GAAP/GAAS Updates 2012-2013
CICA Handbook  Accounting  Part I  International
Financial Reporting Standards (IFRS)
(Substantial changes Feb. 2009; major additions and deletions Feb. 2010; minor changes
Jan. 2011 & Jan. 2012)
Background
In January 2006, the AcSB announced its decision to move financial reporting for Canadian
publicly accountable enterprises to a single set of “globally accepted high-quality standards”
— namely, IFRSs issued by the IASB.
Application

At that point in time, the term “publicly accountable enterprises” (PAE) was used in the
same sense as that of section 1300 of the Handbook.

An entity has public accountability if:

o
it has issued debt or equity securities in a public market; or
o
it holds assets in a fiduciary capacity for a broad group of outsiders.
Effectively, the definition is such that it applies to all entities other than those described
in the chart below.
1

In September 2008, the AcSB further refined the definition:
o
A PAE is a profit-oriented entity that has issued (or is in the process of issuing)
debt or equity securities that are (or will be) outstanding and traded in a public
market, or holds assets in a fiduciary capacity for a broad group of outsiders.

“A public market” is defined as “a domestic or a foreign stock exchange or an over-thecounter market, including local and regional markets.”

NFPs do not fall within the definition, even if such an organization happens to meet one
or more of the criteria for a profit-oriented enterprise to be considered a PAE.

In February 2008, the AcSB confirmed that publicly accountable enterprises will be
required to report using the Canadian version of IFRS-based standards for fiscal periods
beginning on or after January 1, 2011.
Effective Date

Financial statements for years ending December 31, 2008 and 2009 were required to
disclose an enterprise’s plan for convergence and any anticipated effects that will arise
with the change to IFRSs, with 2009 reports providing a greater degree of quantification
of the effects of the change.
2

For firms with a December 31st year end, financial statements for the year ending
December 31, 2010 will be the last year of reporting under current Canadian GAAP.

If a firm’s year end is other than December 31st, then that is when the new standards
become effective.

For example, a firm with a November 30th year end would apply current GAAP for its
year end November 30, 2011.

It would apply the new standards for the fiscal period beginning December 1st, 2011.

Consequently, it would be 2012 before all publicly accountable firms are using IFRS.

As noted, for affected firms, financial statements for the year ending
December 31, 2011 will be the first year of reporting under IFRS-based Canadian GAAP.
The AcSB maintains separate versions of the Handbook (pre/post IFRS) as it
previously did with its pre/post financial instruments versions.
Summary of Changes
Disclosure of Accounting Policies

In May 2008, the CSA issued Staff Notice 52-320, providing guidance to an issuer on
disclosure of expected changes in accounting policies relating to an issuer’s changeover
to International Financial Reporting Standards as the basis for preparing its financial
statements.
3

The guidance applies to disclosure relating to each financial reporting period in the three
years before the first year for which an issuer prepares its financial statements in
accordance with IFRS.

Essentially, the CSA Staff Notice reinforced the CICA requirements to begin disclosing
information as early as interim statements prepared in 2009.

In April 2008, the AcSB released an exposure draft entitled Adopting IFRSs in Canada.
Adopting IFRS

The exposure draft (ED) itself was only 13 pages — but it came with a 2,400 page
appendix — all IFRSs as of January 1, 2007!

The goal of the ED was not to seek comments on individual issues, but rather to identify
any areas where problems could arise.

In its review of comments received, the AcSB noted that respondents presented no
compelling arguments for why one or more of the IFRSs exposed in the omnibus ED
should not be applied in Canada.

It further noted that a large majority of respondents were not concerned about the
possibility of some entities in Canada choosing to adopt IFRSs in advance of the
mandatory changeover date.

Therefore, the AcSB decided to continue with its plans to incorporate the IFRSs exposed
in the omnibus ED into the Handbook in mid-2009.

In March 2009, the AcSB released an exposure draft with the imaginative title Adopting
IFRSs in Canada, II.

As noted above, respondents did not provide any compelling reasons as to why the
subjects covered in the April 2008 ED (the 2007 IFRS set) should not be adopted in
Canada.

The 2009 ED dealt with changes made after the 2007 Bound Volume was published.

The ED also finalized the definition of a publicly accountable enterprise, confirmed the
effective date of the transition and dealt with the disposition of EIC Abstracts that are
part of current GAAP.

Furthermore, the ED presented a preliminary draft of new introductory material to be
included in the Handbook once it contains IFRSs.

Therefore, IFRSs replace the current standards and interpretations applicable to publicly
accountable enterprises, effective for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2011.
4

Private enterprises and not-for-profit organizations are permitted to adopt IFRSs once
they have been included in the Handbook, but are not required to do so.
Publicly Accountable Enterprise Definition

The definition of a publicly accountable enterprise is stated in a positive manner—not by
what it had not done (as was the case before).

A publicly accountable enterprise is an entity, other than a not-for-profit organization, or
a government or other entity in the public sector that:
o
has issued, or is in the process of issuing, debt or equity instruments that are, or will
be, outstanding and traded in a public market (a domestic or foreign stock exchange
or an over-the-counter market, including local and regional markets); or
o
holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses.
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2010/2011 IFRS Updates
Restructuring of the Handbook

In January 2010, the Handbook was restructured as follows to implement the strategy of
the Accounting Standards Board (AcSB) of adopting different sets of standards for
different categories of entities:
o
Part I — International Financial Reporting Standards;
o
Part II — Accounting Standards for Private Enterprises;
o
Part III — Accounting Standards for Not-for-Profit Organizations;
o
Part IV — Accounting Standards for Pension Plans; and
o
Part V — pre-changeover accounting standards. These standards will cease to be
Canadian generally accepted accounting principles for publicly accountable
enterprises for fiscal years beginning in 2011.

The Preface to the CICA Handbook — Accounting provides an overview of the structure
of the Handbook and the applicability of the different sets of standards it contains.

Part I — International Financial Reporting Standards includes:
o
an Introduction;
o
the Framework for the Preparation and Presentation of Financial Statements
(subsequently replaced by The Conceptual Framework for Financial Reporting in
January 2011);
o
o
the IFRSs in Effect at December 31, 2009; and
amendments, revisions, and new IFRSs issued at December 31, 2009 but not yet
effective, except for IFRS 9 Financial Instruments.

Part I includes only authoritative material issued by the International Accounting
Standards Board. Part I applies to publicly accountable enterprises other than pension
plans. Private enterprises and not-for-profit organizations may adopt the standards in
Part I instead of the standards in Parts II and V, respectively. Part I is effective for
interim and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. Earlier application is permitted.

The AcSB plans to issue a Background Information and Basis for Conclusions document
to assist in understanding how the AcSB reached decisions relevant to the addition of
IFRSs as Part I.
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IFRSs in Effect on January 1, 2010

In June 2010, the International Financial Reporting Standards (IFRSs) that were in effect
for annual periods beginning on January 1, 2010 were incorporated into the IFRSs in
Effect section of the 2010 edition. As such, the 2010 edition includes the following:
o
IFRS 1 First-time Adoption of International Financial Reporting Standards,
amendment regarding Additional Exemptions for First-time Adopters;
o
IFRS 2 Share-based Payment, amendment regarding Group Cash-settled Sharebased Payment Transactions; and
o
2009 Improvements to IFRSs, amendments regarding non-urgent but necessary
changes to IFRSs.

IFRIC 8 Scope of IFRS 2 and IFRIC 11 IFRS 2 — Group and Treasury Share Transactions
were incorporated into amended IFRS 2 and, accordingly, were withdrawn.

To identify the changes made, refer to the effective date guidance in the 2010 edition.
IFRSs in Effect on January 1, 2011


In November 2010, International Financial Reporting Standards (IFRSs) that are in
effect for annual periods beginning on January 1, 2011 were incorporated into the IFRSs
in Effect section of the 2011 edition. As such, the 2011 edition includes the following:
o
IFRS 1 First-time Adoption of International Financial Reporting Standards,
amendment regarding Limited Exemption from Comparative IFRS 7 Disclosures for
First-time Adopters;
o
IAS 24 Related Party Disclosures (Revised);
o
IAS 32 Financial Instruments: Presentation, amendment regarding Classification of
Rights Issues;
o
IFRIC 14 IAS 19 — The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction, amendment regarding Prepayments of a
Minimum Funding Requirement;
o
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (New); and
o
2010 Improvements to IFRSs, amendments regarding non-urgent but necessary
changes to IFRSs.
To identify the changes made, refer to the effective date guidance in the 2011 edition or
IFRSs issued but not yet effective in the 2010 edition.
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
IFRSs in effect on January 1, 2010 — For reference purposes, the 2010 edition has been
retained.
Introduction to Part I

The Introduction to Part I of the Handbook was amended several times in 2010.

In April 2010 , the Introduction to Part I was amended to make clear that:
o
the Introduction should be read in conjunction with the Preface to the CICA
Handbook — Accounting;
o
Part I does not contain the International Accounting Standards Board's International
Financial Reporting Standard for Small and Medium-sized Entities.
o
In October 2010, the Introduction to Part I was amended to revise the mandatory
date for first-time adoption of International Financial Reporting Standards by
investment companies, segregated accounts of life insurance enterprises and entities
with rate-regulated activities, to interim and annual financial statements relating to
annual periods beginning on or after January 1, 2012. Earlier adoption is permitted.
o
In December 2010, the Introduction to Part I was amended to incorporate
information previously contained in the Preface to the CICA Handbook — Accounting
on first-time adoption of this Part by entities with non-calendar year-ends. The
information previously contained in the Preface was amended to improve clarity
without changing the intent.
The Conceptual Framework for Financial Reporting

In January 2011, The Conceptual Framework, issued by the International Accounting
Standards Board (IASB) in September 2010, which sets out the concepts that underlie
the preparation and presentation of financial statements for external users, replaced the
Framework for the Preparation and Presentation of Financial Statements (the 1989
Framework). The highlights of the framework are as follows:
o
Chapter 1 sets out the objective, usefulness, and limitations of general purpose
financial reporting. Chapter 2 on the reporting entity will be added at a later date.
Chapter 3 establishes the fundamental and enhancing qualitative characteristics of
useful financial information. Chapter 4 consists of the remaining text from the 1989
Framework on the going concern assumption, the elements, and the recognition and
measurement of the elements of financial statements.
o
Stakeholders can apply the Conceptual Framework immediately as there is no
effective date. References to the 1989 Framework in International Financial
Reporting Standards have not been revised by the International Accounting
Standards Board.
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IFRS 1 First-time Adoption of International Financial Reporting Standards

In April 2010, IFRS 1 First-time Adoption of IFRS, Paragraphs 39D and E3 were added to
provide first-time adopters the same relief on transition to IFRSs that those already
applying IFRSs received on adopting the March 2009 amendment to IFRS 7 Financial
Instruments: Disclosures. A consequential amendment was made to paragraph 44G of
IFRS 7. These amendments are effective for fiscal years beginning on or after July 1,
2010. Earlier application is permitted.

In July 2010, IFRS 1 First-time Adoption of IFRS, Paragraphs 27 and 32 were amended
and paragraph 27A was added to clarify how changes in accounting policies should be
addressed by a first-time adopter when those changes occur after the publication of the
entity's first interim financial report. Paragraphs 31B and D8B were added and
paragraphs D1(c) and D8 were amended to extend the scope of the deemed cost
exemption to an event-driven fair value and to entities with operations subject to rate
regulation. These amendments are effective for annual periods beginning on or after
January 1, 2011.
IFRS 3 Business Combinations

In July 2010, IFRS 3 Business Combinations, Paragraphs 19, 30 and B56 were amended
and paragraphs B62A and B62B were added to limit the scope of the measurement
choice for certain components of non-controlling interest and to clarify the accounting
for unreplaced and voluntarily replaced share-based payment awards. As well,
paragraphs 65A-65E were added to this standard and conforming changes have been
made to IFRS 7 Financial Instruments: Disclosures, IAS 32 Financial Instruments:
Presentation, and IAS 39 Financial Instruments: Recognition and Measurement to
provide transition guidance on how to account for contingent consideration from a
business combination that occurred before the effective date of IFRS 3. These
amendments were effective for annual periods beginning on or after July 1, 2010.
IFRS 7 Financial Instruments: Disclosures

In July 2010, IFRS 7, Financial Instruments: Disclosures, Paragraph 32A was added to
emphasize the interaction between qualitative and quantitative disclosures about the
nature and extent of risks arising from financial instruments. Paragraph 34 was
amended to clarify that only material disclosures of quantitative financial information are
required. Paragraphs 36-38 were amended to revise the credit risk disclosures required
for financial assets, including collateral held and renegotiated financial assets. These
amendments were effective for annual periods beginning on or after January 1, 2011.

In January 2011, IFRS 7, Financial Instruments: Disclosures was amended regarding
Disclosures — Transfers of Financial Assets, issued by the IASB in October 2010, to
enhance the disclosure requirements for transfers of financial assets that result in
derecognition. The amendments were as follows:
9
o
Paragraphs 42A, 42C, and B29-B31 were added to provide guidance on identifying
transfers of financial assets and continuing involvement in a transferred asset for
disclosure purposes.
o
Paragraph 42B was added and paragraph 13 was replaced by paragraphs 42D-42H
and B32-B39. These amendments provide greater transparency around risk
exposures relating to transfers of financial assets that are:

not derecognized in their entirety; and

derecognized in their entirety, but with which the entity continues to have some
continuing involvement.
o
The amendments also provide greater transparency about the effect of those risks on
an entity's financial position.
o
These amendments are effective for annual periods beginning on or after July 1,
2011. Earlier application is permitted. An entity need not apply the disclosures for
any period presented that begins before the date of initial application of the
amendments.
o
First-time adopters now have the same relief on transition to IFRSs that those
already applying IFRSs received on adopting these amendments to IFRS 7.
IFRS 9 Financial Instruments

In April 2010, IFRS 9 Financial Instruments was issued. This new standard replaced the
requirements in IAS 39 Financial Instruments: Recognition and Measurement for
classification and measurement of financial assets. IFRS 9 is the first part of a multiphase project to replace IAS 39. The main features of the new standard are:
o
A financial asset is:

classified on the basis of the entity's business model for managing the financial
asset and the contractual cash flow characteristics of the financial asset;

initially measured at fair value plus, in the cash of a financial asset not at fair
value through profit or loss, particular transaction costs; and

subsequently measured at amortized cost or fair value.
o
Reclassification is required when the business model under which the assets are
managed changes.
o
Gains and losses on investments in equity instruments that are not held for trading
may be presented in other comprehensive income if so elected at initial recognition.
10

IFRS 9 is effective for fiscal years beginning on or after January 1, 2013. Earlier
application is permitted.
IFRS 10 Consolidated Financial Statements

In May 2011, the IASB released IFRS 10, Consolidated Financial Statements, which
established principles for the presentation and preparation of consolidated financial
statements when an entity controls one or more other entities.

Entities that are controlled must be consolidated. An investor controls an investee when
the investor “is exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee.”
(IFRS 10, Paragraph 6) IFRS 10 identifies three criteria for assessing control:
1. power over an investee — does the reporting entity have the current ability to
direct activities that significantly affect an investee’s returns;
a. An investor has power over an investee when the investor has existing
rights that give it the current ability to direct the relevant activities —
specifically, the activities that significantly affect the investee’s returns.
2. exposure to, or rights to, variable returns from involvement with an investee;
and
a. An investor is exposed, or has rights, to variable returns from its
involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s
performance.
3. linkage between power and returns — whether the investor has the ability to
affect its returns through its power.
a. Lastly, there is the linkage: an investor controls an investee if the investor
not only has power over the investee and exposure or rights to variable
returns from its involvement with the investee, but also has the ability to
use its power to affect the investor’s returns from its involvement with the
investee.

The accounting requirements for business combinations and their effect on consolidation
remain part of IFRS 3, Business Combinations, not IFRS 10. The presentation and
disclosure requirements for consolidated financial statements are contained in IFRS 12,
Disclosure of Interests in Other Entities.

This change is effective for annual periods beginning on or after January 1, 2013, with
early adoption permitted.
Illustrative Examples
In determining which entities to consolidate, accountants will use the definition of control
given in IFRS 10. Prior to the adoption of IFRS 10, control was determined using the
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definition in IAS 27 control; that is, control was defined as “…the power to govern the
financial and operating policies of an entity so as to obtain benefits from its
activities”. The definition of control in IFRS 10 is central to understanding and
applying this new standard. Where control is determined by voting rights, it may be
clear cut whether or not the investor has control. In cases where it is not clear cut,
significant professional judgment is required to determine control.
Step 1: The investor, who potentially controls another entity, begins by identifying
those activities of the investee that have a significant influence on the investee’s
return. Activities that typically have relevance in determining an investee’s return
are: 1) establishing operating policies, 2) making capital investment decisions, 3)
appointing key personnel, 4) determining capital structure, 5) managing investments,
6) managing sales programs, and 7) making strategic decisions about research and
development.
Step 2: Once the relevant activities that influence the investee’s returns are
determined, the investor must determine who has the power to influence those
activities (step 2). Indicators of power to influence the relevant activities include: 1)
voting rights, 2) potential voting rights, 3) the right to appoint or remove key
personnel, 4) decision-making rights established by contract, and 5) the right to
appoint or remove members from the governing body (generally the board). It is
rights that are currently exercisable, not future rights, that are considered. If another
party can block the investor from exercising his rights, for instance by vetoing a
decision, or if the investor would face a significant penalty by enforcing a right, the
investor does not have an exercisable right.
Step 3: The third, and final, step in determining control is to examine the connection
between power over an investee’s activities and the investee’s returns. To satisfy the
definition of control set out in IFRS 10, the investor must be able to benefit from the
power it has. If the investor cannot benefit from its power, he does not have control
over the investee.
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IFRS 11 Joint Arrangements

In May 2011, the IASB released IFRS 11, Joint Arrangements, which classifies joint
arrangements into two types — joint operations and joint ventures.

A joint operation is a joint arrangement whereby the parties — the joint operators —
that have joint control of the arrangement have rights to the assets and obligations for
the liabilities relating to the joint arrangement. Holding title to the assets would be
evidence of rights to assets; correspondingly, being liable to a third party for specific
liabilities is evidence of obligation. Both must be present for the arrangement to be a
joint operation.

A joint venture is a joint arrangement whereby the parties — the joint venturers — that
have joint control of the arrangement have rights to the net assets of the joint
arrangement. Typically, a joint venture is structured through a separate vehicle (that is,
entity) while joint operations are usually contractual rather than separate.

The definition of control used in IFRS 11 is drawn from IFRS 10 Consolidated Financial
Statements: “an investor controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee.” IFRS 10 states that if two or more
investors who collectively control an investee must act together to direct its relevant
activities, because no investor can direct the activities without the cooperation of the
others; no investor individually controls the investee. Each investor would then account
for its interest in the investee in accordance with … IFRS 11, Joint Arrangements.

For joint ventures:
1. A joint venturer accounts for its interest in a joint venture as an investment, using
the equity method, in accordance with IAS 28, Investments in Associates and
Joint Ventures unless the entity is exempted from applying the equity method as
specified in IAS 28.
2. A party that participates in, but does not have joint control of, a joint venture
accounts for its interest in the arrangement in accordance with IFRS 9, Financial
Instruments, unless it has significant influence over the joint venture, in which
case it accounts for its interest in accordance with IAS 28.

For joint operations, the joint operator has to recognize (in relation to a joint operation):
1. its assets, including its share of any assets held jointly;
2. its liabilities, including its share of any liabilities incurred jointly;
3. its revenue from the sale of its share of the output arising from the joint
operation;
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4. its share of the revenue from the sale of the output by the joint operation; and
5. its expenses, including its share of any expenses incurred jointly.
In addition, the joint operator accounts for the assets, liabilities, revenues and
expenses relating to its interest in the joint operation in accordance with the IFRSs
applicable to the particular assets, liabilities, revenues and expenses.


See the discussion of IAS 28, below, regarding accounting for transactions
between the joint venture or joint operation and the venturers or operators,
respectively. Specifically, that such transactions can be treated as transactions
between independent third parties to the extent of the other participants’ interests
in the joint operation or joint venture. Additionally, losses and reductions in net
realizable value are to be recognized, and recognition of gains is deferred.
This change is effective for annual periods beginning on or after January 1, 2013, with
early adoption permitted.
Illustrative Examples
The first step in applying IFRS 11 is to determine whether there is collective control or if
one party does control the arrangement. The definition of control is given in IFRS 10.
If there is collective control, IFRS 11 applies. If control is not collective, then IFRS 11
does not apply. Note: collective control means that the parties must act together to
determine the relevant activities of the arrangement.
Having determined that there is collective control, the next step is to determine if the
control is also joint control. Note: joint control means that the parties must
unanimously agree on decisions regarding the relevant activities of the arrangement.
Joint control may be implicit or explicit. Implicit joint control is seen in a fifty-fifty
sharing arrangement that requires a majority decision. A contractual requirement that
decisions must be unanimous makes the joint control explicit.
If there is joint control, the next step in applying IFRS 11 is to determine if the joint
arrangement is a joint operation or a joint venture. The diagram below sets out the
questions you must ask, and answer, to make this determination. On adopting IFRS
11, all joint arrangements should be reassessed; this will require professional
judgment in evaluating each arrangement.
For an example of how to classify a joint arrangement, please see the Ernst and Young document, titled
IASB issues three new standards: Consolidated Financial Statements, Joint Arrangements, and
Disclosure of Interests in Other Entities, diagram 4.
14
Once you have classified the arrangement, you turn to the appropriate accounting
standard — IAS 28 if the arrangement is a joint venture, and to the appropriate
standards for the transactions of the joint operation.
As noted above, if the joint arrangement is a joint venture, it must be accounted for
using equity accounting rather than proportionate consolidation. In switching from
proportionate consolidation to equity accounting, the most visible change in the
financial statements will be the reduction in sales and cost of goods sold on the
income statement and in property, plant, and equipment on the balance sheet. Other
areas that may change are in the reporting of hedges if the venturer has hedged the
joint venture’s assets or liabilities, and interest that the venturer formerly capitalized
as part of its joint venture asset would no longer be capitalized.
The changes can be summarized as follows:
Financial statements
Potential effects
Statement of financial position
Non-current assets
Increase or decrease
Current assets
Decrease
Equity
Potential increase if
the venture has net
liabilities
Non-current liabilities
Decrease
Current liabilities
Decrease
Statement of comprehensive income
Revenue
Decrease
Operating expenses
Decrease
Results from operating
activities
Operating margin
(results from operating
activities divided by
revenue)
Net finance costs
Increase or decrease
Increase or decrease
Increase or decrease
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Explanation
Depends on whether the joint venture’s
net assets exceed its non-current assets
or vice versa.
The joint venture’s assets will no longer
be proportionately consolidated.
Under the equity method, a share of net
liabilities is not recognised (the
investment is reduced to nil and no
further) unless certain conditions are
met.
The joint venture’s liabilities will no
longer be proportionately consolidated.
The joint venture’s liabilities will no
longer be proportionately consolidated.
The joint venture’s revenues will no
longer be proportionately consolidated.
The joint venture’s operating expenses
will no longer be proportionately
consolidated.
Depends on the results of the joint
venture.
Depends on the profitability of the joint
venture relative to the group.
The joint venture’s net finance costs will
no longer be proportionately
consolidated; the increase or decrease
Share of profit of
equity-accounted
investees
Profit or loss before tax
Increase or decrease
Profit or loss
Potential increase
when the venture has
net liabilities
Increase or decrease
depends on the net finance costs of the
joint venture.
Depends on the results of the joint
venture.
Decrease if the joint venture has a tax
expense as this is now taken up in the
venturer’s pre-tax results, and vice
versa.
See explanation in relation to equity.
Source:
KPMG, (May 2011). IFRS, First Impressions: Joint Arrangements. Page 23.
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/First-ImpressionsJoint-arrangements.pdf
IFRS 12 Disclosure of Interests in Other Entities

In May 2011, the IASB released IFRS 12, Disclosure of Interests in Other Entities, which
is applicable to entities that have an interest in a subsidiary, a joint arrangement, an
associate, or an unconsolidated structured entity.

The intent of the disclosure requirements is to provide financial statement users with the
information necessary to evaluate risks associated with an entity’s interests in other
entities, and the effects of those interests on the entity’s financial position, financial
performance, and cash flows.

The entity must use judgment to determine if the interest is classified as a subsidiary, a
joint arrangement, an associate, or an unconsolidated structured entity. The reporting
entity is required to disclose the significant judgments and assumptions it has made in
determining the nature of the interest, with the focus on how the entity concluded that it
controlled another entity, or how it determined that it had joint control and/or was a
party to a joint arrangement, and what the nature of that joint arrangement was. All the
information that is required for the financial statement reader to assess risk is to be
provided even if it is not specifically identified in the accounting standards.


