IFRS-Related Amendments to NI 52-107 and Other Securities Rules and Policies
As discussed in our earlier bulletins, International Financial Reporting Standards (IFRS) will apply to Canadian publicly accountable enterprises for financial years commencing or on subsequent to January 1, 2011. Consistent with this changeover from Canadian Generally Accepted Accounting Principles (Canadian GAAP) to IFRS, the Canadian Securities Administrators (CSA) have approved National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards (NI 52-107), Companion Policy 52-107CP Acceptable Accounting Principles and Auditing Standards (Policy), and amendments to National Instrument 14-101 Definitions (NI 14-101). The Instrument, the Policy and the amendments to NI 14-101 (Final Materials) published on October 1, 2010, will come into force on January 1, 2011 following Ministerial approval. The CSA had published proposed versions of the Instrument, the Policy and amendments to NI 14-101 (Proposed Materials) for comment on September 25, 2009 and the comment period ended on December 24, 2009. Other related rule and policy amendments have also been approved and are expected to come into force on January 1, 2011.
The Final Materials reflect the changeover in Canada to IFRS and to Canadian Generally Accepted Auditing Standards (Canadian GAAS) relating to the adoption of International Standards on Auditing.
History of IFRS in Canada
NI 52-107 sets out acceptable accounting principles and auditing standards to be applied by issuers and registrants for financial statements filed or delivered to securities regulatory bodies. Under the current version of NI 52-107 (Current NI 52-107) a domestic issuer and a domestic registrant must use Canadian GAAP for public enterprises as detailed in the Handbook of the Canadian Institute of Chartered Accountants (Handbook), with the exception that a domestic issuer that is also registered with the United States Securities and Exchange Commission (SEC) has the option to use U.S. Generally Accepted Accounting Principles (U.S. GAAP). Under Current NI 52-107, other than domestic issuers who have received exemption orders to be early adopters of IFRS, only foreign issuers and foreign registrants may use IFRS.
In February 2006, the Canadian Accounting Standards Board (AcSB), the independent body responsible for developing standards and directions on accounting and financial reporting in Canada, published a strategic plan to transition, over a period of five years, Canadian GAAP for public enterprises to IFRS, as adopted by the International Accounting Standards Board (IASB). In March 2008, the timing of the transition was confirmed.
In February 2008, the CSA published their Concept Paper 52-402 discussing issues and inviting comments on the impending transition. It pointed to the AcSB's 2011 implementation date and to developments in the United States. In the (almost) three years since, the CSA have released numerous bulletins addressing, among other things, the changeover to IFRS, disclosure of IFRS transition, and exemptive relief.
The CSA published CSA Concept Paper 52-402 Possible Changes to Securities Rules Relating to International Financial Reporting Standards (February 13, 2008), CSA Staff Notice 52-320 Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Financial Reporting Standards (May 9, 2008), CSA Staff Notice 52-321 Early Adoption of International Financial Reporting Standards, use of US GAAP and reference to IFRS-IASB (June 27, 2008) and CSA Staff Notice 52-324 Issues Relating to Changeover to International Reporting Standards (May 21, 2009).
In CSA Staff Notice 52-321, the CSA indicated that their staff were prepared to recommend exemptive relief to permit a domestic issuer to prepare its financial statements in accordance with IFRS for periods beginning prior to January 1, 2011, and in CSA Staff Notice 324, the CSA reported on the grant of such exemption orders. CSA Staff Notice 52-320 had provided guidance on transitional disclosure to issuers who would adopt IFRS within their financial years beginning on or after January 31, 2011 and also, in anticipation of the CSA's granting permission for early adoption, to issuers who would adopt IFRS earlier. OSC Staff conducted a review to assess the extent and quality of IFRS disclosure made by issuers in 2008 annual and 2009 interim Management's Discussion and Analysis (MD&A) and published the results of its review in OSC Staff Notice 52-718 IFRS Transition Disclosure Review IFRS Transition Disclosure Review (February 5, 2010). CSA Staff conducted a similar review for 2009 annual MD&A and published the results in CSA Staff Notice 52-326 IFRS Transition Disclosure Review (July 23, 2010).
