Canada: Perspectives on the Canadian banking industry - OSFI Final Advisory on the conversion to IFRS by Federally Regulated Entities

Last Updated: September 21 2010
Article by Sandra D. Mundy

The final Advisory from OSFI on accounting and capital matters related to the conversion to International Financial Reporting Standards (IFRS) by Federally Regulated Entities (FREs) was released in March 2010.

After reviewing and commenting on the draft Advisory, PwC has reviewed the final Advisory in the context of changes from the draft version. The notes which follow reflect on these changes and some of the impacts on noninsurance FREs as a result of this Advisory. These should be considered in IFRS conversion implementation plans.

Key principles or philosophies articulated by OSFI that governed their approach to determining the final Advisory

  • OSFI, under their jurisdiction, has the ability to make specifications for additional disclosures or to specify an IFRS option that is preferred, or make an IFRS option not available. They will not modify Generally Accepted Accounting Principles (GAAP) or interpret GAAP in such a way that it puts FREs offside from getting a "clean opinion" from their auditors as to the application of IFRS as globally interpreted and applied.
  • With the above ability in mind, it is still recognized that such specifications should be kept to a minimum where required, in OSFI's view, for prudential regulatory monitoring.
  • OSFI understands the importance of not creating operational inefficiencies or risk by creating differences between IFRS reporting and regulatory reporting.
  • As a user of financial information where their focus is on regulatory monitoring and supervision, it is preferred to have comparability amongst FREs in the same sector.
  • As accounting standards may derive differing balance sheet treatments for FREs, OSFI may determine that capital metrics could be adjusted in certain circumstances.

Early adoption of standards

OSFI had previously communicated that no early adoption of new IFRS standards would be allowed. Based on feedback received on the draft Advisory, the position has been slightly modified so that OSFI will consider allowing early adoption by FREs on a standard-by-standard basis once a particular IFRS is issued in final form. Therefore, as standards are issued over the course of the next two years, OSFI will look at each one individually and assess whether early adoption will be allowed. Currently, there should be no early adoption of standards which are issued but not yet in effect. This includes IFRS 9 which considers the classification and measurement of financial assets.

Therefore, entities should consider that IFRS conversion project plans will not cease once the transition is complete as the first two years after conversion are likely to see significant changes in accounting standards. The most significant area of change for lending institutions is likely to be the proposed change from an incurred loss model to an expected loss model, the changes to consolidation, derecognition and hedging, all part of a refresh of IAS 39: Financial Instruments, Recognition and Measurement.


OSFI maintains a number of disclosure Guidelines which are being revised to align with IFRS requirements. OSFI issued revised guidelines for comment in May. The revised Guideline D1 does not require any additional disclosures. However, it has been streamlined to remove duplication of the requirements already included in IFRS and it includes some specific requirements around disclosures of the loan loss allowance.


The overall principles from the draft Advisory have not changed; the accounting treatment of these transactions will drive the components of the ACM. So many FREs will see higher assets after transition to IFRS. However, there is also an indication that OSFI will start to consider an FRE's actual exposure in securitization transactions, irrespective of accounting treatment. This could mean that in the future, certain assets which currently qualify for derecognition may need to be included in the ACM. The Advisory does not indicate which types of transactions could fall into this category.

Historic securitizations done through the CMHC programs (NHA MBS, CMB and IMPP transactions) are grandfathered up to March 31, 2010. This means that assets now on balance sheet for accounting under IFRS on the financial statements which arose from these transactions before March 31, 2010 will not have to be included in the ACM, regardless of the accounting treatment. The draft Advisory outlined December 31, 2009 as the grandfathering date.

The final version also gives more specifications around reinvestments; for example, all future reinvestment assets for the grandfathered CMB or IMPP transactions will be excluded from the ACM.

The grandfathering rules do not apply to any other kind of securitization transaction so entities which have entered into significant transactions in the past outside of the CMHC programs may face significant transition challenges.

The exclusion of mortgages sold through the CMHC Programs up to March 31, 2010 from the ACM calculation will require each FRE to have the capability to track and report two views of assets. One view will include those assets which have been brought back on to the balance sheet pursuant to IFRS standards for consolidation, derecognition and related IFRS 1 provisions. The second view, required to calculate the ACM, will exclude those mortgages sold through the MBS/CMB Programs up until March 31, 2010 that are otherwise required to be re-recognized under IFRS. This will become even more complex should OSFI require certain assets which pass the derecognition test to be included in the ACM.

Loan provisioning

OSFI will require continued separate disclosure of individual and collective allowances by providing a reconciliation of changes to each of these accounts during the period. IFRS 7.37(b) also requires entities to disclose an analysis of accounts that are individually considered to be impaired. As part of this analysis, entities would typically show the balance of the allowance account related to those impaired loans, so the guideline does not appear to be asking for anything additional to what is required by IFRS 7 related to individually assessed impaired assets. This request by OSFI stems from the fact that greater transparency in a financial crisis helps to instill market confidence.

