Copyright 2008, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, May 2008
In the recently published Staff Notice 52-320 Disclosure of Expected Changes in Accounting Policies Relating to Change over to International Financial Reporting Standards, the Canadian Securities Administrators (CSA) state that they expect issuers to disclose in their management's discussion and analysis (MD&A), beginning in 2008, expected changes resulting from the future adoption of international financial reporting standards (IFRS) as the basis for preparing their financial statements.
The Canadian Accounting Standards Board has confirmed that January 1, 2011 will be the changeover date for when IFRS will replace current Canadian accounting standards and interpretations as the generally accepted accounting principles for publicly accountable enterprises (including investment funds and other reporting issuers). (The CSA are currently considering allowing domestic issuers to adopt IFRS at an earlier date, but no decision has been made see CSA Concept Paper 52-402 Possible Changes to Securities Rules Relating to International Financial Reporting Standards.) Adoption of IFRS is expected to be a significant undertaking for issuers that may materially affect their reported financial position and certain results of operations, as well as certain business functions. Accordingly, CSA Staff have stated that they expect issuers to provide timely and meaningful information about these changes in their MD&A in a progressively more detailed manner, beginning three years before the adoption of IFRS.
REPORTING ISSUERS OTHER THAN INVESTMENT FUNDS
The CSA are of the view that disclosure regarding the expected changes in accounting standards is required for reporting issuers other than investment funds by section 1.13(a) of the MD&A form requirements in Form 51-102F1, which requires disclosure relating to changes in accounting policies that an issuer expects to adopt subsequent to the end of its most recently completed financial year, including changes resulting from a new accounting standard that need not be adopted until a future date. Section 1.13(a) specifies that disclosure should include: (i) a description of the new standard; (ii) disclosure of the permitted methods of adoption and the method expected to be used; (iii) a discussion of the expected effects of the new standard on the issuer's financial statements; and (iv) a discussion of potential effects on the issuer's business.
The CSA recognize that issuers will likely only be able to provide limited information in the three and two years before the changeover to IFRS but expect issuers to provide more detailed information in the year prior to the changeover. As the changeover date approaches, the CSA state that issuers should consider how they might make available meaningful quantitative information to allow investors to understand the impact of the changeover to IFRS on the issuer's financial statements.
The CSA have provided the following guidance on disclosure to be included in interim and annual MD&A beginning three years before the changeover.
Interim and Annual MD&A Three Years Before Changeover to IFRS
An issuer should develop a plan for the changeover from Canadian GAAP to IFRS. If the changeover plan has been developed at the time the issuer prepares its interim MD&A for interim periods in the financial year three years before the changeover date (e.g., the financial year ending December 31, 2008 for issuers with a calendar year end), the issuer should disclose the key elements and timing of the changeover plan in its interim MD&A. No later than in its annual MD&A for that year, the issuer should discuss the status of the key elements and timing of the changeover plan.
CSA Staff indicate that key elements of the changeover plan may address the impact of IFRS on:
- accounting policies, including choices among policies
permitted under IFRS, and implementation decisions such as
whether certain changes will be applied on a retrospective or
a prospective basis;
- information technology and data systems;
- internal control over financial reporting;
- disclosure controls and procedures, including investor
relations and external communications plans;
- financial reporting expertise, including training
- business activities, such as foreign currency and hedging
activities, as well as matters that may be influenced by GAAP
measures such as debt covenants, capital requirements and
Interim MD&A Two Years Before Changeover to IFRS
For interim periods during the second year before the changeover date (e.g., the financial year ending December 31, 2009), the issuer should provide an update of any progress and changes in its changeover plan.
Annual MD&A Two Years Before Changeover to IFRS
In annual MD&A for the financial year beginning two years before the changeover date (e.g., the financial year ending December 31, 2009), the issuer should discuss its preparations for changeover to IFRS, including in respect of the key elements of its changeover plan as discussed above. In addition, issuers are asked to describe the major identified differences between current accounting policies and those they will be required or expect to apply in preparing financial statements in accordance with IFRS. While such disclosure may only be narrative in form at this stage, CSA Staff state that it should enable an investor to understand the key elements of the issuer's financial statements that will be affected by the changeover to IFRS.
Interim and Annual MD&A for the Year Before Changeover to IFRS
For interim and annual MD&A in respect of the financial year before the changeover date (e.g., the financial year ending December 31, 2010), the issuer should provide an updated discussion of its preparations for changeover to IFRS, including in respect of the key elements of the changeover plan.
During this time, the CSA Staff expect the issuer will generally be able to provide more detail about the decisions and changes required by the changeover, including decisions about accounting policy choices available under IFRS 1 First-time Adoption of International Financial Reporting Standards. IFRS 1 requires disclosure of comparative and reconciliation information in the interim and annual financial statements of the financial year beginning on the changeover date. To comply with this requirement, the CSA indicate that issuers will need to prepare quantified information about the impact of IFRS on each line item for the interim periods and annual period preceding the changeover. CSA Staff state that, where an issuer has this quantified information about the impact of IFRS during the year prior to the changeover, it should disclose this information in its MD&A.
DISCLOSURE OF CHANGEOVER TO IFRS BY INVESTMENT FUNDS
Investment funds that are reporting issuers will also need to adopt IFRS and provide disclosure regarding the expected changes resulting from the adoption of IFRS.
Currently, the annual and interim Management Report of Fund Performance (MRFP) requires discussion of developments affecting the investment fund. As well, section 2.1(2) of the Companion Policy to National Instrument 81-106 Investment Fund Continuous Disclosure concerns financial statement disclosure and states that an investment fund should disclose information necessary to ensure disclosure of all material information concerning the financial position and results of the investment fund. CSA Staff are of the view that an investment fund that is a reporting issuer should discuss the changeover to IFRS for each fund or fund family in either the MRFP or the notes to the financial statements.
Similar to other reporting issuers, an investment fund should begin disclosing in the three, two and one year(s) before the changeover date relevant information about the changeover, including with respect to:
- the key elements and timing of its changeover plan;
- impact on business arrangements;
- impact, if any, on net asset value per unit;
- accounting policy and implementation decisions the fund
will have to make;
- major differences the fund has identified between its
current accounting policies and those it expects to apply
under IFRS; and
- progress made on the fund's changeover
In the year before changeover, disclosure should also include quantitative information on the impact of the change of accounting standards to IFRS.
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