The Canadian Securities Administrators (CSA) today released an updated version of Staff Notice 81-320 regarding the adoption of IFRS by investment funds in Canada. The notice was first published in October 2010, and revised in March 2011. Ultimately, the revisions to the notice reflect the fact that the Accounting Standards Board has extended the mandatory changeover date to IFRS for investment funds to January 1, 2014. According to the AcSB, the deferral reflects the likelihood that the IASB will not issue proposed guidance on investment entities before January 1, 2013.
Last week, the OSC's Office of the Chief Accountant published a staff notice highlighting selected areas of interest with respect to financial reporting in the era of IFRS, and identifying areas for closer examination during 2012. Among other things, the notice considers: (i) the level of compliance with certain features of IFRS 3 Business Combinations; (ii) accounting for business combinations under common control; and (iii) the application of the requirements of IAS 36 Impairment of Assets. According to the OSC, the objective of the notice is to provide market participants with information that may assist in preparing financial reports during 2012.
The CSA announced today that it has updated Staff Notice 52-306 (Revised) to provide further guidance on the disclosure of additional GAAP measures presented under IFRS. Among other things, the revised notice provides a list of suggested practices to help issuers and certifying officers address obligations in relation to additional GAAP measures. The notice was last updated in November 2010.
The Alberta Securities Commission recently released its annual Corporate Finance Disclosure Report for 2011, which sets out the results of its continuous disclosure reviews for the past fiscal year. In addition to performing full continuous disclosure reviews, the ASC also conducted issue-oriented reviews focused on the first quarter interim filings of reporting issuers that transitioned to IFRS.
Ultimately, the report highlights recurring issues found in reporting issuers' disclosure, including such things as gaps in financial statements relating to reverse takeover transactions, deficiencies in the disclosure of risk factors and assumptions used to develop forward looking information, and insufficient environmental disclosure.
While the ASC stated that it was generally satisfied with the results of its IFRS-focused reviews, the report cited a slight increase in the amount of refilings requested (from 14% to 16% of issuers reviewed). Notably, the proportion of financial statement refilings increased significantly, from 17% of refilings to 43%. Issues that the ASC observed included missing financial statements, unclear transition impact, boilerplate accounting policy disclosure and lack of identification of IFRS 1 exemptions taken. The report also provides practice tips and examples of disclosure for the benefit of reporting issuers preparing to file their first annual IFRS financial statements.
Finally, the report also reviews disclosure made in offering documents filed by reporting issuers where Alberta is the principal regulator. Deficiencies found in such documents included insufficient disclosure regarding use of proceeds and oil and gas activities.
The CSA published a staff notice today in response to inquiries about the financial information to be included in a prospectus during the time of an issuer's transition to IFRS. As we have previously discussed, Canadian reporting issuers have generally been required to transition to IFRS effective as of January 1, 2011.
Specifically, the notice highlights the difference between the information required when preparing an IPO prospectus (which must include Q1 IFRS transition information) as opposed to a short form or non-IPO long form prospectus (which need not). Q1 IFRS transition information refers to an opening statement of financial position as at the date of transition to IFRS and IFRS 1 reconciliations for the date of transition to the most recent annual period. The notice also discusses accounting principles for financial statements in prospectuses filed in the first year after transition.
For more information, see CSA Staff Notice 41-306.
OSC Corporate Finance Branch clarifies prospectus financial disclosure issues in connection with IFRS transition
On August 18, the OSC's Corporate Finance Branch released clarification on issues relating to financial disclosure required in a prospectus arising out of the transition to International Financial Reporting Standards (IFRS). As we have previously discussed, Canadian reporting issuers have generally been required to transition to IFRS effective as of January 1, 2011. Specifically, the Corporate Finance Branch release provides guidance on the presentation of IFRS transition information in prospectuses, as well as the use of GAAP for financial statement disclosure in prospectuses filed in and after the issuer’s transition year.
With respect to the presentation of transition information in prospectuses, the release outlines the difference in requirements between an IPO prospectus (which must include an opening statement of financial position at the date of transition to IFRS, as well as IFRS 1 reconciliations for the date of transition and the most recent annual period) and a short form prospectus or a non-IPO long form prospectus (which are not required to include the above information).
With respect to an IPO prospectus in the year of transition, the release clarifies that the annual financial statements required for the previous three years are not required to be converted into IFRS. However, the interim financial report for the most recent interim period, along with the comparative interim financial statements for the corresponding period in the previous year, would still have to be prepared in accordance with IFRS.
Finally, in cases where an IPO prospectus is filed in the first year after transition (2012), an issuer has three options with respect to the presentation of historical annual financial statements. Specifically, IFRS may be used for the three most recently completed years (2009, 2010 and 2011) or IFRS may be used for 2011 and 2010 and Canadian GAAP used for either 2009 and 2010, or 2008 and 2009. In either case, the issuer would be including financial disclosure above and beyond what would normally be required, in that financial statements for the 2010 financial year would be included twice or a fourth year back would have to be included.
This release follows three prior releases published by OSC staff on issues relating to the transition to IFRS. For more information, see OSC Corporate Finance - IFRS Release No. 4.
OSC Corporate Finance Branch identifies IFRS filing deficiencies and publishes IFRS filing checklist
On May 19, the OSC's Corporate Finance Branch issued a notice identifying deficiencies found in issuers' first IFRS interim financial reports for the quarter ending March 31. Specifically, the notice discussed deficiencies related to missing IFRS 1 reconciliations, missing opening IFRS statements of financial position and missing statements of changes in equity. The OSC reminded issuers that internal control over financial reporting (ICFR) and disclosure controls and procedures (DC&P) should be robust enough to address the transition to IFRS and the notice stated that non-compliant issuers would be placed on a list of defaulting reporting issuers until deficiencies were remedied. Issuers with deficient disclosure will be expected to refile interim financial reports, along with revised CEO/CFO certificates.
To help issuers deal with some of these issues upfront, the Corporate Finance Branch issued a checklist earlier this week listing key elements of a first IFRS interim financial report (which is still relevant given the extended deadline for the first IFRS interim filing, which we discussed in our post of April 11). Tip sheets for issuers with year-ends of March 31, June 30 and September 30 are also available.
In response to a letter from the Center for Audit Quality, the U.S. Securities and Exchange Commission has stated that foreign private issuers that prepare financial statements in accordance with IFRS will not be required to submit, or post online, interactive data files (using XBRL), until the SEC specifies a taxonomy for use in preparing such interactive data files. For more on the SEC's requirements for Interactive Data Files, see our post of February 18, 2009.
On April 12, the CSA published a notice regarding the adoption of IFRS by Canadian investment funds. As we discussed in a blog post of March 24, the CSA recently decided to delay the implementation of IFRS for investment funds to reflect the decision by the Canadian Accounting Standards Board to defer the transition to IFRS for investment companies to January 1, 2013.
In light of the delay by the IASB in publishing for comment a proposal to exempt investment companies from consolidating entities that they control, and the deferral of the IFRS transition date, CSA staff now intend to implement previously proposed IFRS-related amendments to National Instrument 81-106 Investment Fund Continuous Disclosure, subsequent to review and revision, prior to January 1, 2013.
Last week, the Canadian Securities Administrators (CSA) issued a Staff Notice in response to questions they have received regarding disclosure about accounting policies in issuers' interim and annual MD&A. While the CSA previously issued a staff notice addressing disclosure for periods preceding the changeover to IFRS, the current notice considers issues relating to the year of changeover.
Specifically, the notice considers Item 1.13(b) of Form 51-102F1 Management's Discussion & Analysis regarding the initial adoption of new accounting policies. The notice clarifies that while Item 1.13(b) of 51-102F1 does not apply to accounting policies initially adopted as a result of a changeover to IFRS, Item 1.13(b) applies to an issuer voluntarily changing accounting policies subsequent to filing the first interim financial report (other than due to the early adoption of a new or revised IFRS standard). Further, management may want to provide information regarding significant entity-specific features of the issuer's transition to IFRS.