For example, disclosures might discuss why or how an entity determined that it
does not control another entity even though it holds more than half of the voting
rights of the other entity, or how and why it does control another entity even
though it holds less than half of the voting rights of the other entity.
For subsidiaries, an entity discloses information that enables users of its consolidated
financial statements to
16
1. understand the composition of the group;
2. understand the interest that non-controlling interests have in the group’s activities
and cash flows;
3. evaluate the nature and extent of significant restrictions on its ability to access or
use assets, and settle liabilities, of the group;
4. to evaluate the nature of, and changes in, the risks associated with its interests in
consolidated structured entities;
5. to evaluate the consequences of changes in its ownership interest in a subsidiary
that do not result in a loss of control; and
6. to evaluate the consequences of losing control of a subsidiary during the reporting
period.

For joint ventures and associates, an entity discloses information that enables users of
its financial statements to evaluate the nature, extent, and financial effects of its
interests in joint arrangements and associates, including the nature and effects of its
contractual relationship with the other investors with joint control of, or significant
influence over, joint arrangements and associates; and the nature of, and changes in,
the risks associated with its interests in joint ventures and associates.

Regarding an entity’s interests in unconsolidated structured entities, disclosures must be
made so that financial statement readers can understand the nature and extent of the
interest(s) and can evaluate the risks associated with those interests. Qualitative and
quantitative information about the nature, purpose, size, activities, and financing of the
entity are required.

For example, along with the carrying amounts of the assets and liabilities
recognized in its financial statements relating to its interests in unconsolidated
structured entities, the reporting entity would disclose the amount that best
represents the entity’s maximum exposure to loss from its interests in the
unconsolidated structured entity, including how the maximum exposure to loss is
determined. If the reporting entity cannot quantify its maximum exposure to loss
from its interests in unconsolidated structured entities, it needs to disclose that
fact and the reasons therefore.

This change is effective for annual periods beginning on or after January 1, 2013,
with early adoption permitted.
Illustrative Examples
17

If the reporting entity has an interest in another entity that is exposed to risks from
credit swaps, the reporting entity must disclose this risk.

In its disclosures, the reporting entity may aggregate according to the nature of the
risks, by geographic region, or by industry.

Disclosure is also required when the reporting entity holds more than 50% of the shares
in another entity but has concluded that it does not have control, when the reporting
entity has less than 50% of the voting shares but concludes that it does have control,
and when the reporting entity is either principal or agent to another entity.

When the non-controlling interests in a subsidiary are material to the reporting entity,
the reporting entity is required to disclose, among other things,

the proportion of ownership interests and voting rights held by the noncontrolling interests,

the profit or loss allocated to non-controlling interests during the period,

accumulated non-controlling interests at the end of the period,

dividends paid to non-controlling interests during the period, and

summary information regarding the subsidiary’s assets, liabilities, profit or loss,
and cash flows.
Any restrictions on the reporting entity’s ability to access or use the subsidiary’s
assets or to settle the subsidiary’s liabilities must be disclosed.

Typical disclosures would include things such as the nature of the entity’s
relationship with the joint arrangement or associate and the proportion of
ownership interest or participating share held by the entity and, if different, the
proportion of voting rights held (if applicable). For joint ventures and associates
that are material to the entity, disclosures such as whether the investment in
the joint venture or associate is measured using the equity method or at fair
value would be made, along with summarized financial information about the
joint venture or associate that is required by the Standard.
Disclosure required of:
Joint Ventures
Total current assets
Cash and cash equivalents
Non-current assets
Total current liabilities
Certain current financial liabilities
●
●
●
●
●
18
Associates
●
●
●
Total non-current liabilities
Certain non-current liabilities
Revenue
Depreciation/amortization
Interest income
Interest expense
Income tax expense/income
Profit or loss from continuing operations
Profit or loss from discontinued operations
Other comprehensive income
Total comprehensive income
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
●
Source: KPMG, (May 2011). IFRS, First Impressions: Joint Arrangements. Page 32.
http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/First-ImpressionsJoint-arrangements.pdf

Information about joint ventures is to be disclosed separately from information related
to associates. If material, each associate or joint venture is to be disclosed separately. A
reconciliation should be presented that reconciles the amounts reported by the reporting
entity to the proportionate amount of the disclosed amounts. The reporting entity must
present a reconciliation of these summary amounts to the carrying amount of its interest
in the joint venture(s) or associate(s).

The mandatory date for IFRS 12 is annual reporting periods beginning on or after
January 1, 2013; early adoption is permitted. Piecemeal early adoption of some of the
disclosure requirements of IFRS 12 is permitted without requiring that all of the
disclosures required under IFRS 12 be made. However if IFRS 11 is adopted early, the
reporting entity must also adopt IFRS 10, IFRS 11, IAS 27, and IAS 28, and disclose
that the standards have been adopted early.
19
IFRS 13 Fair Value Measurement

In May 2011, the IASB issued IFRS 13, Fair Value Measurement. IFRS 13 defines “fair
value,” sets out a framework for measuring fair value, provides guidance for measuring
fair value and addressing valuation uncertainty in markets that are no longer active, and
sets out the disclosures necessary to understand what underpins the fair value
measurements.

IFRS 13 does not introduce any new requirements to measure an asset or liability at fair
value, nor does it change what is measured at fair value in IFRS or address how to
present changes in fair value. It applies when other IFRS require or permit fair value
measurements, with the following exceptions:
share-based payment transactions (IFRS 2), leasing transactions (IAS 17),
measurements that have similarities to fair value but are not fair value, such
as net realizable value in regard to inventories (IAS2) or value in use as it
relates to impairment of assets (IAS 36), employee benefit plan assets
measured at fair value (IAS 19), retirement benefit plan investments
measured at fair value (IAS 26), and assets for which recoverable amount is
fair value less costs of disposal (IAS 36).

Detailed disclosures are required about fair values derived using models; this increases
the transparency of fair value measurements. Some disclosures previously required
under IFRS 7, Financial Instruments: Disclosures, have been relocated to IFRS 13.

Fair value is defined as “the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date” (that is, an exit price). It is a market-based measurement, not an
entity-specific measurement.


When measuring fair value,

an entity uses the assumptions that market participants would use when pricing
the asset or liability under current market conditions, including assumptions about
risk,

the entity’s intention to hold an asset or to settle or otherwise fulfill a liability is
not relevant,

the transaction to sell the asset or transfer the liability is assumed to take place in
the principal market for the asset or liability, or in the absence of a principal
market, in the most advantageous market for the asset or liability.
Different entities (and businesses within those entities) with different activities may
have access to different markets, so the principal (or most advantageous) market for
the same asset or liability might be different for different entities (and businesses
20
within those entities). The order of markets is important: if there is a principal market
for the asset or liability, the fair value measurement represents the price in that
market (whether that price is directly observable or estimated using another
valuation technique), even if the price in a different market is potentially more
advantageous at the measurement date. The principal (or most advantageous)
market (and thus, market participants) must be considered from the perspective of
the entity. Even when there is no observable market to provide pricing information at
the measurement date, IFRS 13 states that a fair value measurement can be derived
by assuming that a transaction takes place at that date, considered from the
perspective of a market participant that holds the asset or owes the liability.

Transaction costs: The price in the principal (or most advantageous) market used to
measure the fair value of an asset or liability is not adjusted for transaction costs.
Instead, transaction costs are accounted for in accordance with other IFRSs. Why? As
with business combinations, transaction costs are not a characteristic of an asset or a
liability — they are a cost of “doing business.” However, transaction costs do not include
transport costs. The price in the principal (or most advantageous) market has to be
adjusted for the costs, if any, that would be incurred to transport the asset from its
current location to that (the principal or most advantageous) market.

When an asset is acquired or a liability is assumed in an exchange transaction for that
asset or liability, the transaction price is the price paid to acquire the asset or
received to assume the liability (an entry price). This contrasts with the notion of fair
value adopted by IFRS 13, namely that fair value is the price that would be received
to sell the asset or paid to transfer the liability (an exit price). In many cases, the
transaction price will equal the fair value. On the other hand, in many cases entry
price is not the same as exit price.

Therefore, when determining whether fair value (as contemplated by IFRS 13) at
initial recognition equals the transaction price, an entity needs to take into account
factors specific to the transaction and to the asset or liability.

Consequently, if another IFRS requires or permits an entity to initially measure an
asset or a liability at fair value — and the transaction price differs from fair value —
then the entity must recognize any resulting gain or loss in profit or loss, unless that
IFRS specifies otherwise.

IFRS 13 directs an entity to use valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to measure fair value,
maximizing the use of relevant observable inputs and minimizing the use of
unobservable inputs. There are three widely used valuation techniques: the market
approach, the cost approach, and the income approach.

The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable (that is, similar) assets,
liabilities, or a group of assets and liabilities, such as a business.
21



The cost approach reflects the amount that would be required currently to replace
the service capacity of an asset (often referred to as current replacement cost).

The income approach converts future amounts (for example, cash flows or
income and expenses) to a single current (that is, discounted) amount. When the
income approach is used, the fair-value measurement reflects current market
expectations about those future amounts.
IFRS 13 uses the fair-value hierarchy in order to increase consistency and
comparability in fair-value measurements and related disclosures. The hierarchy
categorizes the inputs to valuation techniques used to measure fair value into three
levels.

Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date. Level 1
inputs are given the highest priority.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly.

Level 3 inputs are inputs for the asset or liability that are unobservable, including
the entity’s own data, which are adjusted if necessary to reflect market
participants’ assumptions.

Disclosure requirements are greater for Level 2 than for Level 1, and greater for
Level 3 than for Level 2. Additionally, greater disclosure is required for recurring
Level 3 measurements than for one-off Level 3 measurements.
An entity must disclose information that enables users of its financial statements to
assess

the valuation techniques and inputs used to develop measurements for assets
and liabilities that are measured at fair value on a recurring or non-recurring
basis in the statement of financial position after initial recognition; and

the effect of the measurements on profit or loss or other comprehensive income
for the period for recurring fair-value measurements using significant
unobservable inputs (that is, Level 3 inputs).

IFRS 13 states that fair value is the price that would be received to sell an asset (or
paid to transfer a liability) in an orderly transaction in the principal (or most
advantageous) market at the measurement date under current market conditions,
regardless of whether that price is directly observable or estimated using another
valuation technique.

Where there is an active market and/or market participants, the application of IFRS
13 to financial assets and liabilities is relatively straightforward because there is an
22
observable price. Level 1 or 2 inputs can be determined. The challenge emerges when
dealing with non-financial assets as there often is no active market. Even if there is a
“market,” there may not be sufficient participants or “trades” to establish a fair value
using level 1 or 2 inputs. In such cases, “a fair-value measurement of a non-financial
asset takes into account a market participant’s ability to generate economic benefits
by using the asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use.” The highest and best
use of a non-financial asset takes into account the use of the asset that is physically
possible, legally permissible, and financially feasible.

This change is effective for annual periods beginning on or after January 1, 2013. Early
adoption is permitted.
Illustrative Examples
In determining fair value, the entity must consider any factors that would be
important to market participants in valuing the asset, such as restrictions on use of
the asset that extend to a subsequent owner of the asset, or the condition and
location of the asset. Actual market participants consider the cost of relocating
assets that are remotely located from where they would be needed.
Applying the highest and best use criterion in determining an asset’s fair value may
result in an entity reporting a higher value for the asset than it has in the past if it
had not previously used this criterion. An entity that buys an asset that it does not
intend to use because it wishes to preclude anyone else from using the asset, must
continue to report the asset at the fair value that another market participant would
value the asset at. Examples include a brand name that the entity wishes to remove
from the market, a competing manufacturing or processing facility, or a website
domain name that the entity wishes to prevent anyone else from using (such as the
various .xxx domains that many legitimate business purchased to prevent others
from creating sites with the entity’s name under the .xxx extension).
Examples of the fair value hierarchy
Level 1: Quoted prices on a stock exchange such as the Toronto Stock Exchange.
The asset (shares of a particular class of stock, for example Bell Canada, are the
same for every share of Bell Canada stock of a particular class), which closed at
$40.37 on February 3, 2012.
Level 2: Interest rates and yield curves for specific periods, which are observable,
and which implicitly incorporate volatility of the stock and credit risk of default; for
example the Bell Canada’s five-year, 4.85% corporate bonds that mature on June
30, 2014, which were trading at 106.08 to yield 2.23% on February 3, 2012.
Level 3: Inputs that are unobservable, such as those for valuing an investment in a
company that is non-publicly traded, for example, Bell Canada’s investment in the
Bell Centre in Montreal or, through Bell Aliant, its investment in FTTH Technology.
Neither Bell Centre or FTTH Technology are publicly traded, thus under IFRS 13, the
23
method of determining the fair value of these investments would involve Level 3
input data.
http://www.financialpost.com/markets/data/bonds-canadian.html
IAS 1 Presentation of Financial Statements

In July 2010, IAS 1 Presentation of Financial Statements, Paragraphs 106 and 107 were
amended and paragraph 106A was added to clarify how entities may present the
required reconciliations for each component of other comprehensive income in order to
reconcile the equity section of the statement of financial position. These amendments
were effective for annual periods beginning on or after January 1, 2011.

In June 2011, the IASB issued Presentation of Items of Other Comprehensive Income
(amendments to IAS 1) to improve the consistency and clarity of the presentation of
items of other comprehensive income (OCI). It is to be presented with the same
prominence as profit and loss. Items within OCI are to be grouped according to whether
they could or could not potentially be reclassified to profit or loss (reclassification
adjustments). If the items are presented before tax, then the tax related to each of the
two groups of OCI items (those that might be reclassified and those that will not be
reclassified) must be shown separately. This amendment does not result in any changes
to the items presented in OCI.
Illustrative Examples
o
Items included in OCI that could potentially be reclassified to profit and loss
include

exchange gains and losses on cash flow hedges. and

foreign exchange translation adjustments from consolidating financial
statements.
o
Items that will not be reclassified to profit and loss include

fair-value adjustments on equity investments if on initial recognition the
investor elected to report the adjustments in other comprehensive income,

revaluation adjustments on land,

the change in fair value resulting from changes in credit risk on liabilities
carried at fair value through profit and loss,

changes in revaluation surplus, and
24

actuarial gains and losses (now known as “remeasurements”).
Illustrative Example: Statement of Other Comprehensive Income
SIM Company
Statement of Comprehensive Income — partial
for the years ended December 31, 2011 and 2012
2012
2011
$2,750,600
$2,498,500
Other Comprehensive Income
Potentially reclassifiable to profit and loss in the future:
Exchange gain on cash flow hedges, net of tax
Exchange gain (loss) on translating foreign operations, net of tax
18,000
123,000
12,500
–95,000
Income tax expense (recovery) on potentially reclassifiable items
35,250
–20,625
Not reclassifiable to profit and loss in the future:
Fair-value adjustment on equity investment in Abco, net of tax
Revaluation adjustment on land in Northern Townships, net of tax
Actuarial gains (losses) on employee pension plan, net of tax
25,700
75,600
33,400
48,700
–8,500
Income tax expense (recovery) on potentially reclassifiable items
25,325
18,400
181,725
–6,675
$2,932,325
$2,491,825
Profit for the year
Other Comprehensive Income for the year
TOTAL COMPREHENSIVE INCOME FOR THE YEAR

The terminology was changed. The reference is now to “the statement(s) of profit or loss
and other comprehensive income” rather than “the statement of other comprehensive
income or separate income statement (if presented).” This change is effective for annual
periods beginning on or after July 1, 2012.
IAS 27 Consolidated and Separate Financial Statements

In July 2010, as a result of amendments made to IAS 27 Consolidated and Separate
Financial Statements in 2008, consequential amendments were made to the transition
guidance in IAS 21 The Effects of Changes in Foreign Exchange Rates, IAS 28
Investments in Associates, and IAS 31 Interests in Joint Ventures. These amendments
are effective for annual periods beginning on or after July 1, 2010.
25
IAS 28 Investments in Associates and Joint Ventures

In May 2011, the IASB amended IAS 28 to extend the scope of the standard to include
investments in joint ventures. All entities that are investors with joint control of, or
significant influence over, an investee (that is, an associate or joint venture) must apply
IAS 28. The use of the equity method is now required for joint arrangements.
Investments in joint ventures are to be shown as investments and not consolidated.

A transaction between a joint operator and a joint operation, and a joint venturer
and a joint venture, can be treated as transactions between independent third
parties to the extent of the other participants’ interests in the joint operation or
joint venture. When downstream transactions provide evidence of a reduction in
the net realizable value of the assets to be sold or contributed, or of an
impairment loss of those assets, those losses must be recognized in full by the
investor. When upstream transactions provide evidence of a reduction in the net
realizable value of the assets to be purchased or of an impairment loss of those
assets, the investor must recognize its share in those losses. However, recognition
of gains is deferred until the assets are sold to a third party.
Illustrative Example
o

For example, if an entity, which is a joint operator, purchases assets from the
joint operation, it does not recognize its share of the gain until the assets are
sold to a third party outside the joint operation and the joint operator.

If an entity’s share of losses of an associate or a joint venture equals or exceeds
its interest in the associate or joint venture, the entity discontinues recognizing its
share of further losses. After the entity’s interest is reduced to zero, additional
losses are provided for, and a liability is recognized, only to the extent that the
entity has incurred legal or constructive obligations or made payments on behalf
of the associate or joint venture. If the associate or joint venture subsequently
reports profits, the entity resumes recognizing its share of those profits only after
its share of the profits equals the share of losses not recognized.

After application of the equity method as prescribed by IAS 28, an entity must
apply IAS 39, Financial Instruments: Recognition and Measurement, to determine
whether it has to recognize any additional impairment losses with respect to its
net investment in the associate or joint venture. Additionally, IAS 28 requires that
an investment in an associate or a joint venture be accounted for in the entity’s
separate financial statements in accordance with IAS 27, Separate Financial
Statements (as amended in 2011). The disclosures required for entities with joint
control of, or significant influence over, an investee are outlined in IFRS 12,
Disclosure of Interests in Other Entities.
This change is effective for annual periods beginning on or after January 1, 2013.
26
Illustrative Example

Where the proportionate consolidation method is in use, on initial application
of the equity method, the “investor/joint operator” will sum the individual
values previously reported, test the total for impairment, and use that total as
the deemed cost of for equity accounting purposes going forward.
IAS 34 Interim Financial Reporting

In July 2010, IAS Interim Financial Reporting, Paragraphs 15, 15B, and 16A were
amended, paragraphs 15A and 15C added, and paragraphs 16-18 deleted to emphasize
the disclosure principles in IAS 34 and to add further guidance on how to apply these
principles. These amendments were effective for annual periods beginning on or after
January 1, 2011; early adoption is permitted.
IFRIC 13 Customer Loyalty Programmes

In July 2010, IFRIC 13 Customer Loyalty Programmes, Paragraph AG2 was amended to
clarify the basis for measuring the fair value of the award credits. This amendment was
effective for annual periods beginning on or after January 1, 2011; early adoption is
permitted.
27
CICA Handbook  Accounting  Part II  GAAP for Private
Enterprises
(Substantial additions Jan. 2010; minor changes Jan. 2011)
Background

When it announced the “move” to IFRS early in 2006, the AcSB noted that “one size
does not necessarily fit all” and stated that it would pursue separate strategies for public
and private enterprises.

The AcSB proposed a comprehensive examination of the needs of the financial
statement users of private enterprises to determine the most appropriate financial
reporting approach.

In May 2007, the AcSB published an Invitation to Comment [ITC] and a Discussion
Paper [DP] to solicit stakeholders’ views as to the best approach.

Possibilities ranged from a set of standards not very different from current standards to
a set of standards substantially different from current standards to something “in
between.”

The timing of development and implementation of private enterprise standards would
vary depending on the approach taken.

The DP also addressed enterprises with no significant external users.

In June 2008, the AcSB issued its FYI Bulletin outlining decisions taken by the Board
during the previous six months.

The most critical decision taken was that neither full IFRSs nor the proposed IFRS for
SMEs would be used as a starting point for standards applicable to private enterprises.
Instead, a “made in Canada” version would be created.

There would be no size test — an entity would not be subject to a size test or other
qualifiers such as unanimous consent as a condition of applying the standards for private
enterprises.

Private enterprises would be given a free choice to elect to follow (a) full IFRS, (b) these
standards being developed, or (c) no specific standards at all. However, if the
organization needed to conform to GAAP for whatever reason, they would have to follow
either IFRS or the private enterprise standards.

The conceptual framework would be the same for both publicly and non-publicly
accountable enterprises.
28

The definitions of assets, liabilities, revenue and expenses and the
recognition/derecognition criteria would be the same.

The existing CICA Handbook − Accounting would be used as a starting point for drafting
purposes.
o
The AcSB noted that there had been a strong demand from stakeholders to produce
the standards for private enterprises as soon as possible, and this factor appears to
be the basis for the AcSB’s decision to base private enterprise standards on the
existing Handbook.

Nevertheless, the AcSB acknowledged that there were a number of areas in the existing
Handbook that are problematic for private enterprises.

These areas would be examined and if appropriate, changes would be made to the
standards, primarily based on cost/benefit considerations.

The AcSB identified the problematic areas as financial instruments, consolidation and
accounting for affiliates, future income taxes, asset retirement obligations, employee
future benefits, leases, current/non-current classification, goodwill and intangible assets,
and stock-based compensation.

A complete reconsideration would be given to the existing disclosure requirements.

The AcSB expected the disclosure requirements in the standards for private enterprises
to be significantly fewer than in the existing Handbook.

In April 2009, the AcSB finally released for comment its exposure draft entitled
Generally Accepted Accounting Principles for Private Enterprises. Comments on the
exposure draft were due July 31, 2009.

The ED consisted of:

o
a summary of significant changes to standards in the existing Handbook;
o
specific questions on which the AcSB would like input from stakeholders;
o
proposed text that differs significantly from that in the existing standards; and
o
a listing of all proposed disclosure requirements.
The ED gave a clear definition of what will constitute a private enterprise — it was a
profit-oriented enterprise that:
o
has not issued, and is not in the process of issuing, debt or equity instruments that
are, or will be, outstanding and traded in a public market (a domestic or foreign
stock exchange or an over-the-counter market, including local and regional
markets); and
29
o

does not hold assets in a fiduciary capacity for a broad group of outsiders as one of
its primary businesses.
The ED’s disclosure requirements focussed on three types of disclosures:
o
accounting policies — disclose whatever is necessary for users to understand and
analyze the financial statements;
o
risks and uncertainties — disclose whatever is necessary to enable users to evaluate
the likelihood of an enterprise meeting its cash flow obligations; and
o
unusual events — disclose whatever is necessary for users to understand the
financial statements and changes from prior periods.

The Accounting Standards for Private Enterprise (ASPE) would be effective for annual
financial statements relating to fiscal years beginning on or after January 1, 2011.

The AcSB’s plan was to issue the final standards at the end of 2009 so as to permit early
adopter the option of using the new standards for 2009 calendar year-end financial
statements.

As a final “check,” the AcSB intends to review the overall effectiveness of the proposed
standards for private enterprises and reassess its strategy for this sector after the
standards have been in place for approximately five years.
Sections Excluded from Part II

The AcSB concluded that a number of current sections and Guidelines are not generally
relevant to private enterprises — the following are specifically excluded:
o
Section 1300, Differential Reporting
o
Section 1701, Segment Disclosures
o
Section 1751, Interim Financial Statements
o
Section 3480, Extraordinary Items
o
Section 3500, Earnings per Share
o
Section 4100, Pension Plans
o
Section 4211, Life Insurance Enterprises — Specific Items
o
Section 4250, Future-Oriented Financial Information
o
AcG-3, Financial Reporting by Property and Casualty Insurance Companies
30
o
AcG-7, The Management Report
o
AcG-8, Actuarial Liabilities of Life Insurance Enterprises — Disclosure
o
AcG-9, Financial Reporting by Life Insurance Enterprises
o
AcG-11, Enterprises in the Development Stage
Introduction to Part II

In April 2010, the Introduction to Part II was amended to make clear that the
Introduction should be read in conjunction with the Preface to the CICA Handbook —
Accounting. Other amendments were made to both the Introduction and the Preface to
improve clarity and remove duplication. These amendments do not affect an entity's
application of the standards in Part II.

In December 2010 the Introduction to Part II was amended to:
o
address the effective date of new or amended standards; and
o
incorporate information previously contained in the Preface to the CICA Handbook —
Accounting on first-time adoption of this Part by entities with non-calendar yearends. The information previously contained in the Preface has been amended to
improve clarity without changing the intent.
Section 1100 Generally Accepted Accounting Principles

In February 2011, section 1100 Generally Accepted Accounting Principles was amended
by deleting paragraph 1100.19 and amending paragraph 1100.22, removing references
to Board-authorized implementation guidance because there is no such guidance for Part
II of the Handbook.
Section 1400 General Standards of Financial Statement Presentation

In April 2010, section 1400 General Standards Of Financial Statement Presentation,
paragraph 1400.16 was amended to conform with the basis of presentation
requirements set out in the Preface to the CICA Handbook — Accounting and the
Introduction to Part II.

