IFRS
Transition to International Financial Reporting Standards (IFRS)
Companies, Dealers, Advisers and Investment Fund Managers are transitioning to IFRS for financial years beginning on or after January 1, 2011. Investment Funds are expected to transition to IFRS for financial years on or after January 1, 2013. For more information please see the links below:
- Information on IFRS for Companies
- Information on IFRS for Investment Funds
- Information on IFRS for Dealers, Advisers and Investment Fund Managers
Background
On October 1, 2010, the Canadian Securities Administrators (CSA) published IFRS-related materials about Canada’s upcoming transition in 2011. Reporting issuers and registrants with financial years beginning on or after January 1, 2011, will be required to comply with the new requirements. For companies with a year-end of December 31, 2011, the initial reporting period under IFRS will be the first quarter ending March 31, 2011.
In advance of the official changeover, the CSA published National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards plus IFRS-related amendments to other national instruments and policies including continuous disclosure, prospectus, certification, and registration requirements. These changes reflect the new requirements for domestic reporting issuers and registrants when preparing filings in compliance with IFRS for Canadian securities regulators. Click here to access the revised rules and policies.
In 2006, the Canadian Accounting Standards Board (AcSB) announced a strategic plan to adopt IFRS by "publicly accountable enterprises" in Canada. In 2008, the AcSB confirmed the 2011 changeover date, and has since incorporated IFRS into the Handbook of the Canadian Institute of Chartered Accountants. IFRS is a single set of high quality, globally accepted accounting principles that are set by the International Accounting Standards Board.
Conversion to IFRS
Converting to IFRS represents a change to Canada's accounting framework that will impact issuers and registrants in Canada. The process will require all issuers and registrants to assess the impact of the conversion well in advance of 2011. How significantly a company is impacted by this change may depend on the size and complexity of their operations. In addition, some industries may be faced with more changes than others. For all issuers and registrants, advance planning is required to facilitate a smooth transition for the company and their investors. This will likely involve a significant commitment of resources prior to and during the changeover period.
On November 26, 2010 the OSC issued an online guide to assist issuers with filing their first interim financial report titled Top 10 Tips for Public Companies Filing their First Interim Financial Report.
The CSA published on April 7, 2011 CSA Staff Notice 52-328 Disclosure about Accounting Policies in the Year of Changeover to International Financial Reporting Standards which responds to specific questions CSA staff have received on disclosure about accounting policies in an issuer's interim and annual Management's Discussion and Analysis (MD&A) in the year of changeover to IFRS.
Timeline for IFRS conversion
The first reporting issuers that will be required to convert their financial statements to IFRS are those with financial years beginning on or after January 1, 2011. For a calendar year company with a year end of December 31, 2011, this means the first reporting period under IFRS will be the first quarter ending March 31, 2011.
The diagram below outlines the expected timeline for calendar year-end reporting issuers converting their financial statements to IFRS. This timeline may extend into 2012 for reporting issuers having non-calendar year ends.
As the diagram clearly indicates, the timeline for IFRS conversion is highly compressed. In addition to their ongoing business activities, issuers will have to fully research and plan for the impact of converting to IFRS during fiscal years 2008 and 2009. This includes:
- developing a detailed conversion plan
- implementing IFRS training for employees, management, board and audit committee members
- reviewing, analyzing and making accounting policy choices
- implementing these decisions in their financial reporting systems (which includes monitoring proposed or anticipated changes to standards that could be in effect by December 31, 2011)
The completion of this work is critical for the required compilation of fiscal 2010 IFRS comparative information.
What issuers need to know about IFRS
Reporting issuers need to be aware that developing and implementing an IFRS conversion plan is not just an accounting exercise, since it will affect a wide variety of an issuer's business activities. Issuers will have to consider how the transition to IFRS will affect all business functions that rely on financial information, including:
- executive compensation plans and related disclosure requirements
- income and other taxes
- treasury activities such as foreign exchange and hedging
- debt covenants and funding arrangements
- banking and other contracts or agreements
- internal controls and certification
- investor relations
- information technology systems
Corporate governance
Audit committees will need to actively monitor the issuer's IFRS conversion plan, given this fundamental change to financial reporting standards and the impact it could have on many areas of an issuer's business. Education and awareness of IFRS related issues is critical to discharging the stewardship responsibilities of audit committee members.
Companies
Canada's transition to IFRS will have significant impact on some issuers within certain industries where existing IFRS guidance is fairly limited or differs materially from Canadian GAAP. Some of these industries are highlighted below. For further IFRS guidance, see Information on IFRS – Companies.