The notice also states issuers should consider discussing "significant differences" between MD&A disclosure made prior to changeover to IFRS and information disclosed in the current period regarding accounting policy choices. According to the notice, issuers should also consider disclosing information pertaining to IFRS transition in one section of the MD&A and separately from the discussion of financial performance and financial condition.
For more information, see CSA Staff Notice 52-328.
Issuers filing their first IFRS interim financial report should keep in mind that the filing deadline has been extended by 30 days. This extension is available in respect of the first interim financial report required to be filed in the year of adopting IFRS provided that the issuer (i) is disclosing a statement of compliance with International Accounting Standard 34 Interim Financial Reporting for the first time, and (ii) has not previously filed financial statements that disclosed compliance with IFRS. The usual 45 and 60 day deadlines are consequently extended to 75 days for non-venture issuers and 90 days for venture issuers. This extension also applies to the corresponding MD&A required to be filed.
As such, non-venture issuers with a December 31st year-end will now have until June 14, 2011 to file their first IFRS interim financial report, while venture issuers will have until June 29. According to the OSC, the extension was made "to recognize the fact that the first IFRS interim financial report will be due shortly after the filing of the Canadian GAAP annual financial statements for fiscal 2010."
This extension has been added on a transitional basis to National Instrument 51-102 Continuous Disclosure Obligations in connection with the implementation of final amendments to NI 52-107 Acceptable Accounting Principles and Auditing Standards as discussed in our post on November 26, 2010.
The Canadian Securities Administrators yesterday released an updated version of Staff Notice 81-320, first published on October 8, 2010, regarding the adoption of IFRS by investment funds (as defined in securities legislation and subject to National Instrument 81-106 Investment Fund Continuous Disclosure) in Canada. The revised version of the notice reflects the recent decision by the Canadian Accounting Standards Board to further defer the transition to IFRS for investment companies to January 1, 2013. In the meantime, investment funds are expected to continue to provide appropriate disclosure about the anticipated impact of the changeover to IFRS in accordance to the guidance provided in Staff Notice 52-320.
As we discussed in a post last year, IIROC proposed amendments to its Form 1 in August 2010 to harmonize the standards used to comply with the financial reporting requirements of Form 1 with IFRS as much as possible. The OSC has now approved the amendments, with revisions. The amendments came into effect as of February 28, 2011 and are for the period beginning January 1, 2011. While the approved amendments do not include the changes initially proposed to the definition of "market value of securities", IIROC has indicated that a change in definition is forthcoming in the months ahead.
A number of departures from IFRS, however, have been made, including (i) reporting of client and broker trading balances on a net basis or gross basis; (ii) treating preferred shares as regulatory capital; and (iii) presenting the financial statements on a non-consolidated basis. Meanwhile, Dealer Members that meet certain criteria will be able to request a deferral for one year on the implementation of IFRS, except for certain specified departures. For more information, see IIROC Notice 11-0082.
As we discussed in an earlier post, the CSA published amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure, its companion policy and related forms in October in furtherance of their project to implement point of sale disclosure for mutual funds. The Ontario Minister of Finance has now approved the amendments, with minor modifications, which will become effective on January 1, 2011.
The Minister also recently approved the IFRS-related amendments referred to in our post of October 1 (with minor modifications). Generally, the amendments affect continuous disclosure rules, prospectus rules, certification rules and registration materials and also come into force on January 1, 2011.
Earlier this week, the Ontario Securities Commission published an online guide to assist issuers in preparing their first IFRS interim financial report. The issues and tips reviewed in the guide include: (i) changes to acceptable accounting principles; (ii) discussion of a 30 day filing extension for an issuer's first IFRS interim report; (iii) the consequences of missing financial statement filing deadlines, which may include a cease trade order; (iv) suggested financial statement notes to include in the first IFRS interim financial report ; and (v) required reconciliations under IFRS 1, including an example of an equity reconciliation. According to the OSC, its goal in publishing the guide is "to help facilitate a smooth regulatory transition, which will benefit both issuers, their advisors and their investors".
As discussed in our post of October 1, the CSA have published final amendments to NI 52-107 Acceptable Accounting Principles and Auditing Standards and other related instruments and policies relating to the transition to IFRS for reporting issuers and registrants. These amendments take effect on January 1, 2011. The IFRS transition for investment funds, meanwhile, has been deferred for now, to January 1, 2012, as discussed in our post of October 8.
The Canadian Securities Administrators today published an update to CSA Staff Notice 52-306 Non-GAAP Financial Measures and Additional GAAP Measures in light of the upcoming changeover to IFRS. Specifically, the notice has been amended to include, among other things, specific guidance to issuers regarding additional GAAP measures required by IFRS. The CSA also published IFRS-related amendments today to National Policy 41-201 Income Trusts and Other Indirect Offerings. NP 41-201 provides guidance on measures of cash available for distribution and is being updated to reflect changes to NP 52-306.
On October 15, the Ontario Securities Commission (OSC) released its Investment Funds Branch Annual Report for 2010 as well as its Compliance and Registrant Regulation Branch Annual Report.
The Investment Funds Branch (IF) report provides an overview of the IF Branch's major policy initiatives for the year (including with respect to the CSA's point of sale project and the modernization of investment fund product regulation) and also describes the IF Branch's ongoing reviews of the prospectus and continuous disclosure filings of Ontario-based investment funds.
Meanwhile, the Compliance and Registrant Regulation (CRR) Branch report summarizes the CRR Branch's activities and initiatives for the year (including, notably, with respect to registration reform), provides information for firms and individuals applying for registration for the first time and reviews its findings for the normal course reviews it conducted of regulated registrants. With respect to the latter, the CRR Branch found that the percentage of firms requring "significantly enhanced compliance" rose from 32% in fiscal 2009 to 50% in fiscal 2010. Meanwhile, referrals to the enforcement branch due to serious breaches of securities law jumped from 4% to 10% of field reviews.
General deficiencies identified by the CRR Branch included improper marketing practices on the part of large portfolio managers, inadequate written policies and procedures on the part of newly registered portfolio managers and prohibited investments for investment funds.
The Canadian Securities Administrators (CSA) published an update today regarding their plans for requiring adoption of IFRS by Canadian investment funds. As we discussed in October 2009, the CSA proposed amendments to NI 81-106 Investment Fund Continuous Disclosure last year that would have required investment funds to transition to IFRS by January 1, 2011. The Accounting Standards Board (AcSB) recently decided, however, to defer the mandatory IFRS changeover date for investment companies in order to give the International Accounting Standards Board time to implement a proposed exemption for investment companies from having to consolidate investments they control. As the CSA would prefer that the proposed IASB consolidation exemption be in place before requiring investment funds to transition to IFRS, the CSA intend to wait before seeking approval for, or republishing IFRS-related amendments to NI 81-106. The new goal for IFRS implementation for investment funds is now January 1, 2012.
The Canadian Securities Administrators (CSA) today published IFRS-related amendments to a number of national instruments and companion policies with the intention of reflecting the transition to IFRS and updating accounting terms and references. Generally, the amendments affect continuous disclosure rules, prospectus rules, certification rules and registration materials and make housekeeping changes to various instruments. Assuming that all required Ministerial approvals are granted, the amendments will come into force on January 1, 2011.
On August 27, the Investment Industry Regulatory Organization of Canada (IIROC) published proposed amendments to Form 1, used to monitor the financial solvency of dealer members. The proposals would include amendments to the "market value" definition in Form 1 to adopt the mandated IFRS valuation approach, except where value cannot be reliably measured in which case IIROC has proposed an alternative approach. While IIROC's proposals are intended to harmonize the standards used in financial reporting with IFRS as much as possible, a number of departures from IFRS are proposed. These include reporting of client and broker trading balances on a net basis, treating preferred shares as regulatory capital and presenting the financial statements on non-consolidated basis. IIROC is accepting comments on its proposals for 60 days from the date of publication of the notice.
