to start working now to address the unique challenges they will face in converting to international financial reporting standards by 2011, as required by industry regulators.

“It’s not something you can do in your lunch hour,” says Ian Hague, a principal at the Canadian Accounting Standards Board, referring to the extensive evaluation and overhaul of accounting processes involved in moving from the current Canadian generally accepted accounting principles to the international standard.

“The timing is now,” adds Andy Kenins, a partner in Toronto with KPMG LLP’s financial services practice, noting that investment dealers need to begin planning immediately, if they have not already done so, in order to comply with deadlines set by the Investment Industry Regulatory Organization of Canada.

The IIROC informed its members in a Sept. 30 bulletin that they must adopt the new reporting rules for fiscal years beginning on or after Jan. 1, 2011, and must submit progress reports, the first of which will be due on April 1, 2009.

“So, companies want to have some progress to report,” says Kenins. “ and a lot of them have not done anything yet. There is time, but they do have to get going.”

“It’s a big change,” agrees chartered accountant Barry Myers, senior advisor in the securities and capital markets group at law firm Borden Ladner Gervais LLP in Toronto. He notes that the firms will need to change their accounting systems well in advance of the 2011 deadline because IIROC requires them to keep a dual set of books in 2010, reporting under both Canadian GAAP and IFRS rules.

Although some executives may assume that it is the big investment firms and mutual fund dealers that will have the most difficulty complying because of the complexity of their operations, Kenins says it is, in fact, smaller and mid-sized privately owned firms that will face the greatest challenges. He says privately owned firms — which make up the majority of the dealers in Canada — are in an unusual position because the IFRS rules were designed primarily for public companies.

Privately owned investment dealers and mutual fund dealers that hold client cash, securities or other properties are required to comply with IFRS, however, because they are considered by IIROC and theMutual Fund Dealers Association of Canada to be publicly accountable enterprises. The change means that these private firms will now have to report on matters such as executive compensation, as public companies are already required to do. And investment dealers, according to Kenins, “are not used to putting information of that sort in financial statements.”

The new rules will not dramatically affect the way dealers account for the investments they hold, as Canadian GAAP rules have already moved close to international standards in that regard. But there will be a number of significant changes in financial reporting of other matters, such as how a firm is capitalized and its compensation arrangements with employees. And these may result in “nasty surprises,” Kenins says, such as unexpected changes in reported income.

Privately owned firms are particularly vulnerable in this regard because of their ownership structures and arrangements they may have for issuing shares to employee/owners. All of these will need to be scrutinized carefully in light of the new rules, Kenins suggests. For example, a $500,000 payment made to lure a retail broker and his or her client list away from a competitor now may be recorded as a compensation expense, rather than as an asset. Or income from advisory fees on a project spread over several years may now have to be reported differently.

Another specific change that may have implications for many dealers relates to the way that potential legal liabilities are reported. Kenins notes that it is relatively common for firms to be faced with a number of law suits at any given time. Under IFRS, firms may have to record potential losses earlier than under GAAP, because the language of the new standard requires reporting of “probable losses,” as compared to “likely losses.”

Myers notes that it may also be necessary for firms to review debt agreements and covenants, which could include provisions that certain ratios must be met in accordance with GAAP, “and under IFRS that might change. So, they’d better be talking to their lenders.”

@page_break@Kenins says these matters cannot be left to accountants alone to deal with. Management and employees need to be educated about the implications of IFRS so that they can identify issues and plan ahead. It is particularly important for investment dealers to do this, he says, because many people in the firms may be doing things that are affected by IFRS.

Lawyer Dawn Whittaker, a partner at Ogilvy Renault LLP who often advises public companies and investment dealers on compliance issues, says firms may not have people on staff trained to deal with the new rules and they should remember that they could have trouble finding outside help if they leave it too late. “The market is going to get tight,” she says.

Kenins says there is no shortage of IFRS expertise available for hire today: “But organizations that start looking for help some time in 2010 might find their options are limited.” IE