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Regulator Expectations for First Annual IFRS Financial Statements

14/02/2012


​​The Alberta Securities Commission (“ASC”) has released its 2011 Corporate Finance Disclosure Report.​

The report highlights weaknesses identified through their review of first quarter interim filings of Reporting Issuers (“RIs”) that transitioned to IFRS. Although the findings were for RIs in Alberta, we believe that the findings would be useful for issuers across Canada.

Based on their findings, the ASC has identified specific expectations for the first annual IFRS financial statements and related Management Discussion and Analysis (“MD&A”):

TRANSITION IMPACT ON FINANCIAL STATEMENTS

IFRS 1 requires an explanation of the impact of adopting IFRS on financial position, financial performance and cash flows therefore the financial statements need to:

  1. Reconcile from previous GAAP to IFRS opening numbers
    • Starting point under GAAP – need to make sure it matches previously filed financial statements (i.e. if errors are identified, these need to be specifically stated so that users are aware of changes specifically related to errors as opposed to changes related to IFRS adoption.)
    • For each material adjustment made to reconcile the financial statement line item from the RI’s previous GAAP to IFRS, there should be sufficient detail in the disclosure in order for the user to understand the impact of the change. The ASC recommends that the RI discuss the dollar value of the change and whether it increases or decreases the line item balance.
  2. Ensure that there are no missing financial statements
    • In the first quarter, there were financial statements filed without the Statement of Changes in Equity
    • The Opening Statement of Financial Position must be included as a primary statement. If it is reflected in the notes, this would be considered a deficiency that would require the financial statements to be re-filed.

ACCOUNTING POLICY DISCLOSURE

Because IFRS is principles based, there are many options available regarding accounting policy selection. In their report, the ASC noted many boilerplate accounting policies.

  1. Accounting policy disclosure is expected to be complete, clear and entity – specific. Disclose what is relevant and not a laundry-list of accounting policies. Consider relevance and materiality in order to avoid boilerplate accounting policies.
  2. In the absence of an IFRS that addresses a transaction, event, or condition, judgment will be required in order for the RI to determine an appropriate accounting policy (see IAS 8). The disclosure must be in sufficient detail to allow a user to understand the accounting treatment.
  3. Disclosure of judgments was considered lacking. There should be a clear description of what is judgment as opposed to an estimate. Common areas that require judgment include the determination of:
    • Control or significant influence
    • Cash-generating units
    • Functional currency

In order to enhance disclosure, the RI could disclose the factors assessed in order to reach a conclusion on the applicable accounting policy selected.

MANAGEMENT DISCUSSION & ANALYSIS

The ASC commented that RIs are not providing disclosure in the MD&A that supplements what has been disclosed in the financial statements.

  1. Mixed GAAP disclosure in MD&A
    • For the Selected Annual Information and Summary of Quarterly Results, ensure that it is clearly stated which periods have been presented under the IFRS accounting framework and which periods have been presented in accordance with the RIs previous GAAP (i.e. December 2009)
  2. Venture issuers without significant revenue
    • The expectation is that the MD&A would discuss the status of projects and progress towards milestones and objectives. The MD&A should provide more discussion surrounding expenditures (both capitalized and expensed).

IN CONCLUSION

As Reporting Issuers prepare to file their first IFRS compliant annual financial statements, there are specific considerations that should be addressed in the annual financial statements and MD&A. Ensure you consider these items to avoid the pitfalls of inadequate disclosure.

This article has been prepared for informational purposes only and is not intended for any other purpose. We do not assume any responsibility or liability for losses occasioned by you in reliance on this information. We would be pleased to discuss with you the issues raised within the context of your particular circumstances. Please contact your local MNP Public Companies advisor.