Copyright 2009, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Securities Regulation, October 2009
On September 25, 2009, the Canadian Securities Administrators (the CSA) published for comment a new rule (the Proposed Rule) that would replace the existing National Instrument 52-107 — Acceptable Accounting Principles, Auditing Standards and Reporting Currency. The new rule would be known as National Instrument 52-107 — Acceptable Accounting Principles and Auditing Standards, and contains changes that are intended to deal with the scheduled adoption of International Financial Reporting Standards (IFRS) in Canada for financial years beginning on or after January 1, 2011. Consequential amendments to other instruments, including those governing financial information contained in prospectuses and continuous disclosure documents, have also been published for comment. The CSA have requested that comments be provided by December 24, 2009.
The Proposed Rule would apply to reporting issuers, other than investment funds, and registrants such as investment dealers and advisers. The CSA have indicated that they intend to publish amended rules for investment funds reflecting the transition to IFRS, as well as consequential amendments to additional regulatory instruments, at a later time.
Transition To IFRS And Terminology
The Canadian Accounting Standards Board (AcSB) has adopted a strategic plan to transition Canadian generally accepted accounting principles (GAAP) for public issuers to IFRS. The AcSB intends to incorporate IFRS as a new Part I of the Handbook of the Canadian Institute of Chartered Accountants (CICA Handbook). This Part will be known as "Canadian GAAP for publicly accountable enterprises" and will be applicable for periods relating to financial years beginning on or after January 1, 2011.
The current version of Canadian GAAP will remain as Part IV of the CICA Handbook and will continue to apply for periods relating to financial years beginning before January 1, 2011. Issuers that do not have a calendar financial year-end will continue to apply Canadian GAAP under Part IV of the CICA Handbook until later in 2011 when their first financial year beginning after January 1, 2011 commences.
Basic Accounting And Auditing Framework
The basic framework of the Proposed Rule will require that, for periods relating to financial years beginning on or after January 1, 2011, reporting issuers (other than investment funds) in Canada must:
- Canadian GAAP applicable to publicly accountable enterprises (that is, IFRS as set forth in Part I of the CICA Handbook); and
- disclose in their annual financial statements an explicit and unreserved statement of compliance with IFRS, and disclose in their interim financial reports that they have complied with International Accounting Standard 34, Interim Financial Reporting.
For purposes of the Proposed Rule and other securities laws, the CSA have proposed to define IFRS with reference to the standards and interpretations adopted by the International Accounting Standards Board. This definition would not allow for local modifications or amendments to IFRS in Canada. In a concept paper issued in February 2008, the CSA had previously expressed their view that IFRS should be implemented in Canada without local modifications, which have been adopted in certain other countries when implementing IFRS. To achieve this, the CSA have proposed the dual requirement that financial statements must be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises, and also must disclose without reservation that they comply with IFRS.
The Companion Policy to the Proposed Rule clarifies that issuers will have two options when referring to applicable accounting principles in their financial statements and accompanying auditor's report: (a) they may refer only to IFRS in the notes to the financial statements and auditor's report, or (b) they may refer to both IFRS and Canadian GAAP applicable to publicly accountable enterprises in the notes to the financial statements and auditor's report.
Similarly, under the Proposed Rule, financial statements of a reporting issuer must be audited in accordance with Canadian generally accepted auditing standards (GAAS) and be accompanied by an auditor's report that:
- does not contain a modification of opinion;
- identifies all financial periods presented for which the auditor has issued an audit report; and
- is in the form specified by Canadian GAAS for an audit of financial statements prepared in accordance with a fair presentation framework, and, if the financial statements are prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises (that is, IFRS), refers to IFRS as the applicable fair presentation framework.
In conjunction with the changeover to IFRS, the Canadian Auditing and Assurance Standards Board intends to adopt International Standards on Auditing as the Canadian standards.
The Proposed Rule also sets out requirements for financial statements delivered to securities regulatory authorities by registrants such as investment dealers and advisers. For periods relating to financial years beginning on or after January 1, 2011, domestic registrants will be required to:
prepare financial statements in accordance with Canadian GAAP applicable to publicly accountable enterprises, except that their financial statements must account for investments in subsidiaries, jointly controlled entities and associates as specified for separate financial statements in Canadian GAAP; and
in annual financial statements, disclose that the financial statements comply with IFRS, except that they account for investments in subsidiaries, jointly controlled entities and associates as specified for separate financial statements in IFRS.
SEC Issuers And Foreign Issuers
Under the Proposed Rule, as is the case under the current rule, SEC issuers may prepare financial statements in accordance with U.S. GAAP. SEC issuers are generally reporting issuers (including Canadian issuers) that have securities registered in the United States or that are required to file reports in the United States under the Securities Exchange Act of 1934. CSA staff had initially proposed, in their February 2008 concept paper, to eliminate the ability for a domestic SEC issuer to report in U.S. GAAP but, after receiving comments, CSA staff subsequently indicated in June 2008 that they would retain the ability for a Canadian issuer that is also an SEC issuer to use U.S. GAAP. This will likely be welcome news to many Canadian public companies that are also publicly listed in the United States.
Under the Proposed Rule, most foreign issuers that are reporting issuers in Canada will continue to be able to prepare their financial statements using alternative accounting principles including: (a) IFRS, (b) U.S. GAAP, if the issuer is an SEC foreign issuer, and (c) accounting principles that meet the requirements for foreign private issuers, if (i) the issuer is an SEC foreign issuer, (ii) no more than 10% of its equity securities are held by Canadians, and (iii) the statements include any required U.S. GAAP reconciliation. In addition, "designated foreign issuers" (generally, foreign issuers with no more than 10% of their equity securities held by Canadians and which are subject to the disclosure requirements of certain specified countries including Australia, France, Germany, Hong Kong, Japan, Mexico, South Africa and the United Kingdom) will continue to be able to use accounting principles that meet the disclosure requirements of the specified foreign country. The exception under the current rules that permits a foreign issuer to use accounting principles that "cover substantially the same core subject matter as Canadian GAAP", subject to certain conditions, has been eliminated in the Proposed Rule due to global conversions to IFRS and infrequent use.
