OSC cautions issuers: Improve MD&A disclosures regarding IFRS changeover

Most Canadian companies have now begun their IFRS transition year—the year for which the opening balance sheet and interim financial statements will ultimately be restated using IFRS. In addition, management, audit committees and boards are now or will soon be scrutinizing the company’s 2009 annual Management’s Discussion & Analysis (MD&A), and considering whether it provides investors with meaningful information about the company’s upcoming changeover to IFRS.

In OSC Staff Notice 52-718, released on February 5, 2010, the Ontario Securities Commission:

• underscores the importance to investors of disclosures that are specific to the issuer
• provides additional guidance for issuers regarding their future MD&A filings
• cautions issuers to be prepared—going forward, regulators will be giving close scrutiny to IFRS-related disclosures in MD&A and, as required, will request re-filings or take other regulatory actions.

This Staff Notice provides valuable input for senior management, audit committees and boards, as well as thought-provoking illustrations of meaningful disclosures.

Using the OSC’s recent observations and guidance, companies can consider what information their investors and regulators need and want. Applying this insight, they can assess whether their 2009 annual MD&A is providing appropriate and adequately detailed information. In particular, in addition to updating past disclosures, 2009 annual MD&A should describe the major identified differences between the issuer’s current accounting policies and those the issuer is required or expects to apply in preparing IFRS financial statements.

The Staff Notice will also help companies in developing interim MD&A disclosures through 2010 that provide investors with meaningful and increasingly detailed information as the changeover date approaches.

IFRS disclosures in MD&A: Generally falling short of expectations

The Canadian Securities Regulators (CSA) provided initial guidance in Staff Notice 52-320 (May 2008) on the disclosures expected from issuers adopting IFRS. Based on their recent review of IFRS-related MD&A disclosures, OSC staff indicate that, to date, most issuers have fallen well short of the CSA’s expectations:

• 40 percent of issuers made no mention of an IFRS changeover plan in their MD&A disclosure—and received letters from OSC staff questioning whether a changeover plan was in place.
• Among the issuers that did discuss their IFRS changeover plan
  • approximately half made only a generic reference to an IFRS changeover plan, with no direct application to their own situation.
  • 80 percent failed to describe significant milestones and expected timelines for key elements of their plan.
  • 48 percent failed to provide quarterly updates in 2009 interim MD&A on their progress in implementing their changeover plan.

Ideas for improving entity-specific disclosures

OSC staff recognize that investors are increasingly interested in assessing a company’s progress in its transition to IFRS and want to understand the impact IFRS will have on its financial statements.

In their review, OSC staff therefore focused on the key elements of an IFRS changeover plan, as outlined in the initial CSA Staff Notice 52-320. Among the 60 percent of issuers that did include IFRS transition disclosure in their MD&A, apparently only a small proportion provided comprehensive discussion of the impact that IFRS would have on each element:

12% Accounting policies
  9% Internal control over financial reporting
  6% Disclosure controls and procedures
  9% Financial reporting expertise
  4% Business activities
11% IT systems

To help issuers in filing future MD&A, the Staff Notice discusses each of these areas in more detail, highlighting ways to provide enhanced disclosure. The accompanying examples provide thought-provoking illustrations of entity-specific disclosures.

In addition, OSC staff point out that issuers need to discuss the milestones and timing for key elements of their project, and provide meaningful quarterly MD&A updates.

Disclosure expectations increasing through 2010

OSC staff remind issuers that, as they move through 2010, their disclosures should include more detailed information about the expected effects of IFRS—providing significant details of their conversion plan, and describing their policy choices under IFRS 1 First-time Adoption of International Financial Reporting Standards. In addition, the issuer should include in its MD&A quantified information about the impact of IFRS on key financial statement line items, when the issuer has this information.

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