Law Times

PAGE 10 FOCUS May 10, 2010 • Law TiMes Lawyers guiding clients on IFRS transition Clear communications to shareholders key as Canada makes the switch BY DARYL-LYNN CARLSON For Law Times switch their accounting systems to comply with International Fi- nancial Reporting Standards as of January, companies — and, in many cases, their lawyers — are still in the thick of facilitating the change. W Although the transition is largely the responsibility of accounting professionals, in- house counsel and law fi rms will be involved in overseeing the switch to IFRS to protect companies from discrepancies over disclosure and, ultimately, any related liabilities. In a review released in Feb- ruary, the Ontario Securities Commission, which will over- see compliance here, found companies were generally unprepared or didn't include their plans in management dis- cussion and analysis (MD&A) statements. It reviewed transi- tion plans by 106 issuers and found: • 40 per cent of issuers made no mention of an IFRS changeover plan in their MD&A disclosure. • 60 per cent of them dis- cussed a changeover plan but only half provided dis- closure beyond a generic ref- erence to the transition. • Only half of the issuers that discussed their IFRS transi- tion in their 2008 MD&A also provided investors with quarterly progress updates hile Canada is man- dating that publicly traded businesses in 2009 interim MD&A documents. While the changes are largely the purview of accountants, Paul Mingay, a partner with Borden Ladner Gervais LLP's securities and capital markets group, points out there are legal implications stemming from communications and disclosure that corporate law- yers must be up to speed on. "From a compliance point of view, companies have to explain to their shareholders what these changes mean," says Mingay. "And from another aspect, issuers have to think about what the eff ect will be on con- tracts they have." Mingay provides an ex- ample. "Let's say you have a bank loan. And in that, you have a fi nancial covenant and normally in a loan agreement, those [covenants] are required to be calculated under the Generally Accepted Account- ing Principles. But now, under the IFRS, it could aff ect your loan covenants, so companies have to review" all documents that could be subject to the new IFRS rules, he says. In the event of a recent or pending merger or acquisition, companies also need to factor in the new reporting standards, which can make matters some- what more complicated if they involve integrating two diff er- ent accounting systems. "Th is may be signifi cant in mergers and acquisitions, as if a company buys another pub- lic company, and both have to do the transition to IFRS, they will have to integrate a new Dawn Whittaker notes that while IFRS has legal implications, 'it's tak- ing the legal community a bit lon- ger to embrace it.' accounting system," says Mingay. Dawn Whittaker, a partner in the business law group at Ogilvy Renault LLP, affi rms there is a role for lawyers in accommodating the transition to IFRS. She was a member of the OSC's continuous disclo- sure advisory committee from 2006 to 2008 and has written several papers about the IFRS transition for both clients and lawyers. "Probably about two years ago, the accounting profession latched on to this as a major change," she says. "But it's taking the legal community a bit longer to embrace it, mostly because it's an accounting issue, not really a legal issue. But it does have legal implications." Lawyers are primarily in- volved in helping their clients communicate the switch to in- vestors so they're not "unduly surprised by any changes and that these transition rules will allow them to give more grad- ual details before the change," Whittaker says. "Lawyers cer- tainly have a role to play in the communication end of things to let everyone know of the changes." Whittaker points out that companies that haven't heed- ed the IFRS rules, which have been out there for more than three years, could face liabil- ity risks if their shareholders deem the communications to be inadequate. As well, companies that are contemplating going pub- lic need to accommodate the IFRS standards and work with their respective legal counsel to prepare their initial public off erings in compliance with them. Still, Whittaker notes some companies that aren't con- templating an IPO are indeed making accommodations to comply with the new account- ing standards. "Private companies might decide to convert to IFRS be- cause it allows them to compete more easily on a global scale. If they have IFRS, they can then take those statements and show them to suppliers, bankers or anyone outside of Canada. So it helps a lot for companies do- ing global business." Joseph Groia of Groia & Com- pany in Toronto says he doubts there will be any signifi cant en- forcement measures for several years while companies adapt. "Th e concern right now is the extent to which the com- mission has been unhappy with the level of disclosure about the transition rules. [Companies] are expected to have plans in place and should be disclos- ing to their shareholders what those transition plans are all about," says Groia. "In terms of the changes themselves, they're probably essential so we, like most of the sophisticated capital markets, can move to a single uniform accounting rule system. We have at the moment a very complicated international sys- tem, and a lot of Canadian is- suers who trade in the United States through listed stocks or otherwise have to pay for two sets of accounting statements with necessary adjustments." Groia suggests, however, that the timing of the IFRS in- troduction might not be ideal. "I'm concerned that when you combine the uncertainty as to what the IFRS changes are going to be together with the uncertainty that exists with de- veloping a national securities regulator, it looks like those two developments could be coming together at about the same time. So it's really a ques- tion of how much uncertainty is good for our marketplace and how much uncertainty will the market tolerate for investors." Shane McLean, a partner at LaBarge Weinstein Professional Corp. in Ottawa who practises corporate and securities law, says that along with MD&A documents and covenants, lawyers may have to help cli- ents redraft contracts for sales personnel employed at publicly traded companies. At this point, however, many companies are still focused on the accounting aspects of the transition. "Th e contract review process Shareholders Agreements An Annotated Guide, Second Edition Your ultimate guide through the rigours of drafting solid shareholders agreements The challenge in preparing a shareholders agreement is ensuring it meets the needs and intentions of clients. Guarantee that you've addressed the complex issues and considered all the circumstances which may arise and their impact with Shareholders Agreements: An Annotated Guide, Second Edition. This cost-effective, well-crafted and user-friendly resource is an excellent guidebook for corporate-commercial lawyers and general practitioners. This edition has been updated and revised to include: and regulations • amendments to the • discussion of the recent Ontario Court of Appeal judgment in • amendments to the Ontario ORDER your copy today Perfectbound with CD-ROM • 336 pp. 2009 • $90 • P/C 0860010002 ISBN 978-0-88804-489-1 • changes in general drafting principles Tailor agreements to your clients' needs easily and effectively with the included CD-ROM version of the sample agreements. and the may be the larger issue in terms of legal time but it's not neces- sarily the focus right now," says McLean. "We, as lawyers, obviously don't need to understand the ins and outs of the account- ing side but we do need to be cognizant of the changeover and understand that when clients send in their MD&A, you're looking for the proper disclosure and you need to understand what the securi- ties commissions are expecting companies to disclose to meet the new standards." LT For a 30-day, no-risk evaluation call: 1.800.565.6967 LT0510 Canada Law Book is a Division of The Cartwright Group Ltd. Prices subject to change without notice, to applicable taxes and shipping & handling. Moreau_Shareholders Agreement (LT 1-3x4).indd 1 www.lawtimesnews.com 5/5/10 11:47:46 AM Aird & Berlis LLP Edited by Lisa E. Moreau Frye v. Frye Estate Income Tax Act Corporations Act Business Corporations Act Canada Business

• Cover
• Plaintiff Rights
• Dangerous Conflicts
• Focus On Securities Law