Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions - exemption granted from the requirement to audit acquisition statements in accordance with Canadian GAAS or USGAAS -- the acquired business' financial statements have been audited in accordance with International Standards on Auditing. Exemption granted from the requirement that an auditors' report on acquisition statements must not contain a reservation of opinion.
Applicable Legislative Provisions
National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency.
Citation: Kulczyk Oil Ventures Inc., Re, 2010 ABASC 425
September 7, 2010
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
ALBERTA AND ONTARIO (the Jurisdictions)
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
KULCZYK OIL VENTURES INC. (the Filer)
The securities regulatory authority or regulator in each of the Jurisdictions (the Decision Maker) has received an application from the Filer for a decision under the securities legislation of the Jurisdictions (the Legislation) exempting the Filer from:
(a) the requirement in subsection 6.2(1) of National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (NI 52-107) that the acquisition statements of KUB-Gas LLC (KUB) must be audited in accordance with Canadian GAAS or United States generally accepted auditing standards (U.S. GAAS); and
(b) the requirement in subsection 6.2(4) of NI 52-107 that an auditor's report filed in connection with certain acquisition statements must not contain a reservation in order that the Filer may file a business acquisition report (BAR) containing audited financial statements of KUB with an auditor's report containing a limitation of scope reservation;
(collectively, the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
a) the Alberta Securities Commission is the principal regulator for this application;
b) the Filer has provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia (the Passport Jurisdiction); and
c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the Business Corporations Act (Alberta).
2. The registered office of the Filer is located in Calgary, Alberta.
3. The Filer is a reporting issuer in the Jurisdictions and the Passport Jurisdiction.
4. The common shares of the Filer are not listed on any North American stock market, but are listed on the Warsaw Stock Exchange.
5. On June 11, 2010, the Filer acquired a 70% indirect equity interest in KUB (the Acquisition).
6. KUB is a private Ukrainian company based in Lugansk, Ukraine whose principal asset consists of a 100% interest in four gas fields located in eastern Ukraine in the Dnieper-Donets Basin.
7. The Acquisition constitutes a "significant acquisition" for the purposes of National Instrument 51-102 Continuous Disclosure Requirements (NI 51-102) and the Filer was required to file a BAR within 75 days of the closing of the Acquisition.
8. The Filer is currently, and has been since August 25, 2010 (the Default Date), in default of securities legislation due to the failure to file a BAR relating to the Acquisition.
9. The Filer acknowledges that any right of action, remedy, penalty or sanction available to any person or company or to a securities regulatory authority against the Filer from the Default Date until the date of this decision document are not terminated or altered as a result of this decision.
10. Except for the default noted above, the Filer is not in default of any of its obligations under the securities legislation of the Jurisdictions or the securities legislation of the Passport Jurisdiction as a reporting issuer.
11. Under section 8.4 of NI 51-102, the BAR must include the following financial statements of KUB:
(a) audited annual consolidated financial statements for the year ended December 31, 2009, with unaudited consolidated comparative financial information for the year ended December 31, 2008, together with the auditor's report thereon (the Annual Financial Statements); and
(b) unaudited interim consolidated financial statements for the three months ended March 31, 2010 and March 31, 2009.
12. Under subsection 8.4(2) of NI 51-102, KUB's financial statements for the most recently completed financial year must be audited. Under subsection 6.2(1) of NI 52-107, the Annual Financial Statements must be audited in accordance with Canadian GAAS or U.S. GAAS. The Filer is not a "foreign issuer" as defined in NI 52-107.
13. Under subsection 6.2(4) of NI 52-107, the Annual Financial Statements must be accompanied by an auditor's report that does not contain a reservation.
14. At the time of its acquisition by the Filer, KUB was not a reporting issuer in any jurisdiction and its securities were not listed on any stock exchange. As a private company in Ukraine, KUB was not subject to any statutory obligations to have its financial statements audited or reviewed, nor had it ever prepared financial statements in conformance with Canadian generally accepted accounting principles or International Financial Reporting Standards (IFRS).
