Could the momentum of IFRS in Canada be fated to decline?
Here’s an extract from an interesting recent article in the National Post, written by Drew Hasselback:
- “Add the publicly traded company to the endangered species list.
- Since 2007, the number of publicly listed companies in Canada has dropped 16.7 per cent, according to statistics from TMX Group Ltd., the company that operates both the Toronto Stock Exchange and the junior market TSX Venture Exchange.
- The drop isn’t merely a blip explained by a recent economic downturn. It’s an entrenched, structural trend that has seen the number of listed companies shrink at a fairly steady rate of about 1.6 per cent per year.
- Market experts say no single reason explains why Canadian publicly listed companies are going the way of the dodo and most say the answer is a mix of conditions. But the incredible shrinking equity market has massive implications for entrepreneurs used to tapping public equity, as well as for the securities lawyers, investment bankers, accountants, and stock exchanges who depend on serving that market….
- One explanation for the decline might be that the Canadian market just doesn’t need as much public equity as it has in the past. New, alternative sources of funding, such as private equity and venture capital, are available in greater numbers.
- The Canadian Venture Capital and Private Equity Association said the value of venture capital investments in the first quarter surged to a record $838 million, nearly double the amount recorded during the same period last year.
- Mike Woollatt, the CVCA’s chief executive, said private capital has exploded in Canada over the past 10 years and is rapidly growing.
- About $440 billion in private equity and $110 billion in venture capital North America-wide has been raised, but not yet invested — a sum Woollatt calls a “ton of dry powder.”
- The bulk of that money has been raised in the U.S., but Canadians are just as likely to be on the receiving end of an investment because there is “basically no border for private capital anymore,” he said. “The impact is that basically you don’t have to go public to get serious scale and money.”
It’s interesting to look at this from the perspective of IFRS in Canada. You’ll recall that a large part of the reasoning for the changeover from old Canadian GAAP was based in the perceived increasing globalization of markets and international competition for capital (of course, that’s not the only reason – IFRS was generally considered to constitute a “better” framework for financial reporting, by various measures). At the same time as the transition, Canada developed a set of accounting standards for private enterprises, modeled to some extent on that old GAAP. Various publications discuss the circumstances under which private enterprises might nevertheless voluntarily choose to adopt IFRS – most obviously, if they’re considering going public in the foreseeable future. I’m not sure if any statistics exist on how many private enterprises make that voluntary choice – my own (possibly completely inaccurate) impression is that not too many do. Even if a private enterprise thinks it might go public at some point, it will likely consider it more rational to deal with the transition to IFRS if and when that intention crystallizes. Anyway, the remark about there being “no border for private capital” could be seen as a point in favour of IFRS as a basis for borderless comparison, whether public or non-public. But it’s not clear that private Canadian investors would care about IFRS as a necessary reference point for investing in Canadian enterprises, and private US investors would presumably be more likely to care about US GAAP (a case of back to the future…?)
For another way into this, the National Post article again cites the University of Calgary’s Tingle:
- “He thinks companies choose to go private or remain so (because) company founders and managers recognize that going public comes with a loss of control and a lot of hassle. “I think that managers are looking at public markets and thinking, ‘I don’t need that crap,’” he said.
- And this, Tingle said, is an issue that should interest Canadian securities regulators, who should be surveying public company executives on which rules they find most burdensome and then determine whether they can be fixed. He also said securities commissions should be reaching out to private company managers to ask why they’ve avoided going public.
- He suggests Canadian securities regulators focus too much on addressing corporate governance issues, such as setting rules on executive compensation, and not enough on things that might stop the continuing decline in the number of Canadian public companies.”
Similarly, I’ve heard it suggested that preparers and auditors of financial information increasingly find it burdensome to work in the IFRS environment (particularly, for auditors, given the added oversight attaching to their work on public enterprises) and are drawn instead to working with private enterprises. It’s not hard to see why, if such work allows a greater focus on immediate business needs, without having to constantly push through unproductive thickets of compliance. But given that Hasselback’s article seems to hold out little immediate prospect of this trend changing, could it follow that IFRS, rather than being established as the accepted natural language of financial reporting, will be seen as an overpriced, inflexible “premium” commodity, an outdated offer of classiness that most capital-raisers and practitioners will happily decline…?
The opinions expressed are solely those of the author