The Ontario Securities Commission (OSC) recently released the results of its review of the quality of International Financial Reporting Standards (IFRS) transition disclosure provided by certain randomly selected issuers in their 2008 annual and 2009 interim management discussion and analysis (MD&A). Guidance on IFRS transition disclosure was provided to issuers in May 2008 in Canadian Securities Administrators (CSA) Staff Notice 52-320 Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Financial Reporting Standards.
In its Staff Notice 52-718 – IFRS Transition Disclosure Review (Staff Notice), the OSC noted that many issuers have not been adequately disclosing information relating to their IFRS transition plans. Of the 106 issuers reviewed, 40 per cent did not provide any IFRS transition disclosure. Of the remaining 60 per cent:
- approximately 50 per cent provided boilerplate disclosure without applying entity-specific information;
- 80 per cent did not describe significant milestones and anticipated timelines associated with each of the key elements of the plan; and
- 48 per cent did not provide quarterly updates on progress relating to their changeover plan.
As IFRS adoption is expected to affect a wide variety of an issuer’s business activities, the development and implementation of an IFRS conversion plan is more than an accounting exercise. As outlined in CSA Staff Notice 52-320, key elements of a transition plan include assessing the impact of IFRS on each of the following: accounting policies, internal controls over financial reporting, disclosure controls and procedures (DC&P), financial reporting expertise, business activities and IT systems (collectively, Key Elements).
In the Staff Notice, the OSC noted that in most cases, issuers have not been providing a comprehensive discussion of the impact of IFRS on each of the Key Elements. The OSC also expressed particular concern that DC&P were disclosed in the issuers’ MD&A less frequently than any of the other Key Elements. The Staff Notice reviews in detail each of the Key Elements of an IFRS transition plan and the extent to which they were addressed. As well, it provides examples of entity-specific disclosures to assist issuers in filing future MD&A.
It is important to remember that this recent review examines only the quality of disclosure of an issuer’s IFRS transition plan and does not examine the actual preparedness of the issuer. Since the disclosure assists investors in evaluating an issuer’s preparedness for the transition, deficient disclosure can create an environment of investor uncertainty.
From the perspective of the OSC:
- if an issuer does not provide disclosure about an IFRS transition plan, it implies that it has not begun to prepare for IFRS;
- boilerplate disclosure does not allow an investor to effectively assess the readiness of the issuer to transition to IFRS and the possible impact that IFRS may have on the issuer; and
- failing to provide quarterly updates on the status of IFRS transition suggests the issuer has not made any progress.
Accordingly, issuers should ensure that, if they are not already doing so, they include disclosure regarding their IFRS transition plans in their MD&A, including status updates. While the disclosure of other issuers may serve as a useful example, boilerplate should be avoided and disclosure should be specific to each particular issuer.
The OSC will continue to conduct reviews of select 2009 and 2010 annual and interim MD&A filings and follow up with those issuers whose disclosure was reviewed. The OSC has not requested that issuers re-file their MD&A to improve the quality of their IFRS disclosure, as the main objective of the review was to raise awareness about OSC disclosure expectations related to transition. Going forward, however, the OSC has indicated that re-filing requests will be made and other regulatory action may be taken in cases where issuers have not met their disclosure obligations.
Issuers should carefully review their own IFRS transition disclosure and the suggestions offered in this Staff Notice when filing their 2010 interim MD&A.
To learn additional detail about the review, click here to be taken to the Staff Notice.