Suncor and the Adoption of Ifrs

Abstract

This research paper analyses the impact of Suncor’s transition from Canadian GAAP to IFRS. Suncor is a leading Canadian fully integrated company in the oil and gas industry and is listed on the TSX and NYSE. The analysis will reveal extent to which the qualitative characteristics of the Conceptual Framework for Financial Reporting, i.e. understandability, comparability, reliability and relevance, are affected by this transition in accounting standards.

Major reporting issues that are analyzed include accounting for exploration and evaluation costs, depreciation method for oil and gas reserves, decommissioning and restoration costs, pension liabilities and employee benefits, financial instruments, and finally the net earnings. Qualitative analysis of the transition include efficient securities market theory, the measurement and information approach to decision usefulness, the shift from historical costs towards present value accounting, the theory of executive compensation, earnings persistence, etc.

Finally, the analysis is done on the costs incurred by the transition to IFRS and how it could lead to earnings manipulation and volatility. It was determined that even though the costs of the conversion were high, Suncor is suspected to perceive more benefits in the long run by achieving global transparency and therefore, easier access to foreign capital markets.

Introduction

The collapse of Enron, WorldCom and others brought a negative spotlight to the requirements of the rules-based United-States GAAP. The Financial Accounting Standards Board (FASB) has reacted by ordering the conversion of rules-based regulation to a principles-based system. Enormous pressure was then placed on the United-States and on the rest of the world to recognize the role of global accounting standards. Canada could not escape this shift and as of January 1st, 2011 all publicly accountable Canadian enterprises had to report using International Financial Reporting Standards...