The existing OSFI guideline C-5: General Allowances for Credit Risk might be interpreted to state that FREs maintain a minimum level of general allowance. This methodology is a departure from the definition of incurred loss in IAS 39 paragraph 59. FREs will have to recognize a collective allowance based on the incurred loss approach under IFRS. Revised Guideline C-5 has been issued which removes the minimum general allowance requirement.

Items to consider:

  • FREs still need to consider how they will reconcile their methodology to ensure that it is compliant with both IFRS and OSFI requirements;
  • FREs must consider the modifications to C-5 relative to terminology of collective and individually assessed which are embedded in IFRS;
  • FREs should not lose sight of the fact that bright line tests found in Guideline C-1 should not be the sole consideration of impairment in a principles-based IFRS world. There may be instances where objective evidence of impairment is noted prior to the dates set out by OSFI (i.e. prior to 90 days past due) and as a result these additional loans should be considered as impaired under accounting rules. Conversely, a full write-off at 180 days may be inappropriate from an accounting perspective in certain circumstances, including where FREs have a history of recoveries, yet the OSFI requirement for writeoff remains in the draft Guideline.
  • OSFI has included concepts found in the BCBS paper on Sound Credit Risk Assessment and Valuation for loans. FREs should consider if their internal policies meet these requirements.

Financial Instruments—Fair value option

Guideline D-10 will remain due to OSFI's concern around the use of the Fair Value Option and the need to have a clearly documented risk management strategy.

The revised guideline states that FREs must follow the guidance in IAS 39 if opting to use the Fair Value Option. Revised D-10 does note however that the Fair Value Option should not be used for loans and mortgages to companies having annual gross revenues below $62.5 million, unless such loans and mortgages are in aggregate, immaterial. D-10 does not override the obligation to use fair value through profit and loss treatment for those loans and mortgages that by nature meet the definition of held-fortrading. Loans which are originated with the intent to sell in the near term are "held-for-trading" by nature and must be carried at fair value. They do not fall into the fair value option category.

Transition to IFRS

Recognizing the full net impact of the IFRS transition on retained earnings in available capital in the first quarter after adoption may cause some entities to breach capital ratios.

The final Advisory permits and gives clearer guidance on the phase in rules. Entities may elect to phase in the impact on retained earnings as a result of transition adjustments. However, this election must be made at the time of conversion and is irrevocable (the conversion date for a calendar year end FRE is January 1, 2011). Only certain items can be phased in and the items excluded relevant non-insurance entities are:

  • Gains and losses on own use property, if FREs elect to use the fair value model
  • the reversal of gains or losses on sale related to securitizations other than CMHC programs The phase in must start on conversion to IFRS and end in the quarter ending on or after December 31, 2012 (for calendar year FREs) and be done on a straight line basis.

Disclosures that this election has been made must be included in the audited financial statements as well as what the regulatory capital position would have been had the election not been taken.

Summary of reporting to OSFI in 2010 and 2011

In the progress report due by July 30, 2010 (for calendar year end entities), a report must be included which shows a reconciliation of equity at January 1, 2010 to equity previously reported under Canadian GAAP. There is no requirement for this report to be audited and OSFI recognizes that although the reconciliation should be based on fair estimates, the numbers are subject to change. Any changes should be notified to OSFI as they become known. This is essentially real-time reporting and FREs should have appropriate mechanisms to ensure that internal stakeholders are aligned prior to such communication.

The requirement to file semi-annual progress reports with OSFI will cease after the first quarterly reporting after conversion to IFRS (March 2011 for calendar year end entities).

Watch this space

The Advisory alludes to a number of things that will be coming which FREs need to have on their radar screen:

  • Standards that may change with effective dates after 2012 may allow early adoption by the IASB in the transition rules. Will OSFI allow early adoption? OSFI will consider allowing early adoption on a standard by standard basis once they have a chance to evaluate it in its final form.
  • Guidelines, including those impacting disclosures, are still being aligned with IFRS requirements. Amended guidelines have been issued and comments were due by June 15, 2010. Final guidelines are targeted for issue in July 2010.
  • The Basel Committee on Banking Supervision (BCBS) has announced its intention to create a leverage test applicable to all internationally active banks. There were a number of references in the final Advisory where the final views by the BCBS may impact the conclusions therein.
  • Tactical instructions will be issued on certain regulatory capital returns and forms.

Call to action

FREs should prepare their opening balance sheet and use this to evaluate the capital requirements on transition and develop a process to evaluate the differences on the tier 1 and total capital calculations and the ACM ratio going forward. Internal stakeholders need to be engaged to ensure that all aspects of the business are aware of the impact on the business model and internal processes.

It will be important for FREs to develop internal controls over processes to capture the data for accounting purposes, management reporting purposes and regulatory capital requirements, especially where assets may be recorded in the financial statements but excluded from the ACM due to the grandfathering rules and the phase in rules.

FREs should consider their credit risk processes such that they take into account BCBS practices and disclosure expectations.

Are you on track?

PricewaterhouseCoopers has extensive experience in helping banks and financial institutions adopt IFRS. We have assisted with IFRS conversion projects for a wide range of financial institutions both in Canada and globally. When implementing IFRS, we can help guide you through an effective IFRS conversion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.