In May 2011, the AcSB issued an omnibus exposure draft entitled 2011
Improvements to Accounting Standards for Private Enterprises. The 2011 ED focused
on five sections in Part II: sections 1400, General Standards of Financial Statement
Presentation; 1521, 3064, 3820, and 3856.

The May 2011 omnibus ED proposed changes to section 1400, General Standards of
Financial Statement Presentation. As issued, section 1400 permits an enterprise to
31
produce more than one set of financial statements prepared in accordance with ASPE,
but using different accounting policy options. The amendment (paragraph 1400.11A)
will require an enterprise to designate one set of financial statements as its general
purpose financial statements. Any other financial statements issued must include a
reference to the general purpose financial statements.

If approved, the changes will also apply to section 1401, General Standards of
Financial Statement Presentation for Not-for-profit Organizations. The amendment
will become paragraph 1401.12A, with the same intent.

As of the date this presentation was prepared, the goal of the AcSB was to issue the
final text of the amendments in the fourth quarter of 2011. They would be effective
for fiscal periods beginning on or after January 1, 2011 (that is, the mandatory
adoption date for the standards).
Section 1500 First-Time Adoption

Part II contains a new section, section 1500 First-time Adoption, which sets out specific
transitional provisions for first-time adoption of the new private enterprise standards.

The objective of section 1500 is to ensure that a private enterprise’s first financial
statements prepared in accordance with the new standards contain high-quality
information that:
o
is transparent for users and comparable over all periods presented;
o
provides a suitable starting point for accounting under the new standards; and
o
can be generated at a cost that does not exceed the benefits to financial statement
users.

In general, section 1500 requires private enterprises to apply the private enterprise
standards retrospectively.

However, section 1500 provides different transitional provisions for specific standards
when the AcSB believes the cost of retrospective application would exceed the benefit.

Refer to paragraph 1500.09 for the “shopping list.” Furthermore, section 1500 prohibits
retrospective application of some aspects of standards. Refer to paragraphs 1500.25 to
.32.

Section 1500 requires private enterprises to:
o
recognize all assets and liabilities whose recognition is required by the standards;
o
not recognize items as assets or liabilities if the standards do not permit such
recognition; and
32
o

reclassify items that it recognized previously as one type of asset, liability, or
component of equity, but are recognized as a different type of asset, liability, or
component of equity under the standards.
In February 2011, section 1500, paragraph 1500.14 was amended to permit an entity
that accounts for its defined benefit plans using the deferral and amortization approach
described in Employee Future Benefits, section 3461 in Part II of the Handbook, to carry
forward at the date of transition to accounting standards for private enterprises any
unrecognized actuarial gains and losses and past service costs that were determined
previously in accordance with EMPLOYEE FUTURE BENEFITS, section 3461 in Part V of
the Handbook, or an equivalent basis of accounting such as IAS 19 Employee Benefits in
Part I of the Handbook.
Section 1500, First-Time Adoption

In September 2010, the AcSB issued an exposure draft to deal with an unintended
consequence of first-time adoption requirements. Specifically, under the initial
requirements of section 1500, an entity that accounts for its defined benefit plans
using the deferral and amortization approach can recognize all accumulated actuarial
gains and losses and past service costs in opening retained earnings upon transition
(see previous comment). However, when an entity chooses not to utilize the “fresh
start” approach, it has to recalculate the recognized and unrecognized amounts
relating to actuarial gains and losses and past service costs retrospectively from the
inception of the plan. The recalculation often involves significant effort and cost, and
in some cases, the data may not be available. The ED proposed that at the date of
transition, entities should be able to carry forward unrecognized actuarial gains and
losses and past service costs that were determined in accordance with a previously
applied standard equivalent to section 3461. This change was carried into Part II in
February 2011.

The implementation of ASPE means an enterprise must comply with the requirements
of section 1500, First-Time Adoption. However, there are other issues that need to be
considered when an enterprise adopts ASPE for the first time. An enterprise must
consider its accounting policy choices for all sections that are affected.

For example, at the date of transition, an enterprise can designate any financial asset
or financial liability as one to be measured at fair value in accordance with section
3856, Financial Instruments. The question is, should it? Remember, section 3856
requires equity securities quoted in an active market to be accounted for at fair value,
with unrealized gains and losses going through net income. How would this
requirement affect investments that are thinly traded? Even more, what might be the
effects that these gains/losses have on covenants or compensation arrangements? In
addition, section 3856 requires an enterprise to recognize and account for
freestanding derivatives (for example, foreign-exchange forward contracts) at fair
value at the date of transition. Any unrealized gains/losses are recognized in net
income.
33


Similarly, there is a one-time exemption available to use fair value of an item of
property, plant, and equipment as the deemed cost at the date of transition. Again,
the question is, just because you can, should you? Especially since significant remeasurements that increase retained earnings will increase taxable capital for income
tax purposes. Furthermore, how will a revaluation impact future depreciation,
potential impairments, or any covenant calculations? What information will be
required to support the fair value of PP&E? Will you have to obtain an independent
valuation to provide evidence of the fair value or will other means of supporting the
fair value be acceptable?
o
Illustrative Example: On its pre-transition balance sheet, Company T
reports a warehouse at its cost of $1,800,000, with accumulated amortization
of $540,000. The net carrying value of the warehouse is $1,260,000. The
warehouse is being amortized straight-line over40 years, with zero expected
salvage value; annual amortization is $45,000. The company considers
applying the one-time exemption and reporting the asset at its fair value. The
company hires an appraiser at a cost of $1,200 to re-appraise this one asset.
The appraiser determines the fair value of the warehouse to be $1,710,000.
The expected life of the building hasn’t changed; there are still 28 years
remaining; however, the building is now expected to have a $100,000
salvage value. Annual depreciation will be $57,500. On the transition date
balance sheet, Company T reports the warehouse at its fair value of
$1,710,000, and does not report any accumulated amortization. The
offsetting increase is reported directly in retained earnings. The company’s
asset ratios will change; its debt-to-equity ratio will change, annual
amortization expense increases, and the company has incurred the cost of
having the asset appraised. However, the company faces the possibility of
impairments in value in the future. If this occurs, these must be reported in
profit and loss, and not directly to retained earnings as the increase was
credited on adoption of ASPE.
o
Illustrative Example: Company NR is a private company; it lost its financial
records in a fire two years ago. At the time this was not a major problem for
the company as it did not prepare GAAP-compliant financial statements.
However, the company is currently seeking bank financing and must prepare
financial statements in accordance with either IFRS or ASPE. The company
has elected to adopt ASPE. The option to measure its assets at fair value on
first-time adoption of ASPE allows the company to prepare statements in
compliance with ASPE without the excessive cost that would otherwise be
required to acquire all of the information necessary to determine the original
cost of the company’s many assets. It is not without cost, but it is a less
costly alternative.
Following are some of the accounting and reporting issues that need to be considered
as part of first-time adoption.
34

Financial assets and liabilities are impacted as follows:
o
Because the fair value of non-interest-bearing receivables or below-market
interest-rate receivables is likely not equal to the cash consideration, loans
and advances receivable must be discounted upon initial recognition, unless
the discount is not material.

Illustrative Example: A loan to a key employee, a partner, or a
critical vendor made at an interest rate of 3% when the market
rate for comparable loans is 5.5% would need to be discounted on
initial recognition. Assume a five-year, 3%, $125,000 loan to a key
employee in the business on June 1, 2010, when the market rate
was 5.5%. Interest-only payments are made semi-annually on
November 30 and May 31. The balance of the loan is due on May
31, 2015. The company adopts ASPE for its fiscal year beginning
June 1, 2011.

The fair value of the loan on June 1, 2010 is $111,500.The
difference between the fair value and the face value of the
loan is treated as compensation to the employee.

At each interest date the difference between the interest
income (at market rates) and the interest payment (at loan
rate) is added to the carrying amount of the loan so that
when the loan matures, the carrying amount is equal to the
amount due.
Face value of loan
Fair value
Rate on loan
Market rate
Carrying
amount
of loan —
Opening
01-Jun-10
30-Nov-10
31-May-11
30-Nov-11
31-May-12
30-Nov-12
31-May-13
30-Nov-13
31-May-14
30-Nov-14
31-May-15
$111,500
$112,691
$113,915
$115,173
$116,465
$117,793
$119,157
$120,559
$121,999
$123,479
$125,000
$111,500
3.00%
5.50%
Interest
payment
$1,875
1,875
1,875
1,875
1,875
1,875
1,875
1,875
1,875
1,875
35
Interest
income
3,066.25
3,099.01
3,132.67
3,167.26
3,202.79
3,239.31
3,276.83
3,315.38
3,354.99
3,395.69
Amortization
for the
period
Carrying
amount
of loan —
Ending
$1,191
$1,224
$1,258
$1,292
$1,328
$1,364
$1,402
$1,440
$1,480
$1,521
$111,500
$112,691
$113,915
$115,173
$116,465
$117,793
$119,157
$120,559
$121,999
$123,479
$125,000
$18,750
o

$13,500
Likewise, the fair value of a financial liability (for example, accounts and notes
payable, loans and bank debt) with non-market interest rates is required to
be discounted upon initial recognition, unless the discount is not material.
What is the impact on investments?
o
For investments in subsidiaries, entities with significant influence, and joint
ventures, the options for cost, equity, consolidation, or proportionate
consolidation have not changed from what were the previously permitted
options under differential reporting.
o
However, if the investment is an equity security that is traded in an active
market, the cost method option is not available — the investment must be
accounted for at fair value.


$32,250
Illustrative Example: Company R owns 2,500 shares of TRX Inc.,
which it purchased 10 years ago for $38 per share. Company R
accounted for the shares at cost and carried them on the balance
sheet at $95,000. On transition to ASPE, the shares must be
accounted for at their fair value, which is $52 per share. Thus, on
the transition date balance sheet the investment will be reported at
$130,000. The $35,000 increase in the asset is credited to
adjusted opening retained earnings.
What is the impact on impairment of what used to be called “long-term investments?”
o
Previously, impairment was a function of whether a decline in value was
temporary or permanent. Any declines considered to be permanent were
recognized and could not be reversed. Under ASPE, impairments are
recognized if there is an indication of impairment and there is significant
adverse change in the expected timing or amount of future cash flows from
an investment.
o
Furthermore, cash flows are discounted using the current market rates of
interest (whereas before, cash flows were discounted using the original
effective interest rate).

Illustrative Example: Company X received the third annual
interest payment on December 31, 2012 as scheduled. The
company holds $1.5 million of bonds that it intends to hold until
the bonds mature on December 31, 2019. The 5% rate of interest
the bonds pay was also the market rate when the bonds were
36
issued; however, on December 31, 2012, the bonds are trading in
the market to yield a 7% rate of return.
o


Under the previous accounting standards, the company
would have reported the investment at $1,500,000 [(FV=
$1,500,000, n=7, i=5% + PV of $75,000 interest
payments, n=7, i=5%) or ($1,066,022 + $433,978)].

Under the current Part II standards, the company will report
the investment at $1,338,321 [(PV of $1,500,000, n=7,
i=7% + PV of $75,000 interest payments, n=7, i=7%) or
($934,124 + $404,197)].

Retained earnings will change by a corresponding amount;
in this case a reduction in retained earnings of $161,679.
This will affect the company’s debt-to-equity ratio. If the
bonds were a short-term investment, the Company’s
current ratio would be affected.
In addition, impairments are/can be reversed if events occurring subsequent
to the impairment have reduced the initial impairment. Accordingly, an entity
should consider whether any past impairment should/could be reversed at the
date of transition.
What is the impact on impairment of intangibles and goodwill?
o
Impairment testing for goodwill is required to be considered when there are
events or circumstances that indicate that there may be impairment —
effectively the previously permitted option under differential reporting section
1300.
o
In addition, the goodwill impairment loss is determined as the difference
between the carrying amount of the reporting unit and the fair value of the
reporting unit — eliminating the two-step approach formerly used and the
need to fair value the individual assets and liabilities.

o
Illustrative Example: Recall that under the former two-step
approach, the first step was to determine if carrying value
exceeded fair value; if it did, step two was undertaken, which was
to compare the carrying value of the goodwill to its fair value. A
goodwill impairment loss was recorded only if the carrying value of
the goodwill exceeded its fair value. Under the current ASPE, if the
assets include goodwill and fair value is less than carrying value,
the loss will be recorded first as a goodwill impairment loss.
Unlike financial instruments, impairment losses on goodwill cannot be
reversed.
37
o

The related accounting policy notes will need to be updated to explain how
the impairment loss is determined, and to delete any reference to a two-step
test of impairment.
What is the impact on the equity component of convertible debt?
o
The equity component can be measured at zero or the residual method can
be applied. There is also a new definition for contributed surplus that includes
only contributions by equity holders.

Preferred shares issued under tax-planning arrangements are required to be
presented as equity, with disclosure of the redemption amount on the face of the
balance sheet. Unless repayment has been demanded, there is no longer an option to
present these preferred shares as a liability.

Key actions required by an enterprise when transitioning to ASPE:
o
Note that ASPE requires financial statements to be prepared on a comparative
basis, unless the comparative information is not meaningful or where the
standards permit otherwise.
o
In the first year of adoption of ASPE, every private enterprise will be required
to prepare a set of financial statements that
o

restates its operating results and financial position in accordance with
the ASPE; and

provides additional note disclosures explaining the impact of the
changes.
That means the enterprise must determine the date of transition to ASPE.

The date of transition is the beginning of the earliest period for which
an entity presents full comparative information under ASPE, (that is,
January 1, 2010 for financial statements for an enterprise with a fiscal
period ending December 31, 2011).

The December 31, 2011, balance sheet will have three columns as
shown below:
Balance Sheet as at
Balance Sheet as at
Opening Balance Sheet
December 31, 2011
December 31, 2010
as at January 1, 2010
38

The timelines for an enterprise that prepares its changeover financial statements for
the year ending December 31, 2011 are as follows:
January 1
2010
December 31
2010
December 31
2011
Report using pre-changeover GAAP
Prepare opening B/S using
using pre-changeover
GAAP
Restate comparatives using ASPE
Report using
ASPE
Date of transition to ASPE


Retrospective application of ASPE accounting policies under section 1500 will require
restating
o
the opening balance sheet as at date of transition (that is, January 1, 2010);
o
a comparative income statement and the statement of cash flows for the
period ended December 31, 2010;
o
the statement of retained earnings and balance sheet as at December 31,
2010; and
o
2010 comparatives included in the notes to the financial statements.
In the year ASPE is adopted, an enterprise must disclose
o
the amount of each charge to retained earnings at the date of transition
resulting from the adoption of ASPE and the reason(s) therefore (see
Illustrative example below); and
39
o
a reconciliation of the net income reported in the entity’s most recent
previously-issued financial statements to its net income under ASPE for the
same period.
o
The level of detail must be sufficient to enable users to understand any
material adjustments made to the balance sheet and income statement.
o
If a cash flow statement was presented under the previous accounting
policies, the enterprise must also explain any material adjustments to the
cash flow statement.
40
Illustrative Example: Changes to the date of transition retained earnings can be
reconciled and reported using a format such as the following:
Reconciliation of Retained Earnings at adoption of ASPE (that is, January 1, 2010)
Retained Earnings as at January 1, 2010, based on previous financial statements
$
Business combinations (1500.10 and .11)
1500.10 — Retrospective application
Recognize and reclassify transactions that meet the definition of business
combinations
Remeasure and account for business combinations
Recognize assets acquired and liabilities assumed that qualify for recognition
Exclude assets acquired and liabilities assumed that no longer qualify for recognition
$
$
$
1500.11 — Prospective application
Recognize assets acquired and liabilities assumed that qualify for recognition
Exclude assets acquired and liabilities assumed that no longer qualify for recognition
$
$
Fair value (1500.12 and .13)
Change due to revaluation of property, plant, and equipment
$
Employee future benefits (1500.14 to .16)
Recognize accumulated actuarial gains and losses and unamortized past service
costs
Recognize unamortized transitional asset or unamortized transitional obligation
$
$
Cumulative translation differences (1500.17 and .18)
Recognize cumulative translation differences
$
Financial instruments (1500.19 to .21)
Measure and recognize financial instruments at fair value
Measure at fair value all financial assets and financial liabilities designated at the
date of transition
$
$
Stock-based compensation (1500.22 to .23)
Change in stock-based compensation
$
Asset retirement obligations (1500.24)
Net change in retained earnings from asset retirement obligations
$
Change in future income taxes (when the method is chosen)
$
Total changes
$
41
Retained Earnings as at January 1, 2010, based on ASPE
Source:

$
Adapted from: CICA. (June 2011). Accounting Standards for Private Enterprises: A Guide to
Understanding Transitional Options and Accounting Policy Choices.
On the World Wide Web at http://www.cica.ca/privateenterprises/site-utilities/item50867.pdf
As of the date this presentation was prepared, the goal of the AcSB was to issue the
final text of the amendments in the fourth quarter of 2011. They would be effective for
fiscal periods beginning on or after January 1, 2011 (that is, the mandatory adoption
date for the standards).
Section 1506, Accounting Changes

The requirement for private enterprises to use ASPE is not absolute. A private
enterprise may choose to apply IFRS instead of ASPE.

The standards in Part I (IFRS) and Part II (ASPE) are based on conceptual
frameworks that are substantially the same. They cover many of the same topics and
reach similar conclusions on many issues. The style and form of each set of standards
are generally quite similar. The standards in Parts I and II are laid out in the same
way, highlight the principles, and use similar language. However, the standards in
Part II were developed separately from those in Part I and reflect the specific
circumstances of private enterprises. Consequently, there are a number of differences
between the standards. Notwithstanding, we can say that the standards are
converged when the requirements in Part II are substantially the same as the
relevant standards in Part I.

Section 1506 and the corresponding requirements of IAS 8 (Accounting policies:
changes in accounting estimates and errors) are converged, except that
o
IAS 8 allows an entity to be exempt from the requirement to restate prior
periods for the correction of an error on grounds of impracticability (there is
no such exemption in Section 1506); and
o
Section 1506 permits certain accounting policy choices to be changed without
meeting the criterion of providing more relevant or reliable information that
IFRS requires.
Section 1520 Income Statement and section 1521 Balance Sheet

Part II contains a new section, section 1521 Balance Sheet, which sets out the form and
content of a private enterprise’s balance sheet.
42

The section complements section 1520 Income Statement.

Like section 1520 which deals with income statement issues, the section is a “shopping
list” for the required components of the balance sheet, with cross-references to the
appropriate sections in the Handbook.

Basically, section 1521 is similar to parts of IAS 1, Presentation of Financial Statements,
in that it sets out how the financial statements are to be presented.

In April 2010, section 1520 Income Statement, paragraph 1520.04 was amended to
address inconsistencies with the requirements of Business Combinations, section 1582.

The May 2011 omnibus ED proposed changes to section 1521, Balance Sheet. The
presentation requirements in respect of current liabilities in section 1521 are not fully
consistent with those in section 1510, Current Assets and Current Liabilities. The
amendment to section 1521 is to harmonize the requirements in these two sections.
Paragraph 1521.05 will be amended to remove what was sub-paragraph (b) and to
modify sub-paragraph (a) so that it requires disclosure of the main classes of current
liabilities in accordance with paragraph 1510.11.

As of the date this presentation was prepared, the goal of the AcSB was to issue the
final text of the amendments in the fourth quarter of 2011. They would be effective
for fiscal periods beginning on or after January 1, 2011 (that is, the mandatory
adoption date for the standards).
Section 1582 Business Combinations, section 1601 Consolidated Financial
Statements, and section 1602 Non-controlling Interests

Sections 1582 Business Combinations, 1601 Consolidated Financial Statements, and
1602 Non-controlling Interests apply with an immediate effective date.

This approach is interesting in that publicly accountable enterprises do not have to apply
these sections until at least 2011.
Section 1590 Subsidiaries, section 3051 Investments, and section 3055 Interests
in Joint Ventures

Section 1590 Subsidiaries offers an accounting policy choice, allowing an enterprise to
account for subsidiaries either by consolidating them, or using either the cost or equity
method.

Section 3051 Investments offers an accounting policy choice, allowing an enterprise to
account for significantly influenced investees using either the cost or equity method.

Section 3055 Interests in Joint Ventures offers an accounting policy choice, allowing an
enterprise to account for interests in joint ventures using one of proportionate
consolidation, the cost method, or the equity method.
43

As with income taxes, the joint venture GAAP might change once section 3056 is
finalized.
Section 3031 Inventories

Section 3031 and IAS 2 (Inventories) are converged, except that
o
section 3031 has different scope exemptions than IAS 2 because of the
guidance in IAS 11, Construction Contracts, and IAS 41, Agriculture, that is
not addressed in Part II. This only affects enterprises with inventories of
agricultural products or involved with construction contracts.
Section 3051 Investments

In April 2010, section 3051 Investments, paragraph 3051.16 was added to provide
guidance concerning recognition of an equity accounted investee's losses in excess of
the enterprise's investment.

Section 3051 differs from the corresponding requirements in IAS 28 (Investments in
Associates) and IAS 36 (Impairment of Assets) as follows:
o
Section 3051 permits an enterprise to account for significantly influenced
investees using either the cost or equity method; IAS 28 requires the use of
the equity method.
o
IFRS require the reversal of an impairment loss when the recoverable amount
changes.
o
IFRS determine an impairment loss as being the excess of the carrying
amount above the recoverable amount rather than the excess of the carrying
amount above the higher of the present value of future cash flows and the
amount that could be realized from selling the investment.
Section 3061, Property, plant, and equipment

Section 3061 and IAS 16 (Property, plant, and equipment) and IAS 40 (Investment
Property) are converged, except that
o
IAS 16 permits the revaluation of property, plant, and equipment to fair
value;
o
IAS 16 requires the depreciable amount to be the asset cost less its residual
value, rather than using the greater of the asset cost less its residual value or
asset cost less its salvage value;
44
o
IAS 40 allows investment property to be accounted for using a fair value or a
cost-based model; and
o
IFRS 6 provides limited guidance on the financial reporting for exploration for,
and evaluation of, mineral resources.
Section 3063, Impairment of Long-lived Assets

Section 3063 differs from IAS 36 (Impairment of Assets) because IAS 36
o
does not include a separate “trigger” for recognizing impairment losses based
on an assessment of undiscounted cash flows;
o
determines an impairment loss as the excess of the carrying amount of an
asset or group of assets above the recoverable amount (the higher of fair
value less costs to sell and value in use), rather than the difference between
carrying amount and fair value; and
o
requires the reversal of an impairment loss when there has been a change in
estimates used to determine the recoverable amount.
Section 3064 Goodwill and Intangible Assets

Section 3064 Goodwill and Intangible Assets allows an enterprise an accounting policy
choice: either capitalize qualifying development costs incurred on internally developed
intangible assets that meet the criteria set out in existing section 3064, or expense them
as incurred.

Section 3064 retains the differential reporting requirement that enterprises test goodwill
and other intangible assets not subject to amortization on an “events and circumstances
basis.”

In addition, the methodology for impairment testing and write-downs is simplified.

Finally, testing is done at the reporting unit level, removing the need to allocate fair
values to individual assets.

It can be argued that all the changes proposed for section 3064 are positive and should
reduce some of the burden faced by private enterprises.

The May 2011 omnibus ED proposed changes to section 3064, Goodwill and
Intangible Assets. The amendment would clarify that the requirement to expense
expenditures on advertising and promotional activities includes expenditures on mail
order catalogues and other similar documents intended to advertise goods, services,
or events to customers. The ED proposed changes to section 3064, Goodwill and
Intangible Assets. Specifically, paragraph 3064.53(c) would see the underlined
material added: advertising and promotional activities (including mail order
45
catalogues and other similar documents intended to advertise goods, services, or
events to customers);

As of the date this presentation was prepared, the goal of the AcSB was to issue the
final text of the amendments in the fourth quarter of 2011. They would be effective
for fiscal periods beginning on or after January 1, 2011 (that is, the mandatory
adoption date for the standards).

Section 3064 differs from IAS 38 (Intangible Assets) for the initial recognition and
measurement of intangible assets as IAS 38 does not permit development stage costs
to be expensed.
o

Also, IAS 38 permits revaluation at fair value for intangible assets that have
an active market.
In addition, section 3064 differs from IAS 36 in the way it tests for impairment:
o
IAS 36 includes identifiable indefinite life intangible assets in the cashgenerating unit to which they relate;
o
IAS 36 requires enterprises to test goodwill and other intangible assets not
subject to amortization each year rather than on an events-andcircumstances basis; and
o
IAS 36 requires goodwill impairment to be determined by comparing the book
value to the recoverable amount of the cash-generating unit, rather than
comparing the book value to the fair value of the reporting unit
Section 3110 Asset Retirement Obligations

Section 3110 Asset Retirement Obligations uses a different measurement approach
(taken from IAS 37 Provisions, Contingent Liabilities, and Contingent Assets), which is
easier to apply.