Financial Statements For Significant Acquisitions
Under Canadian securities laws, reporting issuers must prepare and file certain historical financial statements relating to an acquired business (acquisition statements) if the acquisition or proposed acquisition of the business is "significant", as determined under National Instrument 51-102 — Continuous Disclosure Obligations (NI 51-102). Currently, acquisition statements may be prepared in accordance with any of the following:
Canadian GAAP applicable to public enterprises;
- U.S. GAAP;
- in certain circumstances, certain specified foreign accounting principles; or
- accounting principles that cover substantially the same core subject matter as Canadian GAAP, including recognition and measurement principles and disclosure requirements.
Under the current rule, acquisition statements may not be prepared using the differential reporting options under Canadian GAAP for private enterprises, even if the acquired business is or was privately held.
For periods relating to financial years beginning on or after January 1, 2011, the Proposed Rule would permit acquisition statements to be prepared in accordance with:
- Canadian GAAP applicable to publicly accountable enterprises;
- U.S. GAAP;
- in certain circumstances, certain specified foreign accounting principles; or
- in provinces other than Ontario, Canadian GAAP applicable to private enterprises, if certain conditions are met and a prescribed notice is included.
According to the Notice and Request for Comments accompanying the Proposed Rule, provinces other than Ontario are of the view that the time and cost to convert acquired business financial statements from Canadian GAAP applicable to private enterprises to IFRS would exceed the benefit to investors. However, unlike the other provinces, Ontario has concluded that the only Canadian GAAP acceptable for acquisition statements should continue to be the accounting principles that are required for public companies (namely, Canadian GAAP applicable to publicly accountable enterprises, or IFRS). The CSA have specifically requested comments on this aspect of the Proposed Rule, including whether there may be other options that would better balance the cost and time for issuers to provide acquisition statements and the needs of investors to make investment decisions.
Other Transitional Matters
To assist with transition, the CSA are proposing to retain rules applying to periods relating to financial years beginning before January 1, 2011 in Part 4 of the Proposed Rule. These rules would apply to financial statements for such periods, even if they are issued after the January 1, 2011 changeover date.
The Proposed Rule requires financial statements to be prepared in accordance with the same accounting principles for all periods presented in a particular set of financial statements. This would require that prior year comparative periods that are presented together with annual or interim financial statements for periods relating to a financial year beginning on or after January 1, 2011 be prepared in accordance with IFRS. However, where financial statements present comparative three-year information and the most recent year begins on or after January 1, 2011, the CSA have proposed as an exception that the information for the earliest of the three years may be presented in accordance with existing Canadian GAAP instead of IFRS.
In respect of registrants' financial statements, the CSA are proposing transitional assistance by permitting financial statements and interim financial information for periods relating to a financial year beginning in 2011 and complying with IFRS to exclude comparative information for the preceding financial year or interim period.
Consequential Amendments To Other Rules
Consequential amendments to other rules are being proposed to accommodate the transition to IFRS, including to NI 51-102, National Instrument 41-101 — General Prospectus Requirements (NI 41-101), National Instrument 44-101— Short Form Prospectus Distributions (NI 44-101) and National Instrument 52-109 — Certification of Disclosure in Issuers' Annual and Interim Filings. In addition, certain housekeeping changes are also being proposed.
These amendments include replacing existing Canadian GAAP terms and phrases with IFRS terms and phrases. For instance, "balance sheet" will be replaced with "statement of financial position", "cash flow statement" with "statement of cash flows", "earnings/net earnings/income/net income" with "profit or loss", "income statement" with "statement of comprehensive income", "interim financial statements" with "interim financial report", "results of operations" with "financial performance" and "statement of retained earnings" with "statement of changes in equity". As well, a definition of "forward-looking information" consistent with IFRS is being added to NI 51-102.
IFRS requires the preparation of an opening IFRS statement of financial position as at the date of transition to IFRS. The CSA propose amending NI 51-102 to require the presentation of this opening statement in both the first IFRS interim financial report and first IFRS annual financial statements. The CSA believe such disclosure is necessary to explain how the transition to IFRS has affected an issuer's reported financial position. If an issuer is making an initial public offering in the year of transition, the CSA propose amending NI 41-101 to require that the opening IFRS statement of financial position be included in first, second or third quarter interim financial reports included in the prospectus.
To accommodate the preparation of this opening statement, the CSA are proposing to grant a 30-day extension to the filing deadline for the first IFRS interim financial report in the transitional provisions for NI 51-102 and in Form 41-101F1 (Information Required in a Prospectus) under NI 41-101. An extension is not being proposed for subsequent interim financial reports or the first IFRS annual financial statements.
Amendments to NI 51-102 and related amendments to NI 41-101 and NI 44-101 will also change financial statement disclosure requirements to accord with IFRS. For instance, where there has been a retrospective application of an accounting policy or restatement or reclassification, both IFRS annual financial statements and IFRS interim financial reports will need to include the presentation of a statement of financial position as at the beginning of the earliest comparative period. In respect of the presentation of the statement of cash flows, IFRS interim financial reports will require a statement of cash flows only for the year-to-date period and the corresponding comparative period (currently, cash flow statements are required for the year-to-date and three-month periods as well as the respective corresponding comparative periods). Also, if the components of profit or loss are reported in a separate income statement, under IFRS the separate income statement must be displayed immediately before the statement of comprehensive income.
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.