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Originally published in PCMA Private Capital Markets Magazine, Winter 2012
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 in 2011. 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 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, those preparing and/
or auditing financial statements. Based on review of 2011
interim filings, the OSC noted deficiencies in new IFRS
disclosure requirements including:
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 3 approaches in use including:
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.
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
Key areas of OSC interest include:
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
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.
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
Many EMDs will want to review CSA Staff Notice 52-306
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:
For those EMDs now finalizing their December 31st
financial 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: [email protected]
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