Technical Bulletin - Part 1 - July 2014

This technical bulletin covers the various developments from April to June 2014.

 Acknowledgement: The content of the Technical Bulletin has been summarized or reproduced from the CPA Canada, CICA, IASB, IAASB, IFRIC, AcSB, PSAB, AASB press releases, updates, publications, meeting summaries and other publications referenced within the bulletin.

 Summary of acronyms used in this bulletin is included at the end.

 To discuss implementation or interpretation issues with respect to these or any other accounting or assurance matters, please contact your local Collins Barrow service provider.

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Collins Barrow regularly publishes Technical Bulletin for the general interest of its clients and friends to highlight the continually changing accounting and assurance standards, and the interpretations thereof, in Canada. Since this is not intended to be a complete reproduction or summarization of the standard or document reviewed, we recommend that you refer to the original document(s) discussed in this Bulletin and/or discuss the matter with your professional advisor before acting upon any of the matters discussed herein.

1.    ACCOUNTING

International Financial Reporting Standards (IFRS)

Pronouncements Effective for Annual Periods Beginning on or After January 1, 2014

Investment Companies and Segregated Accounts of Life Insurance Enterprises

Mandatory date for first-time adoption of IFRS by investment companies and segregated accounts of life insurance enterprises - fiscal years beginning on or after January 1, 2014.

Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27)

Amendment to IFRS 10 introduces an exception for investment entities to the principle that all subsidiaries are consolidated.  Amendments define investment entities and require them to measure subsidiaries at fair value through profit or loss.  In addition, IFRS 12 has been amended to include disclosure requirements for investment entities.  IAS 27 has been amended to require investment entities to measure investments in subsidiaries at fair value through profit or loss when separate financial statements are presented. 

IAS 32 Financial Instruments: Presentation

Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32): amendment addresses inconsistencies identified in applying some of the offsetting criteria.

IAS 36 Impairment of Assets

The standard was amended to modify certain disclosure requirements about the recoverable amount of impaired assets if that amount is based on fair value less costs of disposal.

IAS 39 Financial Instruments

The standard was amended to allow hedge accounting to continue in a situation where a derivative, which has been designated as a hedging instrument, is novated to effect clearing with a central counterparty as a result of laws or regulation, if specific conditions are met (in this context, a novation indicates that parties to a contract agree to replace their original counterparty with a new one). Similar relief will be included in IFRS 9 Financial Instruments.

IFRIC 21 Levies

This new interpretation provides guidance on the accounting for levies imposed by governments.  The interpretation clarifies the obligating event that gives rise to a liability to pay a levy.

Pronouncements Effective for Annual Periods Beginning on or After July 1, 2014

IAS 19 Employee Benefits

Amendment to IAS 19 simplifies the accounting for contributions to defined benefit plans that are independent of the number of years of employee service.

Annual Improvements 2010-2012 Cycle

Annual improvements process is comprised of minor revisions, clarifications or corrections to the standards, by compiling amendments to a number of standards into one exposure draft (ED) rather than issuing a separate ED for each issue. Issuance of new standards is not included in the annual improvement process.

Annual Improvements 2011-2013 Cycle

Annual improvements process is comprised of minor revisions, clarifications or corrections to the standards, by compiling amendments to a number of standards into one exposure draft (ED) rather than issuing a separate ED for each issue. Issuance of new standards is not included in the annual improvement process.

Pronouncement Effective for Annual Periods Beginning on or After January 1, 2015

Entities with rate-regulated activities

Mandatory date for first-time adoption of IFRS by entities with rate-regulated activities - fiscal years beginning on or after January 1, 2015.

Pronouncement Effective for Annual Periods Beginning on or After January 1, 2016

IFRS 14 - Regulatory Deferral Accounts

This interim standard permits first-time adopters to continue to recognize amounts related to rate regulation in accordance with previous GAAP requirements when they adopt IFRS.  However, to enhance comparability with entities that already apply IFRS and do not recognize such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. An entity that already presents IFRS financial statements is not eligible to apply the Standard.  Earlier application is permitted.

Pronouncement with Effective Date to Be Determined

IFRS 9 Financial Instruments

This new standard replaces the requirements in IAS 39 Financial Instruments: Recognition and Measurement for classification and measurement of financial assets.  IFRS 9 also incorporates requirements for financial liabilities, most of which were carried forward unchanged from IAS 39.  Certain changes were made to the fair value option for financial liabilities to address the issue of own credit risk. 

As well, requirements related to hedge accounting, representing a new hedge accounting model, have been added to IFRS 9.  The new model represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements.  The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions.

As a result of these changes, users of the financial statements will be provided with better information about risk management and about the effect of hedge accounting on the financial statements.