The Canadian Securities Administrators (CSA) today released CSA Staff Notice 52-326 IFRS Transition Disclosure Review, which provides an assessment of IFRS transition disclosure made by issuers in 2009 annual MD&A. The review, which was completed in consideration of disclosure guidance provided in May 2008, ultimately found an improvement in the amount and quality of transition disclosure. Specifically, findings included:
- 95% of issuers reviewed disclosed their IFRS transition plans;
- 60% of issuers described milestones and anticipated timelines associated with key elements of their transition plans;
82% of issuers identified significant accounting policy differences between Canadian GAAP and IFRS; and
- 80% of issuers provided an update of transition information from 2008 disclosure.
The CSA did, however, identify various areas for improvement. For example, despite the fact that the vast majority of issuers disclosed their transition plans in their MD&A, many failed to discuss key elements of their plans. According to the CSA, "[f]or each key element of an IFRS changeover plan discussed in MD&A, issuers should have described the significant milestones and anticipated timelines." The CSA also stated that issuers should consider whether they can communicate quantified information in 2010 interim and annual MD&A prior to final approval of IFRS balances.
It is expected that the CSA will continue to review IFRS transition disclosure as part of their overall continuous disclosure review program and that issuers should expect requests to refile MD&A if disclosure obligations are not met. Thus, the movement towards the implementation of IFRS continues. As 2011 approaches, it is clear that, while issuers are making definite improvements in disclosing their IFRS transition plans, care must be taken to ensure that regulatory expectations are met.
The Canadian Financial Executives Research Foundation (CFERF) recently released the results of a survey suggesting that about half of public companies in Canada are less than 60% through their IFRS conversions. The state of readiness differs depending on company size, with larger companies reporting conversion processes that are further along.
On May 18, Ontario's Bill 16, An Act to implement 2010 Budget measures and to enact or amend various Acts, received Royal Assent. Among other things, the Bill amends section 83 of the Securities Act to once again allow the Ontario Securities Commission (OSC) to publish a list of reporting issuers who are in default of any requirement of the Act or the regulations. Amendments to the Securities Act and the Commodity Futures Act also replace certain terms with comparable terms under International Financial Reporting Standards (IFRS).
The Investment Industry Regulatory Organization of Canada (IIROC) recently released its Strategic Plan for 2010-2012. The plan describes IIROC's vision and values and sets out the challenges it faces in fulfilling its mandate. Specifically, the plan discusses the following goals:
- Promoting a culture of compliance and high standards among those subject to IIROC's jurisdiction. This will include a reorganization of IIROC's rules to enhance comprehension, providing compliance examination findings and recommendations to members and undertaking periodic industry-wide compliance audits.
- Delivering effective, efficient and expert regulation. Projects that IIROC will undertake in pursuit of this goal include the implementation of a risk-based methodology for registration and completing its framework approach to IFRS.
- Maintaining market integrity by actively monitoring market structure developments and market-related events. IIROC states that it will reduce timelines to complete enforcement investigations and bring proceedings, clarify roles and relationships in order to strengthen the client/adviser relationship and continue to develop its policies respecting OTC and debt markets.
- Ensuring that it discharges its responsibilities in a cost-effective manner, which will include the implementation of an equitable Dealer and Marketplace Member fee model.
- Maintaining a confident and well-trained staff.
The Provincial/Territorial Council of Ministers of Securities Regulation (Council) issued its 2009 Progress Report yesterday outlining the various regulatory activities undertaken last year across Canadian jurisdictions. The issues considered in the Council's Progress Report include the federal transition to a single securities regulator, the upcoming changeover to IFRS and the introduction in various jurisdictions of harmonized securities transfer legislation.
The Progress Report also provides a preview of initiatives that the Council anticipates the CSA will undertake during the next year, namely, a new rule dealing with oversight of credit rating organizations, the development of a harmonized regulatory framework for derivatives, including OTC derivatives, hedge fund regulation and executive compensation requirements.
The SEC issued a statement on Wednesday outlining its position with respect to global accounting standards. Specifically, the SEC stated that it supports "the objective of financial reporting in the global markets pursuant to a single set of high-quality globally accepted accounting standards." It recognizes, however, that incorporating IFRS into the U.S. financial reporting environment would be a large task and recognizes the need for deliberation as well as a sufficient transition time to prepare for such a change.
Thus, the SEC directed its staff to develop and execute a work plan to enhance the SEC's understanding and assist it in making a decision in 2011 regarding the incorporation of IFRS into the financial reporting system for U.S. issuers. Specifically, the work plan sets out the following areas of concern: (i) sufficient development and application of IFRS for the U.S. domestic reporting system; (ii) the independence of standard setting for the benefit of investors; (iii) investor understanding and education regarding IFRS; (iv) examination of the U.S. regulatory environment that would be affected by a change in accounting standards; (v) the impact on issuers; and (vi) human capital readiness.
Considering the time required to successfully implement a change in financial reporting, the SEC stated that should it make the decision in 2011 to incorporate IFRS, the earliest that U.S. companies would report under such a system would be approximately 2015 or 2016, although SEC staff have been asked to further evaluate this timeline as part of the work plan.
On February 5, 2010, staff of the Canadian Securities Administrators (CSA) published a staff notice (the February FAQ) addressing frequently asked questions regarding compliance with the financial reporting requirements under National Instrument 31-103 Registration Requirements and Exemptions (NI 31-103). NI 31-103 came into effect on September 28, 2009 and was the subject of an earlier FAQ published on December 18, 2009. The questions in the February FAQ were compiled from informal public enquiries received by CSA members and the responses are based on views of CSA staff.
The February FAQ focuses on addressing the challenge faced during the first year of implementation of NI 31-103 by those registrants that were previously required by the securities legislation of certain provinces to deliver audited consolidated financial statements, to comply with the requirements under section 12.11 of NI 31-103 to (i) deliver annual financial statements and interim financial information on a non-consolidated basis and (ii) to provide comparative figures.
The February FAQ provides that for financial years and interim periods ended on or between September 30, 2009 and August 31, 2010, staff will accept annual financial statements and interim financial information prepared under one of the following two options:
- non-consolidated financial statements and interim financial information with no comparative figures; or
- non-consolidated financial statements and interim financial information with non-consolidated comparative figures.
Unless otherwise exempt under National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), the annual financial statements must be prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), except on a non-consolidated basis and, if the first option is chosen, excluding comparative information. Since the annual financial statements will be prepared on a basis of accounting other than Canadian GAAP, the February FAQ provides that the financial statements must include a note describing this basis of accounting and the auditor’s report that must accompany the financial statements is to be prepared in accordance with CICA Handbook Section 5600 Auditor’s Report on Financial Statements Prepared Using a Basis of Accounting other than Generally Accepted Auditing Principles.
As a reminder - pursuant to currently proposed amendments to NI 52-107, all domestic registrants will be required to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) and report compliance with IFRS for financial years beginning on or after January 1, 2011.
On February 5, the Ontario Securities Commission published OSC Staff Notice 52-718 IFRS Transition Disclosure Review (the Notice), which summarizes the results of a review conducted by the OSC of the "extent and quality of International Financial Reporting Standards (IFRS) transition disclosures made by issuers" in light of guidance previously provided by the CSA. The review focused on IFRS transition disclosure provided in 2008 annual, and 2009 interim, MD&A. Staff of the OSC provide additional guidance under the Notice regarding expectations for future MD&A filings.
In summarizing the results of the OSC's review, the Notice states that 40% of reporting issuers reviewed did not provide IFRS transition disclosure. Of the 60% of issuers that did discuss an IFRS changeover plan in MD&A disclosure, half provided a generic description without direct application to the issuer's own circumstances. Ultimately, the OSC found that "reporting issuers are not adequately discussing, in MD&A, the key elements of their IFRS changeover plan or their progress towards achieving this plan."
In respect of future MD&A filings, the Notice states that staff expect issuers to provide more detailed information about the expected effects of IFRS as the changeover date approaches. Specifically, an issuer's 2009 annual MD&A disclosures should provide a progress update on their conversion plan, along with a description of the major identified accounting differences between the issuer's current accounting policies and those the issuer expects to apply when preparing its IFRS financial statements. In 2010, OSC staff expect issuers to provide significant details of their changeover plans and information about key decisions on policy choices under IFRS 1 First-time Adoption of International Financial Reporting Standards. Further, if an issuer has quantified information about the impact of IFRS on key financial statement line items when it prepares MD&A in 2010, the issuer should include this information in its MD&A.