Accordingly, an asset retirement obligation is measured at “the best estimate of the
expenditure required to settle the present obligation at the end of the reporting period.”

The best estimate is based on management’s experience and judgment and takes into
account the probabilities of different outcomes, as well as the time value of money.
Section 3290, Contingencies

Section 3290 and IAS 37 (Provisions, Contingent Liabilities, and Contingent Assets)
are converged, except that under IAS 37
46
o
a contingent liability is recognized as a provision when the outflow of
economic benefits is more likely than not to be required to settle the
obligation; and
o
a debit balance is recognized as an asset when realization of income is
virtually certain.
Section 3461 Employee Future Benefits

Section 3461 Employee Future Benefits permits an enterprise to apply a simplified
approach to account for its defined benefit plans for which the only members are the
controlling owner, his or her spouse, or both.

Many, but not all, “individual pension plans” qualify for this simplified approach.

The approach uses the actuarial valuation prepared for funding purposes to measure the
obligation and recognizes all actuarial gains and losses and past service costs in income
when they occur.

All other types of employee future benefit plans can use the immediate recognition
approach but most will apply the recognition and measurement requirements in existing
section 3461.
Section 3465 Income Taxes

Section 3465 Income Taxes offers an accounting policy choice between the taxes
payable method and the future income taxes method.

Basically, the requirements are substantially the same as they were as formerly
permitted under differential reporting.

Note that this may change once the IASB ED on Income Tax is finalized.

Section 3465 and IAS 12 (Income Taxes) differ as IAS 12 does not permit the taxes
payable method.
o
The future income tax method in section 3465 and IAS 12 is converged in
principle for the recognition and measurement of taxes, but they have
different exceptions to the principle.
o
In practice, section 3465 differs from IAS 12 in a number of ways that matter
if an enterprise is not using the taxes-payable method.
47
Section 3820, Subsequent Events

The May 2011, omnibus ED proposed changes to section 3820, Subsequent Events.
The amendment would clarify the meaning of the date of completion of the financial
statements to be consistent with that contemplated by Canadian assurance
standards. The date of completion of the financial statements represents the cut-off
date for identifying and considering the effects of subsequent events. Having different
requirements would potentially be confusing to financial statement preparers and
users. The changes will be reflected in paragraph 3820.07A which explicitly defines
when the financial statements are complete. Financial statements are complete when
o
o
o
o

a complete set of financial statements, including all required note disclosures,
have been prepared;
all final adjusting journal entries have been reflected in the financial
statements … ;
no changes to the financial statements are planned or expected; and
the financial statements have been approved as meeting the above
requirements, in accordance with the entity’s process to finalize its financial
statements.
This is effective for fiscal periods beginning on or after January 1, 2011 (that is, the
mandatory adoption date for the standards).
Section 3831, Non-monetary Transactions

Section 3831 is more comprehensive than IAS 16 (Property, Plant, and Equipment),
IAS 38 (Intangible Assets), and IAS 40 (Investment Property), as Section 3831
applies to a broader range of non-monetary transactions.
o
Sections 3400 and 3831 provide less comprehensive guidance than SIC 31 on
barter transactions involving advertising services.
Section 3840, Related Party Transactions

In April 2010, section 3840 Related Party Transactions, paragraph 3840.44(b) was
amended to address inconsistencies within the section.
Section 3850, Interest Capitalized — Disclosure Considerations

Section 3850 differs from IAS 23 as IAS 23 does not allow the expensing of borrowing
costs to the extent they are directly attributable to acquisition, production, and
construction of a qualifying asset.
o
IAS 23 also includes guidance on how to determine the amount of borrowing
costs eligible for capitalization.
48
o
This matters to an enterprise whose accounting policy is to expense
borrowing costs.
Section 3856 Financial Instruments

All aspects of accounting for financial instruments are set out in a single proposed
standard, section 3856 Financial Instruments.

Section 3856 supersedes the following Handbook sections:
o
1530, Comprehensive Income;
o
1535, Capital Disclosures;
o
3020, Accounts and Notes Receivable;
o
3025, Impaired loans;
o
3210, Long-term Debt;
o
3855, Financial Instruments —Recognition and Measurement;
o
3861, Financial Instruments — Disclosure and Presentation;
o
3862, Financial Instruments — Disclosures;
o
3863, Financial instruments — Presentation;
o
3865, Hedges;
o
AcG-2, Franchise Fee Revenue; and
o
AcG-12, Transfers of Receivables.

Most of the accounting choices that are available in the current set of financial
instruments standards are eliminated.

Financial assets and liabilities, with two exceptions, are measured at cost or amortized
cost.

Derivatives that are not part of a designated hedging relationship are measured, both
initially and subsequently, at fair value.

Investments in equity securities for which prices are quoted in an active market are
measured, both initially and subsequently, at their quoted market value.

Subsequent changes in measurement of such financial instruments are reported in net
income.
49

Enterprises have the option of ascribing a nil value to the conversion option in
convertible debt — in essence permitting convertible debt to be presented entirely as a
liability.

Certain preferred shares issued as part of tax planning arrangements that would
otherwise be classified as a liability are classified as equity.

Hedging remains optional.

Hedge accounting follows an accrual-based model, and is permitted only when the
critical terms of the hedging instrument match those of the hedged item.

Enterprises are not required to assess hedge effectiveness.

However, an enterprise is required to determine that the critical terms of the two
components of the hedging arrangement continue to match.

A single impairment model applies to all financial assets.

Impairment losses are recognized immediately in net income.

An impairment loss is recognized when there are indicators of impairment and the
carrying amount of an asset at the assessment date exceeds the highest of:
o
the present value of the future cash flows expected from holding the asset;
o
the net amount that could be realized from selling the asset; and
o
the net amount that could be realized from exercising any rights to collateral.

Significant assets are assessed individually, but assets that are individually insignificant
may be assessed in groups on the basis of similar credit risk characteristics.

Impairment losses may be reversed if, at a subsequent reporting date, there is a change
in the circumstances that previously indicated impairment.

However, the carrying amount of the asset can be increased only to an amount no
greater than it would have been had the impairment not occurred.

The May 2011 omnibus ED proposed changes to section 3856, Financial Instruments.
These amendments all relate to hedge accounting, and arise from user concerns that
many private enterprises would not be able to apply the existing hedging provisions in
section 3856 while maintaining the overall hedge accounting principles.
o
Changes will be made to the requirement that the prepayment terms of an
interest-rate swap designated as a hedging instrument match those of the
financial asset or liability it hedges — if the hedged item is pre-payable,
50
hedge accounting would be available if it is probable that the asset or liability
will not be prepaid.
o
Changes will be made to the guidance on hedging foreign-currency
transactions to permit hedge accounting when the forward contract matures
near the date the resulting payable or receivable will be settled.
o
Increase the number of days from 14 to 30 by which the maturity date of the
hedging derivative might differ from that of the hedged position.
o
Changes will be made to the hedging requirements to state that a single
derivative contract could be designated as hedging a group of transactions,
provided the single derivative contract matches the critical terms of the group
in aggregate.
o
Changes will be made to remove the requirement that the location parameter
of a derivative contract match that of the anticipated purchase or sale of a
commodity that it hedges.
o
However, the grade or purity specified in the derivative must be similar to
that of the contract that it hedges.

As of the date this presentation was prepared, the goal of the AcSB was to issue the
final text of the amendments in the fourth quarter of 2011. They would be effective
for fiscal periods beginning on or after January 1, 2011 (that is, the mandatory
adoption date for the standards).

Section 3856 differs from IAS 39 (Financial Instruments: Recognition and
Measurement). Some of the key differences are that IAS 39
o
requires financial instruments that are held for trading and financial assets
classified as available for sale to be measured at fair value;
o
records gains and losses for available-for-sale instruments in other
comprehensive income;
o
does not require preferred shares issued in a specified tax-planning
arrangement to be classified as equity;
o
does not permit the equity component of convertible debt and warrants or
options issued with, and detachable from, financial liabilities to be measured
at zero; the equity component must be measured as the difference between
the proceeds and the fair value of the liability component;
o
employs a fair-value-based model for hedge accounting that requires
quantitative assessments of effectiveness rather than a narrowly prescribed
set of hedging relationships;
51
o
does not address financial instruments exchanged or issued in related-party
transactions;
o
does not focus on legal isolation in assessing derecognition but on risks and
rewards of ownership; and
o
provides comprehensive guidance on derecognition of financial instruments
that is different to and more comprehensive than that in section 3856.
Section 3870, Stock-based Compensation

Section 3870 Stock-based Compensation and Other Stock-based Payments replaces the
minimum value method (that is, the ability to ignore volatility in measuring stock based
compensation) with the calculated value method.

Under the calculated value method, an enterprise estimates the volatility that is needed
as an input to a stock option pricing model, based on an appropriate sector index.

Note that the use of this value does not address the more fundamental question of how
meaningful is the derived value for the stock options.

Section 3870 and IFRS 2 (Share-Based Payment) are converged, except that IFRS 2
o
does not provide an exemption for the recognition of an expense when an
employee share purchase plan provides a discount to employees that does
not exceed the per-share amount of share issuance costs that would have
been incurred to raise a significant amount of capital by a public offering and
is not extended to other holders of the same class of shares;
o
defaults to using the fair value of the non-tradable equity instruments granted
if the value of received goods or non-employee service is not reliably
measurable;
o
requires that share-based payments to non-employees be measured at the
date the entity obtains the goods or the counterparty renders service;
o
requires that cash-settled, share-based payments are measured at the fair
value, not intrinsic value, of the liability;
o
requires the transaction to be accounted for as a cash-settled transaction if
the entity has incurred a liability to settle in cash or other assets, or as an
equity-settled transaction if no such liability has been incurred; and
o
is more detailed about how to deal with a modification of an award.
52
Other Differences between ASPE and IFRS

In addition to the key differences identified in the preceding slides, there are a
number of IFRSs for which no section exists in Part II. These standards are identified
here:
o
IFRS 8 specifies how an entity should report information about operating
segments in its financial statements.
o
IAS 33 provides guidance on the determination and presentation of earnings
per share.
o
IAS 34 addresses interim financial reporting, including the minimum content
of an interim report.
o
IAS 37 encompasses issues addressed by sections 3110 and 3290, but has a
broader scope.
o
IAS 41 provides specific guidance in dealing with agriculture.
53
CICA Handbook  Accounting  Part III  Accounting
Standards for Not-for-Profit Organizations
Restructuring the Handbook

In December 2010, the Handbook was restructured as follows to implement the strategy
of the Accounting Standards Board (AcSB) of adopting different sets of standards for
different categories of entities:
o
Part I — International Financial Reporting Standards;
o
Part II —Accounting Standards for Private Enterprises;
o
Part III — Accounting Standards for Not-for-Profit Organizations;
o
Part IV — Accounting Standards for Pension Plans; and
o
Part V — pre-changeover accounting standards. These standards are no longer
Canadian generally accepted accounting principles for not-for-profit organizations
because Accounting Standards for Not-for-Profit Organizations came into effect
January 1, 2012.

Part III of the Handbook includes an Introduction and the accounting standards for notfor-profit organizations approved by the AcSB for annual financial statements relating to
fiscal years beginning on or after January 1, 2012. Earlier application is permitted. There
is no size test or other qualifier to use these standards; any not-for-profit organization
can use the accounting standards for not-for-profit organizations.

Not-for-profit organizations may adopt the standards in Part I, International Financial
Reporting Standards, instead of the standards in Part III. However, IFRSs do not contain
any standards dealing with issues specific to not-for-profit organizations, and it is not
expected that the IASB will develop such standards in the foreseeable future.

PSAB issued its own ED, considered input received in response to that ED, and adopted
a version of the 4400 series of sections modified to fit within public sector standards;
these are contained in the Public Sector Accounting Handbook [PSAH]. Government notfor-profit organizations are now required to follow public sector standards. The
accounting standards for not-for-profit organizations are not a stand-alone set of
standards. They require reference to another set of standards (that is, those in Part II of
the Handbook) to address some issues or for additional guidance on others. A not-forprofit organization applying Part III of the Handbook also applies the standards in Part II
to the extent that the Part II standards address topics of general applicability not
covered in Part III or topics that apply to the not-for-profit organization’s transactions or
circumstances.
54

The existing conceptual framework in the pre-IFRS version of the Handbook has been
retained as Financial statement concepts for not-for-profit organizations, section 1001.
Section 1001 contains material basic to the underpinnings of not-for-profit standards
and is unchanged from what was section 1000, other than to omit references specific to
the circumstances of profit-oriented enterprises.
o
Examples 14-16 in Emerging Issues Committee Abstract of Issues Discussed EIC123, "Reporting Revenue Gross as a Principal versus Net as an Agent," have been
incorporated into the illustrative examples in Financial Statement Presentation by
Not-for-Profit Organizations, section 4400. The example financial statements have
not been carried forward.
o
The AcSB plans to issue a Background Information and Basis for Conclusions
document that will provide more detail about changes made to standards in Part V in
developing the accounting standards for not-for-profit organizations.
Section 1101, Generally Accepted Accounting Principles for
Not-for-Profit Organizations

Section 1101 Generally Accepted Accounting Principles for NFP Organizations clarifies
the inter-relationship of Part III with the standards in Part I and Part II of the Handbook.
In February 2011, this section was amended to delete paragraph 1101.20 and to amend
paragraph 1101.23 to remove references to Board-authorized implementation guidance
because there is no such guidance for Part III of the Handbook.
Section 1401, General Standards of Financial Statement
Presentation by Not-for-Profit Organizations
General standards of financial statement presentation for not-for-profit organizations has
been issued as section 1401, paralleling section 1400 in Part II. It sets out the general
standards of financial statement presentation for not-for-profit organizations.
Section 1501, First-time Adoption by Not-for-Profit
Organizations

First time adoption has been issued as section 1501, paralleling section 1500 in Part II.
As with private-sector enterprises, the purpose of the section is to ensure that a not-forprofit organization’s first financial statements prepared using the standards in Part III of
the Handbook meet the needs of the users. The goal of the section is to provide highquality information that

is transparent for users and comparable over all periods presented;

provides a suitable starting point for accounting under accounting standards
for not-for-profit organizations; and

can be generated at a cost that does not exceed the benefits to users.
55

In February 2011, section 1501 First-time Adoption by Not-for-Profit Organizations,
paragraph 1501.15 was amended to permit an organization that accounts for its defined
benefit plans using the deferral and amortization approach described in Employee Future
Benefits, section 3461 in Part II of the Handbook, to carry forward at the date of
transition to accounting standards for not-for-profit organizations any unrecognized
actuarial gains and losses and past service costs that were determined previously in
accordance with Employee Future Benefits, section 3461 in Part V of the Handbook, or
an equivalent basis of accounting such as IAS 19 Employee Benefits in Part I of the
Handbook.

The accounting standards in Part III of the Handbook are viewed as a new basis of
accounting, which allows all first-time adopters to take advantage of the transitional
provisions regardless of whether or not they have previously applied the standards that
were part of the “old” Handbook.
Section 3032, Inventories Held by Not-for-Profit Organizations

Section 3032, Inventories held by not-for-profit organizations, carries forward
appropriate material from what used to be section 3031, Inventories, related to
contributions of materials and services, and inventories to be distributed at no charge or
for a nominal charge. That material was not included in Part II of the Handbook as it not
applicable to private enterprises.
Sections 44004470 Not-for-Profit Organizations
Background

In August 2007, the AcSB issued an omnibus exposure draft of proposed amendments
to, and a new section for, the not-for-profit part of the Handbook.

The amendments represent the first major revisions to the NFP material since the 4400
series of sections was issued in 1996.

Since 1996, there have been revisions to many of the Handbook sections on which parts
of the 4400 series were based; however, not all the amendments have been carried
forward to the corresponding section in the 4400 series.

The proposals in the exposure draft fall into three categories: new requirements,
changes to existing requirements, and conforming and clarifying amendments.

The objective of the proposals is to improve financial reporting by NFPs in the context of
current Canadian GAAP prior to the adoption of IFRSs as GAAP for publicly accountable
profit-oriented enterprises.

In June 2008, the AcSB approved all the amendments to the standards in the 4400
series of Handbook sections proposed in the omnibus exposure draft, with one
exception.
56

Amendments to section 4450 would have required that all assets controlled directly or
indirectly by an NFP, and all obligations to which those assets are subject, be recognized
in the NFPs statement of financial position

Specifically, section 4450 would require all controlled entities to be consolidated.

The changes would eliminate the current consolidation exemption available when an NFP
has a large number of individually immaterial controlled organizations.

The AcSB did not proceed with proposed amendments to section 4450, pending the
outcome of its deliberations on the future basis for setting standards for the not-forprofit sector.

All of the other amendments proposed in the August 2007 exposure draft were approved
with no significant changes. Specific reference to Accounting Guidelines and EIC
Abstracts as well as other primary sources of GAAP in the Introduction to Accounting
Recommendations that Apply Only to Not-for-Profit Organizations assist NFPs in applying
section 1100.
Section 4400 Financial Statement Presentation by Not-forProfit Organizations

Section 4400 describes the different treatment accorded internal and external
restrictions on net assets in general, rather than on net assets invested in capital assets,
specifically.

Section 4400, Financial Statement Presentation by Not-for-Profit Organizations, has
been amended to remove material related to interim financial statements and material
that conformed with the concept of other comprehensive income. Those two matters are
not included in the standards in Part II of the Handbook; accordingly, they have been
eliminated from Part III as well. In almost all other respects, the section is substantively
the same as the “old” section 4400.

An NFP reporting internally restricted amounts must now disclose what these amounts
represent and how they were determined, including the extent to which related debt has
been taken into account.

Paragraph 4400.37 used to state that “revenues and expenses should be disclosed at
their gross amounts,” but the material that followed tended to undermine that principle.

The proposals amend the existing language to make clear the objective of paragraph
4400.37.

Section 4400 required NFPs to apply section 1540. As a result, NFPs are no longer
permitted to group cash flows from financing and investing activities.

Section 4400 is applicable to the relatively rare situations where an NFP is required to
prepare interim financial statements in accordance with GAAP.
57
Section 4431 Tangible Capital Assets Held by Not-for-Profit
Organizations and Section 4432 Intangible Capital Assets Held
by Not-for-Profit Organizations

The former section 4430, Capital Assets Held by Not-for-Profit Organizations, was
replaced by two new sections: section 4431, Tangible Capital Assets Held by Not-forProfit Organizations, and section 4432, Intangible Capital Assets Held by Not-for-Profit
Organizations.

Section 4431 retains the provisions of section 4430 as they apply to tangible capital
assets (property, plant, and equipment).

Section 4432 directs not-for-profit organizations to apply the provisions of section 3064,
other than those dealing with impairment to intangible assets. The provisions of Goodwill
and Intangible Assets, section 3064 in Part II of the Handbook, apply to development
costs. Such costs would include costs related to a series of plays or concerts, gallery
exhibitions, and fundraising events and campaigns. The guidance on other types of costs
addressed by section 3064, such as selling, administrative, and other general overhead
expenditures, also applies.

Section 4432 adopts the same impairment requirements as section 4431.
Section 4460, Disclosure of Related Party Transactions by Not-for-Profit
Organizations

Paragraph 4460.02 conforms with paragraph 3840.02 in respect of employee future
benefits.
Section 4470, Disclosure of Allocated Expenses by Not-for-Profit
Organizations


Section 4470 requires NFPs that are making allocations of general support and
fundraising costs to other functions to disclose
o
the policies adopted for the allocation of expenses among functions
o
the nature of the expenses being allocated
o
the basis on which such allocations have been made
o
the functions to which they have been allocated
Allocations that are to be disclosed are those made after individual expenses have been
attributed among the functions to which they relate and all of the expenses of a function
have been accumulated within that function.
Effective Date
58

The accounting standards for not-for-profit organizations are effective for fiscal years
beginning on or after January 1, 2012.
59
CICA Handbook – Accounting – Part IV – Accounting
Standards for Pension Plans
Introduction to Part IV

In December 2010, the Introduction to Part IV was issued to clarify the effective date of
the standards.

The Preface to the CICA Handbook — Accounting (Handbook) defines the various
categories of reporting entity and specifies which Part of the Handbook applies to each
category. The Introduction provides information specific to the use of Part IV and should
be read in conjunction with the Preface.

First-time adoption of this Part of the Handbook is mandatory for annual financial
statements relating to fiscal years beginning on or after January 1, 2011. When the end
of an entity's annual reporting period does not coincide with the end of a calendar year,
the mandatory date for first-time adoption of this Part is the beginning of the annual
reporting period that commences on or after December 21, 2010.

Early adoption is permitted.

When the end of an entity's annual reporting period does not coincide with the end of a
month, the entity should apply new or amended standards in the annual reporting
period beginning on or after the 21st of the month immediately preceding the month of
the effective date specified in the standard.

An entity that prepares its financial statements in accordance with this Part of the
Handbook states that they have been prepared in accordance with Canadian accounting
standards for pension plans.

An entity that prepares its financial statements in accordance with this Part of the
Handbook is permitted, but not required, to make the additional statement that its
financial statements are in accordance with Canadian GAAP.
Section 4600 Pension Plans

In April 2010, section 4600 Pension Plans was issued.

The AcSB developed section 4600 based on Pension Plans, section 4100, in Part V. The
most noteworthy differences are as follows:
o
The standards apply to all pension plans. They also apply to benefit plans that have
characteristics similar to pension plans and provide benefits other than pensions (for
example, retiree health care and life insurance benefits, and long-term disability
plans), with necessary adaptations.
60
o
The standards include references to other Parts of the Handbook for issues not
directly addressed in Part IV.
o
The statement of financial position includes the pension obligation, together with the
net assets available for benefits, and the resulting surplus or deficit.
o
Investments in entities over which the pension plan has control or can exercise
significant influence are presented on the same basis as all other investments (that
is, at fair value).
o
Investment assets are not measured on an actuarial asset value basis. The difference
between fair value and actuarial asset value does not represent an asset or a liability
that can be included in a pension plan's financial statements.
o
Disclosures have been revised and enhanced, including disclosure of information that
enables financial statement users to evaluate
o


the nature and extent of risks arising from financial instruments, and

the pension plan's objectives, policies, and processes for managing capital.
Disclosures previously described as desirable are now required.
The AcSB plans to issue a Background Information and Basis for Conclusions document
that will help readers understand how the AcSB reached its conclusions in developing the
accounting standards for pension plans.
61
CICA Handbook  Accounting  Part V  Accounting
Standards
Section 1000 Financial Statement Concepts (Internally
Developed Intangible Assets)
Background

In December 2005, the AcSB issued an exposure draft to modify sections 1000 and
3062.

The proposed changes reinforced the principle-based approach to the recognition of
costs as an asset in accordance with section 1000. The objective was to eliminate the
practice whereby items were recognized as assets even though they did not meet the
definition and recognition criteria in section 1000.

To accomplish these objectives, the AcSB intended to delete paragraphs 1000.26 and
1000.51, to remove any ambiguity about the rationale for the recognition of assets.

The removal of paragraph 1000.51 turned out to be quite controversial — it essentially
removed the matching principle from the conceptual framework!

In addition, guidance was to be added to section 3062 (replaced by section 3064),
regarding the recognition of internally developed intangible assets not addressed by
other Handbook sections.

Specifically, section 3062 would define an intangible asset as “… an asset other than
goodwill or a financial asset (as defined in section 3055) that lacks physical substance.”

It is this second change that was most important — no longer would it be necessary for
an intangible to be acquired in order to be recognized in the financial statements.

The criteria for recognition of an internally generated intangible asset were essentially
the same as those for the deferral of development costs (see paragraph 3450.21).

An internally developed intangible asset should be recognized only when all of the
following criteria are met:
o
the intangible asset is clearly defined and its cost can be reliably identified and
measured;
o
the technical feasibility of producing, marketing or using the intangible asset has
been established;
o
the management of the enterprise has both the intention and ability to produce,
market or use the intangible asset;
62
o
adequate technical, financial and other resources exist, or are expected to be
available, to complete the development and permit the use or sale of the intangible
asset; and
o
the management of the enterprise can demonstrate that the intangible asset will
generate probable future economic benefits by demonstrating, among other things,
the existence of a market for the output of the intangible asset or the intangible
asset itself or, if it is to be used internally, the usefulness of the intangible asset.

As a result of these changes, Canadian practice was to have been aligned with
international practice with respect to the accounting treatment of start-up and similar
costs.

However, comments received required that the AcSB issue a re-exposure draft in early
third quarter of 2007.

The re-ED maintained much of the original intent, but it recognized that redundancy
would occur and proposed to alleviate that issue.

The main changes from the 2005 ED related to the incorporation of guidance directly
from current IFRSs and the related withdrawal of section 3450.