IFRS will apply to most Canadian publicly accountable enterprises for financial years beginning on or after January 1, 2011. The Instrument does not reflect the impact of exposure drafts or discussion papers from the IASB prior to their adoption into IFRS. However, the definition of IFRS included in the amendments to NI 14-101 incorporates amendments to IFRS made from time to time.
The AcSB has incorporated IFRS into the Handbook as Canadian GAAP for publicly accountable enterprises. As a result, the Handbook contains two sets of standards for public companies:
- Part I of the Handbook – Canadian GAAP for publicly accountable enterprises that applies for financial years beginning on or after January 1, 2011, and
- Part V of the Handbook – Canadian GAAP for public enterprises that is the pre-changeover accounting standards (current Canadian GAAP).
On the audit front, the Canadian Auditing and Assurance Standards Board published their strategic plan to adopt International Standards on Auditing as Canadian Auditing Standards in February 2007. These standards will continue to be known as Canadian GAAS in the Handbook. Canadian Auditing Standards are effective for audits of financial statements for periods ending on or after December 14, 2010.
The following paragraphs describe the IFRS requirements for domestic issuers and domestic registrants. As noted below, investment companies will not be required to adopt IFRS until their first financial year beginning on or after January 1, 2012.
Under the Instrument, the following requirements generally apply to a domestic issuer's financial statements for financial years beginning on or after January 1, 2011:
- annual financial statements and interim financial reports must be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises;
- annual financial statements must include an unreserved statement of compliance with IFRS and interim financial reports must include an unreserved statement of compliance with International Accounting Standard 34 Interim Financial Reporting (IAS 34); and
- an auditor's report accompanying financial statements must refer to IFRS as the applicable fair presentation framework and be in the form specified by Canadian GAAS for an audit of financial statements prepared in accordance with a fair presentation framework.
Issuers and their auditors may refer to Canadian GAAP applicable to publicly accountable enterprises in addition to the reference to compliance with IFRS.
For both domestic issuers and domestic registrants, the Instrument requires the opening IFRS statement of financial position (the balance sheet under Canadian GAAP) to be presented in an issuer's first IFRS interim financial report and first IFRS financial statements. A 30-day extension to the filing deadline for the first interim financial report has been provided.
Both domestic issuers and domestic registrants may elect to transition to IFRS for a financial year that begins before January 1, 2011 if the immediately preceding financial year ends no earlier than December 21, 2010.
Under the Instrument, the following requirements apply to a domestic registrant's financial statements and interim financial information for financial years beginning on or after January 1, 2011:
- financial statements and interim financial information must be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate, or non-consolidated, financial statements in IAS 27 Consolidated and Separate Financial Statements.
- financial statements and interim financial information for periods relating to a financial year beginning in 2011 may exclude comparative information relating to the preceding financial year;
- annual financial statements must include a statement that the financial statements are prepared in accordance with the financial reporting framework specified in NI 52-107 for financial statements delivered by registrants, and must also describe that framework; and
- an auditor's report accompanying financial statements must be in the form specified by Canadian GAAS for an audit of financial statements prepared in accordance with a fair presentation framework.
In order to facilitate consistent interpretation of financial reporting requirements, the Instrument also uses terms and phrases used in IFRS as it has been incorporated into Part I of the Handbook, rather than the corresponding terms and phrases used in current Canadian GAAP (see footnote 1). The Instrument addresses certain transition issues that domestic issuers and registrants will face as they change from current Canadian GAAP to IFRS.
Summary of Changes from the Proposed Materials
Some of the key outcomes of the comments process on the Proposed Materials are described below.
Initially, in the Proposed Materials, jurisdictions other than Ontario proposed to permit financial statements for a business acquired or to be acquired (acquisition statements) prepared in accordance with Canadian GAAP applicable to private enterprises (also known as accounting standards for private enterprises in Part II of the Handbook) subject to specific conditions.