Citing the importance that investors be properly informed during the transition to IFRS, OSC staff state that they will conduct reviews of selected 2009 and 2010 annual and interim MD&A filings and follow up on commitments made by issuers to improve future disclosure. According to the Notice, OSC staff may also consider other regulatory action as circumstances warrant.
The Mutual Fund Dealers Association of Canada (MFDA) yesterday released a bulletin regarding the upcoming transition to IFRS. The bulletin follows up on an earlier request for comment published by the MFDA in June 2009 that considered whether to require all MFDA Members to submit financial reporting to the MFDA based on IFRS or whether to limit the requirement only to those Members that would likely be considered "publicly accountable enterprises".
Despite concern that a universal requirement would increase costs for those Members that would not otherwise be required to convert to IFRS, the MFDA has decided to adopt the new standard for all Members. According to the MFDA, this approach will not have a significant impact on Members and ensures "that consistent, fair and cost-effective regulatory oversight of the membership continues." Further, the MFDA intends to publish proposed changes to reporting requirements and appropriate departures from IFRS (such as where the regulatory benefit from requiring IFRS compliance would be minimal) sometime in the future.
On November 20, 2009, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-330 Guidance Regarding the Application of Forward-Looking Information Requirements under NI 51-102 (the Staff Notice). The purpose of the Staff Notice is to outline results of the CSA’s continuous disclosure reviews conducted on compliance with the forward-looking information (FLI) requirements in National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102). These FLI requirements under NI 51-102 came into effect on December 31, 2007, replacing the previous requirements under NP 48. A wide range of documents were reviewed for the purposes of the continuous disclosure review (including AIFs and MD&A), and while a number of improvements were requested by staff in future filings, the reviews did not result in any issuers having to re-file any documents in order to correct identified deficiencies.
The Staff Notice highlights deficiencies noted by staff as well as areas where, in staff’s view, disclosure can be enhanced. The areas covered by the Staff Notice include the following:
Identification of FLI
The Staff Notice highlights that issuers have taken different approaches to identification of FLI (as required by section 4A.3 of NI 51-102), including that many issuers identified material FLI solely through a cautionary paragraph at the beginning or end of the disclosure document. Where issuers do identify material FLI in such manner, the CSA have encouraged issuers to give readers an indication of the nature of the material FLI covered in the document, which, in staff's view, would allow an investor to more readily identify material FLI in the document in question.
Disclosure regarding material risk factors and material factors or assumptions
In respect of the requirement to identify material risk factors and material factors or assumptions, (as required under section 4A.3 of NI 51-102) staff note that various issuers have either neglected to discuss the underlying factors or assumptions or stated that there were factors or assumptions without identifying them: disclosure which, in their view, does not satisfy the requirements of NI 51-102. With respect to the issue of incorporating relevant material risk factors and material factors or assumptions by reference, the Staff Notice states that while NI 51-102 does not preclude this, issuers should consider whether incorporation by reference enables a reader to readily inform himself or herself of the material risk factors, and material factors or assumptions, associated with the material FLI. The Staff Notice also cautions that issuers should avoid “boilerplate” disclosure, and strive to disclose material risk factors and material factors and assumptions that are relevant to the FLI being presented. Finally, staff are also encouraging issuers to consider using more user-friendly formats for disclosing FLI, such as tables or other methods that allow readers to clearly link specific material risk factors and material factors and assumptions to the particular FLI.
Disclosure of goals or targets, purpose of FLI and updating requirement
With respect to the disclosure of goals or targets, the purpose of FLI and the requirement to update FLI, the Staff Notice advises that:
- in certain circumstances, disclosure of a goal or target can constitute FLI (namely, where the achievement of the target or goal would be "possible" based on assumptions about future economic conditions and courses of action) and that in such circumstances, the disclosure should comply with the requirements of NI 51-102;
- the requirement (under section 4B.3(b) of NI 51-102) to disclose the purpose of the FLI and caution readers that the information may not be appropriate for other purposes is in addition to the material risk factors and material factors or assumptions disclosure generally required by section 4A.3, and that disclosure of material risk factors and material factors or assumptions contained in a cautionary paragraph at the beginning or end of a document generally will not satisfy this requirement; and
- that section 5.8(2) of NI 51-102 requires issuers to update previously disclosed FLI in certain circumstances, as such, issuers should ensure their policies comply with these requirements and should not be making statements to the effect that the issuer does not assume any obligation to update FLI.
Finally, the Staff Notice reminds issuers that future-oriented financial information (FOFI) or a financial outlook must be based on the accounting policies that the reporting issuer expects to use to prepare its historical financial statements for the period covered. As reporting issuers will be required to transition to international financial reporting standards (IFRS) for fiscal years beginning on or after January 1, 2011, this means that issuers should ensure that FOFI and financial outlooks that cover their 2011 fiscal year are based upon IFRS.
Yesterday, Quebec's Autorité des marchés financiers (AMF) released its Continuous Disclosure Review Program Activity Report for the fiscal year ending March 31, 2009. The report presents the findings of the AMF's review of the continuous disclosure documents of Quebec-based companies and investment funds. The AMF stated in its release that it focused its reviews on financial services companies and those with high indebtedness given the credit and liquidity challenges experienced over the last year.
While the report found a high quality of disclosure records overall, the AMF noted that deficiencies were found in the application of accounting requirements, specifically with respect to financial instrument disclosure. Thus, the AMF encouraged issuers "to rigorously apply all GAAP and to pay special attention to new accounting requirements." The AMF also noted that for the 2009-2010 fiscal year, it will be particularly focused on disclosure relating to the upcoming changeover to IFRS and the recent amendments to the CICA Handbook regarding fair market measurements.
On November 5, the International Accounting Standards Board (IASB) and the U.S.Financial Accounting Standards Board (FASB) released a statement reaffirming their commitment to improving IFRS and U.S. GAAP and to bring about their convergence. The joint statement also described the boards' plans and milestone targets for individual projects.
The Canadian Securities Administrators (CSA) published a notice today regarding proposed amendments to National Instrument 31-103 Registration Requirements and Exemptions, its companion policy and National Instrument 33-109 Registration Information. The proposed changes relate to the impending transition to IFRS and follow proposals respecting IFRS-related changes to investment fund disclosure and prospectus and registration exemptions published last week. Specifically, the immediate amendments include replacing existing Canadian GAAP terms and phrases with IFRS terms, providing registered dealers and investment fund managers a 15-day extension for delivery of their first IFRS interim financial information for an interim period beginning on or after January 1, 2011 and providing registrants with an exemption from the requirement to provide comparative information for financial years beginning in 2011. The CSA are accepting comments on the proposals until January 21, 2010.
The Financial Post recently published an article that considered the upcoming transition to IFRS and the decision for small businesses on whether to adopt the new standard. Simon Romano, a partner in Stikeman Elliott's Toronto office, was quoted in describing the potential benefits to small businesses electing to make the transition.
CSA publish proposed amendments to prospectus and registration exemption instrument arising from upcoming changeover to IFRS
The Canadian Securities Administrators today also published a notice regarding proposed amendments to National Instrument 45-106 Prospectus and Registration Exemptions, its companion policy and forms. The proposed amendments are intended to replace Canadian GAAP terms with IFRS terms, change disclosure requirements where IFRS contemplates different financial statements than existing Canadian GAAP, provide a 30-day extension for reporting issuers to include in an offering memorandum the first interim financial report in the year of adopting IFRS in respect of an interim period beginning on or after January 1, 2011 and clarify, amend or delete provisions that are no longer appropriate.
The Autorité des marchés financiers and the New Brunswick Securities Commission in Quebec and New Brunswick, respectively, are publishing staff notices for comment that set out the substantive proposed changes reflected in the proposals published by the other CSA jurisdictions. However, due to the requirement to publish proposed amending instruments in French and English, and because French IFRS terminology has not been settled, these regulators are not yet able to publish the proposed amendments for comment. Further amending instruments dealing with French IFRS terminology are expected to be published in early 2010.
Comments on the proposals are being accepted by the CSA until January 18, 2010.
