Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, October 2009
On October 16, 2009, the Canadian Securities Administrators (CSA), except the Autorité des marchés financiers and the New Brunswick Securities Commission, published for comment amendments (the Proposed Amendments) to National Instrument 81-106 Investment Fund Continuous Disclosure (the Instrument) and Companion Policy 81-106CP Investment Fund Continuous Disclosure (the Policy). The Proposed Amendments form part of a series of amendments that address proposed changes to Canadian securities legislation arising from the upcoming changeover to International Financial Reporting Standards (IFRS).
The Proposed Amendments have been published for a 90-day comment period which expires on January 14, 2010. Those submitting comment letters should be aware that a copy of their comment letters will be made publicly available on the websites of the Ontario Securities Commission and certain of the other securities regulatory authorities.
THE PROPOSED AMENDMENTS
The Instrument currently refers to Canadian generally acceptable accounting principles (GAAP) for purposes of financial reporting by Canadian publicly accountable enterprises. By 2011, Canada will move to IFRS, a set of principles-based accounting standards issued by the International Accounting Standards Board (IASB) in London, U.K. For financial years beginning on or after January 1, 2011, Canadian GAAP for publicly accountable enterprises will be IFRS incorporated into the Canadian Institute of Chartered Accountants (CICA) Handbook.
In order to accommodate the transition to IFRS, the Proposed Amendments:
- require investment funds, for financial years beginning on or after January 1, 2011, to prepare financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises and to report compliance with IFRS, and
- update the accounting terms and phrases in the Instrument to reflect that, for financial years beginning on or after January 1, 2011, Canadian GAAP for publicly accountable enterprises will be IFRS incorporated into the CICA Handbook.
The CSA has published blacklined versions of the Instrument and Policy that show the proposed changes.
The Proposed Amendments are not intended to substantively alter Canadian securities law requirements applicable to investment funds.
The CSA has highlighted, and is seeking feedback on, the following two changes to the accounting principles currently used by investment funds:
1. Classification Of Investment Fund Securities (Puttable Instruments)
Currently, the Instrument contemplates that the securities issued by investment funds are usually classified as equity. Under IFRS, however, investment funds will have to make a choice.
The CSA Notice accompanying the Proposed Amendments notes that International Accounting Standard (IAS) 32 Financial Instruments: Presentation classifies a puttable financial instrument as a financial liability, unless the instrument has certain features, in which case it is classified as an equity instrument. Generally, puttable instruments are securities which are redeemable by the securityholder. As most investment funds issue redeemable securities, investment funds will have to determine if their securities are puttable instruments and, if so, whether they should be classified as financial liabilities or as equity instruments.
While the classification of an investment fund's securities as either equity instruments or financial liabilities will affect the presentation of the financial statements, the CSA does not expect it to impact other aspects of investment fund disclosure such as performance or management expense ratios.
The CSA is seeking feedback on this approach to the treatment of the classification of securities issued by investment funds.
The CSA Notice states that under current Canadian GAAP, the requirement to consolidate does not apply to investment funds that account for their investments at fair value in accordance with Accounting Guideline 18 Investment Companies. Further, that current Canadian GAAP differs from IFRS as IAS 27 Consolidated and Separate Financial Statements applies to all entities including investment funds and stipulates that "a subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation, mutual fund, unit trust or similar entity."
The IASB is currently reviewing the consolidation requirements under IFRS. Until the IASB provides a decision on these requirements, the Proposed Amendments contemplate that:
- investment funds will prepare and file consolidated financial statements (other than the statement of investment portfolio), if required by IFRS;
- the statement of investment portfolio will be prepared on a non-consolidated basis;
- the statement of investment portfolio will be audited; and
- the financial highlights in the management reports of fund performance will be presented on a non-consolidated basis.
The CSA is seeking feedback on this approach to consolidation for investment funds. It would like specific information about the impact of consolidation on Canadian investment funds, including an analysis and determination of how this standard will be applied and the consequences to the presentation of the financial statements.
The CSA is of the view that the consolidation requirement will not impact the calculation of net asset value, as this calculation must continue to be done using the fair value standard established in the Instrument. However, the requirement to consolidate could result in additional differences between net assets (as shown on the financial statements) and net asset value, which could impact the reconciliation of these amounts required to be disclosed in the notes to the financial statements. The CSA is asking whether this will result in any additional presentation issues.
PUBLICATIONS IN QUEBEC AND NEW BRUNSWICK
Concurrently with the Proposed Amendments, the Autorité des marchés financiers and the New Brunswick Securities Commission have published for comment staff notices setting out the substantive changes reflected in the Proposed Amendments. According to the CSA, because of the legal obligation to publish amending instruments simultaneously in French and English in Quebec and New Brunswick, and because the French IFRS terminology is still in a state of flux, publication for comment of amending instruments in these provinces is presently not feasible. It is expected that the Autorité des marchés financiers and the New Brunswick Securities Commission will publish for comment corresponding amending instruments, in French and in English, during the first quarter of 2010. However, the CSA is encouraging investment funds in Quebec and New Brunswick to comment on the substantive proposed changes presented in the staff notices and on the Proposed Amendments.
CONSEQUENTIAL AMENDMENTS/CONSISTENCY WITH PRIOR PROPOSALS
The changeover to IFRS will also result in certain consequential amendments to other rules and forms applicable to investment funds, including the prospectus rules (Form 41-101F2 Information Required in an Investment Fund Prospectus and National Instrument 81-101 Mutual Fund Prospectus Disclosure, including Form 81-101F1 Contents of Simplified Prospectus).
The Proposed Amendments are consistent with the CSA's proposal to repeal and replace National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (to be renamed Acceptable Accounting Principles and Auditing Standards) (NI 52-107), published for comment on September 25, 2009. The Proposed Amendments are also consistent with proposed changes to National Instrument 51-102 Continuous Disclosure Obligations, National Instrument 41-101 General Prospectus Requirements and National Instrument 14-101 Definitions also published for comment on September 25, 2009.
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