Canada: Technical Bulletin - April 2014

INTRODUCTION

This technical bulletin covers the various developments from January to March 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.

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, 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

Amendments to IAS 1 Presentation of Financial Statements

The IASB is moving forward with its short-term project on materiality, based on the recommendations made at the Disclosure Forum it hosted in January 2013. The objective of the project is to help preparers, auditors and regulators use judgement when applying the concept of materiality in order to make financial reports more meaningful. The scope of the project is the application of materiality across the whole of the financial statements, however, the focus would be on applying the concept of materiality to the notes. The following areas are considered:

• the lack of understanding of what is meant by the concept 'materiality';
• the lack of clarity in applying the concept of materiality, in particular to disclosures in the notes to the financial statements; and
• how disclosure requirements are written, i.e. the use of unclear language used to describe disclosure objectives and other disclosure guidance in IFRS.

The IASB has issued this Exposure Draft in March 2014, proposing narrow-scope amendments to address some of the concerns expressed about existing presentation and disclosure requirements and to ensure entities are able to use judgement when preparing their financial statements.

The proposed amendments:

• Clarify the materiality requirements in IAS 1, including an emphasis on the potentially detrimental effect of overwhelming useful information with immaterial information.
• Clarify that specific line items in the statement(s) of profit or loss and other comprehensive income and the statement of financial position can be disaggregated.
• Add requirements for how an entity should present subtotals in the statement(s) of profit or loss and other comprehensive income and the statement of financial position.
• Clarify that entities have flexibility as to the order in which they present the notes, but also emphasize that understandability and comparability should be considered by an entity when deciding that order.
• Remove potentially unhelpful guidance in IAS 1 for identifying a significant accounting policy.

Comment period ends on July 23, 2014.

IFRS 3 – Post-implementation Review

Post-implementation Reviews are conducted by the IASB normally two years after the global application of a new Standard or a significant amendment to an existing Standard. The purpose of the review is to consider whether the new Standard is functioning as anticipated, has achieved its objectives and improved financial reporting.

Request for Information was issued by the IASB in January 2014. This post-implementation review aims to assess whether the information provided by IFRS 3 is useful to financial statement users, whether there are any implementation challenges that hinder consistent application of the requirements and whether the costs of preparing, auditing and enforcing the requirements have been in line with expectations. Comment period ends on May 30, 2014.

Current Status of Documents Previously Issued for Comment

Major Projects – Exposure Drafts

Other Exposure Drafts

Other Documents

Investment Entities

Accounting for a subsidiary that is both an investment entity and provides investment related services - further developments

The Investment Entity amendments introduced an exception to the consolidation requirement that an investment entity shall measure its investments in subsidiaries at fair value. There is an exception to the exception: if a subsidiary provides investment-related services, the investment entity shall not measure this subsidiary at fair value and the investment entity shall consolidate the subsidiary instead.

IFRS Interpretations Committee received a request to clarify the accounting in cases where an investment entity subsidiary meets the definition of an investment entity (which has investees measured at fair value) and, additionally, provides investment-related services. In such cases it is unclear whether the investment entity parent should measure that subsidiary at fair value or consolidate it.

As reported in the January 2014 edition of the Technical Bulletin, the IFRS Interpretations Committee discussed this issue and noted that it was not clear how to account for a subsidiary that is both an investment entity subsidiary and provides investment-related services.

The IASB discussed this issue at its March 2014 meeting and decided to continue to develop proposals to amend IFRS 10 to confirm that all investment entity subsidiaries should be measured at fair value through profit or loss.

Other proposed amendments to IFRS 10 and IAS 28

At its March 2014 meeting, the IASB also discussed the following proposed narrow-scope amendments:

The IASB tentatively decided to amend IFRS 10 to confirm that the exemption from preparing consolidated financial statements set out in paragraph 4(a) of IFRS 10 should be available to an intermediate parent entity that is a subsidiary of an investment entity but that is not an investment entity itself.

In addition, the IASB tentatively decided to amend IAS 28 so that, when applying the equity method:

• A non-investment entity that is party to a joint venture cannot retain the fair value accounting applied by that investment entity joint venture.
• A non-investment entity investor should, for cost-benefit reasons, retain the fair value accounting applied by an investment entity associate.

IFRIC 21 – what's included?

IFRS Discussion Group discussed the scope of IFRIC 21 Levies at its December 2013 meeting. While the focus of the discussion was on WSIB and property taxes, the group concluded that the scope of IFRIC 21 is potentially quite broad and that careful consideration of all types of payments imposed by governments is necessary. One approach is to consider what kind of payments are imposed on an entity by governments and work through a complete list of such payments to identify why each type of payment might not be in the scope of IFRIC 21.

With respect to the taxes that were the focus of the discussion, group members noted that the premiums payable under the WSIB plan may be considered to fall outside the scope of IFRIC 21 because these payments fall within the scope of IAS 19 Employee Benefits. However, group members observed that property taxes appear to fall within the scope of IFRIC 21, in accordance with the criteria in paragraph 4 of the Interpretation, and the application of IFRIC 21 may result in a change in the timing of the liability and expense recognition.

The group further discussed application of IFRCI 21 at its February 2014 meeting. Specifically, the items presented were:

IFRIC 21 Levies – Property Taxes in Canada

Majority of the group was of the view that the liability to pay property taxes should generally be recognized ratably throughout the year, noting, however, that some members did see merit in the view that the liability should be recognized at a point in time, particularly when other facts and circumstances exist. As for the debit side of the entry, where the liability is recognized ratably, a prepaid asset would only be recorded when property taxes have been paid in excess of the amount of the obligation based on the pro-rated number of days of ownership during the year. However, where the latter view to recognizing the liability is taken – liability is recognized at a point in time – the majority of the group was of the view that the property taxes should be expensed and that it was difficult to support the view that the payment of property taxes generated an asset because it is a non-reciprocal transaction.

IFRIC 21 Levies – Consideration of Levies Other than Property Taxes.

The group sees an issue with IFRIC 21 in that its scope is potentially broader than many preparers might expect. The term "levies" is not one that is widely used in Canada but it is important to remember that it is not what an item is called that determines whether or not it falls within the scope of IFRIC 21. Rather, the key issue is whether or not the item, whatever it may be called, meets the definition of a "levy" under IFRIC 21. As such, Canadian companies should consider all payments imposed by, and/or paid to, government pursuant to legislation or regulation, rather than by contract, to determine if they are within the scope of IFRIC 21. Items that are considered to be levies within the scope of IFRIC 21 may be referred to as a levy or as some other term in the underlying legislation. Examples of items that may be levies under IFRIC 21 include rents, royalties, taxes, contributions and fees. Group members noted that preparers may conclude prematurely that IFRIC 21 does not apply in their circumstances based on what an item is called.

Group members noted that the discussion was intended to raise awareness of IFRIC 21 and how Canadian entities may be impacted by this Interpretation.

Click here for detailed summary of this discussion.

For additional guidance on implications of adoption of IFRCI 21, refer to the decision summary from the AcSB's January 2014 meeting and CPA Reporting Alert IFRIC 21 Levies.

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.

Recent alerts:

February 2014 - IFRIC 21 Levies

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:

• Capitalization of borrowing costs (Mining)
• Accounting for share purchase warrants issued (Mining)
• Revising an existing decommissioning liability (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 IFRSs 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 IFRSs and get the meeting report extract and audio webcast for each issue you find. Click here to access the database.

To read this Bulletin in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.