The Canadian Securities Administrators have announced that Canadian firms registered with the Securities Exchange Commission (SEC) will be permitted to file their financial statements in Canada using US generally accepted accounting principles (GAAP). Of the nearly 1,300 foreign companies registered with US stock exchanges, 500 are Canadian.
The rule takes effective for fiscal years beginning January 1, 2004, or later. Canadian firms must apply for the exemption. To qualify, companies must demonstrate that they have the necessary expertise to prepare US GAAP financial statements. Companies must also show that their auditors are knowledgeable about US GAAS.
For the first two years of the reporting measure, companies must explain the material differences between Canadian and US GAAP and provide reconciliation of net income. In addition, companies must provide disclosure consistent with Canadian GAAP.
Ontario Securities Commission Chairman David Brown addressed the need for the rule in a speech he made at a securities conference in February 2001. He asked the audience, "As our North American capital markets become more and more closely integrated, should we allow US issuers to access Canadian markets using financial statements prepared under US GAAP, without the necessity of preparing a statement reconciling the numbers to Canadian GAAP? Should we make the same allowance for Canadian companies that are registered with the SEC?"
The new rule comes at a time when Canadian authorities are working to close the gap on accounting standards, striving to make them harmonize to either US GAAP or to GAAP established by the International Accounting Standards Committee (IASC). Until a final decision is made, Canadian officials are trying not to adopt any standards that would create a difference between US GAAP and Canadian GAAP.