Skip Ribbon Commands
Skip to main content

In the IFRS Corner: New IFRS Requirements Under NI 45-106

13/05/2016


This article was originally published in PCMA Private Capital Markets Magazine, Spring 2016

As we grow wiser, we tend to see more grey in two places: the mirror, and the world around us. As your enterprise evolves, you would be wise to recognize that there is plenty of grey in the criteria to be used when deciding whether you should report as a private company or a publicly accountable entity (PAE).

Like life itself perhaps, it seems like it used to be more black and white. That’s because it was, at least before 2011.

That’s when the Chartered Professional Accountants of Canada adopted the International Financial Reporting Standard (IFRS). It doesn’t draw lines in the sand as much as it points you to a qualified auditor for advice because it demands a lot more professional judgment.

Yes, it has been a few years that this has been in place. But I still meet sophisticated business leaders who are under the impression that you need only have more than 150 unit holders/shareholders to be considered a public company for financial reporting purposes.

For income tax purposes, that may be true in some cases. Ditto for mutual fund trusts, which have a similar “bright line” for establishing eligibility for investment by registered accounts.

But for financial reporting purposes, there is no one simple dividing line. Many people default to using the 150-unit holder level as a proxy. But like most assumptions – in a grey world – it is fraught with risk and differing views.

If you’re wrong, you can be on the wrong side of regulators. And in a hyper competitive world, damage to your reputation can make the difference between success and failure, which of course isn’t a gray area at all.

Deciding whether to follow the IFRS for publicly accountable entities, or Accounting Stands for Private Entities (ASPE), can be a big deal for another reason.

For many private investment funds, under IFRS they will apply fair value accounting (and related disclosures) for their investments. Under ASPE, they can account for investments at cost which can be a big deal if there are subsidiaries or affiliates which need not be consolidated, for example.

So what are some of the factors at play in this field of grey?

The CPA Canada Handbook defines a publicly accountable entity as: “An entity, other than a not-for-profit organization that:

  1. Has issued or is in the process of issuing, debt or equity instruments that are,
  2. or will be, outstanding and traded in a public market (domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); or,
  3. Holds assets in a fiduciary capacity to a broad range of outsiders as one of its primary business”.

For many entities, their particular circumstance is a “no-brainer”. For example, if a mutual fund is sold by prospectus and all documents and financial reports are filed on SEDAR, IFRS has to be applied. Similarly, National Instrument 31-103 (NI 31-103) requires that exempt market dealers, investment fund managers and portfolio managers follow IFRS.

Similar IFRS reporting requirements are also in place for other regulated financial institutions such as banks and investment dealers. The new financial reporting requirements for certain prospectus exemptions under National Instrument 45-106 (NI 45-106) are also clear: starting in January 2016, if you raise money under the OM exemption, issuers are mandated to report under IFRS. Others will adopt IFRS in anticipation of a go-public transaction down the road.

This issue of what is a PAE becomes a far more difficult judgment call when a private investment fund is sold privately “over-the-counter” or perhaps through a debt or equity offering on crowdfunding portal. It is often overlooked that just because an entity’s debt or shares are not listed on a recognized exchange, that it does mean that it is not publicly accountable. Management will need to assess the particular facts and circumstances, consult with its Board, stakeholders, advisors and auditors.

Many groups have decided not to implement an explicit bright line threshold to determine whether they are a publicly accountable entity and thus should apply ASPE or IFRS. Rather, the assessment is made on a case by case basis. So what can you do if you are in the grey zone?

A possible framework could look at the following criteria:

  • Whether there are laws or regulations which prescribe the applicable financial reporting framework (IFRS or ASPE)? Is the entity regulated and if so, does their regulator prescribe the accounting standards that must be applied? As noted above, this is the case for example, for EMDs are required to follow IFRS under NI 31-103 as are issuers using certain prospectus exemptions under NI 45-106.
  • What is the nature of the entity? Does the investment entity hold and manage financial resources entrusted to them by clients, customers or members not involved in the management of the entity?
  • What are the number of unitholders or potential shareholders in an offering? The greater the number, the more difficult it is to argue that there is not a broad group of outsiders.
  • What are the purpose of preparing the financial statements? Who are the users and how will they be using the financial statements? Are the financial statements prepared to meet the common financial information needs of a wide range of users or the financial information needs of specific users?
  • Whether the substantial majority of stakeholders depend primarily on the annual financial statement for external reporting? Do they have other means of accessing financial information? What are the expectations of the financial statement users?

This type of assessment will need to be made by private companies who are considering the merits of raising capital by an offering memorandum or perhaps through one of the new crowdfunded or business start-up rules. In Ontario, the OSC’s new crowdfunding and OM exemption rules require private entities follow IFRS. NI 45-106 now requires that audited financial statements prepared in accordance with IFRS be provided both with the OM and annually thereafter to investors. That is part of the regulators new “quid pro quo” for increased access to capital in Ontario. On the other hand, the Alberta Securities Commission proposal under the new business start-up rules would allow a start-up issuer to use ASPE with a big warning across the front face of the financial statement. This is bound to cause some sticking points for issuers and their auditors regarding which accounting framework to use under which circumstances.

So where can you go for more guidance?

CPA Canada’s IFRS Discussion Group noted in its March 2010 meeting that these questions relate primarily to whether a particular entity meets criterion (ii) of the definition (i.e., whether it “holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.”). The Group members also noted that there are many questions about what constitutes a broad group of outsiders. CPA Canada observed that there are bound to be grey areas requiring judgment in determining whether a particular entity meets the definition. The IFRS Discussion Group members noted that the definition in the CPA Canada handbook had been developed from the IASB’s definition of public accountability (found in the IFRS for Small and Medium-sized Entities) and recommended that stakeholders be made aware of the training modules developed by the International Accounting Standards Committee Foundation on the IFRS for Small and Medium-sized Entities.

In summary, it’s not always black and white that a private entity will be required to follow IFRS or ASPE. Plan early and consult your stakeholders and auditors. It’s not required that they have turned grey but they do have to be adept at seeing it.

For more information, contact Stephen Warden, CPA, CA, at 416.515.3893 or [email protected], or your local MNP Advisor.