CSA proposes IFRS–related changes to securities rules

On September 25, 2009, the Canadian Securities Administrators (CSA) published for comment National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards and its Companion Policy, as well as related amendments to continuous disclosure rules, prospectus rules, and the certification rule. 

The CSA indicate that they want to ensure that Canada’s market participants understand how the change from Canadian GAAP to International Financial Reporting Standards (IFRS) affects securities regulation, and are prepared when the change to IFRS is made.

The changes to existing rules are required to recognize changes in the CICA Handbook:

• Effective January 1, 2011, IFRS will be incorporated as Part I of the CICA Handbook and be applicable to all publicly accountable enterprises. (This section is referred to as “Canadian GAAP applicable to publicly accountable enterprises.”)
• Effective for audits of financial statements for periods ending on or after December 14, 2010, International Standards on Auditing will be applicable as Canadian Auditing Standards.

The proposals require that domestic issuers with financial years beginning on or after January 1, 2011:

• prepare annual and interim financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises
• make an explicit and unreserved statement of compliance with IFRS in the notes to their annual financial statements, and disclose compliance with International Accounting Standard 34 Interim Financial Reporting in their interim reports
• file auditor’s reports accompanying their financial statements that refer to IFRS and are in the form specified by Canadian generally accepted auditing standards for financial statements prepared in accordance with a fair presentation framework. 

The proposed amendments did not alter any of the previously announced positions in the CSA’s May 2009 Staff Notice 52-324 Issues relating to changeover to IFRS.  

CSA seeking comments

The CSA invite written comments on the Proposed Materials by December 24, 2009.

We draw readers’ attention to several significant new proposals that are included in the Proposed Materials, notably:

• granting an extension to the filing deadline for the first IFRS interim financial report for an interim period beginning on or after January 1, 2011
• modifying the requirements for acquisition statements
• eliminating the Canadian GAAP reconciliation requirements for Canadian SEC issuers who adopt US GAAP in financial years beginning on or after January 1, 2011.

Deadline extension for first interim filing

Recognizing the effort to comply with IFRS for the first time, the CSA have proposed providing a 30-day extension to the deadline for filing the first interim financial report in the year of adopting IFRS for an interim period beginning on or after January 1, 2011. A calendar year-end non-venture issuer would have until June 14, 2011 to file its first interim financial statements under IFRS. A venture issuer with the same year end would have until June 29, 2011.

Acquisition statements

Under the CSA proposals, the acceptable accounting principles for acquisition statements continue to be Canadian GAAP applicable to publicly accountable enterprises, IFRS, US GAAP, principles used by an SEC foreign issuer, and principles meeting the requirements of a relevant designated foreign jurisdiction. For financial years beginning on or after January 1, 2011, CSA jurisdictions, other than Ontario, are proposing to accept acquisition statements prepared using Canadian GAAP applicable to private enterprises (provided certain conditions are met) without reconciliation to the issuer’s GAAP. 

Ontario is proposing to prohibit the use of Canadian GAAP applicable to private enterprises, having concluded that acquisition statements should continue to be prepared in accordance with accounting standards required for Canadian public companies. Ontario’s conclusion would restrict the ability of reporting issuers in Ontario to reduce the financial statement complexities and costs of acquiring Canadian private enterprises. The CSA are inviting specific comment on whether issuers and other interested parties agree with Ontario’s position or that of the other CSA jurisdictions. 

US GAAP reporting option for Canadian SEC issuers

The CSA are proposing to modify the current US GAAP reporting option available to Canadian SEC issuers. A Canadian SEC issuer adopting US GAAP is currently required to reconcile from US GAAP to Canadian GAAP for its first two sets of annual financial statements after the adoption of US GAAP. This reconciliation requirement is being eliminated for a Canadian SEC issuer adopting US GAAP in financial years beginning on or after January 1, 2011. Also, a Canadian SEC issuer choosing to adopt US GAAP in 2010 will not need to reconcile to Canadian GAAP for any period in a financial year that begins after January 1, 2011.

Other reporting requirements

Generally, all financial statements are to be prepared in accordance with the same accounting principles for all periods presented in the financial statements. However, other acceptable principles (e.g., Canadian GAAP) may be permitted in the initial year of converting to IFRS, if the particular year is the earliest of three financial years. Under this provision, a calendar year-end company that was presenting in 2011 three years of financial statements would be allowed to present the 2011 and 2010 years under IFRS and the 2009 year under Canadian GAAP.  

In certain instances, the CSA are proposing to require disclosures beyond those required by IFRS in interim reports:

• As previously announced, they will require inclusion of an opening IFRS statement of financial position (i.e., January 1, 2010 for a calendar year adopter) at the date of transition to IFRS, along with various reconciliations relating to the date of transition.
• They will also require presentation of a statement of financial position, as at the beginning of the earliest period presented, when an issuer
• applies an accounting policy retrospectively
• makes a retrospective restatement of items in its financial statements, or
• reclassifies items in its financial statements.

The CSA are proposing to streamline the interim statement of cash flows to be consistent with IFRS, such that only the year-to-date period and the corresponding comparative period are presented. IFRS does not require presentation of a statement of cash flows for the most recent three-month period.

When a separate income statement is presented, the proposals require it to be presented immediately before the statement of comprehensive income.

Consistent with IFRS requirements, the proposals require the presentation currency to be prominently displayed in the financial statements and the financial statements to disclose the functional currency, if it differs from the presentation currency.

The proposals include requirements for domestic registrants (e.g., a Canadian broker, dealer, financial advisor) to file non-consolidated financial statements, as currently accepted, and provide guidance on the reporting implications for financial years beginning on or after January 1, 2011.

Other IFRS–related amendments

Other IFRS–related amendments to the CSA’s continuous disclosure rules, prospectus rules, and certification rule are not intended to substantively alter securities law requirements. These proposals:

• replace existing Canadian GAAP terms and phrases with IFRS terms and phrases
• change disclosure requirements in instances where IFRS contemplates different financial statements than existing Canadian GAAP
• clarify the existing provisions or amend or delete it where part or all of a provision is no longer accurate or appropriate.

Transition

During the transition period, two versions of the continuous disclosure rules will exist. The new versions will apply to those issuers with financial years beginning on or after January 1, 2011. Issuers with non-calendar year ends filing financial statements prepared in accordance with existing Canadian GAAP will continue to comply with the old versions of the continuous disclosures rules until their changeover to IFRS. 

French language proposals

As the French IFRS terminology is still in a state of flux, the French version of National Instrument 52-107 reflects the CSA’s best efforts to anticipate what terminology will be incorporated into the French version of Part 1 of the CICA Handbook as of January 1, 2011, after consultation with the Linguistic Services of the CICA.

Due to legal obligations in Quebec and New Brunswick to publish amending instruments simultaneously in French and English, and because of the uncertainty surrounding the French IFRS terminology, it was not feasible for those provinces to publish the related continuous disclosure, prospectus, and certification rules at this time. Publication is expected during the first quarter of 2010. 

The CSA encourages market participants in those provinces to comment on the substantive proposed changes presented in the CSA staff notices, and on the amendments published by the other CSA jurisdictions.

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