Section 1000 changes include removal of material potentially permitting the recognition
of assets that would not otherwise meet the definition of an asset or the recognition
criteria.

As well, guidance from the IASB Framework for the Preparation and Presentation of
Financial Statements has been added to clarify the distinction between assets and
expenses.

Section 3064 includes guidance from IAS 38, Intangible Assets, on the definition of an
intangible asset and the recognition of internally generated intangible assets, and the
“transfer” of material related to section 3450 into section 3064.

See section 3064 for more information.
Effective Date

The changes to section 1000 are effective for fiscal years beginning on or after October
1, 2008.
63
Section 1400 General Standards of Financial Statement
Presentation
(Minor changes Feb. 2009)

Background As of June 1, 2007, neither Canadian nor US GAAP addressed
management’s responsibility when there is substantial doubt about an entity’s ability to
continue as a going concern.

On the other hand, GAAS in both Canada and the US does deal with going concern
issues, although not in the same manner.

In Canada, the project resembled the Cheshire cat from Lewis Carroll’s novels — now
you see it, now you don’t.

Beginning in March 2004, the AcSB consulted with the AASB’s Going Concern Task Force
to assess the going concern guidance found in IAS 1.

Then, in December 2005, the AcSB decided to discontinue the project, as it believed
amendments were not warranted at that time.

In May 2006, the AcSB reconsidered and issued an exposure draft proposing to adopt
paragraphs 25 and 26 from IAS 1 into Canadian GAAP. Given that IAS 1 guidance is
followed in US practice — specifically through AICPA AU Section 341, The Auditor’s
Consideration of an Entity’s Ability to Continue as a Going Concern — it was not
surprising that the AcSB was convinced to reinstitute the project.

Sections 25 and 26 read as follows:
25. When preparing financial statements, management shall make an assessment of an
entity's ability to continue as a going concern. An entity shall prepare financial
statements on a going concern basis unless management either intends to liquidate the
entity or to cease trading, or has no realistic alternative but to do so. When
management is aware,…, of material uncertainties related to events or conditions that
may cast significant doubt upon the entity's ability to continue as a going concern, the
entity shall disclose those uncertainties. When an entity does not prepare financial
statements on a going concern basis, it shall disclose that fact, together with the basis
on which it prepared the financial statements and the reason why the entity is not
regarded as a going concern.
26. In assessing whether the going concern assumption is appropriate, management
takes into account all available information about the future, which is at least, but is not
limited to, twelve months from the end of the reporting period. The degree of
consideration depends on the facts in each case. When an entity has a history of
profitable operations and ready access to financial resources, the entity may reach a
conclusion that the going concern basis of accounting is appropriate without detailed
analysis. In other cases, management may need to consider a wide range of factors
64
relating to current and expected profitability, debt repayment schedules and potential
sources of replacement financing before it can satisfy itself that the going concern basis
is appropriate.

Given that IAS 1 guidance is followed in U.S. practice — specifically through AICPA AU
Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going
Concern — it is not surprising the AcSB reinstituted the project.

The key issues remained the same:
o
What is management’s responsibility to assess the appropriateness of the going
concern assumption;
o
Under what circumstances would the going concern assumption not be appropriate;
and
o
If the going concern assumption is not appropriate, what financial statement
disclosures should be made.
Significant Changes

In June 2007, section 1400 was amended as follows:
o
Management is required to make an assessment of an entity’s ability to continue as a
going concern;
o
The assessment must take into account all available information about the future,
which is at least, but is not limited to, twelve months from the balance sheet date;
o
Financial statements must be prepared on a going concern basis unless management
intends either to liquidate the entity, to cease trading or cease operations, or has no
realistic alternative but to do so;
o
When financial statements are not prepared on a going concern basis, that fact must
be disclosed, together with the basis on which the financial statements are prepared
and the reason why the entity is not regarded as a going concern;
o
disclosure is required of material uncertainties related to events or conditions that
may cast significant doubt upon the entity’s ability to continue as a going concern.
Application

The requirements apply to both profit-oriented and not-for-profit organizations.
65
Effective Date

The requirements are effective for interim and annual financial statements relating to
fiscal years beginning on or after January 1, 2008.
Section 1535 Capital Disclosures
(Substantial changes Feb. 2009; minor changes 2010)
See sections 3855 and 3862 for a detailed history of changes to Financial Instruments.
Significant Changes

Section 1535 requires disclosures about capital, and is harmonized with the amendment
to IAS 1 for capital disclosures.

It applies to all entities, irrespective of whether they have financial instruments.

This section requires:
o
o
o
the disclosure of qualitative information regarding an entity’s objectives, policies
and processes for managing capital.
an entity must disclose quantitative data about what it regards as capital.
An entity must disclose whether it has complied with any externally imposed capital
requirements and, if not, the consequences of such non-compliance.

The requirements were effective for fiscal periods beginning on or after October 1, 2007.

Subsequent to implementation, and as with section 3862, the AcSB concluded that relief
for non-publicly accountable enterprises was warranted.

It was acknowledged that most non-publicly accountable enterprises do not have
complex capital structures requiring active management.

There was also some question as to whether the value of the information required by
section 1535 was greater than the costs of preparing it.

In July 2008, the AcSB amended section 1535 to limit a non-publicly accountable
enterprise with externally imposed capital requirements to disclose only the nature
of its capital requirements and how it manages those requirements, along with
information about compliance with those capital requirements.

A non-publicly accountable enterprise without externally imposed capital requirements
would be exempt from the requirements of section 1535.
66

Effective Date: This change was effective for fiscal years beginning on or after August 1,
2008, with earlier adoption permitted.
Section 1582 Business Combinations
(Substantial changes Feb. 2009; minor changes Jan. 2010; minor changes Jan. 2011)
Background

In August 2005, the AcSB issued an exposure draft proposing to replace section 1581
with section 1582.

The changes were converged with proposals issued in June 2005 by the IASB and the
FASB.

Harmonization would enable cross-border and/or international compliance.

The IASB and the FASB had agreed on the principles underlying accounting for noncontrolling interests, and in 2008 the AcSB agreed to issue section 1601 Consolidated
Financial Statements and section 1602 Non-controlling Interests simultaneously with
section 1582.

In January 2009, the AcSB issued section 1582 Business Combinations, section 1601
Consolidations, and section 1602 Non-controlling Interests.

Section 1582 is converged with IFRS 3 Business Combinations. Section 1602 is
converged with the requirements of IAS 27 Consolidated and Separate Financial
Statements for Non-controlling Interests. Section 1601 carries forward the requirements
of section 1600 Consolidated Financial Statements, other than those relating to noncontrolling interests.
Application

Section 1582 does not apply to the following:
o
the formation of joint ventures
o
combinations involving only enterprises or businesses under common control
o
combinations between not-for-profit organizations or the acquisition of a forprofit business by a not-for-profit organization.

Significant Changes The changes to section 1582 represent a significant change in the
way we account for business combinations.

An acquirer is required to recognize an acquired business at its fair value as at the
acquisition date rather than at its cost.
67

The acquirer is required to measure the fair value of the acquiree, as a whole, as of the
acquisition date.

The acquirer is required to measure and recognize the individual assets acquired
and the liabilities assumed at their fair values at the acquisition date, with limited
exceptions.

These changes apply even if the acquirer obtains control of a business by acquiring less
than 100% of the equity interests in the acquiree.

The underlying presumption is that the acquirer obtains control of the acquiree at the
acquisition date and therefore becomes responsible and accountable for all of the
acquiree’s assets, liabilities, and activities, regardless of the percentage of its
ownership in the acquiree.

One of the limited exceptions relates to goodwill.

In general, goodwill is measured and recognized as the excess of the fair value of the
acquiree, as a whole, over the net amount of the recognized identifiable assets
acquired and liabilities assumed.

Without evidence to the contrary, the fair value of the consideration is used to
determine the fair value of the acquired business.

Equity instruments issued as part of the purchase consideration are measured at fair
value on the acquisition date rather than on the date the terms of the business
combination are agreed to and announced.

Other exceptions relate to the following:
o
long-lived assets (or a disposal group) classified as held for sale
o
future income-tax assets or liabilities
o
assets or liabilities related to the acquiree’s employee-benefit plans

These are measured in accordance with the specific generally accepted accounting
principles called for by their Handbook sections.

With respect to income taxes:
o
The acquirer is required to exclude any changes in the amount of its future incometax benefits that are recognizable as a result of that business combination.
o
Section 3465 is amended to require that such changes be recognized either in
income from continuing operations in the period of the combination, or directly to
contributed surplus, depending on the circumstances.
68

A final exception relates to leases:
o


If the acquiree is a lessee to an operating lease, no asset or related liability is
required to be recognized — provided the lease is at market terms.
Another major change relates to negative goodwill:
o
Section 1581 did not provide for the recognition of negative goodwill.
o
If a business combination is effected as a bargain purchase, section 1581 required
that the excess of fair value over the consideration paid be first offset against nonmonetary assets, and then, if necessary, against monetary assets.
o
Under section 1582, the acquirer accounts for that excess by reducing goodwill
until the goodwill related to that business combination is reduced to zero. Then, it
recognizes any remaining excess in income.
Another aspect of the revisions relates to the required reporting subsequent to
acquisition. These changes are covered in section 1600.
Definitions

Besides the preceding changes, section 1582 contains some significant definitional
changes:
o
The business must contain all of the inputs and processes necessary for it to
continue to conduct normal operations after the transferred asset is separated from
the transferor, particularly the ability to sustain a revenue stream.
o
Section 1582 defines a business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return in the
form of dividends, lower costs, or other economic benefits directly to investors or
other owners, members or participants.
o
Under section 1581, control was not specifically cited as a determinant of the
acquirer; instead, specific factors are identified.
o
Section 1582 states that the acquirer is the entity that obtains control of the
acquiree, using the definition of control in IAS 27.
o
Only if it is not clear which of the combining entities is the acquirer would the section
1581 factors be considered to determine the acquirer.
69
Effective Date

The new standards are effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on or after
January 1, 2011. Early adoption is permitted.
Section 1601 Consolidated Financial Statements and Section 1602 Non-controlling
Interests
Background

The 2005 Business Combinations exposure draft indicated that the AcSB had delayed proposing
changes to section 1600 pending finalization of the international standard, since the eventual
release would likely influence the details of a Canadian standard on non-controlling interests.

In January 2008, the IASB issued a revised IFRS 3, Business Combinations, together with
amended IAS 27, Consolidated and Separate Financial Statements.

The IASB’s standards became effective for fiscal years beginning on or after
July 1, 2009.

In January 2008, the AcSB decided to split section 1600 into two new sections.

The AcSB decided to defer the release of section 1582, which incorporated the provisions of the
revised IFRS 3, so that it could be issued concurrently with sections 1601 and 1602.

In April 2008, the AcSB released its exposure draft for section 1602 based on the IASB’s amended
IAS 27.

However, the AcSB decided against incorporating all of IAS 27 into Canadian GAAP now because it
did want to change current standards which differ from IFRSs.

Doing so would result in a mixture of new and old requirements which would only have to be
changed again in 2011:

o
IAS 27 includes a definition of control that differs from that in section 1590, and it
could result in changing which entities are required to be consolidated.
o
SIC-12, Consolidation — Special Purpose Entities, is not the same as AcG-15,
Consolidation of Variable Interest Entities.
o
IAS 27 does not include guidance on investment companies that is comparable to
AcG-18, Investment Companies.
In deciding not to adopt all of IAS 27 now, those requirements of section 1600 that do
not involve non-controlling interests can remain unchanged in a proposed new section
1601.
70

By separating the guidance for non-controlling interests from that for other aspects of
consolidation, it was easier to distinguish the guidance that is new from the guidance
that is unchanged.

Section 1601 carried forward the requirements for preparing consolidated financial
statements after acquisition and some aspects of consolidation at the date of a business
combination but remove the existing guidance on non-controlling interests.

Most of section 1600’s provisions on preparing consolidated financial statements at the
date of a business combination were replaced by guidance in section 1582.

A new section 1602 entitled Non-controlling interests (NCIs) was issued to provide
guidance on accounting for non-controlling interests subsequent to a business
combination.

Lastly, the AcSB intends to delete all illustrative examples from section 1600.

It believed that the examples available in both IFRSs and US GAAP would be appropriate
in applying Canadian GAAP.

Section 1602 is the same as IAS 27 with respect to non-controlling interests other than
the disclosure requirements.

The AcSB decided against including the disclosure requirements of IAS 27 in section
1602 as they are similar in nature and extent to those in existing Handbook sections.

The key principles for the revisions are as follows:
o
NCIs would be reported as a separate component of equity.
o
Changes in ownership interests in a subsidiary that do not result in a loss of control
would be accounted for as capital transactions.
o
On loss of control, any retained interest would be re-measured to fair value on the
date control is lost with the gain or loss recognized in income.
o
Net income or loss and each component of other comprehensive income would be
attributed to the controlling interests and NCI, based on relative ownership interests
or other contractual arrangements.
o
This would include circumstances when the NCI’s share of losses exceeds its interest
in the equity of the subsidiary.
o
The consolidated income statement would show the consolidated net income and
comprehensive income and the amounts attributable to the controlling interest and
to the NCI.
71
Effective Date

The IASB’s standards became effective for fiscal years beginning on or after July 1,
2009.

In the ED, the AcSB stated that sections 1582, 1601, and 1602 will be mandatory for
fiscal years beginning on or after January 1, 2011 with earlier adoption permitted.

The three new Sections would have to be implemented concurrently.

Balances relating to business combinations completed prior to the implementation date
are to be presented in accordance with sections 1601 and 1602 but are not to be remeasured until an entity adopts IFRSs for the first time.

In January 2009, the Handbook was updated (Release 53) finalizing these changes.

Section 1581 was moved to the Superseded section of the Handbook to provide
guidance until the three sections became effective.

This is one of the few times that the Handbook specified that a standard is to be applied
prospectively:
o
The sections apply to business combinations for which the acquisition date is on or
after the beginning of the first annual period beginning on or after January 1, 2011.
o
Earlier adoption is permitted.
Section 3031 Inventories
(Minor changes Feb. 2009)
Background

In June 2006, the AcSB issued an exposure draft to replace current section 3030.

The revised section 3031 provides more explicit guidance on the measurement and
disclosure requirements for inventories than did section 3030

It is the first section to reflect the AcSB’s strategic goal of adopting IASB standards for
publicly accountable enterprises.

With the exception of additional material addressing not-for-profit entities (which neither
the IASB nor the FASB deal with), section 3031 is fully converged with IAS 2 and FASB
151.

In keeping with the move to IFRS, the paragraph numbering in section 3031 has been
aligned with that of IAS 2, “Inventories.”
72
o
When a particular paragraph in IAS 2 has not been adopted, it is identified as "[Not
used]”
o
When a paragraph or sub-paragraph not in IAS 2 has been added, the paragraph or
sub-paragraph is numbered so as to maintain this symmetry (for example, 08A, 09A,
39A, 39B, 39C, and so on)
Application

Section 3031 applies to all inventories of all entities, including not-for-profit
organizations, except the following:
o
work in progress arising under construction contracts, including directly related
service contracts
o
financial instruments
o
contributions not recognized by not-for-profit organizations in accordance with
paragraph 4410.16

There is also a scope exemption from the measurement (but not the disclosure)
requirements for agricultural inventories up to and including the point of harvest.

The inventories measurement exemption also applies to the following:
o
producers of agricultural and forest products
o
agricultural produce after harvest
o
minerals and mineral products to the extent that they are measured at net realizable
value in accordance with well-established practices in those industries
o
commodity broker-traders who measure their inventories at fair value less costs
to sell
Significant Changes

Section 3031 requires the following:
o
measurement of inventories at the lower of cost and net realizable value — rather
than the unspecified term “market”
o
allocation of fixed production overhead based on normal capacity levels, with
unallocated overhead expensed as incurred
73
o
the cost of inventories of items that are not ordinarily interchangeable, and goods or
services produced and segregated for specific projects, is to be assigned by specific
identification of their individual costs
o
consistent use (by type of inventory with similar nature and use) of either FIFO or
weighted average cost formula to measure the cost of other inventories. LIFO has
been proscribed
o
reversal of previous write-downs to net realizable value when there is a subsequent
increase in the value of inventories
o
disclosure of the accounting policies used, carrying amounts, amounts recognized as
an expense, write-downs, and the amount of any reversal of any write-downs
recognized as a reduction in expenses
Effective Date

Section 3031 is effective for interim and annual financial statements for fiscal years
beginning on or after January 1, 2008, with earlier application encouraged.

Section 3031 requires that an entity apply the recommendations either
o
to the opening inventory for the period and adjust opening retained earnings by the
difference in the measurement of opening inventory (prior periods are not restated);
or
o
retrospectively and restate prior periods in accordance with section 1506.
Consequential Amendments

Paragraph 1520.03(r) inserted, which added “the amount of inventories recognized as
an expense during the period” to the required income statement disclosures.

Paragraph 1520.04(c) deleted to remove “the amount of cost of goods sold” from the
desirable income statement disclosures.

Paragraphs 1751.18 and 1751.26 amended in Interim financial statements to remove
references to the LIFO method.

Paragraph 3061.04, Property, plant and equipment amended to include guidance on the
accounting for spare parts and servicing equipment

Paragraph 3062.03, Goodwill and other intangible assets amended to exempt from that
standard, intangible assets that are within the scope of section 3031. Note that section
3062 has now been replaced by section 3064; however, paragraph 3064.03 retains the
scope exclusion from section 3062.
74
Section 3055 Interests in Joint Ventures and Section 3056 Joint Arrangements
(Substantial changes Feb. 2009; additions Jan. 2010; updates Jan. 2011)
Background

In September 2006, the AcSB added a project to its agenda to converge Section 3055
Interests in Joint Ventures with the amended version of IAS 31 Interests in Joint
Ventures.

In April 2008, the IASB discussed the comment letters received in response to the
Exposure Draft ED 9 “Joint Arrangements.” Based on the feedback obtained from the
comment letters, the IASB started its redeliberations on the areas of the ED where
modifications are considered necessary.

In October 2007, the IASB published ED 9 Joint Arrangements, to replace IAS 31.

ED 9 is part of the process to bring about the convergence of IFRS and US GAAP.

In November 2007, the AcSB issued a corresponding ED to amend section 3055.

As part of the adoption of the proposed IFRS in Canada prior to the complete
changeover to IFRSs, the AcSB proposed retaining the guidance for joint venture
transactions in paragraphs 3055.26-.40 by adding it to paragraph 27 of ED 9, since
similar guidance is not contained within ED 9.

Likewise, the AcSB has decided not to make other conforming changes to existing
Canadian GAAP and, therefore, Canadian GAAP and IFRSs will differ in a minor way in
respect of joint arrangements until the complete changeover to IFRSs.

In other respects, the scope of section 3056 does not diverge from that of section 3055
— unanimous agreement is still required between the key parties that have the power to
make the financial and operating policy decisions for the joint arrangement.

The exposure draft carries forward modified versions of the three types of joint
arrangement identified in IAS 31. For the first two types — Joint Operations and Joint
Assets — the description of these types and the accounting for them is consistent with
Jointly Controlled Operations and Jointly Controlled Assets in IAS 31.

The third type of joint arrangement is a Joint Venture which is accounted for using
equity accounting — a major change from section 3055 — which previously required
proportionate consolidation for all types of joint ventures.

The underlying principle of both EDs is that the parties to a joint arrangement must
recognize their contractual rights and obligations arising from the arrangement.
75

Accordingly, the EDs focus on the recognition of assets and liabilities by the parties to
the joint arrangement.

Accounting for a right leads to the recognition of an asset, and accounting for an
obligation leads to the recognition of a liability.

Thus, a joint asset would be recognized when the party has exclusive rights to a share of
the asset and the economic benefits generated from that asset.

This approach is similar to the way both section 3065 and IAS 17 deal with leases: the
right to use an asset in a joint arrangement and the right to use an asset in accordance
with a lease contract.
Proposed Changes

There are two key changes proposed by the exposure draft:
o
The first is the elimination of proportionate consolidation for a jointly controlled
entity.
o
The second change is the introduction of a ‘dual approach’ to the accounting for joint
arrangements.

The elimination of proportionate consolidation will have a fundamental impact on the
income statement and balance sheet.

Under the equity method, entities will replace the line-by-line proportionate
consolidation of the income statement and balance sheet with a single net result and a
single net investment balance.

The IASB has justified the withdrawal of proportionate consolidation by arguing that the
method leads to recognition of assets that an entity does not control and liabilities for
which it has no obligations.

The AcSB ED makes no comment regarding this assertion — implicitly agreeing with the
IASB.

The dual approach will also significantly affect the manner in which joint arrangements
are addressed.

The dual approach takes the perspective that a single joint arrangement may contain
more than one type — for example, Joint Assets and a Joint Venture.

The party to such a joint arrangement accounts first for the assets and liabilities of the
Joint Assets arrangement and then uses a residual approach to equity accounting for
the Joint Venture part of the joint arrangement.
76

The dual approach reflects the IASB’s view that entities must separate transactions into
their components to properly understand their economic substance:
o
For instance, the sale of goods and an associated service contract for those goods
requires that the sale and service components be accounted for separately, even if
they are part of the same contract.

However, a key weakness of the dual approach is the use of equity accounting for the
residual interest.

In fact, the use of equity accounting is a major problem with ED 9: under proportionate
consolidation, investors had a sense of what comprised the assets and liabilities of the
joint venture.

Under the equity method, investors will be presented a single line item representing the
net assets of the joint venture.

Investors will have to do the work to determine how the joint venture’s assets and
liabilities align with the venturer’s assets and liabilities.

How is this a step forward?

The AcSB intends for section 3056 to become effective as part of the complete adoption
of IFRSs.

Canadian entities would be permitted, but not required, to adopt the new standard
before then.

When the IASB publishes the new standard in final form, the AcSB would publish it as a
Handbook section with a deferred mandatory effective date and permit early adoption.

At the April 2008 meeting, the IASB received a report summarizing the main objections
to the exposure draft:
o

The changes introduced are too far reaching — many respondents believed that the
reference to “rights to use” an asset and the elimination of proportionate
consolidation require further research and should not be addressed in a short-term
project.
Many respondents objected to the removal of joint control from the definition of joint
assets and joint operations, arguing that doing so lessens the importance of joint control
and does not reflect the essence of these joint arrangements.

Accordingly, the Board did nothing for more than a year.

The ED was brought back to the IASB for consideration in May 2009.

The main stumbling block related to the definitions regarding “control.”
77

After much debate, the IASB agreed to modify the definitions contained in the ED

There would only be two types of joint arrangement (that is, “joint operations” and “joint ventures”)
instead of three, as stated in ED 9 (that is, “joint operations,” “joint assets,” “joint ventures”).

The Board also modified the definition of “joint arrangement” to “agreements that
establish the terms by which two or more parties agree to undertake and jointly control
an activity.”

The IASB also concluded that it was not was possible to define a rebuttable presumption
that would trigger a consistent and appropriate classification of whether a joint
arrangement was a joint operation or a joint venture (or whether it had elements of
both).

However, it was agreed that joint arrangements not established through a separate
entity would be “joint operations.”

One aspect the Board did not address was the decision to proscribe proportionate
consolidation.

There was considerable opposition to this decision in the comment letters.

Notwithstanding, it was the IASB’s intention to release the final standard before the end
of 2009. Section 3056 was never introduced.
Section 3064 Goodwill and Intangible Assets
(Material added Feb. 2009; minor changes Jan. 2010; minor changes Jan. 2011)
See also section 1000 Financial Statement Concepts for the history of the changes on
this topic.
Significant Changes

Section 3064 includes guidance from IAS 38, Intangible Assets, on the definition of an
intangible asset and the recognition of internally generated intangible assets, and the
“transfer” of material related to section 3450 into section 3064.

In particular, section 3064 adopts IAS 38’s requirement that an intangible asset meet
key three criteria.

Specifically, an intangible asset is an identifiable, non-monetary asset without
physical substance.
78

An asset meets the identifiability criterion in the definition when it:
o
is separable, that is, capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a
related contract, asset or liability; or
o
arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligation.

For intangible assets acquired separately, or as part of a business combination, there is
a presumption that the criteria are met.

On the other hand, section 3064 (and IAS 38) takes the position that (almost) all
internally-generated intangible assets are to be expensed as incurred.

Section 3064 makes an exception for development expenditures, but imposes strict
conditions (paragraph 3064.40) on the recognition of such assets.

The conditions are the much the same as those that previously were found in paragraph
3450.21.

Effectively, except for development expenditures, section 3064 prohibits the recognition
of internally generated intangibles.

Paragraph 3064.46 specifically states that internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognized as
intangible assets.

Paragraph 3064.47 notes that expenditures on internally generated items such as
brands, mastheads, etc. cannot be distinguished from the cost of developing the
business as a whole.