CSA publish proposed changes to investment fund continuous disclosure instrument arising from upcoming changeover to IFRS
The Canadian Securities Administrators published a notice today regarding proposed amendments to National Instrument 81-106 Investment Fund Continuous Disclosure, its companion policy and certain other rules and forms that address the upcoming changeover from Canadian GAAP to International Financial Reporting Standards (IFRS). This notice forms part of a series of notices that address various changes required to be made to securities rules to accommodate the transition to IFRS. The proposals are intended to accommodate the transition to IFRS by requiring that investment funds prepare financial statements in accordance with Canadian GAAP for publicly accountable enterprises and report compliance with IFRS for financial years beginning on or after January 1, 2011 (for financial years beginning on or after January 1, 2011, Canadian GAAP for publicly accountable enterprises will be IFRS incorporated into the CICA Handbook). Terminology found within NI 81-106 will also be updated to accommodate the transition. The proposed amendments are not intended to substantively alter securities law requirements but are required in order to cover terminology differences between Canadian GAAP and IFRS and to reflect changes to financial statement presentation that will result. Two of the changes highlighted in the notice in this respect are the classification of securities issued by investment funds and consolidation.
Notably, the Autorité des marchés financiers and the New Brunswick Securities Commission in Quebec and New Brunswick, respectively, are publishing staff notices for comment that set out the substantive proposed chages reflected in the proposals published by the other CSA jurisdictions. However, due to the requirement to publish proposed amending instruments in French and English, and because French IFRS terminology has not been settled, these regulators are not yet able to publish the proposed amendments for comment. Further amending instruments dealing with French IFRS terminology are expected to be published in early 2010.
Comments on the proposals are being accepted by the CSA until January 14, 2010.
CSA publish proposed amendments to NI 52-107 to reflect transition to IFRS and notice of proposed consequential amendments to continuous disclosure, prospectus and certification rules
The Canadian Securities Administrators (CSA) today published for comment proposed amendments to National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107) and its companion policy as well as related consequential amendments to National Instrument 14-101 Definitions. As previously discussed, International Financial Reporting Standards (IFRS) will apply to Canadian publicly accountable enterprises for financial years beginning on or after January 1, 2011. The amendments are intended to "provide an efficient transition mechanism for issuers and registrants to reflect the change to IFRS".
The Canadian Accounting Standards Board (AcSB) has announced that it plans to incorporate IFRS into the Handbook of the Canadian Institute of Chartered Accountants (the CICA Handbook) as “Canadian GAAP for publicly accountable enterprises.” As a result, Part 1 of the CICA Handbook will contain a version of Canadian GAAP to be known as Canadian GAAP for publicly accountable enterprises that will apply for financial years beginning on or after January 1, 2011, and Part IV will contain a version known as Canadian GAAP for public enterprises that are the standards constituting Canadian GAAP before the mandatory effective date (current Canadian GAAP).
The proposed amendments therefore require that, for financial years beginning on or after January 1, 2011, domestic issuers prepare financial statements in accordance with part 1, or Canadian GAAP applicable to publicly accountable enterprises, and report compliance with IFRS. A domestic issuer who is also an SEC issuer will continue to have the option to use U.S. GAAP. The proposed amendments also require that for financial years beginning on or after January 1, 2011, domestic registrants prepare financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises (except that financial statements must account for investments in subsidiaries, jointly controlled entities and associates as specified for separate financial statements in Canadian GAAP applicable to publicly accountable enterprises), and report compliance with IFRS (except that the financial statements account for investments in subsidiaries, jointly controlled entities and associates as specified for separate financial statements in IFRS). Registrants will continue to be required to provide their financial statements on a non-consolidated basis in order to facilitate identification of potential concerns with a registrant’s capital adequacy and financial solvency.
In connection with the proposed amendment to NI 52-107, amendments are also proposed to be made to the continuous disclosure, prospectus and certification rules, including NI 51-102 Continuous Disclosure Obligations, NI 71-102 Continuous Disclosure and other Exemptions Relating to Foreign Issuers as well as the prospectus rules, National Instrument 41-101 General Prospectus Requirements, National Instrument 44-101 National Instrument, National Instrument 44-102 Shelf Distributions and National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. Notably, these amendments have been published for a 90-day comment period by all members of the CSA other than the Autorité des marchés financiers and the New Brunswick Securities Commission.
The primary purpose of these proposals is to accommodate the transition to IFRS, although other changes are also being proposed.
The published proposals are open for comment with respect to the changeover to IFRS until December 24, 2009.
Staff of the Canadian Securities Administrators (CSA Staff) released a staff notice today summarizing the results of their continuous disclosure review program for the 2009 fiscal year. During fiscal 2009, which ended March 31, CSA Staff completed 1,094 continuous disclosure reviews of reporting issuers other than investment funds, a 28% increase from the last fiscal year. CSA Staff noted that the deficiencies in continuous disclosure were generally in either the Management's Discussion and Analysis (MD&A) or financial statements and provided highlights of some of the more common deficiencies. Review outcomes were categorized and 48% of outcomes fell into the "prospective changes" category, which required the issuer to make changes in its next filing as a result of identified deficiencies. CSA Staff also identified areas of focus for the next fiscal year, including notably, disclosures of IFRS changeover plans in the MD&A.
As part of the Investment Industry Regulatory Organization of Canada (IIROC) staff analysis on the adoption of IFRS in Canada, a survey of dealers was undertaken in early 2009 "to gauge the dealer membership's awareness and understanding of IFRS and to determine the impact of the implementation of IFRS compared to current regulatory reporting of the dealer member's business." Today, IIROC published a rules notice releasing the results of the survey as well as IIROC staff's recommendation that IFRS be adopted by all dealer members. Exemptions from specific accounting standards, however, are recommended, including exemptions from: (i) certain specific note disclosure requirements; (ii) the production of comparative financial data for the first IFRS financial statements; and (iii) the valuation of receivables and payables. Comments on the notice are being accepted by IIROC until September 14, 2009.
The Canadian Securities Administrators (CSA) today published a staff notice updating registrants on the CSA staff's position on whether all non-SRO registrants should be required to use International Reporting Standards (IFRS) beginning in 2011. In September 2008, the CSA published a notice considering the impact of the changeover to IFRS for registrants that are not members of an SRO. Non-SRO registrants, including investment counsel and portfolio managers, limited market dealers, exchange-contracts dealers and scholarship plan dealers do not fall under the definition of publicly accountable enterprise (PAE) and are, therefore, technically not covered by the Canadian Accounting Standard Board's implementation plan relating to mandatory adoption of IFRS.
According to today's notice, the CSA propose that all non-SRO registrants also be required to adopt IFRS for financial years beginning on or after January 1, 2011, regardless of whether the non-SRO registrants falls within the definition of a PAE. Once the new registration categories set out in National Instrument 31-103 Registration Requirements are adopted, the CSA propose that the requirement to use IFRS apply to those categories as well, again, regardless of whether the registrant is a member of an SRO. The Mutual Fund Dealers Association of Canada, the Investment Industry Regulatory Organization of Canada and the Autorité des marchés financiers in Quebec will separately provide notice to their members of the use of IFRS.
The International Accounting Standards Board (IASB) yesterday announced that it has issued a final version of its International Financial Reporting Standard (IFRS) for small and medium-sized entities (SMEs). SMEs are described as entities that publish general purpose financial statements for external users such as owners that are not involved in managing the business, creditors and credit rating agencies, but that do not have public accountability. According to the IASB, the IFRS for SMEs will "provide improved comparability for users of accounts; enhance the overall confidence in the accounts of SMEs; and reduce the significant costs of maintaining standards on a national basis." The IFRS for SMEs simplifies many of the principles of full standards and is a result of a number of years of working group development, round-table meetings and field-tests of a draft IFRS.
While the Canadian Accounting Standards Board (AcSB) has stated that the standard for SMEs will not be adopted in 2011 along with IFRS for publicly accountable companies, it is conceivable that the new standard will become a requirement at some point in the future.