15. The consolidated financial statements of KUB to be presented in the BAR have been prepared in accordance with IFRS issued by the International Accounting Standards Board and the Annual Financial Statements have been audited in accordance with International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB).
16. The auditor of KUB has represented to the Filer that it has expertise and experience in ISAs issued by the IAASB.
17. The Filer will include in the BAR clear disclosure as to the basis of presentation of KUB's financial statements and that they have been audited in accordance with ISAs issued by the IAASB.
18. Due to circumstances beyond the control of the Filer, the Annual Financial Statements are accompanied by an auditor's report containing an opinion that is qualified because of a scope limitation (the Scope Limitation) arising from insufficient audit evidence with respect to certain revenue and expense items.
19. The unaudited consolidated financial statements of KUB for the three month period ended March 31, 2010 include comparative financial information for the period ended March 31, 2009 (the Comparative Information). The auditor's review report that accompanies these interim financial statements has no qualification for the three month period ended March 31, 2010, but does contain a similar qualification with respect to the Comparative Information.
20. Insufficient audit evidence was available to support revenues amounting to US$1.16 million for the year ended December 31, 2009. Equal and offsetting amounts of general and administrative expenses were recorded, and as such, the net effect of these non-auditable amounts is zero for each period presented.
21. KUB did not maintain sufficient accounting records for the above described transactions nor did the issuer possess underlying documentation to be able to support such transactions, and as such, the audit evidence available was not sufficient for KUB's auditors to satisfy themselves as to the accuracy of the amounts recorded. Alternative and analytical procedures were suggested and attempted, however, as the underlying documentation pertaining to such transactions never existed and cannot be created, sufficient appropriate audit evidence could not be produced, notwithstanding the effort expended by the Filer and its auditors since November 2009 to rectify KUB's accounting records in respect of such transactions.
22. The auditor's report accompanying the Annual Financial Statements contains a clear description of the items and amounts to which the Scope Limitation applies. Additionally, the financial statements section of the BAR and the basis of presentation note to the pro forma financial statements will disclose that the auditor's report is qualified and will direct readers to the auditor's report for further information.
23. The scope limitation qualification within the auditor's report accompanying the Annual Financial Statements did not result in the auditor being unable to form an opinion on such financial statements as a whole, nor in the issuance of an adverse opinion.
24. To the best knowledge of Filer on the basis of the due diligence it conducted on KUB prior to the closing of the acquisition, and on KPMG LLP's audit examination of the Annual Financial Statements, the Filer believes that the Annual Financial Statements present fairly, in all material respects, the consolidated financial position of KUB as at December 31, 2009 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with IFRS.
25. Subsequent to the completion of the Acquisition, the Filer has taken steps to ensure that accurate and complete account records will be maintained and retained by KUB such that no further similar qualifications of opinion or other similar communications due to a scope limitation arising from the auditor's examination of such records is reasonably expected to recur. IFRS requires that the KUB accounts be included in the consolidated financial statements of the Filer subsequent to the completion of the Acquisition, including the audited financial statements of the Filer for the period from acquisition of control to December 31, 2010. The Filer anticipates that the auditor's report accompanying the audited consolidated financial statements of the Filer for the year ended December 31, 2010 will not contain a qualification arising from a scope limitation relating to the KUB accounts.
Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that the Exemption Sought is granted provided that:
(a) the Annual Financial Statements are audited in accordance with ISAs issued by the IAASB; and
(b) the auditor's report accompanying the Annual Financial Statements contains or is accompanied by a statement by the auditor that:
(i) describes any material differences in the form and content of the auditor's report prepared in accordance with ISAs as compared to an auditor's report prepared in accordance with Canadian GAAS; and;
(ii) indicates that an auditor's report prepared in accordance with Canadian GAAS would not contain a reservation, other than the Scope Limitation.