After considering the costs to prepare reconciliations and the information needs of investors and their advisors, the CSA developed different requirements for venture issuers and non-venture issuers. In the Instrument, all jurisdictions permit acquisition statements to be prepared in accordance with Canadian GAAP applicable to private enterprises subject to specific conditions. Non-venture issuers will be required to provide a reconciliation to the issuer's GAAP for all financial years presented and the most recently completed interim period. Consistent with acquisition statement requirements in Current NI 52-107, the reconciliation to the issuer's GAAP for the most recently completed financial year must be audited. Venture issuers will not be required to provide such a reconciliation. Both venture and non-venture issuers must prepare pro forma financial statements using accounting policies that are consistent with the issuer's GAAP. The Policy provides new guidance on the preparation of the reconciliations required for non-venture issuers.
The CSA intend to re-examine, from the perspectives of quality of information and cost and time for preparation, the issue of accounting principles permitted for acquisition statements after IFRS and Canadian GAAP applicable to private enterprises have been used in Canadian capital markets for two years.
Use of Different Accounting Principles for Different Periods
The CSA have dropped the proposed exemption from the requirement for financial statements to be prepared in accordance with the same accounting principles for all periods presented in the financial statements. This would have permitted the presentation of a single set of financial statements containing comparative financial information for a financial year beginning before January 1, 2011 prepared using current Canadian GAAP if certain conditions were met.
The Policy clarifies that an entity that is required to file financial statements for three years can choose to present the earliest of the three financial years using current Canadian GAAP in two different formats.
Financial Reporting Framework
Generally, the accounting framework used to prepare a registrant's financial statements and interim financial information is Canadian GAAP applicable to publicly accountable enterprises except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for with separate financial statements as specified in IAS 27. Separate financial statements are sometimes referred to as non-consolidated financial statements. A registrant's annual financial statements must describe the financial reporting framework used. The Policy explains that the exceptions and exemptions included as Appendices in IFRS 1 First-time Adoption of International Financial Reporting Standards (IFRS 1) are relevant for determining the opening statement of financial position at the date of changeover.
(ii) Summarized Financial Information
The description of the accounting framework used to prepare summarized financial information for an investment that is or will be accounted for by the equity method has been modified. The summarized financial information must also include a specified statement and a description of the accounting policies used.
(iii) Acquisition Statements
The accounting framework for acquisition statements that are an operating statement for an oil and gas property that is an acquired business or a business to be acquired has been modified. The operating statement must contain a specified statement and a description of the framework.
The description of the accounting framework for acquisition statements that are based on information from the financial records of another entity whose operations included the acquired business or business to be acquired where there are no separate financial records for the acquired business or business to be acquired, also known as carve-out financial statements, has been modified. The acquisition statements must contain a specified statement and a description of the framework.
Again, the Policy explains that the exceptions and exemptions included as Appendices in IFRS 1 are relevant for determining the opening statement of financial position at the date of transition for acquisition statements.
(iv) Auditor's Report
The requirements relating to an audit report accompanying an operating statement for an oil and gas property or carve-out financial statements have been modified to require the audit report to identify the financial reporting framework used.
52/53 Week Financial Years
The Instrument includes a new provision to permit application of Part 3 of the Instrument, being rules applicable to financial years beginning on or after January 1, 2011, for financial statements for periods relating to a financial year that begins before January 1, 2011, if the immediately preceding financial year ends no earlier than December 21, 2010. This permits issuers and registrants that have financial year ends close to, but not on December 31, 2010, the option to transition to IFRS when their new financial year begins.
Entities with Rate-Regulated Activities
The Instrument includes a new provision to permit the application of Part 3 of the Instrument to be deferred for up to one year by qualifying entities, consistent with the deferral granted by the AcSB. In these circumstances, Part 4, being rules applicable to financial years beginning before January 1, 2011, would continue to apply with the result that the transition to IFRS could be deferred by up to one year. A "qualifying entity" is defined as a person or company that has activities subject to rate regulation, as defined in Part V of the Handbook and that is permitted under Canadian GAAP to apply Part V of the Handbook.
