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Originally published in PCMA Private Capital Markets Magazine, Spring/Summer 2012
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 offsetting 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.
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