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IFRS Disclosure Expectations - EMDs should heed recent OSC advice!
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By: Stephen Warden, CA, EMDA Director and Partner, parker simone LLP

In an effort to provide timely input to issuers, last week on February 28, 2012 the OSC’s Office of the Chief Accountant released OSC Staff Notice 52-720,Financial Reporting Bulletin highlighting areas of interest that the OSC has observed from their review of IFRS adoption experiences by issuers in2011. Those EMDs with year ends beginning on or after January 1, 2011 similarly need to prepare their financial statement in accordance with IFRS and file these with the OSC.

The OSC had observations and recommendations in the following key areas:

Business Combinations

Business combination accounting is not usually a major issue for many EMDs as non-consolidated financial statements must be prepared for regulatory reporting under NI 31-103. On the other hand, EMDs involved with private placements and deals should be aware that the OSC has noted recognition and measurement issues with step acquisitions, the method of acquisition accounting (IFRS requires identifiable assets and liabilities assumed be recognized at full fair value even when the acquired interest is less than 100%).

Further, the new disclosure requirements for acquisitions are far more extensive under IFRS and this will put more demands on dealer due diligence, financial statement preparers and their auditors. Based on review of 2011interim filings, the OSC noted deficiencies in new IFRS disclosure requirements including:

  • a qualitative description of what makes up goodwill.
  • revenue and profit or loss of the acquiree since the acquisition date.
  • pro-forma revenue and profit or loss of the combined entity.
  • the reason for the acquisition.
  • gross contractual amounts of acquired receivables and an estimate of the contractual cash flows expected to be collected.

The OSC asks, "From reading the financial statements, do investors understand what was acquired, how it was acquired and why it was acquired?”Common

Control Business Combination Transactions

IFRS does not currently provide guidance on accounting for common control transactions where the businesses are controlled by the same group before and after the business combination transaction. This sometimes impacts EMDs when they are combining or reorganizing related EMDs or other entities under a holding company ownership. The OSC identified 3approaches in use including:

  • Book value accounting ( carry-over basis) for the current and comparative years as though they had always been combined ( similar to what had been required under previous EIC 89 Canadian GAAP).
  • Book value accounting (carry-over basis) from only the date of acquisition, without combining from the beginning of the fiscal year nor restating the comparative year results.
  • Applying purchase accounting on the basis that the acquirer is a separate unrelated entity.

The OSC‘s view is that investors should have financial information both before and after the common control transaction without any gaps in the periods presented. Thus the first method above would appear to be the preferred method to apply (which is consistent with previous Canadian GAAP). The OSC encourages consultation with them regarding an entities’ proposed accounting treatment for complex common control transactions.

Impairment

EMDs need to be aware that there are significant differences between the recognition and measurement of impairment losses (and reversals) under IFRS compared to previous Canadian GAAP.

Key areas of OSC interest include:

  • Disclosures relating to each material impairment loss or reversal of impairment provisions (under IFRS what has gone down in value may go up and the provision reversed if appropriate). 
  • Disclosures required for estimates used to measure recoverable amounts of cash generating units (CGUs) containing significant goodwill or intangible assets with indefinite lives irrespective of whether there has been any impairment or not.

The OSC is focusing on whether the financial disclosures provide the necessary information for investors to easily understand how recoverable amounts and fair values (including assumptions)are determined. The OSC also suggests that where the market cap of an issuer is less than the carrying amount of an issuer’s net assets, then there should be disclosure to explain the shortfall and why the carrying value of the net assets is supported. Finally,the OSC reminds issuers to ensure that cash flow projections are reasonable and supportable (e.g.forecast period, discount rate, growth rate, sales trends, working capital and cap ex requirements) as well as the approach for determining fair values for assets having unobservable market prices.

Critical Judgments and Sources of Estimation Uncertainty

When applying the Company’s accounting policies, IFRS requires disclosure of judgments having the most significant effect on amounts recognized in the financial statements. Canadian GAAP did not have a similar requirement and thus this will be new to EMDs and reporting issuers. IFRS also requires disclosure about assumptions made concerning sources of estimation uncertainty at year end which have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year. You have to ask yourself, "Which estimates require management’s most difficult, subjective or complex judgments?”

You will have to be concerned with not "cluttering up” the financial statement with disclosures of insignificant or immaterial judgments. The OSC also reminds issuers that disclosures will not meet Staff expectations if disclosures are lacking in substance(aka Boilerplate) and/or does not separate critical judgments from sources of estimation uncertainty.This will result on EMDs putting more time and effort into the assessment of critical judgments, sources of estimation and more extensive tailored disclosures in their financial statements.

Going Concern

The OSC expects that issuers differentiate uncertainties that cast significant doubt on a company’s ability to continue as a going concern from uncertainties that do not cast such doubt. Here too, the OSC warns issuers not to use disclosures which could be considered "boilerplate” and lack specificity. As such,an issuer will need to explicitly identify the material uncertainties which cast significant doubt upon the company’s ability to continue as a going concern.Of course, where there is now a going concern condition, the auditor’s report should include a matter of emphasis paragraph (which was newly introduced to Canada in late 2010).

Non-GAAP Financial Measures and Additional GAAP Measures

Many EMDs will want to review CSA Staff Notice52-306 Non-GAAP Financial Measures and Additional GAAP Measures which has been recently revised to provide additional information on Staff’s expectations for disclosure of additional GAAP measures presented under IFRS.

The notice describes practices that help issuers and certifying officers address their obligations to ensure that the information they provide to the public is not misleading. The practices contain examples of subtotals that should not be presented in the statement of comprehensive income. These examples include subtotals without labels, "income before the under noted items”, adjusted EBITDA and adjusted EBIT. The OSC also reminds issuers who include"operating earnings” or similar subtotals to include all items of an operating nature within the subtotal.

In addition, the OSC provided a summary of areas of interest on which they will focus their reviews in 2012,including:

  • Provisions - in particular, disclosure of whether the discount rate used is credit adjusted or not and the nature and changes in estimates where an estimate previously reported is significantly changed).
  • Fair value measurement (consideration of the impact of current economic conditions on risk adjustments and discount rates).
  • Debt classifications.
  • Statement of comprehensive income - presentation.

For those EMDs now finalizing their December 31stfinancial statements or preparing for future year ends,you may wish to take a review of the OSC Financial Reporting Bulletin to ensure that you have addressed the applicable areas of OSC focus in your year end financial statements.

For more information contact: Stephen Warden - stephen@parker-simone.com

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