The Canadian Securities Administrators (CSA) recently released the results of their review of the extent and quality of International Financial Reporting Standards (IFRS) transition disclosure provided by certain issuers in their 2009 annual management's discussion and analysis (MD&A). Guidance on IFRS transition disclosure was provided to issuers in May 2008 in CSA Staff Notice 52-320 Disclosure of Expected Changes in Accounting Policies relating to Changeover to International Financial Reporting Standards.
In February 2010, the Ontario Securities Commission released the results of its review of IFRS transition disclosure for 2008 annual and 2009 interim MD&A in OSC Staff Notice 52-718. Click here to read our previous article summarizing their findings.
In the most recent CSA Staff Notice, 52-326 – IFRS Transition Disclosure Review, the CSA focused on the issuer's disclosure of its changeover plan and related effects on its financial reporting (as opposed to the issuer's preparedness for IFRS transition) and found there had been an improvement in the amount and quality of IFRS transition disclosure provided in 2009 annual MD&A compared to the prior year.
Of the 196 calendar year-end issuers reviewed:
- 95 per cent disclosed their IFRS changeover plan, a significant improvement from the prior year;
- 60 per cent described milestones and anticipated timelines associated with each of the key elements of their IFRS changeover plan; and
- 82 per cent identified significant accounting policy differences between Canadian Generally Accepted Accounting Principles (GAAP) and IFRS.
Disclosure of IFRS Changeover Plan
With respect to the disclosure of an issuer's IFRS changeover plan, the CSA noted as follows:
- If an issuer determines it will not be able to prepare IFRS financial statements in the time required following the changeover date, that issuer should consider the need to issue a news release and material change report.
- If the issuer continues to file financial statements using Canadian GAAP after the changeover date, the issuer's principal regulator may issue a cease trade against it.
- For those issuers who have provided an update on the changeover plan, the CSA noted that though there has been a general improvement in the extent to which such issuers discussed each of the key elements, they would like to see enhanced disclosure in this area. For example, certain issuers discussed some key elements of their changeover plans (accounting policies and IT were commonly discussed), but not others (disclosure controls and procedures were not discussed by 41 per cent of those reviewed). The CSA suggested that a comprehensive discussion of the assessment, and related conclusion, for all key elements included in the changeover plan would enhance a reader's understanding and reduce the potential for investor uncertainty.
- All issuers should describe significant milestones and anticipated timelines, and discuss the outcomes and implications associated with the completion of key milestones.
Disclosure of Differences between Canadian GAAP and IFRS
With respect to disclosing the differences between Canadian GAAP and IFRS, the CSA provided the following suggestions:
- Impairment of assets: Issuers should identify and explain that the differences in the measurement and recognition of impairment losses and reversals could lead to increased income statement volatility under IFRS.
- Revenue recognition: Issuers should disclose the potential timing differences in revenue recognition, to help investors interpret a change in accounting policy versus a change in the issuer's revenue generating activities during the year of adoption.
- Property, plant and equipment: Issuers should disclose the effects of asset componentization on the balance sheet and depreciation expense in net income.
- Mining industry issuers: Issuers should discuss the accounting policy they expect to adopt for exploration and evaluation expenditures, including any possible changes that this choice would have on its balance sheet and income statement. If an accounting policy decision has not yet been made, mining issuers should disclose this fact.
- Oil & Gas industry issuers: Issuers should describe the potential impact on the key balance sheet and income statement areas that are expected to be affected as a result of the shift from full cost accounting under GAAP to exploration and evaluation activities under IFRS. These issuers should also disclose first-time adoption exemptions they plan to use.
- Real Estate industry issuers: Since a shift to fair value of property from historical cost will result in greater volatility in reported results, issuers need to describe the potential impact to the balance sheet and income statements resulting from this change.
Implications and Tips for 2010 Disclosure
Issuers, particularly those with December 31 year-ends, should review their own IFRS transition disclosure and take note of the suggestions offered in the most recent Staff Notice and the guidance in Staff Notice 52-320 regarding the year before changeover to IFRS when filing their 2010 interim and annual MD&A. This includes communicating to investors the quantitative impacts of the changeover as they become clear.
The following tips for 2010 can be derived from review of the most recent Staff Notice:
- The CSA reinforced that investors need to be properly informed of whether reported changes in financial performance relate to the adoption of different accounting standards or relate to a change in the issuer's business.
- Issuers should describe the significant milestones and anticipated timelines of the IFRS transition.
- Issuers should explain the full implications of the differences between IFRS and current Canadian GAAP on the issuer's expected reporting under IFRS and should focus the discussion on the policy differences that would likely be material to the issuer.
- Incremental disclosure should become more robust and complete as IFRS transition approaches. 2010 disclosure should include more detailed disclosure of the issuer's changeover plan and information about key decisions on policy choices under IFRS 1 and other standards, to the extent not disclosed in the 2009 MD&A.
- As more quantitative information becomes available during 2010, issuers should consider when they can communicate quantified information in the 2010 interim and annual MD&A prior to final approval of IFRS balances, such as an indication, directionally, of how significant asset and liability balances may change, or providing estimates of balances relating to the transition date balance sheet.
To read the most recent Staff Notice in its entirety, click here
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