On January 1, 2011, Generally Accepted Accounting Principles (GAAP) for Publicly Listed Enterprises will adopt the International Financial Reporting Standards (IFRS). With less than one year to go, issuers' preparations should be well underway. The following practical tips include a few things that issuers should consider in preparing for the conversion:
Disclosure Implications: OSC Staff Notice 51-706
In addition to CSA Staff Notice 52-320, which provides guidance regarding disclosure of expected changes in accounting policies, the OSC recently provided further guidance on IFRS transition disclosure in its Staff Notice 51-706. Published on December 4, 2009, this notice outlines the preliminary findings of its review of fiscal 2008 disclosure related to the IFRS changeover. It emphasizes the OSC's expectations for an issuer's disclosure of expected changes in accounting policies related to the changeover, in particular that:
- The changeover to IFRS is not simply an accounting exercise, as it will affect a wide variety of an issuer's business activities. The OSC's expectation is that issuers will consider how the transition affects all business functions, including information technology systems, executive compensation plans, treasury activities and investor relations.
- If an issuer's 2008 MD&A did not include a discussion of the effect of IFRS on such functions, such a discussion should be included in the 2009 MD&A.
- The conversion plan should have been discussed. If there is no conversion plan underway, this fact should be stated.
The OSC also discusses the focus for fiscal 2009 and 2010. It is expected that, as issuers are approaching the changeover date, they will provide more detailed information. In particular, the expectation is that more detail will be provided in fiscal 2009 disclosure than was provided for fiscal 2008.
A review of the commentary provided in the OSC Staff Notice suggests that issuers should keep the following tips in mind when preparing their MD&A.
Annual 2009 MD&A: Key drafting tips
- Include a progress update on the conversion plan. This element was lacking in many of the 2009 interim disclosures. MD&A disclosure should outline if the project is progressing according to plan — and if not, what steps are being taken to correct the situation.
- Identify differences between current accounting policies and those the issuer expects to apply when preparing IFRS financial statements.
2010 MD&A Key Drafting Tips
- Provide significant details of the conversion plan and include a progress update compared with prior disclosure.
- Provide information on policy choices under IFRS 1 First-Time Adoption of International Financial Reporting Standards.
- If any quantified information is available about the impact of IFRS policy choices on its financial statements, it should be disclosed. The OSC noted that some quantitative information is expected.
General Drafting Tips
- Avoid "boilerplate" language. Do not simply repeat what was outlined in the Staff Notices.
- Consider the reader's ability to assess the status of the changeover plan and the impact that it will have on the business.
The OSC Staff Notice also highlighted specific areas of difference between Canadian GAAP and IFRS that may impact an issuer's financial statements and MD&A disclosure. Such differences should be kept in mind when preparing for the changeover and drafting disclosure related thereto. These areas of difference include revenue recognition, business combinations, related party disclosure, impairment of assets, recognition and measurement of provisions, financial instruments; investment properties, and specific industry standards (insurance contracts, exploration and evaluation of mineral resources).
The US Securities and Exchange Commission also published Comment Letters on Foreign Private Issuers Using IFRS. These comment letters highlights similar areas of difference regarding the presentation of financial statements, including revenues, provisions, business combinations, earnings per share, income taxes, intangible assets, and segment reporting.
Drafting: Cautionary Language
Issuers should consider that it may also be appropriate to include cautionary language in the MD&A, such as:
- reasons for providing the information;
- a statement that expectations are based on information prevailing and available at the time of reporting;
- factors and assumptions used; and
- a statement that circumstances could change before the changeover date that may require alternative action.
Implications for Agreements
In addition to disclosure implications, issuers should consider how the IFRS transition will affect operating agreements, such as:
- shareholder agreements;
- joint venture agreements;
- operating agreements;
- compensation plans;
- credit agreements (e.g., debt covenants, where measured in accordance with GAAP); and
- any other agreements that use financial information, whether they use GAAP standards or not, should be evaluated to confirm whether they will be impacted by the changeover to IFRS.
Reviewing agreements in light of the changeover to IFRS is of particular importance as they may need to be amended. In addition, the material agreements affected by the conversion should be identified in the issuer's MD&A, together with the nature of the impact. Once finalized, any significant changes in the agreements should be explained. Finally, issuers may need to consider revisions to filings of any affected material contracts with the securities regulators.
Implications for CEO and CFO certifications
Currently, there are no changes planned to National Instrument 52-109 — Certification of Disclosure in Issuers' Annual and Interim Filings, and the current representations will still be required. However, there are nonetheless implications related to the certificates provided under NI 52-109.
- Processes must be in place to allow the required certifications to be provided on and after the IFRS conversion date.
- Issuers will need to critically assess IFRS's impact on the representations made in the NI 52-109 certificates.
- The chief executive officer and chief financial officer must have an understanding of IFRS presentation and any effect on the representations made in the certificates in order to make such representations on and after the changeover date.
Communication and Education
As financial statements and other disclosure will look different under IFRS, management should be prepared to discuss the differences with board members, shareholders, the investment community and financial analysts. It is important for issuers to provide early and proactive communication, with timely and relevant information, rather than create uncertainty about the consequences of IFRS.
Investors will want to be able to differentiate reported performance changes, caused by the adoption of different accounting standards, from those caused by business activities. In addition, investors will want to know that the issuer has an appropriate plan in place to deal with conversion, and what to expect from the conversion before it takes place.
In order to accomplish such effective communication, issuers must also consider the education that needs to be provided for the board of directors, investors and analysts, in addition to accounting personnel, as they may not get training elsewhere.
Many other functions will be affected by the changeover to IFRS, such as:
- information technology and data systems;
- disclosure controls and procedures, including investor relations and external communications plans;
- financial reporting expertise, including training requirements; and
- business activities, such as foreign currency and hedging activities, as well as matters that may be influenced by GAAP measures (e.g., debt covenants, capital requirements and compensation arrangements).
It is important that issuers look into specific implications of the IFRS conversion on internal controls. These implications should be identified and addressed as early as possible, and include:
- assessments made under GAAP must be revisited under IFRS to address new financial statement elements or those for which underlying risks will change;
- identification of any changes to internal controls; and
- development, testing and evaluation of new processes, in order to ensure that internal control processes that worked for GAAP will work and are working for IFRS.
In addition to these areas, issuers should consider the tax implications of any changes, and how to minimize any adverse effects, as well as any other contractual or regulatory consequences.
Keeping up to date
In order to stay up to date with changes resulting from IFRS conversion, issuers should monitor known or proposed changes in IFRS, as these changes may have an effect on the financial statements at the changeover date.
OSC Staff Notice 52-718 — IFRS Transition Disclosure Review, released February 5, 2010, discusses the results of a recent review by OSC Staff of the extent and quality of IFRS transition disclosures made by issuers in light of disclosure guidance provided in CSA Staff Notice 52-320. Issuers may find it useful when preparing and reviewing their own IFRS transition disclosure to ensure compliance. See our recent e-Alert for further details.
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.