IFRS 9 is available for application; however, the previous mandatory effective date of January 1, 2015 has been removed as the IASB decided that this date would not allow sufficient time for entities to apply the new standard because the impairment phase of the IFRS 9 has not yet been completed.  In February 2014, the IASB tentatively decided on the new mandatory effective date of January 1, 2018. 

Recently Issued Documents for Comment

Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging

The IASB issued this Discussion Paper in April 2014 with the goal of exploring a possible approach to better reflect dynamic risk management activities in entities’ financial statements.  The approach is the portfolio revaluation approach (PRA).  When applying the PRA, exposures within open portfolios would be revalued with respect to the managed risk. This revaluation would offset the effect of measuring any risk management instruments (derivative instruments) that are used to manage those risks at fair value.

The IASB will use the feedback received on the Discussion Paper to evaluate whether, and how, the new approach would result in an enhancement of the usefulness of the information provided by the financial statements. The feedback will be also useful to the IASB to assess whether the approach being explored is operational and to evaluate whether, and how, it could be applied to other risks.

The comment period ends on October 17, 2014.

Investment Entities – Applying the Consolidation Exception (Proposed Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures)

This ED was issued by the IASB in June 2014, proposing amendments that are designed to clarify three issues about the application of the requirement for investment entities to measure subsidiaries at fair value instead of consolidating them. The proposed amendments:

• confirm that the exemption from presenting consolidated financial statements continues to apply to subsidiaries of an investment entity that are themselves parent entities;
• clarify when an investment entity parent should consolidate a subsidiary that provides investment-related services instead of measuring that subsidiary at fair value; and
• simplify the application of the equity method for an entity that is not itself an investment entity but that has an interest in an associate that is an investment entity.

Comment period ends on September 15, 2014.

Current Status of Documents Previously Issued for Comment

Major Projects – Exposure Drafts

Other Exposure Drafts

Other Documents

 IAS 12 Income Taxes – recognition of an asset when tax position is uncertain

The Interpretations Committee received a request for guidance on the recognition of a tax asset in the situation in which tax laws require an entity to make an immediate payment when a tax examination results in an additional charge, even if the entity intends to appeal against the additional charge. In the situation described by the submitter, the entity expects, but is not certain, to recover some or all of the amount paid.  The Interpretations Committee was asked to clarify whether IAS 12 (and a ‘probable’ threshold) is applied to determine whether to recognize an asset for the additional payment, or whether the guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets (and a ‘virtually certain’ threshold) should be applied.  The Interpretations Committee concluded that the issue should be added to its agenda and tentatively decided to develop an Interpretation on the recognition of assets and liabilities in the situation in which the tax position is uncertain.  Stay tuned.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors—distinction between a change in an accounting policy and a change in an accounting estimate

The Interpretations Committee received a request to clarify the distinction between a change in an accounting policy and a change in an accounting estimate, in relation to the application of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, due to divergent practices identified regarding the assessment of whether a change qualifies as a change in an accounting policy or as a change in an accounting estimate in accordance with IAS 8. Moreover, IAS 8 sets out stricter criteria for changes in accounting polices than those for changes in accounting estimates. According to paragraph 14(b) of IAS 8, a voluntary change to an accounting policy is permitted only if that change provides reliable and more relevant information. IAS 8 does not explicitly include an equivalent requirement for a change in an accounting estimate. Accordingly, a clarification is sought on whether an entity is required to justify a change in accounting estimate and, if so, on what basis.

The Interpretations Committee noted that a change in an accounting estimate may encompass a change in the method used to develop an estimate, as well as a change in inputs to the method, both of which result in a change in the amount of the estimate. The Interpretations Committee thinks that a change in the method used to develop an estimate should only be made if that change produces a reliable and equally or more relevant estimate.

The Interpretations Committee observed that it would be helpful if clear guidance was given about the circumstances in which changes in the method of estimation may be made.  The Interpretations Committee will be presenting its recommendations to the IASB at a future meeting.  Stay tuned.

IAS 1 Presentation of Financial Statements—disclosure requirements relating to assessment of going concern

While not being added to the Interpretations Committee agenda, the following discussion may be of interest when determining the appropriate disclosure requirements relating to assessment of going concern. 

The Interpretations Committee discussed a situation where management of an entity is considering events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.  Having considered all relevant information, including the feasibility and effectiveness of any planned mitigation, management concludes that there are no material uncertainties that require disclosure in accordance with paragraph 25 of IAS 1.

However, reaching this conclusion that there was no material uncertainty involved significant judgement.  Accordingly, the disclosure requirements of paragraph 122 of IAS 1 would apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

Questions?  Issues? 

Here are some resources that will assist in the application of the standards.