On September 30, 2008, the Investment Industry Regulatory Organization of Canada (IIROC) issued Notice 2008-0113 regarding the adoption of International Financial Reporting Standards (IFRS). Notice 2008-0113 stated that IIROC would require progress reports on the adoption of IFRS from dealer members by April 1, 2009.
On February 23, 2009, however, IIROC released a notice stating that in lieu of a progress report, dealer members will be required to complete a survey, which will be sent to the CFOs of each dealer member. The purpose of the survey will be to "assist dealer members in their self-assessment of the impact to adopt IFRS" and IIROC intends to use the results to "identify implementation issues and next steps".
As the Canadian implementation date for the changeover from Canadian generally accepted accounting principles (Canadian GAAP) to international financial reporting standards (IFRS) approaches, the broad potential impact is becoming more apparent. The Canadian Accounting Standards Board (CASB) has adopted a transition plan that requires adoption of IFRS by public companies (and certain others, including non-listed financial institutions and securities dealers) for financial years beginning on or after January 1, 2011. While 2011 may still seem a long way off, given the substantial differences between IFRS and Canadian GAAP, it would not be untimely for issuers to now begin thinking about transition issues and developing a transition plan.
As stated in the Canadian Securities Administrators’ recent staff notice (discussed in detail below), moving from Canadian GAAP to IFRS is a significant undertaking that may materially affect an issuer’s reported financial position and results of operations.1 Among other things, IFRS-compliant financial statements for fiscal 2010 will also be necessary for comparative purposes. Outside of the official transition from Canadian GAAP to IFRS, Canadian public entities would be wise to start educating their boards and audit committees about these standards and the ways in which they may differ from Canadian GAAP. This has been underscored by the CASB's recent response to the credit crunch with respect to fair value accounting requirements. On October 17, 2008, the CASB announced that it would be amending Canadian GAAP requirements relating to reclassification of financial assets to make them more consistent with IFRS and U.S. standards in this respect. IFRS is a global reality that will soon be coming to Canada, that is, if it isn’t already here.
Impact on Business
The transition from Canadian GAAP to IFRS will impact a wide range of activities, including those that may seem to have little connection to a company’s disclosed financial position. The first and most obvious impact of the move to IFRS concerns the effect on the presentation of the financial position of an entity as set out in its financial statements. IFRS, like Canadian GAAP, to an extent, represents a statement of principles; principles that must be applied based on judgment and assumptions given the specific facts at hand. With the change to IFRS, not only will many principles change, but arguably, so will many of the more rigid prohibitions or rules that have become a part of Canadian GAAP over time (whether through practice or prescription). For example, IFRS allows for more fair value and accounting policy choices and may, as a result, be open to a greater degree of interpretation and professional judgment. New principles underlying the presentation of financial measures suggest potential changes not only to the way in which things are measured, but also changes to what is included in the measurement, when it is measured and in what period it is disclosed. This could impact a variety of financial statement line items and in turn, impact all areas of business that refer or rely on those line items. Further, while IFRS primarily represents a change in Canadian GAAP measures, non-GAAP measures (i.e. EBIDTA, distributable cash, etc.) may also be impacted and these effects will need to be assessed and managed as well.
Transition issues, however, extend beyond simply dealing with changes to financial reporting. Consideration must also be given to terms of existing or new contracts that refer to, or rely on, financial measurements. References in such contracts to commonly occurring phrases such as “in accordance with Canadian GAAP” may, for example, now become contentious interpretive issues. Consideration must also be given to terms of compensation arrangements or plans based on, or connected to, financial targets or measures, internal budgeting and forecasting (including forecasting and modeling for significant acquisitions or similar transactions), changes to compliance procedures, including internal control and disclosure controls and procedures, and tax matters that are derived from Canadian GAAP. If entering into a contract or considering an acquisition today, the IFRS transition should be kept in mind. Will the contracting party make choices consistent with your expectations about financial measures? Will the acquisition target also be moving to IFRS and if so, what policy choices will it make? These are just some of the questions that should come to mind as your company moves towards 2011. The impact on these aspects of business will also affect the nature of the company's disclosure. To this end, companies must consider how, what and when disclosure will be required, keeping in mind that, as the internal transition continues, external public disclosure must also to be kept current and accurate. Given the broad range of activities connected to the presentation of a company’s financial position and the general requirement that audit committee members be “financially literate”, this also means that boards and audit committees will require education on the new requirements in order to provide the stewardship necessary for a smooth transition.
CSA Notices on Transition and Disclosure
The Canadian Securities Administrators (CSA) have now also issued their guidance on a number of IFRS transition issues as well, including the CSA’s views on transition matters and on the short and long-term impact on MD&A disclosure.
Concept Paper 52-402
On February 15, 2008, the CSA published Concept Paper 52-402 (the Concept Paper) to discuss ramifications for securities laws and rules as a result of the impending transition from Canadian GAAP to IFRS.2 The purpose of the Concept Paper was to set out some of the issues that arise as a result of the impending transition, including the options available to address them. The issues on which the Concept Paper focused are limited to early adoption of IFRS by domestic issuers, continued use of US GAAP by domestic issuers and references to Canadian GAAP in securities regulatory materials. But, as the CSA cautioned, the review of issues in the Concept Paper was not exhaustive and the conclusions set out were tentative only.
By way of background, National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107), which currently sets out acceptable accounting principles for financial reporting for Canadian and non-Canadian reporting issuers as well as for foreign registrants and other capital markets participants, requires reporting issuers to disclose on the basis of Canadian GAAP. SEC registrants, however, are given the option of using US GAAP and foreign reporting issuers are given the option of using IFRS. Recognizing that domestic issuers may want to move to IFRS prior to 2011, the most significant among the tentative conclusions made in the Concept Paper was that the CSA may allow Canadian domestic issuers to voluntarily move to IFRS before then. Such an action may be of benefit to domestic subsidiaries of foreign-based parents that must comply with IFRS, domestic issuers with significant foreign operations and foreign-based subsidiaries that must comply with IFRS, domestic issuers that are SEC registrants and that may wish to take advantage of the SEC’s recent decision to allow foreign private issuers to comply with IFRS (without US GAAP reconciliation), and Canadian entities considering an IPO in Canada and the U.S. prior to January 1, 2011. For those choosing to adopt early, the CSA indicated they may be inclined to permit adoption as early as the financial year beginning January 1, 2009. Subsequent to the publication of the Concept Paper, on June 27, 2008, the CSA published Staff Notice 52-321 (Staff Notice 52-321), in which they provided more clarity on some of the tentative IFRS issues being considered. Among these issues, the CSA have clarified that they would be prepared to recommend exemptive relief to permit a domestic issuer to adopt IFRS early on a case by case basis. However, in order to recommend such relief the CSA will be looking for evidence that the issuer is prepared for early adoption, which will include the readiness of its staff, board of directors, audit committee, auditors, investors and other market participants (raising the question as to how an issuer might establish their readiness). The CSA will also assess readiness based on preparedness for the implications of early adoption on its securities law obligations, including certifications, business acquisition reports, offering documents and previously released material forward-looking information.
In considering early adoption, however, the CSA caution that issuers should carefully consider the advantages and disadvantages associated with such a move. As the CASB first confirmed in its decision to move to IFRS in 2006, an in-depth knowledge of the new standard is still developing in Canada. This is true of external auditors as well as internal accounting and finance personnel. Issuers wanting to adopt IFRS before 2011 need to ensure adequate deployment of resources to address this gap, as well as adequate education and training for boards and board committees. It is also important to note that the Office of the Superintendent of Financial Institutions has issued a notice indicating that federally regulated financial firms will not be permitted to adopt IFRS early.
