International Financial Reporting Standards (“IFRS”) has been widely touted as a comprehensive, high-quality, universal set of principles. In an effort to ensure Canada would be on equal footing in terms of financial reporting with over 100 other nations—such as the U.K., other members of the E.U., and Australia—the Canadian Accounting Standards Board (AcSB) released a strategic plan in February 2006 to transition from Canadian generally accepted accounting principles (“Canadian GAAP”) to IFRS by January 1, 2011. This changeover date was confirmed in February 2008. AcSB plans to incorporate IFRS into Part 1 of the Canadian Institute of Chartered Accountants Handbook as “Canadian GAAP for publicly accountable enterprises,” which will be applicable for financial years beginning on or after January 1, 2011.
The Canadian Securities Administrators (“CSA”) has been taking steps to ensure Canada’s securities regime facilitates the changeover. As part of this effort, on September 25, 2009 the CSA published, for the purposes of soliciting comments, proposed amendments to National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (“NI 52-107”), the companion policy to NI 52- 107, and National Instrument 14-101 Definitions (“NI 14-101”). The purpose of NI 52-107, generally, is to provide the accepted accounting principles for financial reporting for Canadian and non- Canadian reporting issuers, foreign registrants, and other capital markets participants.
In its current form—not considering the proposed amendments—NI 52-107 requires reporting issuers to disclose financial information in accordance with Canadian GAAP, while giving SEC registrants the option of reporting in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Currently, only foreign reporting issuers and registrants are provided with the option of reporting on the basis of IFRS.
Under the proposed amendments to NI 52-107, Canadian GAAP applicable to publicly accountable enterprises (post changeover to IFRS), will be defined as follows:
“IFRS” means standards and interpretations adopted by the International Accounting Standards Board and amended from time to time, comprising International Financial Reporting Standards, International Accounting Standards and interpretations developed by the International Financial Reporting Interpretations Committee or the former Standing Interpretations Committee.
For financial years beginning on or after January 1, 2011, domestic issuers will be required to prepare their annual and interim financial statements on the basis of IFRS, and to make a clear statement regarding complete compliance with IFRS in the notes to their annual financial statements, or, in the case of interim financial statements, to discuss compliance with International Accounting Standard 34, Interim Financial Reporting. Further, the auditor’s report accompanying these statements must address the fact that the statements were prepared under IFRS (which may be referred to as “Canadian GAAP applicable to publicly accountable enterprises”).
Similarly, registrants must prepare their financial statements on the basis of IFRS, except that the financial statements must account for investments in subsidiaries, jointly controlled entities, and associates as specified for separate financial statements under IFRS.1 Consistent with current requirements, registrants will still be required to issue financial statements on a non-consolidated basis to facilitate identification of capital and solvency issues.
There is some disagreement among CSA jurisdictions as to how IFRS should apply to acquisition statements.2 All of the CSA jurisdictions, except Ontario, propose that acquisition statements should be permitted to be prepared under Canadian GAAP applicable to private enterprises as long as they meet the following conditions: (1) the acquisition statements consolidate subsidiaries and account for influenced investees and joint ventures using the equity method; (2) financial statements for the business were not previously prepared using the other accounting principles permitted for acquisition statements; and (3) the acquisition statements are accompanied by a notice specifying the accounting principles used, explaining that they differ from Canadian GAAP applicable to publicly accountable enterprises, and indicating that the pro forma financial information incorporates adjustments relating to the business and financial information compiled using accounting principles employed by the issuer. In contrast, Ontario asserts that Canadian GAAP applicable to private enterprises with or without variations is unsuitable for acquisition statements, and that permitting acquisition financial statements to be prepared in accordance with those principles would result in investors receiving insufficient comprehensive financial information for making informed investment decisions. The CSA is soliciting comments specifically on this issue.
In conjunction with the proposed changes to NI 52- 107, the CSA, except the Autorité des marchés financiers and the New Brunswick Securities Commission, also published notices that propose IFRS-related changes to several of the prospectus, continuous disclosure and certification rules.3
Most companies have begun their changeover to IFRS. It is important to note that, while the changeover date is January 1, 2011, the changeover to IFRS will require issuers to record their results in IFRS during the financial year leading up to the changeover date in order to prepare the IFRS comparative statements that will be required in 2011. The CSA are asking for comments on the proposed changes to NI 52-107 on or before December 24, 2009.