November 28, 2008
IFRS Disclosures in MD&A
New CICA guidance supports IFRS disclosures in MD&A
The Canadian Securities Administrators (CSA) published Staff Notice 52-320 in May 2008 requiring, with immediate effect, disclosures of IFRS changeover plans commencing three years prior to adoption (i.e., for 2011 first-time adopters, these disclosure requirements commence in 2008). The staff notice represents an interpretation of existing disclosure requirements for future changes in accounting standards and policies, and emphasizes that the level of detail in the required disclosures is intended to increase as changeover plans are developed and refined.
Recently issued guidance from the CICA’s Canadian Performance Reporting Board (CPRB) outlines how companies can provide useful disclosures to investors in MD&A in the period leading up to the changeover. This CPRB guidance describes recommended best practices and elaborates on the CSA’s disclosure requirements. Specifically, it discusses communication of the IFRS conversion process, its impact on financial reporting and agreements, as well as its impact on controls over financial reporting.
The publication may be useful to issuers in preparing their MD&A disclosures. The CSA staff notice 52-320 is included in the CICA document’s appendix.
Click here for a link to the CPRB’s publication on communications during IFRS transition.
Recent International Developments
IFRIC activities: Rejection of rate-regulated accounting interpretation
The International Financial Reporting Interpretations Committee (IFRIC) received a request to consider whether regulated entities could or should recognize a liability (or an asset) as a result of rate regulation by regulatory bodies or governments. At its November meeting, the IFRIC tentatively decided to reject adding the recognition of regulatory assets and liabilities onto its agenda.
The IFRIC staff had prepared an analysis that attempted to identify why rate regulated entities are different from other entities and why these differences are not adequately captured by applying the existing requirements of IFRS standards. However, the IFRIC believed resolving the issue would require interpreting the definition of assets and liabilities set out in the Framework and, while the issue was not specifically being considered in an active Board project, it relates to one or more Board projects currently underway. The IASB’s Standards Advisory Council is now considering whether rate-regulated accounting should be added to the IASB active agenda.
The IFRIC’s tentative decisions, including recommended reasons for not adding the items to the agenda, will be reconsidered at the IFRIC meeting in January 2009.
Click here for a link to the November 2008 IFRIC newsletter.
Exposure Draft: Disclosures about Financial Instruments
In response to the ongoing credit crisis and recommendations by interested parties, the IASB has published Exposure Draft Improving Disclosures about Financial Instruments – Proposed amendments to IFRS 7, Financial Instruments: Disclosures. The amendments propose to enhance disclosures about fair value measurements, especially in light of the current market conditions, and to address concerns that the nature and extent of liquidity risk disclosure requirements are unclear and difficult to apply.
The proposals
- introduce a three level fair value hierarchy for determining the amount of information to be disclosed around estimating fair values. The hierarchy reflects the availability of observable market inputs when estimating fair values.
- amend the definition of liquidity risk and the related disclosures, such that disclosures are based on how liquidity risk is actually managed.
The effective date of the proposed amendments is for annual periods beginning on or after July 2009, and earlier application would be permitted.
The AcSB has also issued an Exposure Draft to amend Section 3862, Financial Instruments – Disclosures to adopt the corresponding amendments and the same effective date being proposed by the IASB.
Click here for more information on the amendments to IFRS 7.
The IASB Exposure Draft follows recommendations of the Financial Stability Forum and reflects reports issued by the IASB’s Expert Advisory Panel on Measuring and disclosing the fair value of financial instruments in markets that are no longer active and the IASB Staff Summary on Using judgement to measure the fair value of financial instruments when markets are no longer active.
These reports do not establish new requirements for entities applying IFRS; however, they provide useful information and educational guidance on certain issues that entities may face in measuring and disclosing the fair value of financial instruments when markets become inactive.
Click here for a summary of the reports on measurement and disclosure the fair value of financial instruments when markets are inactive.
IASB and FASB discuss credit crisis and joint projects
At its October meeting and its joint meeting with the FASB, the IASB continued to discuss its response to the credit crisis and projects on its own active agenda and that of the joint Boards.
As a result of the joint meeting, the IASB and the FASB agreed to create a global advisory group to address financial reporting issues arising from the ongoing credit crisis. They also agreed to resume their discussions on the definition of control and related disclosure issues. They plan to address decisions around convergence once the IASB has issued its Exposure Draft on consolidations, expected before the end of the year, and after the FASB has received comments on its current proposals.
Discussion at the meetings also covered derecognition of financial instruments, share-based payments, financial instruments with the characteristics of equity, insurance contracts and the annual improvements project.
Click here for a summary of the October 2008 IASB meeting and joint meeting with the FASB.
Click here for our updated description of IASB projects, reflecting significant discussions of the IASB up to and including its October meeting.
Discussion paper: Financial statement presentation
On October 16, 2008, the IASB and FASB issued a joint Discussion Paper entitled Preliminary Views on Financial Statement Presentation, as a result of the second phase of the joint Boards’ larger convergence project on financial statement presentation.
Key changes proposed include:
- classification of items in the financial statements into business, financing, equity, discontinued operations and income tax sections, based on a management approach, and alignment of the items between the statement of financial position, comprehensive income and cash flows
- elimination of the option of presenting a separate income statement; instead, mandating the use of a single statement of comprehensive income
- presentation of cash flows from operating activities in the statement of cash flows using the direct method, eliminating the use of the indirect method
- introduction of a new disclosure requirement to reconcile cash flows to comprehensive income.
The final standard, expected to the published in 2011, would likely not be effective until after Canada’s changeover to IFRS.
Click here for more details on the preliminary views on financial statement presentation.
IFRS in the US
SEC unveils a "roadmap" to phase in IFRS for US public companies
In November 2008, the SEC issued a proposed roadmap that would commit its staff, between now and 2011, to monitor progress in achieving certain milestones toward IFRS adoption. In 2011, if there has been sufficient progress, the SEC would then consider adopting final rules to phase in the requirements for US public companies to use IFRS as issued by the IASB.
The roadmap outlines a potential phased transition to IFRS over three years with large-accelerated, accelerated and non-accelerated filers transitioning in calendar year ending in 2014, 2015 and 2016, respectively. Some US public companies that operate within an IFRS industry would be permitted to begin using IFRS as soon as next year’s financial statements if the proposal is adopted unchanged.
Click here for a summary of the SEC’s proposed roadmap for mandatory IFRS filings by US public companies.
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