Banking
Banks commonly use securitization vehicles to move assets off their balance sheets to free capital for additional lending. Consolidation of special purpose entities (SPEs) differs between IFRS and Canadian GAAP. The concept of a qualified SPE exists under Canadian GAAP, which is commonly used to avoid consolidation, however the concept of a qualified SPE does not exist under IFRS. The IASB is working with standard setters in the US, Canada and internationally to try and achieve harmonization with respect to the accounting for SPEs.
Insurance
The most significant impact of the transition to IFRS on the insurance industry will be the standard that results from the IASB project on insurance contracts. It is expected that the standard will result in a consistent basis of accounting for insurance contracts worldwide. The standard was issued as an exposure draft in the summer of 2010. A final standard is under development and is not expected to be effective before 2015. The current IFRS 4 Insurance Contracts permits insurers to use existing accounting treatment for insurance contracts.
Mining
IFRS, as currently in effect, does not specifically address many attributes of a mining company's operations. Specifically, these attributes include large upfront investment with low success rates and long lead times, significant back-end costs associated with the closing of a mine, and activities that both produce saleable product and contribute to the development of the mine.
IFRS 6 Exploration for and Evaluation of Mineral Resources provides guidance for the financial reporting of expenditures incurred in the exploration for, and evaluation of, mineral resources. It does not address development of mineral resources. Guidance on a limited range of relevant issues may also be found in IAS 16 Property, Plant and Equipment, IAS 36 Impairment of Assets and IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
While the IASB is currently undertaking a comprehensive research project to address a broad range of issues faced by the mining sector, guidance is not expected for several years. In the meantime, these issues will need to be addressed by mining companies that report under IFRS.
Real Estate
One of the standards that may impact a number of the issuers in this industry, as well as companies who hold non-owner occupied properties, is IAS 40 Investment Property. Issuers who hold assets such as land or buildings that meet the definition of investment property may choose to record these assets using the fair value model.
Under the fair value model, period to period valuation changes in these assets are recorded in the income statement. In addition, this model does not require these assets to be depreciated or tested for impairment, as compared to the historical cost model.
The fair value model option does not exist in Canadian GAAP and may significantly impact an issuer's balance sheet and income statement upon transitioning to IFRS, depending upon the nature of their assets.
Investment Funds
The timeline for changeover to IFRS for investment funds under NI 81-106 Investment Fund Continuous Disclosure has been delayed for an additional year to financial years beginning on or after January 1, 2014. This is consistent with the deferral granted by the AcSB. On March 30, 2012, the CSA published CSA Staff Notice 81-320 (Revised) Update on International Financial Reporting Standards for Investment Funds confirming the extension of the deferral to 2014. For further IFRS guidance, see Information on IFRS – Investment Funds.
Rate-regulated Entities
The timeline for changeover to IFRS for entities with rate-regulated activities was delayed by the CSA to financial years beginning on or after January 1, 2012. In March 2012, the AcSB granted an additional deferral to financial years beginning on or after January 1, 2013. The CSA has not granted the additional deferral. For further information, please contact the OSC at inquiries@osc.gov.on.ca
Dealers, Advisers and Investment Fund Managers – Registrants
CSA Staff Notice 33-314 International Financial Reporting Standards and Registrants advised that all registered firms that are not members of a self-regulatory organization (SRO), or a registered firm that is a member of an SRO and also registered as a dealer, adviser and/or investment fund manager, will be required by securities regulation to use IFRS for financial years beginning on or after January 1, 2011. This requirement applies regardless of whether the registrant fits the definition of a publicly accountable enterprise set by the AcSB.
National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards contains general accounting and auditing requirements for registrants and for foreign registrants. This includes the option of delivering financial statements and interim financial information in the year of transition to IFRS excluding comparative information, and with the transition date at the beginning of the financial year disclosed.
National Instrument 31-103 Registration Requirements and Exemptions states that financial statements and interim financial information must be prepared on a non-consolidated basis. For further IFRS guidance, see Information on IFRS – Dealers, Advisers and Investment Fund Managers.
Audit of comparative financial statements on first-time adoption of IFRS
IFRS 1 First-time Adoption of International Financial Reporting Standards requires the comparative financial statements in the first set of IFRS financial statements to also be reported in accordance with IFRS. Securities law requires annual financial statements to be audited. Accordingly, the comparative annual IFRS financial statements must also be audited.
For reporting issuers that change over to IFRS at December 31, 2011, the 2010 year end will have already been filed with securities regulators and audited on a Canadian GAAP basis. The change-over to IFRS will mean an additional audit of the annual 2010 IFRS comparative financial statements and issuers should plan accordingly.
Non-GAAP Financial Measures and Additional GAAP Measures
On February 16, 2012, the CSA published revised CSA Staff Notice 52-306 Non-GAAP Financial Measures and Additional GAAP Measures which provides further guidance on disclosure of additional GAAP measures presented under IFRS.