CPA Reporting Alerts

CPA Canada issues Reporting Alerts which are aimed at assisting smaller public companies in determining the impact of new and revised standards on their business.  Reporting Alerts provide a summary of the standard, highlight significant items, summarize key changes and address common questions. 

Click here to access the Alerts.

Viewpoints

This series discusses views of the Oil and Gas Task Force and the Mining Task Force on IFRS application issues relevant to junior oil and gas companies and junior mining companies, respectively. 

Some of the recent issues being addressed in these publications include:

• Accounting for share purchase warrants issued (Oil and Gas)
• Segment reporting (Oil and Gas)
• Identifying levies in the oil and gas industry (Oil and Gas)

Click to access the mining alerts and oil and gas alerts.

The Guide to International Financial Reporting Standards in Canada

This guide, issued by CPA Canada, examines and explains the application of IFRS from a Canadian perspective.

Each publication includes an overview of key requirements and a detailed analysis of relevant issues, including practical application insights, as well as a discussion of accounting policy choices, significant judgments and estimates.

Additional application insights include:

• extracts from financial statements of Canadian entities;
• analysis of IFRS Discussion Group reports;
• items discussed but never incorporated into the IASB agenda;
• industry application viewpoints via the Viewpoint Series;
• illustrative examples; and
• statistics on particular IFRS application

Click here to access the publications.

IFRS Discussion Group Meeting Topics

Established by the AcSB, the IFRS Discussion Group implements and maintains a regular public forum to discuss issues that arise in Canada when applying IFRS.

The Financial Reporting & Assurance Standards Canada website allows for topics and issues discussed by the IFRS Discussion Group to be searched and sorted. Find out whether the Group has discussed an issue that you face in applying IFRS and get the meeting report extract and audio webcast for each issue you find. Click here to access the database.

Accounting Standards for Private Enterprises (ASPE)

Pronouncements effective for annual periods beginning on or after January 1, 2014

Employee Future Benefits, Section 3462

The new standard replaces Section 3461 Employee Future Benefits.  The new standard requires immediate recognition of all gains and losses arising from defined benefit plans as they are incurred, thus eliminating the deferral and amortization accounting.  The new standard also requires for the plan obligations and plan assets to be measured at the balance sheet date.  In addition, past service costs are now recognized in the current period for defined contribution plans.     

Disposal of Long-lived Assets and Discontinued Operations, Section 3475

This standard was amended to modify the definition of a discontinued operation by creating a higher threshold for a disposal to be classified as a discontinued operation, thus resulting in fewer disposals qualifying as discontinued operations in practice.

2013 Annual Improvements

Annual improvements process is comprised of minor revisions, clarifications or corrections to the standards, by compiling amendments to a number of standards into one exposure draft (ED) rather than issuing a separate ED for each issue. Issuance of new standards is not included in the annual improvement process.

Current Status of Documents Previously Issued for Comment

Questions?  Issues? 

Here are some resources that will assist in the application of the standards.

CPA Canada Reporting Alerts for ASPE

CPA Canada issues Reporting Alerts which are aimed at assisting companies in determining the impact of new and revised standards on their business.  Reporting Alerts provide a summary of the standard, highlight significant items, summarize key changes and address common questions. 

Alerts are accessible by clicking here.

Private Enterprise Advisory Committee

Established by the AcSB in 2010, the Committee assists the AcSB in maintaining and improving accounting standards for private enterprises and advises on the need for non-authoritative guidance about the standards. At the request of the AcSB, the Committee may also undertake research into the financial reporting needs of private enterprises.

Redeemable preferred shares issued in a tax planning arrangement

The Committee discussed presentation requirements related to the recognition of redeemable preferred shares issued in a tax planning arrangement as a liability at a recent meeting.

The Committee noted that the AcSB had agreed that such redeemable shares should be classified as a liability. That liability would be measured on initial recognition at fair value. The Committee agreed to recommend to the AcSB that the resulting debit should be presented as a separate component of equity that would be reclassified to retained earnings as the preferred shares are redeemed. The Committee also recommended disclosure of a description of the transaction that resulted in the separate component of equity.

Click here to access recent meeting notes.

Accounting Standards for Not-for-profit Organizations (ASNPO)

Pronouncement effective for annual periods beginning on or after January 1, 2014

Reporting Employee Future Benefits by Not-for-Profit Organizations, Section 3463

This new Section provides guidance for defined benefit plans on the recognition and presentation of remeasurements and other items that differs from the guidance in Employee Future Benefits, Section 3462 in Part II of the Handbook. The requirements in Section 3462 apply in all other respects. 

The main features of Section 3463 are as follows:

• Remeasurements and other items are: recognized directly in net assets in the statement of financial position rather than in the statement of operations, and presented as a separately identified line item in the statement of changes in net assets.
• Remeasurements and other items are not reclassified to the state­ment of operations in a subsequent period.

Current Status of Document Previously Issued for Comment

Public Sector Accounting (PSA)

Pronouncement effective for fiscal years beginning on or after April 1, 2014

PS 3260 Liability for Contaminated Sites

The new standard establishes recognition, measurement and disclosure standards for liabilities relating to contaminated sites.

Pronouncements effective for fiscal years beginning on or after April 1, 2016

(except for government organizations that applied the CICA Handbook – Accounting prior to adoption of the CICA Public Sector Accounting Handbook, for which these pronouncements apply to fiscal years beginning on or after April 1, 2012)

Financial Statement Presentation, Section PS 1201

This section revises and replaces Financial Statement Presentation, Section PS 1200. The new standard introduces a new statement for reporting of remeasurement gains and losses.

Foreign currency translation, Section PS 2601

This section revises and replaces Foreign Currency Translations, Section PS 2600. Definition of currency risk is aligned with the new Financial Instruments Section, PS 3450. The new standard also removes certain previously available exceptions to measurement of items on initial recognition. The deferral and amortization of foreign exchange gains and losses relating to long-term foreign currency denominated monetary items, hedge accounting and presentation of items as synthetic instruments are removed. In addition, the new statement of remeasurement gains and losses introduced in Section PS 1201 is used to reflect exchange gains and losses until the period of settlement, rather than reflecting them in the statement of operations.

Portfolio investments, Section PS 3041

This section replaces Section PS 3040, Portfolio Investments. In addition, Section PS 3030 is withdrawn, as the distinction between temporary and portfolio investments is removed with the issue of Section PS 3041. The scope in the new standard is expanded to include interests in pooled investment funds and requirement for application of cost method is removed. The new standard is also aligned with the new Financial Instrument Section, PS 3450.

Financial instruments, Section PS 3450

This new Section establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. The standard introduces two measurement categories: fair value and cost or amortized cost. The statement of remeasurement gains and losses will reflect gains and losses arising on fair value remeasurement until an item is derecognized. The standard also introduces new disclosure requirements of items reported and the nature and extent of risks arising from financial instruments.

Recently Issued Document for Comment

Related Party Transactions

This Re-exposure Draft was issued by the PSAB in April 2014.  Previous ED, issued in June 2013, included both the disclosure requirements for related party transactions as well as guidance on recognition and measurement of related party transactions from both the provider’s and the recipient’s point of view in one Section.  Related party transactions can occur with entities outside of the government’s reporting entity. However, the guidance on recognition and measurement can only be applied to those entities within a government’s reporting entity that follow the PSA Handbook.  To promote clarity, PSAB proposes two new Sections: related party disclosures and inter-entity transactions.

The main features of the Re-exposure Draft are as follows:

Related party disclosures:

• A related party exists when one party has the ability to exercise control or shared control over the other. Two or more parties are related when they are subject to common control or shared control. Related parties also include individuals that are members of key management personnel and close family members.
• Disclosure of key management personnel compensation arrangements, expense allowances and other similar payments routinely paid in exchange for services rendered is not required.
• Two entities that have a member of key management personnel in common may be related depending upon that individual’s ability to affect the policies of both entities in their mutual dealings.
• Disclosure is only required when transactions and events between related parties have or could have a material financial effect on the financial statements.
• Determining which related party transactions to disclose is a matter of judgment based on assessment of :
  • the terms and conditions underlying the transactions;
  • the financial materiality of the transactions;
  • the relevance of the information; and
  • the need for the information to enable users’ understanding of the financial statements and for making comparisons.

Inter-entity transactions:

• Inter-entity transactions involving the transfer of assets or liabilities should be recognized by both a provider and a recipient at carrying amount, exchange amount or fair value depending on the particular circumstances of each case.
• Inter-entity transactions in the normal course of operations or under a policy of cost allocation and recovery should be recognized on a gross basis at the exchange amount.
• A recipient may recognize unallocated costs as a revenue and expense at carrying amount, fair value or another amount based on existing policy, depending on the particular circumstances of each case.
• Information about inter-entity transactions would be disclosed in accordance with the proposed new Section on related party disclosures.

Comment period ends on September 15, 2014.

Current Status of Documents Previously Issued for Comment

PSA Discussion Group Meeting Topics

Established by the PSAB, the PSA Discussion Group provides a public forum for discussion of issues arising on the application of the PSA Handbook.

Summaries of topics and discussions from past meetings are available on the Financial Reporting & Assurance Standards Canada website by clicking here.

Continue to Part 2