Americans : Investment Losses Await You In Canada

Many American residents who choose to “invest” in Canadian-listed stocks (along with unaware Canadians) ought to do some serious homework very soon. Large numbers of Canadian public companies report using IFRS (called International Financial Reporting Standards).

IFRS unfortunately is built upon an unsupportable foundation, being “current values.” Trustworthy “current values” of assets and liabilities often are not available in Canada. Swindlers thus can easily manipulate reported public company figures to their advantage, leaving you with losses. Simply, IFRS often is not trustworthy.

For example, an especially common swindler “trick” involves annual re-valuation of properties. Dollar increases from the previous year in so-called “values” become added to reported current-year “income.” All too often the valuators who choose the “values” are too “cozy” with corporate management. Those who invest using “stock price to income” ratios/bases become conned by the so-called bloated “income” trickery.

With no arm’s length sale of the property having occurred, the “valuation” becomes based on many valuators’ “assumptions” (which IFRS accepts). No cash is received, which leads to IFRS “income” becoming divorced from available cash needed to pay dividends, and similar. That is, unlike with U.S. GAAP reporting, cash generated from operations cannot serve as a cross-check on reported income.

Exchange-listed stocks can have 50%-80% of their reported IFRS “income” originating by these annual property appraisals, and similar non-cash accounting (beyond adjustments for conventional amortizations). Yet, many financial analysts are unaware of the looseness of IFRS. Having been investigative accountants for many years, for Court purposes, we have to have been shown the evidence documents.

Learning how to identify “suspect IFRS reporting” companies is easier than you may think. For example, several recently-failed marijuana companies reported (sometimes “audited”) “sales, cost of goods sold and huge gross profits,” when zero cash was involved. Hence, the absence of cash was a significant warning signal, where credibility checks, such as “follow the money” might easily have been ineffective. No cash existed. End of story!

Instead, “management estimates” were being reported as IFRS income. Major losses consequentially occurred for these “investors.” “Absence of cash” was all that you needed to know; and might be labelled as “learners Lesson One” (missing cash).

First, however, is “how to commence a worthwhile investor education procedure.” Some Canadian public companies report in accordance with U.S. GAAP (generally accepted accounting principles). So, how do you know whether a company you are considering for investment purposes reports under IFRS? Your “adviser” or “broker” has to be asked to obtain for you a copy of the company’s latest “annual report.” (Also, available from your computer.)

Next, you have to locate the “auditor’s report,” wherein the basis of reporting (U.S. GAAP, and not just GAAP/IFRS) has to be disclosed. If IFRS is mentioned as the reporting basis, read the auditor’s report. Much is boilerplate wording, but look for whether they had any “sort of” concerns, as auditors, and IFRS was utilized.

Auditors in Canada ultimately are required to conclude that (before signing the auditor’s report) the financial statements are “not materially misleading to investors.” But, in our view, as related to IFRS, we do not think that “materially misleading” has adequately been tested in Canadian Courts. Thus, you have to press onward, and identify where IFRS could have been utilized to mislead you.

The following are some of the most commonly-utilized dangerous IFRS suspect items:

*??????? as noted above, reported income can be mainly comprised of non-cash “value” increases, as decided by, say, a property appraisal company, which may be too cozy with corporate management. An example would be an appraiser who largely ignores the increasing unrecorded losses on empty space in office buildings (being the company’s main assets).

*??????? lenders, such as banks, who have loaned to such entities as real estate owners or those directly and materially affected by, for instance, widespread virus impacts.

*??????? pension plans that hold over 40% of their assets in what would be labelled as “Level 3” offshore or foreign properties. (Level 3 is the label that has been given to assets for which credible evidence of value is simply “unavailable.” As a consequence, various assumptions have to be made by “appraisers.”)

Our experience over many years is that a few such assumptions turn out to be adequate -- when a sale to an independent party eventually occurs. However, many other “values” are far off target. The “melt-down” in recent years in real estate prices is but one example.

IFRS is based on the belief that credible “current market values” are readily available in most countries. Such generally is not close to being valid. Yet, supporters of IFRS choose to not face the reality. Such is beyond strange because IFRS is anchored to a falsehood.

Level 3 in essence is an admission that credible dollar figures are simply not available, many times. A figure in dollars and percentages of perhaps 25% or more of assets being Level 3 “investments” should worry most investors, and potential pensioners.

*??????? “Rolling loans.” Prior to Canada adopting IFRS (in roughly 2012), a scary issue involved the impact of recording losses or not on loans, and thereby determining the dollars of legitimate “income.” Two major bank failures in 1985 in Canada forced a tightening of requirements, obligating the prompt recording of bad debts. From 1996 to 2012 Canadian financial reporting required prompt recording of loan bad debt expense. In contrast, IFRS “watered down” the promptness requirement, and allows trickery.

A “rolling loan” involves a lender having to issue additional money to its initial or original borrower, because overdue interest needs to be paid to the lender. The bank or lender can falsely thereby avoid recording a bad debt expense for unpaid interest revenue. As a result, income and owners’ equity are kept at false levels. However, with “rolling loans” cash never left the bank’s premises, but future losses were not avoided. Delayed recording of bad debts is an especially troublesome aspect of IFRS. Similarly, fluctuating interest rates directly affect IFRS “values,” and loan collection.

Such practices of rolling delinquent loans are not easy to detect quickly, nor to quantify. Dubious disclosure in financial statements has to be tracked, and compared over time, to what is happening in the local economy. IFRS generally avoids requiring prompt recording of such bad debts, and similar “cover-ups.” Close monitoring is thus advised because the dollars involved can be huge.

*??????? IFRS’ permission to allow non-cash valuation “estimates” to be called current income creates a series of other problems for investors. Most government taxation authorities do not tax such “income” (because it is not real). This in itself should tell investors that this type of “non-cash” income is “suspect,” or worse. Yet, other dangers arise because borrowings of cash become necessary, especially if the company is paying cash dividends. What is the source of the needed cash? Do you know?

U.S. GAAP reporting of income can usually be cross-checked for reasonableness against “cash from business operations.” IFRS’ separation of its reported “income” from its cash from operations obligates investors to do their own calculations of an entity’s liquidity and solvency. Is the needed cash coming from further borrowings (with high interest involved), or sales of assets, or sales and leasebacks, or combinations? In brief, IFRS can fairly easily mask growing cash/liquidity problems, and needs investor attention. Sudden corporate failures can occur (and have occurred).

*??????? Several other examples of IFRS’ deficiencies can be mentioned, but space is limited in one article. Much of IFRS reporting has to be categorized as “suspicious” because it is often loose, and easy to manipulate, and typically is poorly regulated.

*??????? Under IFRS simple trickery can be built into large dollars of investor losses. For example, an uncollectible account receivable from XYZ can be hidden from having to be recorded as a bad debt expense, by:

(a)?? re-labelling the fake current receivable and calling it a non-current receivable; then, after a few months

(b)?? again, re-label the non-current receivable as an “investment in XYZ” (being a fake “research” company, having alleged “great potential,” and therefore worthy of being on an IFRS balance sheet).

The moral of the story is that when you observe just a few dirty reporting tricks, sell your shares quickly. Lousy ethics are being displayed (such as by using pliable IFRS). What more evidence do you need elsewhere to escape? You do not have to identify a batch of nasty reporting. No receipts of cash, for instance, means “run-away-fast.”

Reported IFRS income is likely to be faked. If it were real income, it surely would be being taxed, year-by-year.