However, externally acquired items can be recognized as intangible assets since they
will meet the three recognition criteria cited earlier.
Effective Date

The changes to section 3064 are effective for fiscal years beginning on or after October
1, 2008.
Section 3465 Income Taxes
(Added January 2010)
Background
79

In March 2009, the IASB published an exposure draft to replace IAS 12, the standard
relating to Income Taxes.

In April 2009, the AcSB issued a corresponding ED to replace section 3465.

The Income Tax ED (IAS 12), FASB Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, and section 3465 of the Handbook (Income Taxes),
all share a common approach — the temporary difference approach.


The objective of that approach is to recognize the income tax that would be
payable or recoverable if an entity’s assets and liabilities were recovered or
settled at their present carrying amount.
In a move that echoes the capital asset/property, plant and equipment terminology flipflop, the ED refers to “deferred taxes” rather than “future income taxes.”
Proposed Changes

IAS 12, SFAS 109 and section 3465 differ in a number of ways, including different
exceptions to the temporary difference approach and differences relating to the
recognition and measurement of deferred tax assets and liabilities, and the allocation of
tax amounts to the components of comprehensive income and equity.

The ED requires deferred tax assets to be recognized in full.

However, the net carrying amount should equal the highest amount that is more likely
than not to be realizable against taxable profit.

A valuation allowance will need to be established, if necessary, to record any difference
between the full amount of the deferred tax asset and the net carrying amount.

The ED means that the Canadian GAAP approach to definition of the tax basis of an
asset will change.

Currently, it is the higher of amount deductible on use or sale, regardless of intent.

Why is this a “big deal”?

GAAP requires that we determine if there will be a future income tax asset or liability.

The challenge arises from the fact that the tax value for the purpose of calculating future
income tax is not necessarily the value on the tax schedules.

Think of class 10.1 assets under the Income Tax Act.

You cannot have recapture, a terminal loss or a capital loss on a class 10.1 asset — but
you can have a capital gain.
80

The problem — the capital gain can only be determined upon sale of the asset.

Assume you have an asset you have classified as held-for-trading.

This classification means, for tax purposes, that any gains or losses on sale could
(would?) be treated as income gains and losses rather than capital gains and losses.

The asset was acquired for $10,000 — which means that the tax basis of the investment
is $10,000.

The tax amount is deductible in determining taxable income only on disposition.

However, as a held-for-trading financial instrument, it is supposed to be carried at fair
value.

The fair value is readily determined as $5,000, and so that is the amount by which it is
reported on the balance sheet.

The tax basis is $10,000 and the accounting basis is $5,000 — giving rise to temporary
difference.

The problem with all this: will any future gains and losses be income or capital?

Furthermore, the ED requires that deferred taxes be derived based on an amount equal
to the highest amount that is more likely than not to be realizable against taxable profit.

The ED refers to “applicable substantively enacted tax law” whereby the measurement
of a tax asset or liability related to an asset is determined by the consequences of the
sale of the asset for its current carrying value.

In other words, the “use” criterion is gone.

This presentation will differ from section 3465, which requires the recognition of a future
income tax asset to the extent it is more likely than not to be realized and permits, but
does not require, a separate valuation allowance.

This change should not affect the net deferred tax asset recognized since it is form over
substance.

The proposed standard is expected to improve financial reporting by clarifying various
aspects of the requirements in IAS 12.

It eliminates many of the differences between the accounting for income tax under
IFRSs and US GAAP.

The proposed standard will remove old IAS 12’s exception to the recognition of deferred
taxes on the initial recognition of an asset or liability when a basis difference exists.
81

Instead, the ED’s measurement approach implements the following steps:
o
First, record the asset or liability (excluding any entity-specific tax effects) that
resulted in the initial temporary difference in accordance with applicable IFRSs;
o
Next, recognize a deferred tax amount based on the difference between the carrying
amount of the asset or liability and the tax basis available to the entity;
o
Then, recognize an allowance against or premium in addition to the deferred tax
liability.

Note that the premium or allowance would be part of the deferred tax asset or liability.

The ED will require a two-step approach for the recognition of deferred tax assets:
o
First, recognize deferred tax assets for deductible temporary differences, unused tax
losses and unused tax credits carried forward, and measure them at the appropriate
rate; then
o
Reduce deferred tax assets by a valuation allowance, so that the net amount equals
the highest amount that is more likely than not to be realizable against taxable
profit.

The ED requires the use of average rates that are expected to apply to the expected
taxable profit of the periods in which temporary differences are expected to reduce;
section 3465 is less specific.

While both the ED and section 3465 require the use of substantively enacted tax rates to
measure income tax assets and liabilities, the ED includes more general guidance on
when tax rates are substantively enacted and does not include guidance specific to
Canadian legislative processes (as is done by section 3465).

One area that has had considerable attention the past few years is what is known as
uncertain tax positions.

Tax positions are considered “uncertain” if some degree of doubt exists over whether
amounts reported by the enterprise to taxation authorities will be accepted.

Section 3465 is silent in this area; authoritative guidance is FASB FIN 48.

The ED proposes that, with a few specified exceptions, deferred tax assets and liabilities
should be recognized for all temporary differences, and the carry forward of unused tax
losses and tax credits, rather than only those likely to be accepted by taxation
authorities.

The ED requires the use of a probability-weighted average amount of all possible
outcomes applied to uncertainties in both current and deferred tax amounts.
82

The proposals in the ED apply to the accounting for all domestic and foreign taxes that
are based on taxable profit.

Income tax for a parent or an investor in an associate or joint venture also includes tax
payable on distributions by the subsidiary on behalf of the parent, or by an associate or
joint venture on behalf of the investor.

Investment tax credits is excluded from the scope of the ED, but accounting for
temporary differences that arise from such grants or investment tax credits is included.

A key difference between the ED and section 3465:

o
The ED defines an investment tax credit as “relating directly to the acquisition of
depreciable assets” while section 3465 includes all qualifying expenditures prescribed
by tax legislation, whether or not they are made for depreciable assets.
o
A deferred tax liability for temporary differences related to the liability component of
a compound financial instrument must be recognized — currently, if an enterprise is
able to settle the instrument without the incidence of tax, no temporary difference is
recognized.
Another key difference between the ED and section 3465 relates to intercompany asset
transfers:
o
Under section 3465, tax expense from intercompany sales is deferred until the
related asset is sold or disposed of, and no future taxes are recognized for the
purchaser’s change in tax basis.
o
No such exception is provided to the temporary-difference approach under the IASB
proposals.
o
Under the ED, any taxes paid or recovered by the seller as a result of the transfer
are recorded as an asset or liability in the consolidated financial statements until the
gain or loss is recognized by the consolidated entity.

The ED exception to the temporary difference approach is restricted to an investment in
a foreign subsidiary or joint venture that is essentially permanent in duration and it is
apparent the temporary difference will not reverse in the foreseeable future.

The section 3465 exclusion to all investments in subsidiaries and joint ventures would be
curtailed.

The ED does not provide an exception from the general requirement to recognize
deferred tax amounts due to temporary differences arising:
o
from the difference between the historical exchange rate and the current exchange
rate translations of the cost of non-monetary assets or liabilities of integrated foreign
operations; and
83
o
in consolidated financial statements as a result of a difference between the tax basis
of an asset in the purchaser’s tax jurisdiction and its cost recognized in the
consolidated financial statements.

The ED will require that deferred tax assets and liabilities be classified as either current
or non-current on the basis of the financial reporting classification of the related non-tax
asset or liability.

IAS 1, Presentation of Financial Statements, currently requires all deferred tax to be
classified as non-current.

The IASB expected to issue the revised version of IAS 12 (IFRS 10?) in the summer of
2010; however, it did not become effective until 2012.

Canadian firms transitioning to IFRS in 2011 will need to decide whether to adopt the
proposals on one of the following bases:
o
the new standard for all periods presented (that is, 2010 and 2011); or
o
existing IAS 12 for any period presented that starts before the date the standard is
issued and the new standard for subsequent periods.

As noted in a June 2009 article by Karlene Mulraine, Canadian firms may find the option
permitting entities to apply the new standard to all periods presented more favourable,
as the alternative approach will require entities to learn and apply existing IAS 12 solely
for the purpose of preparing results for a comparative period.

The following table, used as an example only is taken from Deloitte Canada’s May 2009
Special Edition Countdown Newsletter, and does not represent Deloitte’s current views.
84
Source: Deliotte & Touche, May 2009 Special Edition Countdown Newsletter. Reproduced
with permission.
Section 3855 Financial instruments – Recognition and Measurement
(Substantial changes Feb. 2009; changes Feb. 2010)
See also section 1535 Capital Disclosures and section 3862 Financial Statements —
Disclosures. The following table and related notes summarize the requirements
addressed in this document. They are taken from Deloitte Canada’s May 2009 Special
Edition Countdown Newsletter, and do not represent Deloitte’s current views.
85
Source: Deloitte & Touche, May 2009 Special Edition Countdown Newsletter. Reproduced
with permission.

Note 1: Sections 3862 and 3863 replaced section 3861 as of October 1, 2006. However,
the following entities can elect to continue to apply section 3861 in place of sections
3862 and 3863, rate-regulated enterprises that have not issued, nor are in the process
of issuing, public debt or equity securities.

Note 2: In 2008, section 3855 was amended to permit reclassification of certain assets.
If an entity chose to reclassify an asset prior to November 1, 2008, it could affect the
change as at any date from July 1, 2008 to October 31, 2008. Reclassifications made
after November 1, 2008 can only be applied prospectively.

Note 3: Not-for-profit organizations may elect to replace the disclosure requirements of
section 3861 with those in section 3862, and section 3863, but are not required to do
so.

Note 4: Not-for-profit organizations may elect accounting policies to ignore derivatives
embedded in contracts such as leases and insurance contracts as well as any nonfinancial contracts or, separately, any derivatives that may be embedded therein.

Note 5: Non-publicly accountable enterprises can choose to follow the XFI version of the
Handbook. If a non-publicly accountable enterprise chooses to adopt the newer financial
instruments standards, all of the standards apply. However:
86

They may elect an accounting policy to ignore derivatives embedded in contracts
such as leases and insurance contracts.

They may elect an accounting policy to ignore non-financial contracts including
any derivatives that may be embedded therein.

They may elect the first day of the first year in which section 3855 is applied as
the transition date for identifying embedded derivatives (other than any to which
the policy options apply).

Note 6: Non-publicly accountable enterprises may elect to continue to apply the
disclosures in section 3861.

Note 7: Non-publicly accountable enterprises are not required to provide summary
quantitative risk information or a sensitivity analysis if they choose to adopt section
3862.

Note 8: Non-publicly accountable enterprises are required to make the reduced
disclosures in section 1535 externally imposed capital requirements, if applicable,
effective August 1, 2008.
Significant Changes

Up until October 2008, an entity could not reclassify a financial instrument out of the
held-for-trading category while it is held or issued, so care had to be taken with initial
designation.

While the “due diligence” requirement has not be lifted, illiquidity in the credit markets
had a tremendous impact on fair values.

Section 3855 permits transfers out of the held-for-trading category if a financial asset
is no longer held for the purpose of selling it in the near term (even if the asset may
have been acquired principally for the purpose of selling it in the near term) if the
requirements in paragraph 3855.80A are met.

A financial asset to which paragraph 3855.80(c) applies may be reclassified out of the
held-for-trading category only in “rare” circumstances.

Transfers into the category are still proscribed.

Section 3855 permits limited transfers out of the available-for-sale category:
o
A financial asset … that would have met the definition of loans and receivables (if it
had not been designated as available for sale) may be reclassified … to the loans and
receivables category if the entity has the intention and ability to hold the asset for
the foreseeable future or until maturity.
87

In both cases:
o
If an entity reclassifies a financial asset … the financial asset should be reclassified at
its fair value on the date of reclassification.
o
The fair value of the financial asset on the date of reclassification becomes its new
cost or amortized cost, as applicable.

If an entity reclassifies a financial asset out of the held-for-trading category, any gain or
loss already recognized in net income is not reversed.

If an entity reclassifies a financial asset out of the available-for-sale category, any gain
or loss already recognized in other comprehensive income in accordance with paragraph
3855.76(b) should be amortized to net income over the remaining life of the asset using
the effective interest method.

If an entity reclassifies a financial asset out of the available-for-sale category, any
difference between the new amortized cost and maturity amount should be amortized
over the remaining life of the financial asset using the effective interest method, similar
to amortization of premium and discount.

If there is a change in circumstances such that it is no longer appropriate to classify an
investment as held-to-maturity, it should be reclassified as available-for-sale and remeasured at fair value.

The difference between its carrying amount and fair value should be accounted for in
accordance with the treatment for changes in fair value of available-for-sale financial
assets.

When a quoted market price in an active market becomes available for a financial asset
for which such a price previously was not available, the asset should be re-measured at
fair value.

The difference between its carrying amount and fair value is also accounted for in
accordance with the treatment for changes in fair value of available-for-sale financial
assets.

Another change made in 2008 to section 3855 relates to recoverability (think assetbacked commercial paper).

If a financial asset is reclassified and the entity subsequently increases its estimates of
future cash receipts as a result of increased recoverability of those cash receipts, the
effect of that increase is recognized as an adjustment to the effective interest rate from
the date of the change in estimate rather than as an adjustment to the carrying amount
of the asset at the date of the change in estimate.
88
Effective Date

These amended provisions were released in 2008 apply to reclassifications made on or
after July 1, 2008.

An entity could not reclassify a financial asset in accordance with these amendments
before July 1, 2008.

Any reclassifications made on or after November 1, 2008 took effect from the date of
the reclassification.

Reclassifications before November 1, 2008 were able to take effect from July 1, 2008 or
a subsequent date.

Given that we are long past that date, reclassifications can only be made prospectively.

Reclassifications cannot be applied retrospectively to reporting periods ended before July
1, 2008.
Section 3862 Financial Instruments - Disclosures
(Substantial changes Feb. 2009; minor changes Jan. 2010; minor changes Jan. 2011)
Background

In April 2006, the AcSB issued an exposure draft of three new standards: two related
to the disclosure (section 3862) and presentation of financial instruments (section
3863), and one related to disclosures about capital (section 1535).

In 2008, CGA-Canada issued a Practice Alert as part of the Public Practice Manual
subscription service.

The release detailed the disclosure requirements of section 3862, as well as describing
the nature of those disclosures.

Members whose responsibility includes compliance with section 3862 should seek out
this Practice Alert.

Section 3863 carried forward unchanged the presentation requirements of section 3861
(which was based on IAS 32).

In July 2008, section 3862 was amended such that non-publicly accountable enterprises
would not be required to disclose an analysis of their sensitivity to market risks.

The changes were effective for interim and annual financial statements for fiscal years
beginning on or after August 1, 2008.
89

In July 2008, section 3862 was also amended such that non-publicly accountable
enterprises could elect the date of adoption of section 3855 as the transition date for
recognizing embedded derivatives.

The changes were also effective for interim and annual financial statements for fiscal
years beginning on or after August 1, 2008.

However, these changes were rendered moot with the October 2008 decision to exempt
private enterprises from the ambit of sections 3862 and 3863.

Instead, limited disclosures are required as part of section 3856 Financial Instruments.
Significant Changes

Consistent with the move to IFRS, the paragraph numbering in section 3862 is aligned
with that of IFRS 7:
o
When a particular paragraph or sub-paragraph in IFRS 7 has not been adopted, it is
identified as “[Not used]” (for example, .13).
o
When it has been necessary to add a paragraph or sub-paragraph not included in
IFRS 7, the paragraph or sub-paragraph is numbered so as to maintain this
correspondence (for example, 3862.13A).

Similarly, the Appendices correspond to those in IFRS 7.

When a particular Appendix in IFRS 7 has not been adopted, it is listed where it
otherwise would have appeared in the section and its disposition is indicated.

One part of IFRS 7 that has not been adopted relates to hedge disclosures.

Rather than adopt IFRS 7’s requirements, paragraph 3862.21A specifies that an entity
that holds or issues derivatives, non-derivative financial assets, or non-derivative
financial liabilities that are designated and qualify as hedging items is to follow the
disclosure requirements of section 3865.

Section 3862 replaced the disclosure requirements of section 3861 Financial Instruments
— Disclosure and Presentation and was harmonized with IFRS 7.

Section 3862 places increased emphasis on disclosures about risks associated with both
recognized and unrecognized financial instruments and how these risks were managed.
 Section 3862’s requirements for an entity to disclose the significance of financial
instruments for its financial position and performance are considerably more extensive
relative to those of section 3861.
90
 However, the disclosures about fair value, although revised, are not substantially
different from those of section 3861.

These requirements are less detailed than those of Section 3861 in certain areas (for
example, terms and conditions) and more so in others (for example, reclassifications,
collateral, allowance for credit losses, compound financial instruments with multiple
embedded derivatives, and defaults and breaches).

Section 3862’s requirements for the disclosure of qualitative and quantitative
information about exposure to risks arising from financial instruments have been revised
from, and are more extensive than, those of Section 3861.

The qualitative disclosures must describe management’s objectives, policies and
processes for managing such risks.

The quantitative disclosures must provide information about the extent to which the
entity is exposed to credit risk, liquidity risk and market risk (that is, currency risk,
interest rate risk, and other price risk).

Section 3862 requires that the disclosures related to the risks faced by an entity must
either be incorporated directly into the financial statements or incorporated by crossreference from the financial statements to some other statement, such as a
management commentary or risk report.

If cross-referenced, the originating report must be available to users of the financial
statements on the same terms as the financial statements and at the same time.

Effectively, without the information — either directly or incorporated by cross-reference
— the financial statements are deemed incomplete.

Although, section 3862 applied to all entities, paragraphs .42A and .42B provided some
relief for non-publically accountable enterprises:
o
An enterprise that qualifies under this section may elect to disclose the information
required by paragraphs 3862.25-.30A only for financial assets and financial
liabilities, both recognized and unrecognized, for which fair value is readily
obtainable.

Also, such enterprises may elect to disclose the fair value required by paragraph
3862.37(b1)(i) only for those financial assets for which fair value is readily obtainable.

Basically, the differential reporting option relieves an entity of having to estimate fair
value if an active market does not exist.

It also reduces the extent of the disclosures since reference to active markets reduces
the extent of disclosures necessary.
91
Effective Date

Section 3862 and 3863 Financial Instruments — Presentation both have an effective
date of October 1, 2007.
92
CICA Handbook  Assurance  Part I
Background

On June 23, 2009, the CICA replaced the existing Handbook – Assurance with a new,
two-volume version.

The action came about as a result of the decision to adopt the International Standards
on Auditing (ISAs) as Canadian Auditing Standards (CASs).

The CASs are based on ISAs that have been redrafted as part of the International
Auditing and Assurance Standards Board’s (IAASB’s) project to improve the clarity of its
standards.

Each CAS is the same as the corresponding ISA, except for limited changes made if and
only if appropriate.

In rare circumstances, CASs contain Canadian-specific wording, resulting from the
AASB’s amendments to wording in the ISAs.

These “Canadian” amendments are made only if the AASB’s criteria for such
amendments are met.

The CASs clearly indicate to readers where and when these amendments occur and
provide readers with the wording in the corresponding ISA.

For example, paragraph CA12 of CSQC 1 reads:
o
In Canada, relevant ethical requirements discuss the familiarity threat that may be
created by using the same senior personnel on an assurance engagement over a
long period of time and the safeguards that might be appropriate to address such
threats.
o
In ISQC 1, this paragraph states: The IFAC Code discusses the familiarity threat that
may be created by using the same senior personnel on an assurance engagement
over a long period of time and the safeguards that might be appropriate to address
such threats.

As noted above, The CICA Handbook – Assurance has been separated into Parts I and II.

Part I consists of:
o
the Preface to the CICA Handbook – Assurance, which is effective as of December
15, 2009;
o
all CASs, which become effective for audits of financial statements for periods ending
on or after December 14, 2010;
93
o
CSQC 1, Quality Control for Firms that Perform Audits and Reviews of Financial
Statements, and Other Assurance Engagements, which is effective as of December
15, 2009;
o
and all other Sections and Guidelines (applicable to engagements other than audits
of financial statements) that have been retained and carried forward from the
existing Handbook.

Part II consists of the financial statement auditing standards in the existing CICA
Handbook – Assurance, which remain in effect until the effective date of the CASs, along
with all other Sections and Guidelines in the existing Handbook.

All audits of financial statements for periods ending before December 14, 2010 should
be performed in accordance with these existing Canadian generally accepted auditing
standards (GAAS).

In December 2010, the 2011 edition of the CICA Handbook — Assurance Part I was
issued. The 2011 edition includes all standards issued and effective for periods beginning
on or after January 1, 2011.
94


The following standard, included in Standards Issued but Not Yet Effective in the 2010
edition, has been incorporated into the 2011 edition:
o
CSAE 3416, "Reporting on Controls at a Service Organization"
o
Accordingly, Auditor's Report On Controls At A Service Organization, section 5970,
was withdrawn.
For reference purposes, Part I (2010 edition) and Part II have been retained.
95
CICA Handbook  Assurance  Part I  Canadian Standards
on Quality Control
CSQC 1 – Quality Control for Firms that Perform Audits and
Reviews of Financial Statements (Formerly called GSF-QC:
Quality Control Standards)
(added Feb. 2010; no changes Jan. 2011)

CSQC 1, General Standards of Quality Control for Firms Performing Assurance
Engagements, replaces the GSF-QC material in the Handbook.

There are changes to the scope of the standard and a number of new concepts and
requirements are introduced as well.

CSQC 1 links with CAS 220 the same way the GSF-QC material linked with section 5030
in the old Handbook.

The authority and application of CSQC 1 is set out within the standard in paragraphs 4
to 9 and paragraphs 13 to15, as well as in paragraph A1.

Unlike the rest of the CAS material (indeed any other material in Part I of the
Handbook), CSQC 1 is effective as of December 15, 2009.

Note that CAS 220 retains a 2010 effective date.

For the interim, section 5030 should be followed.

Like the GSF-QC, CSQC 1 is not part of assurance standards, which include Canadian
generally accepted auditing standards (GAAS).
However, CSQC 1 forms part of the generally accepted standards of practice of the
profession.

CSQC 1 (like CAS 220) requires the completion of the engagement quality control review
and resolution of any differences of opinion on or before the date of the auditor’s report
(we’ll cover that under CASs 560 and 700).

This represents a significant change from the GSF-QC material which required that the
engagement quality control review be completed before the date of issuance of the
engagement report.

Currently, the date of substantial completion of examination is used as the date of the
auditor’s report.

For many firms, the date of the engagement report was (significantly) earlier than the
date of issuance of that report.
96

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that the
auditor’s report be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the
financial statements.

Consequently, the implementation of CSQC 1 (and CAS 220) will likely represent a
significant change in practice.

CSCQ 1 also modifies the scope of certain requirements.

Specifically, it (as well as CAS 220) uses the term “listed entity” rather than the existing
Canadian term “public enterprise.”

While there is no significant difference in the requirements and guidance relating to most
aspects of the monitoring process, there is a significant difference with respect to who
can perform the inspection of completed engagements.

CSQC 1 is more rigorous than the GSF-QC wherein it requires that those performing the
engagement or the engagement quality control review not be involved in inspecting the
completed engagement.

Meeting this requirement may create a challenge for smaller firms.

In addition, CSQC 1 is more rigorous with respect to:
o
specific engagement quality control review procedures regarding discussion of
significant matters and review of financial statements or other subject matter
information and the proposed report;
o
maintaining of engagement quality control reviewer’s objectivity and the firm’s
response when the objectivity is impaired;
o
assembly of the final engagement files on a timely basis after the engagement
reports have been finalized; and
o
monitoring procedures specific to the circumstance where firms within a network
operate under common monitoring policies and procedures and these firms place
reliance on such a monitoring system.

For audits of financial statements of listed entities, CSQC 1 requires the rotation of the
engagement partner and the individuals responsible for the engagement quality control
review, and where applicable, others subject to rotation requirements, after a specified
period in compliance with relevant ethical requirements.

As noted, the wording in application material in CSQC 1 regarding the timing of the
inspection of completed engagements is different from that in GSF-QC.
97

Nevertheless, the same underlying principle drives the determination of the nature,
timing and extent of the inspection cycle for completed engagements.
International Standards on Auditing (ISAs) and Canadian
Auditing Standards (CASs)
Background

In February 2007, the IASB announced that, following the completion of the IAASB’s
Clarity Project, Canada would adopt International Auditing Standards issued by the
International Auditing and Assurance Standards Board.

The resulting standards would be called Canadian Auditing Standards (CASs) and be
numbered identically. These standards were released June 2009.

The adoption of CASs impacted more than just the structure of the Handbook.

ISAs deal only with the audit of historical financial information, including financial
statements.

The Handbook sections dealt with all assurance engagements.

Accordingly, CASs dealing with the audit of historical financial information, including
financial statements, have been separated from standards dealing with other assurance
and related services.

