Accountability e-Lert
October 8, 2010 – ISSUE 2010-04
CSA Adopts IFRS-Related
Changes to Securities Rules
On October 1, 2010, the Canadian Securities Administrators (CSA) published National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards and its Companion Policy, as well as related amendments to other national instruments and policies, including continuous disclosure, prospectus, certification, and registration requirements. The CSA had published proposed versions of the National Instrument, the Companion Policy, and related national instruments for comment on September 25, 2009.
The changes to existing rules are required to recognize the following changes to the CICA Handbook:
- Effective for annual periods beginning on or after January 1, 2011, all publicly accountable enterprises must adopt IFRS as contained in Part I of the CICA Handbook. Existing Canadian GAAP (prior to changeover to IFRS) is included as Part V of the Handbook. Part I and Part V are each 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 application of the new requirements in NI 52-107 for financial years beginning on or after January 1, 2011, is deferred for up to 1 year for entities subject to rate regulation, consistent with the 1-year deferral from IFRS granted by the CICA’s Accounting Standards Board for such entities.
Final rules significantly align with proposals
With the exception of the rules with respect to acceptable accounting principles for business acquisition statements, the final rules are not significantly different from the proposed rules.
The final rules provide 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.
Domestic issuers
- Requires domestic issuers with financial years beginning on or after January 1, 2011, to:
- Prepare annual and interim financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises (that is, IFRS as contained in Part I of the CICA Handbook)
- Make an unreserved statement of compliance with IFRS in the notes to their annual financial statements, and an unreserved statement of 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 audits of financial statements prepared in accordance with a fair presentation framework
- Eliminates the Canadian GAAP reconciliation requirements for Canadian SEC issuers who adopt 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.
Domestic registrants (e.g., registered dealers, advisors, investment fund managers)
- Requires domestic registrants with financial years beginning on or after January 1, 2011, to:
- Prepare financial statements and interim financial information in accordance with Canadian GAAP applicable to publicly accountable enterprises except that any investments in subsidiaries, jointly controlled entities, and associates must be accounted for as specified for separate financial statements in IAS 27, Consolidated and Separate Financial Statements. Separate financial statements are sometimes referred to as non-consolidated financial statements
- Make a statement in the annual financial statements that they have been prepared in accordance with the financial reporting framework specified in National Instrument 52-107, Acceptable Accounting Principles and Auditing Standards, and to describe that framework
- Deliver auditor’s reports accompanying their financial statements in the form specified by Canadian generally accepted auditing standards for audits of financial statements prepared in accordance with a fair presentation framework
- Allows the exclusion of prior period comparative information in financial statements and interim financial information for periods relating to a financial year beginning in 2011.
Acquisition statements – harmonized approach
Under the final CSA rule, 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, the CSA will accept acquisition statements prepared using Canadian GAAP applicable to private enterprises (ASPE) provided certain conditions are met, including:
- That financial statements for the acquired business had not previously been prepared in accordance with either Canadian GAAP applicable to publicly accountable enterprises, IFRS, US GAAP, principles used by an SEC foreign issuer, or principles meeting the requirements of a relevant designated foreign jurisdiction
- That the acquisition statements consolidate any subsidiaries and account for significantly influenced investees and joint ventures using the equity method
- That a notice using prescribed wording accompany the acquisition financial statements highlighting the fact that ASPE was used as the basis of preparation, which differs from Canadian GAAP applicable to publicly accountable enterprises and that pro forma information is available elsewhere in the document, which includes adjustments to conform the accounting principles of the (to be) acquired business to the accounting principles of the issuer
- For documents filed by an issuer that is not a venture issuer and is not an IPO venture issuer (e.g., a TSX issuer), the notes to the acquisition statements provide a reconciliation to the issuer’s GAAP and certain additional disclosures for all financial years and the most recently completed interim period presented. The reconciliation to the issuer’s GAAP for the most recently completed financial year must be audited.
The CSA notes that it intends to re-examine the issue of accounting principles permitted for acquisition statements after IFRS and ASPE have been in use for 2 years.
An additional change in the final CSA rule is that the CSA will accept acquisition statements prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises, IFRS, US GAAP, or principles used by an SEC foreign issuer without requiring reconciliation to the issuer’s GAAP. For example, a Canadian issuer preparing financial statements in accordance with IFRS that acquires a US entity that has historically prepared its financial statements in accordance with US GAAP will not be required to reconcile the US GAAP acquisition statements to IFRS in the document.
The CSA has also modified the description of the accounting framework for acquisition statements that are an operating statement for an oil and gas property or “carve-out” financial statements (i.e., based on information from the financial records of another entity whose operations included the [to be] acquired business and there are no separate financial records for that entity). In these cases, the final rules contain certain requirements for the preparation of such statements. The rules also indicate that the acquisition statements must contain a specified statement, which indicates that the financial statements were prepared in accordance with National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards, as well as a description of the framework.
Other reporting requirements
In certain instances, the CSA requires disclosures beyond those required by IFRS in interim reports:
- As previously proposed, the final rules require inclusion of an opening IFRS statement of financial position as at the date of transition to IFRS (i.e., January 1, 2010, for a calendar year adopter), along with various reconciliations relating to the date of transition
- The final rules 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
- Reclassifies items in its financial statements.
When a separate income statement is presented, it is required to be presented immediately before the statement of comprehensive income.
The CSA has streamlined the requirements for 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 3-month period.
Consistent with IFRS requirements, the presentation currency is to be prominently displayed in the financial statements and the financial statements must disclose the functional currency if it differs from the presentation currency.
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, for example:
- 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 existing provisions, or amend or delete such provisions, 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.
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