The CSA supported the AcSB's deferral of the mandatory adoption of IFRS for investment companies to financial years beginning on or after January 1, 2012. This deferral will permit entities whose financial statements are currently subject to Accounting Guideline 18 and will be impacted by the IASB's consolidation project, to attain certainty about IFRS requirements for accounting for investment holdings. The CSA have stated that they expect to publish final IFRS-related materials for National Instrument 81-106 Investment Fund Continuous Disclosure once the IASB revised standard on consolidation for investment companies is final in 2011.
Canada Business Corporations Act Regulations – IFRS Related Amendments
Currently, the Canada Business Corporations Regulations, 2001 (CBCR) is in step with NI 52-107. As the CSA are proposing the various above-discussed amendments to NI 52-107, corresponding amendments are being proposed to the CBCR to ensure that they remain consistent with those standards set out in the Handbook and NI 52-107. The stated purposes behind the amendments to the CBCR are: (i) to reflect the reorganization of the Handbook; (ii) to eliminate certain requirements for SEC-registered federal corporations; and (iii) to recognize IFRS terminology related to financial statements.
More specifically, as the CICA has reorganized the Handbook into three handbooks—one on accounting, one on public sector accounting, and one on certification—the amendments to the CBCR will reference each of the sub-handbooks to ensure accuracy. While the CBCR currently require those SEC-registered federal corporations that prepare their financial statements in accordance with U.S. GAAP to submit reconciliations with respect to recognition, measurement, and presentation, the CBCR amendments will remove such requirements so that the CBCR requirements are in line with the new requirements of the CSA. The CSA are of the view that reconciliations from U.S. GAAP to IFRS would be negligible for shareholders and potential investors and an overly-onerous cost burden to prepare. Nonetheless, the proposed amendments to the CBCR do reflect the transition period for SEC-registered federal issuers as seen in the amended NI 52-107 (that such issuers are required to reconcile the Canadian and U.S. accounting standards for up to two financial periods starting before January 1, 2011). In addition to these more substantive changes, there are various proposed amendments to the CBCR to replace references to Canadian GAAP terminology with IFRS terminology (see note 1).
Consultations were held from May 31, 2010 to June 31, 2010 and the response was uncontroversial. The amendments to the CBCR will come into force on January 1, 2011.
Update on Adoption of IFRS in the United States
In 2007, the SEC adopted rules that allow foreign private issuers to make filings with the SEC using financial statements prepared in accordance with IFRS without a reconciliation to U.S. GAAP for financial years ending after November 15, 2007.
Subsequently, in November 2008, the SEC issued its long-awaited proposed rule (Roadmap) setting out milestones that, if achieved by 2011 could lead to mandatory transition by U.S. public companies from U.S. GAAP to IFRS, with the transition starting in fiscal years ending on or after December 15, 2014. The Roadmap also proposed that certain U.S. issuers be given the option to use IFRS in financial statements for fiscal years ending as early as December 15, 2009. On February 24, 2010, the SEC issued a statement expressing its continuing support for a system incorporating IFRS, maintaining 2011 as the timeframe for making its decision as to whether to change to IFRS, directing its staff to develop a work plan for transition, extending the earliest potential start date to December 15, 2015 and postponing any decision to permit early adoption.
The CSA also published amending instruments for the following instruments and for many of their companion policies (some of which were previously published for comment*) reflecting the far-reaching impact of the transition to IFRS:
Multilateral Instrument 11-102 Passport System and its Companion Policy
National Policy 12-202 Revocation of a Compliance-related Cease Trade Order
National Policy 12-203 Cease Trade Orders for Continuous Disclosure Defaults
National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR)
National Instrument 21-101 Marketplace Operations
National Instrument 31-103 Registration Requirements and Exemptions*
National Instrument 33-109 Registration Information Requirements*
National Instrument 41-101 General Prospectus Requirements*
National Instrument 44-101 Short Form Prospectus Distributions*
National Instrument 44-102 Shelf Distributions*
National Instrument 45-106 Prospectus and Registration Exemptions*
National Instrument 51-102 Continuous Disclosure Obligations*
National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings*
National Instrument 52-110 Audit Committees
National Instrument 54-101 Communication with Beneficial Owners of Securities of a Reporting
Multilateral Instrument 62-104 Take-over Bids and Issuer Bids
National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign