Does Your Company’s IFRS Transition Disclosure Measure Up?

Canadian Securities Administrators (CSA) staff conducted a review to assess the extent and quality of International Financial Reporting Standards (IFRS) transition disclosure made by issuers in 2009 annual Management’s Discussion & Analysis (MD&A). They compared the IFRS transition disclosure of 196 calendar year-end issuers to the disclosure guidance provided in their Staff Notice,¹ focusing on disclosures of IFRS changeover plans and related discussion of accounting policy effects of IFRS on issuers’ financial reporting. The CSA indicated that issuers and their directors should take this notice into account when assessing the extent to which future MD&A disclosures meet the requirements of securities legislation and the need for meaningful IFRS disclosure by investors.

Overall, the CSA noted an improvement in the amount and quality of IFRS transition disclosure compared to the prior year. We have highlighted the CSA’s disclosure expectations for 2009 MD&A based on their Staff Notice and then the areas they noted where opportunities for improvement exist based on their review.

Disclosure Expectations

The disclosure expectations outlined for 2009 annual MD&A directed issuers to provide investors with the following information:

• A status update on their IFRS changeover plan, including a detailed discussion of each of the key elements of the plan
• A discussion of the significant differences between the issuer’s current accounting policies and those the issuer is required or expects to apply in preparing IFRS financial statements
• A description of the impact that the above noted differences may have on the issuer’s reported financial statements and results, and
• Whether the transition to IFRS has, or will, result in a change to the issuer’s business functions and activities.

More detailed disclosures in each successive reporting period as the changeover approaches in 2011 are expected. The Staff Notice indicates that if no progress has been made during a quarter, this fact should be stated.

The CSA’s review noted that 80 percent of the issuers provided an update on the status of their IFRS changeover plans in their 2009 annual MD&As in comparison to their third quarter interim MD&As.

Changeover Plan

Ninety-five percent of issuers reviewed disclosed their IFRS changeover plan—a significant improvement over the prior year. However, many issuers did not provide an in-depth discussion of all key elements of their plan and most commonly focused only on accounting policies and IT systems. The CSA indicated that some of these issuers explained that they had assessed a specific element (e.g. internal control over financial reporting) and because they had determined there was no impact as a result of the changeover to IFRS, they did not discuss that particular element in their MD&A. The CSA asked these issuers to discuss the complete results of their assessment and conclusions in their next MD&A to provide readers with a more comprehensive understanding of the IFRS impacts. 

The CSA also indicated that issuers need to focus on describing milestones and anticipated timelines, and discussing the outcomes and implications associated with completion of key milestones for each of the plan’s key elements. 

The CSA indicated that if an issuer determines it will not be able to prepare IFRS financial statements by the required deadline after the changeover date, this will often be a material change that the issuer should immediately communicate by way of a news release and material change report. The CSA stated that filing Canadian GAAP financial statements after the changeover date may result in a cease trade order. 

Accounting Policies

Eighty-two percent of issuers identified differences between the accounting policies currently applied under Canadian GAAP and those policies required, or expected, to be applied under IFRS. However, the CSA noted these disclosures could have been improved by focusing on those policy differences that would likely be material and providing the full implications of these differences on the issuer’s expected reporting, rather than simply listing the accounting standards to be adopted upon transition and providing a limited description of accounting policy differences with existing GAAP. 

To assist issuers in preparing their MD&A, the CSA provided examples of the types of disclosure it expects for certain common differences across various industries (i.e., impairment of assets, revenue recognition, property, plant, and equipment) and certain industry-specific examples (i.e., mining, oil and gas, real estate).

Future Expectations

The CSA expects more robust and complete disclosure as transition approaches. They expect more detailed disclosure of the changeover plan and information about key decisions on policy choices under IFRS 1 and other standards to the extent these choices were not disclosed in 2009 MD&A.

Disclosure of expected changes in accounting policies should include a discussion of the expected effect on the issuer's financial statements or a statement that the issuer cannot reasonably estimate the effect. The CSA believes it is important for investors to start to understand the quantitative impacts that they will begin to see in 2011. The CSA advised issuers to consider when they can communicate quantified information in their 2010 interim and annual MD&A prior to final approval of IFRS balances. The CSA noted that issuers could, for example, consider indicating, directionally, how significant asset and liability balances may change as a result of accounting policy decisions, or providing estimates of balances relating to the transition date balance sheet.

The CSA indicates that they will continue to review IFRS transition disclosure as part of their overall continuous disclosure review program and warned that issuers should anticipate staff requests for re-filings of MD&A in the future if an issuer has not met its disclosure obligations.

¹ CSA Staff Notice 52-320, Disclosure of Expected Changes in Accounting Policies Relating to Changeover to International Financial Reporting Standards.

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