With respect to internal resources, issuers should keep in mind that early adoption entails making the transition far in advance of the date that IFRS compliant financial statements will be required. Thus, early adopters will need to prepare both Canadian GAAP and IFRS statements in the years prior to the official adoption date, and related internal control and compliance systems will also need to be modified as necessary. The strain on an issuer’s resources may be further exacerbated by the fact that IFRS itself is new, and in many respects, application practices are still being developed. IFRS is also not without its shortcomings, many of which are starting to emerge through the experiences of countries and regions that have already made the transition. While we may have lost a few years in terms of global standardization, we have the opportunity to learn from the transition hurdles faced by others and the value of this hindsight cannot be overlooked. As an illustration, the SEC has recently announced the signing of protocols to allow for the sharing of information among the SEC and a number of European countries with respect to the application of IFRS.3
Although we have much to learn from these experiences, each country will also have its own unique issues based on its characteristics and idiosyncrasies, whether motivated by regional, economic or other concerns. The transition for Canadian issuers in certain types of industries or businesses may, therefore, be more difficult to manage, and for some uniquely Canadian industries and businesses it remains untested. As well, some of the IFRS standards themselves are expected to be modified in the coming years. In this respect, it is also quite likely that the International Accounting Standards Board will make some concessions, in the form of further changes to IFRS, in order to accommodate adoption in the U.S. Another issue to consider is the disadvantage associated with reduced comparability of financial statements until other issuers generally move to IFRS in 2011. This may be mitigated if Canadian GAAP statements are concurrently prepared, but would consume added time and expense to duplicate the process. Regardless of these challenges, however, some issuers may still benefit from early transition. For example, a domestic issuer that is a subsidiary of a foreign-based entity may realize substantial cost savings by moving to IFRS early.
As set out in NI 52-107, certain Canadian domestic issuers may currently rely on US GAAP for the presentation of their financial statements. In preparing for the transition to IFRS, the CSA originally indicated in the Concept Paper that they proposed to eliminate such exemptions for financial years in stages beginning on or after January 1, 2009. The CSA would have eliminated the US GAAP option for issuers who had not filed statements in accordance with US GAAP on or before the year ended December 31, 2008. Issuers currently filing US GAAP statements, however, were proposed to be given an extended transition period that would span from 2009 to 2013. However, according to CSA Staff Notice 52-321, the CSA have decided to retain the option for a domestic issuer that is also an SEC issuer to continue to use US GAAP, without any indication of a cut-off date for the availability of this option. The CSA have also acknowledged that while issuers in certain types of industries may have heightened concerns about how IFRS will impact their financial presentation, ultimately, those issuers may not have a choice with respect to continuing with US GAAP depending on the outcome of the IFRS implementation debate currently underway in the U.S. 4
Another issue addressed by the Concept Paper regards how the CSA will deal with references to Canadian GAAP in various securities rules, policies and instruments after transition occurs. In Staff Notice 52-321 the CSA have confirmed, as well, that references in securities rules to financial statement requirements will be changed to require issuers to prepare their statements in accordance with IFRS-IASB. This is notwithstanding the fact that the CASB's strategic transition plan proposes to import IFRS into Canadian GAAP and then continue to refer to such standards as Canadian GAAP. What is in a name, one might ask? Consider, however, the documents, disclosures and other materials that refer to, or rely on references to applicable accounting standards. If the IASB and the CSA continue as planned, and given that current Canadian GAAP is expected to continue for private companies, there is a potential for significant confusion if the same standards are referred to by different names. Continued use of different terminology also detracts from the goal of promoting comparability on a global scale.
CSA Staff Notice 52-320
Following publication of its Concept Paper, the CSA also published CSA Staff Notice 52-320 - Disclosure of Expected Changes in Accounting Policies. This notice details how disclosure in each of the three financial years preceding January 1, 2011 may be impacted by the implementation of IFRS. Given the potential impact on an issuer’s reported financial position and results of operations, as well as certain business functions, the CSA caution that investors and other market participants should be given timely and meaningful information about these matters in the lead-up to the transition date. Specifically, Form 51-102F2 Management Discussion and Analysis (MD&A) will be impacted in that it requires issuers to discuss and analyze any changes in the issuer’s accounting policies that it has adopted or expects to adopt, including changes due to new accounting standards that an issuer does not have to adopt until a future date.
Changes required in order to transition to IFRS are caught by this disclosure. The CSA advise that disclosure with respect to transition issues should include: a description of the new accounting standard; disclosure of methods of adoption permitted and the method expected to be used by the issuer; and a discussion of the expected effects on the issuer’s financial statements and the potential effects on the issuer’s business.
The CSA acknowledge that an issuer may only be able to provide limited information on these items in the few years prior to adoption of IFRS. Issuers will, however, be expected to provide more meaningful information in the year immediately prior to adoption, including meaningful quantified information. Thus, detailed IFRS related disclosure requirements will apply for the annual period ending December 31, 2010 and all interim periods in that year. Issuers should, therefore, be prepared to have the capability to produce this information in 2009 or earlier.
Meanwhile, with the implementation of secondary market civil liability in many Canadian jurisdictions, a misrepresentation in the MD&A can form the basis for a claim of misrepresentation from secondary market purchasers. Issuers should, therefore, be mindful of this risk when preparing forward-looking disclosure (regarding items such as expected effects on financial statements and potential impact on business) as recommended in CSA Notice 52-320.
With respect to the three years preceding the implementation of IFRS, CSA Notice 52-320 details the type of disclosure that should be considered for interim and annual MD&A.
Three Years to Go
In the annual period ending December 31, 2008 and all interim periods during that period, if the issuer has developed an IFRS changeover plan, the CSA advise that the issuer should discuss the key elements and timing of such a plan in the interim MD&A and the status of key elements no later than the annual MD&A for the year beginning three years prior to the changeover (for issuers with a December 31 year-end, this means no later than the annual MD&A for the year ended December 31, 2008). Key elements of such a changeover plan may include a discussion of the impact of IFRS on some of the following areas:
- accounting policies, including choices among policies permitted under IFRS, and implementation decisions such as whether certain changes will be applied on a retrospective or a prospective basis;
- information technology and data systems;
- internal control over financial reporting;
- disclosure controls and procedures, including investor relations and external communications plans;
- financial reporting expertise, including training requirements; and
- business activities, such as foreign currency and hedging activities, as well as matters that may be influenced by GAAP measures such as debt covenants, capital requirements and compensation arrangements.
Further, if an issuer is advanced in its changeover plan at the time of preparing its interim and annual MD&A during the 2008 fiscal year, the CSA recommend that the issuer should also discuss the impact on its financial reporting.
Two Years to Go
In the interim periods in the 2009 fiscal year, the CSA recommend that the issuer provide an update of the progress of its IFRS implementation plan and any changes to the plan. For the annual MD&A relating to this period, the CSA recommend that the issuer discuss its preparation to transition to IFRS. In addition to the details outlined above, matters to be discussed could include major identified differences between accounting policies, which may include any differences due to an expected change in accounting policy even though the issuer's existing policy under Canadian GAAP is permissible under IFRS. While the information need not be quantitative, the CSA caution that it should allow investors to understand what elements of the issuer’s financial statements are expected to be impacted by the changes. In identifying the accounting policies that an issuer is required or expects to apply under IFRS, the CSA also advise that an issuer should consider policies that exist under IFRS as of the date of the MD&A. This is particularly relevant given that some IFRS standards are expected to be modified prior to 2011. In this respect, the CSA’s advice is that if an issuer has considered work that the IASB has in process, it would be well advised to disclose any assumptions made about expected or anticipated future changes to IFRS.
One Year to Go
By fiscal 2010, issuers are expected to provide a more detailed discussion about their implementation plans and the impact on their financial position. For this year, however, the CSA advise that, in addition to the items summarized above, issuers should also discuss decisions about accounting policy choices available under IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) in addition to other relevant IFRS standards. Under IFRS 1, issuers will be required to disclose comparative and reconciliation information in the interim and annual financial statements for the 2011 fiscal year. In order to do this, issuers will need to prepare quantified information regarding the impact of IFRS on each line item presented in the financial statements for the interim and annual periods of the year preceding the changeover (i.e. likely the 2010 fiscal year). The CSA also advise that if quantified information about the impact of IFRS on the key line items is available when an issuer prepares its interim and annual MD&A for the financial year beginning one year before an issuer's changeover date, an issuer should include this information in its MD&A.