For example, section 5050 Using the Work of Internal Audit covers all types of audit engagements,
not just audits of historical financial information.

To the extent considered appropriate, matters regarding other assurance services currently
addressed in section 5050 would be addressed in a separate CAS.

Similarly, even though Canada has adopted the International Standard on Quality Control (ISQC 1) as
the Canadian Standard on Quality Control (CSQC 1), CSQC 1 does not apply to related services.

There is no CAS for which there is no corresponding ISA, and vice versa. The titles and
subject matters covered by CASs are exactly the same as those for ISAs.
Significant Changes

CASs are organized by category:
o
200-299: General Principles and Responsibilities
o
300-499: Risk Assessment and Response to Assessed Risks
o
500-599: Audit Evidence
98
o
600-699: Using the Work of Others
o
700-799: Audit Conclusions and Reporting
o
800-899: Specialized Areas

Certain Canadian assurance standards deal separately with financial statement audits and audits of
other subject matter.

Guidelines in the current Handbook are called Practice Statements to adopt IFAC HB
terminology.

There are only a few International Auditing Practice Statements (IAPSs) in the IFAC HB.

This is in contrast to the nearly 30 Assurance Guidelines in the Handbook:
o
Canadian Auditing Practice Statements (CAPSs)
o
Canadian Review Engagement Practice Statements (CREPSs)
o
Canadian Assurance Engagement Practice Statements (CAEPSs)
o
Canadian Related Services Practice Statements (CRSPSs)
o
Canadian Practice Statements on Securities Regulations (CPSSRs)

Sections for which there is no international equivalent have disappeared.

For example, section 5365 Communications with Actuaries is not carried forward since
there is no ISA equivalent.

However, its Appendix is carried forward as CAS 500.

Likewise, material for which there is no IAASB equivalent is identified by a “-C” following
its number.

There are significant changes to Canadian audit practice with respect to

o
the standard auditor’s report on financial statements and reports with modifications
on financial statements; and
o
the standards for audit situations such as group audits, estimates, related party
transactions, confirmations, use of experts, and going concern.
Canadian GAAS changed with respect to
o
communicating deficiencies in internal control (CAS 265);
99

o
materiality and evaluation of misstatements identified during an audit (CASs 320 and
450);
o
audit considerations relating to an entity using a third party service organization
(CAS 402);
o
external confirmations (CAS 505);
o
auditing accounting estimates, including fair value accounting estimates and related
disclosures (CAS 540);
o
related parties (CAS 550);
o
written representations (CAS 580);
o
special considerations – audits of group financial statements (CAS 600);
o
using the work of an auditor’s expert (CAS 620); and
o
the form and content of the auditor’s reports (CASs 700, 705, 706, 800, 805).
However, there are no changes to
o
Compliance with professional ethics and auditor responsibilities;
o
Legal liability and corporate governance issues;
o
Understanding business entities and business risk;
o
Audit planning; and
o
Internal control evaluation and testing.
Effective Date
CASs are effective for audits of financial statements for periods ending on or after
December 14, 2010.
CAS 200 Overall Objective of the Independent Auditor, and the
Conduct of an Audit in Accordance with Canadian Auditing
Standards
(added Feb. 2010)

CAS 200, Overall Objective of the Independent Auditor, and the Conduct of an Audit in
Accordance with Canadian Auditing Standards, has no single, direct equivalent in the
existing Handbook.
100

CAS 200 replaces material contained in section 5090 Audit of Financial Statements,
section 5095 Reasonable Assurance and Audit Risk, and section 5100 Generally
Accepted Auditing Standards.

Section 5090 requires the auditor to perform an audit with an attitude of professional
skepticism.

Paragraph 15 of CAS 200 imposes a similar requirement.

The general standard of section 5100 is replaced with a requirement in CAS 200 to
comply with relevant ethical requirements.

The part of the examination standard requiring the auditor to reduce audit risk to an
acceptably low level is dealt with in paragraph 17 of CAS 200.

The part of the examination standard requiring the auditor to obtain sufficient
appropriate audit evidence is more or less the same as the requirements of paragraph
17 of CAS 200.

Direction and supervision of engagement team members is “split” between CAS 220 and
CAS 300.

However, the part of the examination standard requiring the auditor to obtain an
understanding of the entity and its environment is not part of CAS 200.

Instead, it has been “moved” to CAS 315

CAS 200 does not contain the overall reporting requirements currently part of section
5100.

Instead, auditors must turn to CAS 700 and CAS 800 as well as other CASs in the 700
and 800 series to find the reporting requirements.

As noted earlier, CASs apply only to audits of financial statements and other historical
financial information.

This particularly affects section 5021 in the existing Handbook, which applies to all
assurance engagements.

Consequently, in the new Handbook, section 5021 describes the authority of standards
and guidance other than the CASs.

Notwithstanding, paragraphs 22 and 23 of CAS 200 are comparable to old paragraph
5021.04, which dealt with compliance with what were the Recommendations in the
Handbook.

Canadian Auditing Standards reflect the IAASB focus on the concepts of frameworks:
101
o
applicable financial reporting frameworks;
o
fair presentation frameworks; and
o
compliance frameworks.

These concepts are introduced in CAS 200 and pervade all the CASs.

Moreover, they affect the form and content of the report on the relevant financial
statements, as addressed in the 700 and 800 series of CASs dealing with auditor’s
reports.

The auditor must have an understanding of the entire text of a CAS, including its
application and other material, to understand its requirements.

While this notion is implicit in the old section 5021, it is explicit in CAS 200.

Each CAS contains an objective or objectives that provide the context in which the
requirements of the CASs are set — something not part of current Canadian GAAS.

These objectives support the overall objective of the auditor, which is to obtain
reasonable assurance about whether the financial statements as a whole are free from
material misstatement whether due to fraud or error, and to report on the financial
statements in accordance with the auditor’s findings.

CAS 200 requires the auditor to use the objectives in planning and performing the audit,
having regard to the interrelationships among the CASs.

Note that this is not really different from what is currently required, except that it is
explicit.

CAS 200 also requires the auditor, having complied with the requirements of the CASs,
to:
o
determine whether any audit procedures in addition to those required by the CASs
are necessary in pursuance of the objectives stated in the CASs; and
o
evaluate whether sufficient appropriate audit evidence has been obtained in the
context of the overall objective of the auditor.

Therefore, the auditor’s report cannot assert that the audit was performed in conformity
with Canadian generally accepted auditing standards unless the auditor has complied
with CAS 200 and all other CASs relevant to the audit.

When and/or where an individual objective has not been, or cannot be achieved, the
auditor must consider whether this prevents attainment of the overall objective, namely
to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement.
102

If so, the auditor must document a failure to achieve an objective.
CAS 210 Agreeing the Terms of Audit Engagements
(added Feb. 2010)

CAS 210, Agreeing the Terms of Audit Engagements, replaces Handbook section 5110.

CAS 210 does not introduce any new concepts, but it does make one small change in
scope.

Furthermore, there are changes in the requirements.

CAS 210 uses the Definitions section to explain that references to “management” should
be read as “management and, where appropriate, those charged with governance” in
the remainder of the CAS.

This is a change in scope.

CAS 210 sets out the preconditions for an audit.

These preconditions must be met if the auditor is to accept the engagement.

If these preconditions are not met, the auditor must discuss the matter with
management — something section 5110 does not do.

CAS 210 specifies that the auditor not accept an audit engagement, unless required by
law or regulation, if:

o
the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable, unless specific
requirements are met;
o
management has not provided an agreement that it acknowledges and understands
its responsibility; or
o
management or those charged with governance impose a scope limitation that the
auditor believes would result in a disclaimer of opinion.
If the auditor determines that, except for the fact that it is prescribed by law or
regulation, the applicable financial reporting framework would not be acceptable, the
auditor may accept the engagement only if the following conditions are met:
o
Management agrees to provide additional disclosures in the financial statements
required to avoid the financial statement being misleading; and
o
The terms of the engagement specify that the auditor’s report will incorporate an
Emphasis of Matter paragraph drawing users’ attention to the additional disclosures
103
and, unless required by law or regulation, will not include the phrases “present fairly,
in all material respects,” or “give a true and fair view.”

The terms of the engagement specify that the auditor’s report will incorporate an
Emphasis of Matter paragraph drawing users’ attention to the additional disclosures and,
unless required by law or regulation, will not include the phrases “present fairly, in all
material respects,” or “give a true and fair view.”

The terms of the audit engagement must be agreed with management or those charged
with governance.

Section 5110 requires the auditor to establish an understanding of the terms of
engagement with both parties (not just one of the parties).

The engagement letter must identify the applicable reporting framework for the
preparation of the financial statements.

Section 5110 does not contain such a requirement as it assumes the use of Canadian
GAAP for general-purpose financial statements.

The engagement letter must refer to the expected form and content of any reports to be
issued, and a warning that the report may differ from its expected form and content

Section 5110 does not contain such a requirement.

Section 5110 requires that the written agreement describe the limitation of the
engagement as well as management’s responsibility for providing written confirmation of
significant representations.

CAS 210 does not contain these requirements although it provides similar application
and explanatory material.

Section 5110 requires that the written agreement describe the specific information
management is responsible to provide to the auditor.

CAS 210 does not contain such an explicit requirement

Section 5110 requires that the written agreement describe specific auditor
responsibilities.

CAS 210 does not contain such an explicit requirement although it provides similar
application and explanatory material.

On recurring audits, the auditor must assess whether circumstances require the terms of
the audit engagement to be revised and whether there is a need to remind the client of
existing terms of the existing audit engagement.
104

Section 5110 does not contain such a requirement but provides similar application and
explanatory material.

CAS 210 prohibits the auditor from agreeing to a change in the terms of an audit
engagement where there is no reasonable justification for doing so.

Section 5110 does not contain such a requirement.

CAS 210 contains requirements dealing with circumstances when the financial reporting
standards are supplemented by law or regulation.

Section 5110 does not deal with these circumstances.

CAS 210 contains requirements that deal with circumstances when law or regulation
prescribes the layout or wording of the auditor’s report in a form or in terms that are
significantly different from the requirement of the CASs.

Section 5110 does not deal with this scenario.
CAS 220 Quality Control for an Audit of Financial Statements
(added Feb. 2010)

CAS 220, Quality Control for an Audit of Financial Statements, replaces Handbook
section 5030.

There are changes to the scope of the standard and a number of new concepts and
requirements are introduced in CAS 220.

CAS 220 links with CSQC-1 the same way section 5030 linked with the GSF-QC material
in the old Handbook.

CAS 220 applies only to audits of financial statements (adapted as necessary for audits
of other historical financial information).

Section 5030 applied to all assurance engagements.

CAS 220 requires the completion of the engagement quality control review and
resolution of any differences of opinion on or before the date of the auditor’s report
(we’ll cover that under CASs 560 and 700).

This represents a significant change from section 5030 which required that the
engagement quality control review be completed before the date of issuance of the
engagement report.

Currently, the date of substantial completion of examination is used as the date of the
auditor’s report.
105

For many firms, the date of the engagement report was (significantly) earlier than the
date of issuance of that report.

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that the
auditor’s report be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the
financial statements.

Consequently, the implementation of CAS 220 (and CSQC 1) will likely represent a
significant change in practice.

CAS 220 also modifies the scope of certain requirements.

Specifically, CAS 220 (like CSQC 1) uses the term “listed entity” rather than the existing
Canadian term “public enterprise”.

In addition, CAS 220 includes additional or more stringent requirements regarding:
o
specific engagement quality control review procedures regarding discussion of
significant matters and review of financial statements and the proposed auditor’s
report;
o
engagement partner’s consideration of the results of the firm’s monitoring process;
and
o
engagement quality control review procedures specific to audits of financial
statements of listed entities;
o
documentation of the work performed by the auditor and the engagement quality
control reviewer.
CAS 230 Audit Documentation
(major revision Feb. 2010)

CAS 230, Audit Documentation, replaces Handbook section 5145.

There is no change in the scope, nor are any new concepts introduced in CAS 230.

There are, however, changes in the requirements.

Section 5145 requires the auditor to assemble a complete and final audit file no more
than 45 days after one of three trigger points.

CAS 230 simply states that assembly of the final audit file must be performed on a
timely basis after the date of the auditor’s report.
106

However, CAS 230 goes on to state that the final audit file would normally be assembled
as at a date no more than 60 days after the date of the auditor’s report.

One new requirement relates to the rare situations where the auditor judges it
necessary to depart from a basic principle or an essential procedure that is relevant in
the circumstances of the audit.

If this happens, CAS 230 requires the auditor to document how the alternative audit
procedures performed achieved the objective of the audit, and, unless otherwise clear,
the reasons for the departure.

Section 5145 does not have a similar requirement.
CAS 240 The Auditor’s Responsibilities Relating to Fraud in an
Audit of Financial Statements
(added Feb. 2010)

CAS 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements, replaces Handbook section 5135.

There is no change in the scope, nor are any new concepts introduced in CAS 240.

There are, however, changes in the requirements.

Under section 5135, the auditor’s communication to “those charged with governance”
should include fraud (whether caused by management or other employees) that
results, or may result, in a non-trivial misstatement of the financial statements.

Under CAS 240, this communication is limited to material misstatements

Also, section 5135 required the auditor to communicate to those charged with
governance questions regarding the honesty and integrity of management and
matters that may cause future financial statements to be materially misstated.

These matters are not specifically addressed in CAS 240.

Finally, section 5135 required the auditor to communicate with a successor auditor
when fraud or suspected fraud was a factor in the existing auditor’s withdrawal from
the engagement.

This matter is not addressed in CAS 240.
CAS 250 Consideration of Laws and Regulations in an Audit of
Financial Statements
(major revision Feb. 2010)
107

CAS 250, Consideration of Laws and Regulations in an Audit of Financial Statements,
replaces Handbook section 5136.

There is no change in the scope, but a key new concept is introduced in CAS 250.

Specifically, CAS 250 distinguishes between two categories of laws and regulations:
o
laws and regulations generally recognized to have a direct effect on the
determination of material amounts and disclosures in the financial statements; and
o
other laws and regulations that do not have a direct effect on the determination of
the amounts and disclosures in the financial statements, but compliance with which
is necessary.

The requirements of CAS 250 also differ from those of section 5136.

Section 5136 required the auditor to obtain knowledge of relevant acts and regulations,
as well as obtain representations from management regarding illegal or possibly illegal
acts, and communicate these matters to those charged with governance.

CAS 250 covers much the same matters, but is much more specific regarding these
matters than was section 5136.

In addition, CAS 250 is much more detailed regarding actions the auditor should take
when non-compliance is identified or suspected.

For example, CAS 250 requires the auditor to obtain sufficient appropriate audit
evidence regarding compliance with the provisions of laws and regulations generally
recognized to have an effect on the determination of material amounts and disclosures
in the financial statements.

If the auditor suspects there may be non-compliance, this must be discussed with
management and where appropriate, those charged with governance.

Furthermore, the auditor should consider the need to obtain legal advice regarding a
suspected instance of non-compliance.

If sufficient information about suspected non-compliance cannot be obtained, the auditor
must evaluate the lack of sufficient appropriate audit evidence and the impact on the
auditor’s report.

Furthermore, if the auditor has identified or suspects non-compliance with laws and
regulations, determine whether there is a responsibility to report the identified or
suspected non-compliance to parties outside the entity.

Finally, CAS 250 requires the auditor to document instances of identified or suspected
non-compliance and any related discussions with management, those charged with
governance, or parties outside the entity.
108
CAS 260 Communications with those Charged with Governance
(added Feb. 2010)

CAS 260, Communications with those Charged with Governance, replaces Handbook
section 5751.

There are changes to the scope and requirements relative to section 5751, as well as a
number of new concepts.

The biggest change is the narrowing of scope regarding matters to be communicated to
those charged with governance.

CAS 260 limits some requirements to listed entities, whereas section 5751 referred to
entities with public accountability — which may or may not have been listed entities.

Under section 5751, auditors were required to communicate matters related to their
independence, irrespective of the nature of the client.

Under CAS 260, this communication is required only of auditors of listed entities.

For matters other than independence, auditors of entities without public accountability
were only required to consider communicating in accordance with the Recommendations
in section 5751.

All auditors must follow all of the requirements in CAS 260.

Under section 5751, auditors of entities with public accountability were required to
communicate fees charged during the last year, distinguishing between audit and nonaudit services.

This sort of communication is now only required of listed entities.

Under section 5751, the auditor was to communicate with the audit committee or
equivalent.

CAS 260 is much more demanding, requiring the auditor to determine to whom the
communication should be addressed.

Furthermore, CAS 260 requires the auditor to consider whether communications with
those with management responsibility adequately informs all those charged with
governance with whom the auditor would ordinarily communicate when all of those
charged with governance are involved in managing the entity.

CAS 260 requires the auditor to communicate the form, timing and expected general
content of communications to those charged with governance.

This requirement was not part of section 5751.
109

CAS 260 requires the auditor to communicate with those charged with governance on a
timely basis.

Section 5751 limits its directive to making the audit committee aware of material
weaknesses in the design, implementation or operating effectiveness of internal control
as soon as practicable.

CAS 260 requires the auditor to evaluate whether the communication between the
auditor and those charged with governance was adequate for the purpose of the audit,
and if not, consider the effect on the auditor’s assessment of the risks of material
misstatements.

These requirements were not part of section 5751.

CAS 260 requires the auditor, if communicating orally, to document how and to whom
matters required to be communicated have been communicated.

These requirements were not part of section 5751.
CAS 265 Communicating Deficiencies in Internal Control
(added Feb. 2010)

CAS 265, Communicating Deficiencies in Internal Control, is not a direct replacement for
an existing Handbook section, although sections 5141 and 5220 deal with overall
concepts that are similar to the matters covered by CAS 265.

Notwithstanding, there are no new concepts introduced in CAS 265, although there are
changes in terminology.

Specifically, CAS 265 refers to “deficiencies in internal control” and “significant
deficiencies.”

The definition of a “significant deficiency” is aligned with the definitions in section 5925
and the PCAOB’s Auditing Standard 5.

Furthermore, a significant deficiency is the type of deficiency in internal control that the
auditor should report to those charged with governance.

The term “significant deficiency” is used in all CASs rather than “material weakness.”

Moreover, the Handbook used “material weakness” and “significant deficiency”
synonymously.

Furthermore, unlike CAS 265, section 5925 required the auditor to categorize significant
deficiencies in the audit of internal control over financial reporting that are more severe
as “material weaknesses.”
110

CAS 265 requires that specific matters be included in the written communication of
significant deficiencies to those charged with governance and management.

Currently, the auditor is required to communicate weaknesses in internal control
identified during the course of the financial statement audit.

However, there are no specific requirements regarding the timing or content of such
communication or even if it needs to be in writing.
CAS 300 Planning an Audit of Financial Statements
(added Feb. 2010)

CAS 300, Planning an Audit of Financial Statements, replaces Handbook section 5150.

There is no change in the scope, nor are any new concepts introduced in CAS 300.

Neither are there changes in the requirements, although there are a few small matters.

CAS 300 uses the example of a brief memorandum as a basis for planning a small audit
engagement.

This example had not been part of section 5150.

Also, CAS 300 contains application and other explanatory material that refers to
reviewing the previous auditor’s working papers in the case of an initial engagement.

Section 5150 only referred to discussions with the predecessor auditor since, in Canada,
it wasn’t always (ever?) the case that the auditor would be able to review the
predecessor auditor’s working papers.
111
CAS 315 Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its
Environment
(added Feb. 2010)

CAS 315, Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment, replaces Handbook section 5141.

There is no change in the scope, nor are any new concepts introduced in CAS 315.

However, there are changes in the requirements.

CAS 315 requires the auditor to consider whether information obtained from the client
acceptance or continuance process is relevant to identifying risks of material
misstatement.

Section 5141 had similar wording, but it was not a recommendation.

Section 5141 required that the auditor obtain written representation from management
acknowledging its responsibility for the design and implementation of internal control to
prevent and detect error.

This matter is not addressed in CAS 315.

When the entity has an internal audit function, CAS 315 requires the auditor to take
steps and perform tests to determine whether the internal audit function is likely to be
relevant to the audit.

This requirement was not part of section 5141.

Finally, section 5141 dealt with the communication of material weaknesses in internal
control that came to the auditor’s attention.

These matters are addressed in CAS 265.
CAS 320 Materiality in Planning and Performing an Audit and
CAS 450 Evaluation of Misstatements Identified During the
Audit
(major revision Feb. 2010)

CAS 320, Materiality in Planning and Performing an Audit, is teamed with CAS 450, and
together they replace Handbook section 5142 and Guideline AuG-41.

There are no changes in the scope, nor are any new concepts introduced in either of the
CASs
112



However, there are changes in the requirements.
CAS 320 contains explicit requirements on determining materiality at three separate
levels:
o
materiality for the financial statements as a whole;
o
where applicable, the materiality level or levels for particular classes of transactions,
account balances or disclosures; and
o
performance materiality.
Furthermore, CAS 320 requires that the audit documentation include:
o
materiality for the financial statements as a whole;
o
where applicable, the materiality level or levels for particular classes of transactions,
account balances or disclosures;
o
performance materiality; and
o
any revisions of these factors as the audit progresses.

CAS 330, The Auditor’s Responses to Assessed Risks, replaces Handbook section 5143.

There is no change in the scope, nor are any new concepts introduced in CAS 330.

Furthermore, there is only one small difference between section 5143 and CAS 330

CAS 330 considers whether external confirmation procedures are to be performed as
substantive procedures.

This requirement was not part of section 5143.
CAS 450 Evaluation of Misstatements Identified during the
Audit
(added Feb. 2010)

CAS 450, Evaluation of Misstatements Identified during the Audit, is teamed with CAS
320, and together they replace Handbook section 5142 and Guideline AuG-41.

There are no changes in the scope, nor are any new concepts introduced in either of the
CASs.

However, as with CAS 320, there are changes in the requirements.
113

In particular, the material relating to the evaluation of misstatements is quite different.

For example, section 5142 required the auditor to aggregate:
o
misstatements identified as a result of performing specific procedures on other than
representative samples;
o
projections of misstatements; and
o
disagreements with accounting estimates.

On the other hand, CAS 450 does not require the aggregation of misstatements by these
distinct types, although the standard does provide application and explanatory material
regarding this matter.

Another difference relates to misstatements accumulated during the audit.

CAS 450 requires the auditor to request of management that they correct all
misstatements accumulated during the audit in all cases, regardless of whether the
financial statements are materially misstated.

On the other hand, section 5142 only required the auditor to make sure that
management addressed material misstatements, although it did suggest that the auditor
encourage management to correct all non-trivial misstatements.

Furthermore, there are a number of requirements that are either not part of section
5142, are covered in a very broad sense or are (not) addressed (in whole or in part) by
AuG-41.

Following are some of the key differences:
o
If management refuses to correct some or all of the misstatements communicated by
the auditor, the auditor must obtain an understanding of management’s reasons for
not making the corrections and take that understanding into account when
evaluating whether the financial statements as a whole are free from material
misstatements.
o
Prior to evaluating the effect of uncorrected misstatements, CAS 450 requires the
auditor to reassess materiality determined in accordance with CAS 320 to confirm
whether it remains appropriate in the context of the entity’s actual financial results.
o
CAS 450 requires the auditor to consider the size and nature of any misstatements
and the particular circumstances of their occurrence and determine whether
uncorrected misstatements are material, individually or in aggregate.
o
CAS 450 requires the auditor to first, communicate the effect of uncorrected
misstatements related to prior periods on the relevant classes of transactions,
account balances or disclosures, and the financial statements as a whole, to those
114
charged with governance, and second, request that uncorrected misstatements be
corrected.
o
CAS 450 requires that the audit documentation include:

the amount below which misstatements would be regarded as clearly trivial;

all misstatements accumulated during the audit and whether they have been
corrected; and

the auditor’s conclusion as to whether uncorrected misstatements are material,
individually or in aggregate, and the basis for that conclusion.
o
Finally, there are requirements specified in CAS 450 that were part of other
Handbook sections.
o
For example, the requirement to communicate uncorrected misstatements to those
charged with governance was previously part of section 5751.
CAS 402 Audit Considerations Relating to an Entity Using a
Service Organization
(added Feb. 2010)

CAS 402, Audit Considerations Relating to an Entity Using a Service Organization,
replaces Handbook section 5310.

There are no changes in the scope, nor are any new concepts introduced in CAS 402.

In addition, differences between CAS 402 and section 5310 are more a case of being a
recommendation in one and explanatory material or guidance (as the case may be) in
the other, and vice-versa, rather than unique new or different requirements.

CAS 402 requires the auditor to obtain an understanding of the services provided by a
service organization such that the auditor has a basis for the identification and
assessment of material misstatement.

CAS 402 requires the auditor, in responding to assessed risks, to determine whether
sufficient appropriate audit evidence is available from the records held at the user entity
and if not, to obtain such evidence from the service organization.

