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EMDs have been IFRS’d!

July 20, 2012  
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By: Stephen Warden, CA, EMDA Director and Partner, parker simone LLP

Exempt Market Dealers (EMDs) with fiscal year ends commencing January 1, 2011, have already joined the rank of public companies report their financial results under International Financial reporting Standards (IFRS). However, EMDs with a December 31, 2011 year-end are now in the throws of the changeover form Canadian GAAP to IFRS. In the post NI 31-103 world, many EMDs were just getting accustomed to preparing audited financial statements for the first time in 2010. Now another major change – they have been IFRS’d!

For many EMDS, the IFRS conversion process means taking another look back at their 2010 and 2009 results to see if results need to be restated to conform to IFRS. As one overwrought client remarked to me: "will all these changes ever end?”

So what can a typical EMD expect when adopting IFRS?

Our experience with interim and annual financial statements of publicly traded companies and dealers suggests that there is far more work required than initially thought.

IRFS places a number of new demands on everyone and the amount of required footnote disclosures in financial statements have increased significantly.

First, you will find that IFRS standards have many nuances, which need a good deal of management judgment over the selection of accounting policies and financial statement presentation and footnote disclosures. For example, many dealers and other financial services companies report their balance sheets in order of financial liquidity, not on the typical current / non current asset and liability treatment. Adopting the order of liquidity balance sheet presentation will depend on management’s assessment of the nature of an EMDs business.

For example, a straightforward EMD advisory firm may decide to retain the traditional current / non–current asset/liability balance sheet presentation. On the other hand, dealers with active client trading and settlement and/or proprietary trading may need to take a serious look at presenting their balance sheet in order of liquidity. If so, then they will also need to look at the regulatory reporting under Form 31-103F1, which presumes that a current/non- current asset balance sheet presentation is the norm. The Form 31-103F1 regulatory filing of Excess Working Capital, adjusts "working capital” for "assets not readily convertible into cash” such as prepaid expenses and "longer term” receivables- another one of those areas needing management judgment.

Should an EMD have long-term related-party debt, they may have a surprise to deal with and will need to consider the IFRS implications. Under IFRS, related party term debt is required to be fair valued based upon a reasonable "current market” discount rate to present value the expected cash flows. However, many EMDs have structured their subordinated debt to be non-interest bearing term debt, thus discounting the debt to present fair value result in a lower value than has been reported. The off setting adjustment on transition to IFRS would go to opening retained earnings at the date of transition, so no net capital impact. Interest expense would be accreted annually to through the income statement.

What are the alternatives for related-party debt? Under IFRS, related party debt, including subordinated loans, which is repayable on demand doesn’t have to be fair valued. This treatment has been accepted by other industry regulators including IIROC so it may work for some EMDs as well. You should take a closer look at your debt documents and see if it is possible to restructure your term debt by either exchanging it for a demand loan, converting it to share capital, or repaying the debt should you have excess capital in the business.

Another key issue to note: IFRS now requires footnote disclosure of compensation paid to the "key management personnel” of the company. This disclosure falls under the requirements for many private companies, so disclosing this may come as a surprise for many. You will need to define who in the company is subject to this disclosure
and then pull the information together to disclose - and don’t forget to also compile the comparative amounts for footnote disclosure purposes. Compensation includes all
salary, bonuses and benefits. Termination benefits, if any, would be separately disclosed.

In future articles, I will discuss other emerging developments of interest to EMDs and their accounting obligations. Stay tuned and good luck to those preparing their first year-end audited IFRS results!

For more information contact: Stephen Warden

For more articles, please download the Exempt Market Update - the national magazine of the EMDA