The ease or pain associated with transition to IFRS will depend on a number of different factors for different issuers. The industry in which an issuer operates, the nature of its business and the resources invested will all have an effect on the ease with which an issuer is able to make the transition. Transition issues will include potential changes to important contracts containing financial covenants or other measures based on the financial statements and include not only those that are imposed on an issuer by, for example, creditors, but also those that the issuer may be relying on its suppliers, service providers or other counterparties to maintain. Where IFRS makes available options relating to choice of standards or principles, boards may want to consider determining the impact of choosing one over another, and whether they want to get an early start in lobbying for a particular choice where one is available. Companies, as well as their executives and compensation committees may also want to take a closer look at targets or other measures used to calculate components of their compensation and determine whether any changes are appropriate. As planning continues, issuers will also need to seek to ensure that their internal compliance processes, internal controls over financial reporting and disclosure controls and procedures evolve to meet these changing needs. As well, CEOs and CFOs that must provide certifications regarding these controls and procedures, as well as an issuer’s annual filings will want to ensure that transition issues are addressed well in advance of the relevant interim and annual filing deadlines. The transition will also be affected by the choices that regulators make. For example, securities regulators will have to determine how do deal with historical and pro forma financial statement disclosure requirements in prospectuses, business acquisition reports and proxy circulars.
Finally, there have been some criticisms of IFRS providing too much management flexibility and, thus, reducing the quality of financial reporting. While it remains to be seen if this is indeed the case, even assuming that critics are correct, there remains an incentive for the sake of better international comparability in a globalizing investment marketplace to effect such a transition. While commentators have also expressed concern that private company Canadian GAAP will atrophy once Canadian private companies have moved to IFRS, this too remains to be seen. Thus, the movement towards implementation continues, and early planning must be considered by issuers to effect a successful transition.5
1 CSA Staff Notice 52-320 (2008) 31 OSCB 4744 at p. 4744.
2 (2008) 31 OSCB 1697.
3 SEC Press Release 2008-95, SEC Signs Protocols for Sharing Information on International Accounting Standards, May 23, 2008.
4 At the time of writing this paper, the most recent indication from the Securities and Exchange Commission, as contained in its proposed “Roadmap Toward Global Accounting Standards” was that the Securities and Exchange Commission would determine in 2001 whether it would move to IFRS for U.S. issuers beginning in 2014.
5 This paper has been adapted from a version originally published in the journal “Corporate Disclosure”, Volume 11, No. 1, 2008.
On September 30, IIROC published a notice setting out its position and providing guidance to its Dealer Members regarding the adoption of IFRS. As they are considered to be "publicly accountable enterprises", Dealer Members will also be subject to the Canadian Accounting Standards Board's decision to move from Canadian GAAP to IFRS as of January 1, 2011. This notice sets out IIROC's views on some of the transition issues raised by the move to IFRS for Dealer Members, including IIROC's decision not to permit early adoption prior to January 1, 2011. The notice also reminds Dealer Members that they are required to conduct their own firm-specific impact assessments and conversion planning (which may require the input of outside expertise), and that they will be required to submit progress reports on their conversion plans, with the first report to be due by April 1, 2009. While the conversion date is January 1, 2011, as set out in the notice, Dealer Members will need to start planning for and implementing necessary changes well prior to 2011, including running parallel IFRS-based accounting records for up to a year prior to conversion. Some of the critical and regulatory reporting dates are also set out in the notice.
CSA Staff Notice 33-313 was published on September 12, 2008 and details the impact of the changeover to IFRS for registrants that are not members of an SRO (non-SRO registrants).
Under the current plans of the Canadian Accounting Standards Board (the AcSB), IFRS will replace Canadian GAAP effective January 1, 2011 for publicly accountable enterprises (PAEs). While many registrants are considered PAEs and will have to move to IFRS according to the AcSB’s implementation plan, others, mainly non-SRO registrants, do not fall under the definition of PAE and are technically not covered by the AcSBs implementation plan. These include investment counsel and portfolio managers, limited market dealers, exchange-contracts dealers, scholarship plan dealers and, if amendments to the registration regime are adopted under proposed NI 31-103, will also include new categories of exempt market dealers and investment fund managers.
For all of these registrants, the Staff Notice identifies that if they hold or have access to any client assets, the CSA will expect them to comply with IFRS, which includes preparing both financial statements and working capital calculations in accordance with IFRS as opposed to Canadian GAAP. The Staff Notice also cautions that the move from Canadian GAPP to IFRS may also affect certain business functions, thus, planning for the changeover should be started soon, if not already underway. For those who do not hold or have access to any client assets, the CSA are still reviewing whether they should be mandated to use IFRS, and if so, what the appropriate implementation date should be for such a change.
On Wednesday, the SEC also voted to publish a proposed roadmap that could lead to the adoption of International Financial Reporting Standards (IFRS) beginning in 2014. The roadmap provides several milestones that lead to a 2011 decision on whether adoption of IFRS occurs.
CSA Staff Notice 52-321 is an update to CSA Concept Paper 52-402 published in February 2008 and sets out conclusions that the CSA staff have reached on the following issues (which represent some but not all issues raised in the concept paper):
- Early adoption of IFRS: Staff are prepared to recommend exemptive relief for issuers wanting to transition to IFRS before January 1, 2011. However, if a domestic issuer has previously filed financial statements prepared in accordance with Canadian GAAP or US GAAP for interim periods in the first year that the issuer proposes to adopt IFRS the staff will recommend that the issuer file revised interim financial statements prepared in accordance with IFRS-IASB, revised interim management discussion and analysis, and new interim certificates.
- Staff are proposing to retain the exemption in NI 52-107 for a domestic issuer that is also an SEC issuer to continue to use US GAAP.
- Staff are proposing to retain references to IFRS-IASB (instead of referring to post 2011 principles as Canadian GAAP), however, issues relating to the availability of an appropriate French translation of IFRS and reference to both IFRS-IASB and Canadian GAAP are continuing to be considered.
The Canadian Securities Administrators (CSA) published Concept Paper 52-402 (Concept Paper) on February 15, 2008 to discuss ramifications for securities rules as a result of the impending transition from Canadian GAAP to International Financial Reporting Standards (IFRS, as issued by the International Accounting Standards Board (IASB)). As the Canadian Accounting Standards Board (AcSB) has adopted a transition plan to move to IFRS for years beginning on or after January 1, 2011, the CSA must now consider implications of this move on securities laws and regulations.
The purpose of the Concept Paper is to set out some of the issues that arise as a result of the impending transition, including the alternatives available to address them. The CSA caution that the review of issues presented is not exhaustive and that the conclusions set out in the paper are tentative only. The following is a summary of some of the issues raised in the Concept Paper, along with the CSA's tentative proposals to address them:
Early adoption of IFRS by domestic issuers
The CSA propose allowing domestic issuers to voluntarily move to IFRS prior to January 1, 2011. Some of the reasons cited for this tentative conclusion include early adoption benefits for:
- domestic issuers that are subsidiaries of foreign-based parents that must comply with IFRS;
- domestic issuers with significant foreign operations and foreign-based subsidiaries who must comply with IFRS;
- domestic issuers who are SEC registrants and wish to take advantage of the SEC's recent decision to allow foreign private issuers to comply with IFRS (without US GAAP reconciliation); and
- Canadian entities considering an IPO in Canada and the U.S. prior to January 1, 2011.
Use of US GAAP by domestic issuers
With respect to domestic issuers who currently rely on the exemptions under National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency in order to prepare financial statements in accordance with U.S. GAAP, the CSA propose to eliminate such exemptions (thus requiring Canadian GAAP filing) for financial years beginning on or after January 1, 2009. This effective "early transition deadline" would not apply to issuers who currently file or will have filed U.S. GAAP financial statements for the most recent year ending on or before December 31, 2008: such issuers would have a five year transition period for moving to IFRS, spanning from 2009 to 2013.
Other issues addressed by the Concept Paper include how the CSA will deal with references to Canadian GAAP in various securities rules. The CSA's tentative conclusion is that all such references will be changed to refer to IFRS as issued by the IASB. This is notwithstanding the fact that the AcSB's strategic transition plan proposes to import IFRS into Canadian GAAP and continue to then refer to such standards as Canadian GAAP.
Comments on the Concept Paper are requested by April 13, 2008.