CAS 402 requires the user auditor to inquire of management of the user entity whether the
service organization has reported any fraud, non-compliance with laws and regulations and
uncorrected misstatements that affect the user entity and if so, determine the effect on the audit
procedures.
115

CAS 402 requires that when a user auditor includes reference to the work of a service
auditor to support a modified opinion, the user auditor’s report will also indicate that
such reference does not diminish the user auditor’s responsibility for that opinion.

With respect to a type 2 report, CAS 402 treats the following section 5310
recommendations as Application And Other Explanatory Material:

o
Determination of specific tests of controls and results in the service auditor’s report
that are relevant;
o
Evaluation of the results of tests of those specific controls to support the auditor’s
assessed level of control risk;
o
Evaluation of the adequacy of the time period covered by the tests of controls and
the time elapsed since the performance of the tests of controls; and
o
User auditor’s assessment of a service auditor’s report that contains a reservation of
opinion.
Lastly, CAS 402 permits the user auditor to use service auditor’s reports issued under
standards developed in other jurisdictions, provided the user auditor is satisfied that the
report provides sufficient and appropriate audit evidence.
CAS 500 Audit Evidence
(major revision Feb. 2010)

CAS 500, Audit Evidence, replaces Handbook section 5300.

There is no change in the scope, nor are any new concepts introduced in CAS 500.

However, there are changes in the requirements.

CAS 500 is much more specific than section 5300 in that material which was previously
application and explanatory material is now part of the requirements.

This is not as big a deal as it sounds since the Recommendations of section 5300
included the application and explanatory material.

Furthermore, CAS 500 requires the auditor to specifically:
o
design and perform audit procedures that are appropriate in the circumstances for
the purposes of obtaining sufficient appropriate audit evidence; and
o
consider the relevance and reliability of information to be used as audit evidence.
116

CAS 500 requires the auditor to determine an approach to selecting items for testing
that is effective in meeting the purpose of the audit procedure when designing tests of
controls and tests of details.

When there is an inconsistency in audit evidence obtained from different sources or
when there are doubts about the reliability of information to be used as audit evidence,
the auditor must determine what modifications or additions to audit procedures are
necessary to resolve the matter.

Furthermore, in the circumstances described on the previous slide, the auditor must
consider the effect of the matter, if any, on other aspects of the audit.

Another area where there is a difference relates to where section 5300 required the
auditor to use assertions underlying aspects of the financial statements to:
o
assess material misstatements and
o
design and perform further audit procedures.

CAS 500 does not have similar requirements.

Instead, CAS 315 and CAS 330 deal with use of assertions.

Finally, the requirements regarding use of the work of an expert — which were part of
Handbook section 5049 — are generally covered in CAS 620 rather than in CAS 500.

However, CAS 500 does contain specific demands of the auditor insofar as using the
work of an expert as evidence is concerned — especially when the “expert” is
management’s.
CAS 501 Audit Evidence — Considerations for Specific Items
(added Feb. 2010)

CAS 501, Audit Evidence — Considerations for Specific Items, replaces Handbook
sections 6030 and 6560.

There is no change in the scope, nor are any new concepts introduced in CAS 501.

However, there are changes in the requirements.

For example, CAS 501 calls for an auditor to obtain sufficient appropriate evidence
regarding the existence and physical condition of inventories.

This differs from section 6030 which not only deals with the existence, ownership and
condition of inventories but also requires the auditor to obtain evidence regarding the
valuation of inventory.
117

On the other hand, both section 6030 and CAS 501 require an auditor to attend the
physical inventory count unless it is impracticable to do so.

Note that under CAS 501, general inconvenience to the auditor is not sufficient to
support a decision that attendance is impracticable.

CAS 501 provides more explicit requirements than section 6030 regarding the auditor’s
responsibilities when the:
o
physical count has been conducted at a date other than the date of the financial
statements;
o
auditor is unable to attend the count due to unforeseen circumstances; and
o
inventory is under the custody and control of a third party.

CAS 501 specifically requires the auditor to perform procedures to become aware of
litigation and claims.

Section 6560 deals with such procedures in the Appendix to the standard.

CAS 501 specifies actions when management refuses to give the auditor permission to
communicate or meet with the entity’s legal counsel, or when the entity’s legal counsel
refuses to respond to the letter of inquiry.

These circumstances are not dealt with by section 6560.

Section 6560 requires the auditor to consider the effect of disagreements between an
entity and legal counsel on the evaluation of legal claims on the content of the auditor’s
report.

CAS 501 does not contain such a requirement.

Section 6560 also specifies steps to be taken when, at a conference to discuss the
entity’s legal counsel’s disagreement with the client’s evaluation, the disagreement is
resolved.

CAS 501 does not address this scenario.

CAS 501 contains one requirement on segment information, and application and other
material is provided relating to the requirement.

The guidance in AuG-26 is more extensive than that provided by CAS 501.
118
CAS 505 External Confirmations
(added Feb. 2010)

CAS 505, External Confirmations, replaces Handbook section 5303.

There is no change in the scope, but new concepts are introduced in CAS 505, as well as
new and/or different requirements.

CAS 505 includes various definitions that do not exist, or may differ from those in
section 5303.

For example, CAS 505 defines “external confirmation” to be audit evidence obtained as a
direct written response to the auditor from a third party, in paper form, or by electronic
or other medium.

Section 5303 defines “confirmation” as a process of obtaining and evaluating a direct
communication from a third party in response to a request for information.

Further, when management refuses to allow the auditor to send a confirmation request,
CAS 505 requires the auditor to take the steps outlined below:
o
Inquire as to management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness;
o
Evaluate the implications of management’s refusal on the auditor’s assessment of
the relevant risks of material misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures; and
o
Perform alternative audit procedures designed to obtain relevant and reliable audit
evidence.

Section 5303 does not contain any specific requirements with respect to management
requests not to confirm but provides some guidance.

The auditor must communicate with those charged with governance and determine the
implications for the audit and the auditor’s opinion in accordance with CAS 705 under
the circumstances described below.

The auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable, or

The auditor is unable to obtain relevant and reliable audit evidence from alternative
audit procedures.

CAS 505 requires the auditor to perform alternative audit procedures for non-responses
to obtain relevant and reliable audit evidence.
119

Further, the auditor must investigate exceptions to determine whether or not they
represent misstatements.

Section 5303 does not contain a specific requirement to investigate exceptions.

Because negative confirmations provide less persuasive audit evidence than positive
confirmations, the auditor should not use negative confirmation requests as the sole
substantive audit procedure to address an assessed risk of material misstatement at the
assertion level unless certain conditions are present.

Section 5303 does not contain any specific requirements concerning negative
confirmations but indicates that negative confirmation requests would be used only
when the auditor has no reason to believe that recipients would disregard these
requests.
CAS 510 Initial Audit Engagements — Opening Balances
(added Feb. 2010)

CAS 510, Initial Audit Engagements — Opening Balances, has no equivalent Handbook
section, although sections 5150 and 5510, along with AuG-8, contain limited application
and explanatory material regarding opening balances.

Accordingly, all the requirements are new.

Notwithstanding, there are no new concepts in CAS 510.

The requirements of CAS 510, which were not explicitly addressed by the old Handbook,
are described below.

Opening Balances:
o
The auditor is required to read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to opening
balances, including disclosures.
o
The auditor is required to obtain sufficient appropriate audit evidence about whether
the opening balances contain misstatements that materially affect the current
period’s financial statements.
o
If the auditor concludes that the opening balances contain misstatements that could
materially affect the current period’s financial statements, such additional audit
procedures as are appropriate in the circumstances must be performed to determine
the effect on the current period’s financial statements.
o
If the auditor concludes that such misstatements exist in the current period’s
financial statements, the auditor is required to communicate the misstatements with
120
the appropriate level of management and those charged with governance in
accordance with CAS 450.

o
Furthermore, if the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor is required to express either a qualified
opinion or a disclaimer of opinion (as appropriate) in accordance with CAS 705.
o
Likewise, if the auditor concludes that the opening balances contain a misstatement
that materially affects the current period’s financial statements, and the effect of the
misstatement is not properly accounted for or not adequately presented or disclosed,
either a qualified opinion or a disclaimer of opinion (as appropriate) must be
expressed in accordance with CAS 705.
Consistency of Accounting Policies:
o
The auditor is required to obtain sufficient appropriate audit evidence about whether
the accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements.
o
Likewise, the auditor is required to obtain sufficient appropriate audit evidence about
whether changes in accounting policies have been properly accounted for and
adequately presented and disclosed in accordance with the applicable financial
reporting framework.
o
If the auditor concludes that the current period’s accounting policies are not
consistently applied in relation to opening balances in accordance with the applicable
financial reporting framework, the auditor is required to express either a qualified
opinion or an adverse opinion (as appropriate) in accordance with CAS 705.
o
Likewise, if the auditor concludes that a change in accounting policies was not
properly accounted for or not adequately presented or disclosed in accordance with
the applicable financial reporting framework, either a qualified opinion or an adverse
opinion (as appropriate) must be expressed in accordance with CAS 705.

If the prior period’s financial statements were audited by a predecessor auditor and
there was a modification to the opinion, the auditor is required to evaluate the effect of
the matter giving rise to the modification in assessing the risks of material misstatement
in the current period’s financial statements in accordance with CAS 315.

Furthermore, if the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification that remains relevant and material to the current
period’s financial statements, the opinion on the current period’s financial statements
will also have to be modified in accordance with CAS 705 and CAS 710.
CAS 520 Analytical Procedures
(added Feb. 2010)
121

CAS 520, Analytical Procedures, replaces Handbook section 5301.

There are no new concepts introduced in CAS 520, but there is a change in the scope
and in the requirements.

Section 5301 dealt with the use of analysis as either risk assessment procedures,
substantive procedures, or as part of the auditor’s overall review of the financial
statements at or near the end of the audit.

CAS 520 does not include requirements or guidance addressing the use of analysis as
risk assessment procedures — this is addressed in CAS 315 and not repeated in CAS
520.

CAS 520 requires that when analytical procedures performed in accordance with the CAS
identify fluctuations or relationships that are inconsistent with other relevant
information, or that differ from expected value by a significant amount, the auditor has
to investigate the difference.

Specifically, the auditor must:
o
inquire of management and obtain appropriate audit evidence relevant to
management’s responses, and
o
perform other audit procedures as necessary in the circumstances.

Section 5301 required that the auditor obtain adequate explanations in investigating
results of analytical procedures but did not specifically require the auditor to “inquire of
management.”

Moreover, section 5301 did not require the auditor to perform other audit procedures “as
necessary in the circumstances, although it did provide application and explanatory
material.
CAS 530 Audit Sampling
(added Feb. 2010)

CAS 530, Audit Sampling, has no equivalent Handbook section, although brief guidance
on sampling and other means of selecting items for testing was addressed in paragraphs
5300.14-.17.

Accordingly, all the requirements are new.

Interestingly, CAS 530 does not require the use of audit sampling.

Rather, it states that it “complements CAS 500, Audit Evidence.”
122

Audit sampling is listed as one of the means available to the auditor to obtain sufficient
appropriate audit evidence.

Accordingly, when the auditor chooses to use audit sampling in performing audit
procedures, CAS 530 provides relevant requirements, and application and other
explanatory material.

It addresses:
o
designing an audit sample, determining a sample size, and selecting items for the
sample;
o
performing audit procedures on the items selected;
o
investigating the nature and cause of deviations and misstatements;
o
projecting misstatements found in the sample to the population; and
o
evaluating the results of the sample and whether the use of audit sampling has
provided a reasonable basis for conclusion about the population that has been
tested.
CAS 540 Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures
(major revision Feb. 2010)

CAS 540, Auditing Accounting Estimates, including Fair Value Accounting Estimates, and
Related Disclosures, replaces Handbook section 5305.

There is no change in the scope, nor are any new concepts introduced in CAS 540.

However, there are changes in the requirements.

CAS 540 introduces risk assessment procedures that are not contained in section 5305.

CAS 540 also requires the auditor to review the outcome of accounting estimates made
in the prior period financial statements.

This is consistent with section 5135 but was not a requirement of Section 5305.

CAS 540 defines estimation uncertainty as “the susceptibility of an accounting
estimate and related disclosures to an inherent lack of precision in its measurement”.

This definition was not included in section 5305.

CAS 540 focuses the auditor’s work effort on accounting estimates that have a risk of
material misstatement and on those that have high estimation uncertainty.
123

The goal is to determine which accounting estimates have high estimation uncertainty
and therefore may be significant risks that require special audit consideration.

Where an accounting estimate gives rise to a significant risk, the auditor must evaluate
whether the significant assumptions made by management provide a reasonable basis
for the accounting estimate, whether and how management has considered alternative
assumptions or outcomes, and why they have rejected them.

If management has not adequately addressed the effects of estimation uncertainty on
the accounting estimates that give rise to significant risk, the auditor must, if it is
considered necessary, develop a reasonable range of outcomes with which to evaluate
the reasonableness of management’s estimate.

For accounting estimates that give rise to significant risks, the auditor must evaluate the
adequacy of management’s disclosure in the financial statements in the context of the
requirements of the applicable financial reporting framework relevant to the accounting
estimate.
CAS 550 Related Parties
(major revision Feb. 2010)

CAS 550, Related Parties, replaces Handbook section 6010.

There is no change in the scope, but new concepts and requirements are introduced in
CAS 550.

The basic objective is to evaluate whether related party relationships and transactions
could cause the financial statements to fail to achieve fair presentation.

The auditor must obtain sufficient appropriate audit evidence to support any assertion
by management that related party transactions were conducted on terms equivalent to
arm’s length, or under normal market conditions.

CAS 550 requires an auditor to consider the impact of related parties and the potential
effect on the financial statements and report under any acceptable financial reporting
framework, not just Canadian GAAP.

Furthermore, the auditor must obtain an understanding of related party relationships
and transactions sufficient to be able to conclude whether the financial statements are
affected — whether or not the applicable financial reporting framework
establishes related party requirements.

The notion of “affected” depends on the type of framework:
o
for fair presentation frameworks, it means to achieve fair presentation;
o
for compliance frameworks, it means that the statements are not misleading.
124

Section 6010 required the auditor to obtain sufficient appropriate audit evidence to
determine whether any identified related party transactions had been measured in
accordance with Canadian GAAP.

Because CAS 550 is not tied to any particular financial reporting framework, including
Canadian GAAP, it does not contain equivalent requirements.

Notwithstanding, CAS 550 is consistent with the overall thrust of section 6010, but is
more explicit in what is required of the auditor.

In addition, CAS imposes a number of requirements beyond what was in section 6010.

For example, the auditor must include the names of identified related parties, and
nature of the related party relationships, in the audit documentation.

Even more, the auditor must treat identified significant related party transactions
outside the entity’s normal course of business as giving rise to significant risks.

CAS 550 also deals with additional requirements regarding responses to the risks of
material misstatement associated with related party relationships and transactions.

These requirements “kick in” when the auditor identifies related parties or significant
related party transactions that management has not previously identified or disclosed.

In such instances, the auditor would want to determine why the entity’s controls over
related party relationships and transactions failed to enable the identification or
disclosure of the related party relationships or transactions, in addition to other
procedures.

The overall objective would be to evaluate the implications for the audit if the nondisclosure by management appears intentional — and therefore indicative of a risk of
material misstatement due to fraud.
CAS 560 Subsequent Events
(added Feb. 2010)

CAS 560, Subsequent Events, replaces Handbook sections 5405 and 6550.

There is no change in the scope, but new concepts and requirements are introduced in
CAS 560.

Like section 6550, CAS 560 requires that subsequent event audit procedures cover the
period from the date of the financial statements up to the date of the auditor’s report, or
as near as practicable thereto.

The problem is, CAS 560 is affected by changes that impact another standard — CAS
700.
125

The ripple from the interrelationship between 560 and 700 affects what is considered the
“subsequent period.”

Section 5405 required the date of substantial completion of examination to be used as
the date of the auditor’s report.

Consequently, the auditor’s report would often (usually?) be dated before the date on
which those with recognized authority approved the financial statements.

CAS 700, Forming an Opinion and Reporting on Financial Statements, requires that the
auditor’s report be dated no earlier than the date on which the auditor has obtained
sufficient appropriate audit evidence on which to base the auditor’s opinion on the
financial statements.

In particular, CAS 700 requires that:
o
all the statements that comprise the financial statements, including the related
notes, have been prepared; and
o
those with the recognized authority have asserted that they have taken responsibility
for those financial statements.

The upshot is that the period in which subsequent events occur has been narrowed
(even eliminated) in most cases. Why?

The auditor’s report is dated when the Board accepts responsibility — which means there
often is no “subsequent” period.

Section 6550 dealt with events occurring between the date of the financial statements
and the date of the auditor’s report.

Under CAS 560, there is no such intervening period.

Audited financial statements cannot be issued without an auditor’s report, CAS 560
points out that the date that the audited financial statements are issued must not only
be at or later than the date of the auditor’s report, but must also be at or later than the
date the auditor’s report is provided to the entity.

Section 5405 dealt with the period between the auditor’s report date and the date the
auditor’s report was released.

The auditor’s report was deemed “released” when the auditor granted permission to use
the auditor’s report in connection with the issuance of the client’s financial statements.

Under CAS 560, this interval is again virtually eliminated.

It is the last category — facts which become known to the auditor after the financial
statements have been issued — where CAS 560 and section 6550 overlap.
126

If a fact becomes known to the auditor after the date of the report, the auditor shall:
o
discuss the matter with management and, where appropriate, those charged with
governance;
o
determine whether the financial statements need amendment and, if so;
o
inquire how management intends to address the matter in the financial statements.

It is this last requirement that is new to Canadian GAAS.

When management does not amend the financial statements in circumstances where the
auditor believes they need to be amended, the auditor must modify the opinion as
required by CAS 705, Modifications to the Opinion in the Independent Auditor’s Report —
assuming, of course, that the statements have not yet been issued.

If the auditor’s report has already been provided to the entity, the auditor must notify
management and those charged with governance not to issue the financial statements
to third parties before the necessary amendments have been made.

CAS 560 provides the auditor with an option to dual date the auditor’s report —
something not possible under section 5405.

CAS 560 also allows the report to be single dated with a statement included in an
Emphasis of Matter paragraph or Other Matter(s) paragraph that conveys that the
auditor’s procedures on subsequent events are restricted solely to the amendment of the
financial statements as described in the relevant note to the financial statements.
CAS 570 Going Concern
(major revision Feb. 2010)

CAS 570, Going Concern, has no Handbook equivalent section, although paragraphs
5510.51 to 5510.53 contained application and explanatory material on matters related
to going concern.

Accordingly, all the requirements are new.

CAS 570 provides guidance on matters such as:
o
the auditor’s risk assessment procedures, including consideration of whether there
are events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern;
o
the auditor’s responses to risk assessment procedures, including evaluating
management’s assessment of the entity’s ability to continue as a going concern;
127
o
inquiring of management if they are aware of any matters beyond the assessment
period that may cast doubt on the entity’s ability to continue as a going concern;
o
when events or conditions have been identified that cast significant doubt on the
entity’s ability to continue as a going concern, performing audit procedures to obtain
sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists;
o
based on the audit evidence obtained, concluding (and reporting appropriately)
whether a material uncertainty exists related to events or conditions that casts
significant doubt on the entity’s ability to continue as a going concern; and
o
communicating events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern to those charged with governance, unless all
those charged with governance are involved in managing the entity.
CAS 580 Written Representations
(major revision Feb. 2010)

CAS 580, Written Representations, replaces Handbook section 5370.

There are no new concepts introduced in CAS 580, but there are changes in the scope
and in the requirements.

Section 5370 applies to all representations provided by management, whether written
or oral, explicit or implied, solicited or unsolicited.

CAS 580 applies only to written representations that have been provided in response
to the auditor’s request.

CAS 580 requires that the auditor request written representations from management
with appropriate responsibilities for the financial statements and knowledge of the
matters concerned.

Section 5370 did not contain such a requirement although it did provide similar
guidance.

CAS 580 requires that the auditor request from management written representation it
has fulfilled its responsibility for the preparation of the financial statements in
accordance with the applicable financial reporting framework as agreed in the terms of
the audit engagement.

Section 5370 required that the representation letter include management’s
acknowledgement of its responsibility for the fair presentation of the financial
statements and its belief that the financial statements are presented fairly.

Close, but not quite the same.
128

CAS 580 requires that management’s responsibility be described in the written
representation in the same manner as described in the terms of the audit engagement.

Section 5370 does not contain such a requirement.

If the auditor has concerns about the competence, integrity, ethical values or diligence
of management, or about its commitment, to or enforcement of these, CAS 580 requires
the auditor to determine the effect that such concerns may have on the reliability of
representations and audit evidence in general.

Section 5370 does not contain such a requirement, although section 5090 does address
such concerns.

If the reliability of written representations is in doubt due to inconsistency with other
audit evidence and the matter cannot be resolved, CAS 580 requires the auditor to
reconsider the assessment of the competence, integrity, etc., and the effect this may
have on the reliability of representations and audit evidence in general.

If the auditor concludes that any other written representations are unreliable, CAS 580
requires the auditor to take appropriate action, including determining the possible effect
on the opinion in the auditor’s report.

Section 5370 does not contain such a requirement.

If management does not provide the written representations requested by the auditor,
CAS 580 requires the auditor to discuss the matter with management, and re-evaluate
the integrity of management and evaluate the effect that this may have on the reliability
of representations and audit evidence in general.

Furthermore, if management does not provide the written representations required
about the fulfillment of its responsibilities, CAS 580 requires the auditor to disclaim an
opinion on the financial statements.

This action contrasts with section 5370, which requires the auditor to issue a qualified
opinion or a disclaimer, but does not specify the circumstances when a disclaimer would
be required.

Section 5370 requires the auditor to obtain written representations for matters that are
material to the financial statements, matters that are significant to the engagement, and
matters relevant to management’s judgments and estimates that are material to the
financial statements.

CAS 580 does not require the auditor to obtain written representations from
management regarding specific assertions embedded in the financial statements.
129
CAS 600 Special Considerations — Audits of Group Financial
Statements (Including the Work of Component Auditors)
(added Feb. 2010)

CAS 600, Special Considerations — Audits of Group Financial Statements (Including the
Work of Component Auditors), replaces Handbook section 6930.

There are no changes in the scope, but there are changes in the concepts and in the
requirements of CAS 600.

CAS 600 introduces the concept that a component may be an entity or a business
activity.

Both section 6930 and CAS 600 define the “primary auditor” but CAS 600 notes that the
“primary auditor” may be the partner or the engagement team.

CAS 600 distinguishes between the group engagement partner and group engagement
team and specifies that certain requirements are to be performed by the group
engagement partner as opposed to the group engagement team.

Group engagement partner: the partner or other person in the firm who is
responsible for the group audit engagement and its performance, and for the auditor’s
report on the group financial statements that is issued on behalf of the firm.

Group engagement team: partners, including the group engagement partner, and
staff who establish the overall group audit strategy, communicate with component
auditors, perform work on the consolidation process, and evaluate the conclusions drawn
from the audit evidence as the basis for forming an opinion on the group financial
statements.

The group engagement partner cannot accept an engagement, or must resign from the
engagement, if it will not be possible for the group engagement team to obtain sufficient
appropriate audit evidence due to restrictions imposed by group management AND the
possible effects of this inability will result in a disclaimer of opinion on the group financial
statements.

CAS 600 contains requirements for the auditor to determine four levels of materiality:
o
materiality level for the group financial statements as a whole when establishing the
overall group audit strategy;
o
if applicable, materiality level for particular classes of transactions, account balances
or disclosures in the group financial statements;
o
component materiality; and
o
the threshold above which misstatements cannot be regarded as clearly trivial.
130

CAS 600 contains more extensive and specific requirements than section 6930 regarding
the nature, timing and extent of procedures to be performed in the context of the group
audit.

CAS 600 does not permit the auditor’s report on the group financial statements to refer
to a component auditor unless required by law or regulation.
CAS 610 Using the Work of Internal Auditors
(major revision Feb. 2010)

CAS 610, Using the Work of Internal Auditors, replaces part of Handbook section 5050.

There are no new concepts introduced in CAS 610, but there are changes in the scope
and in the requirements.

CAS 610 applies only to audits of financial statements (adapted as necessary for
audits of other historical financial information).

Section 5050 applied to all assurance engagements and so it had a broader scope.

In addition, section 5050 addressed the practitioner’s use of internal audit staff to
provide direct assistance under the practitioner’s supervision.

This consideration is not within the scope of CAS 610.

As discussed under CAS 315, if the entity has an internal audit function, the auditor
must take steps and perform tests to determine whether the internal audit function is
likely to be relevant to the audit — if so, CAS 610 applies.

Section 5050 did not contain such a requirement.

CAS 610 suggests that internal audit will “likely be relevant to the audit” if:
o
the nature of the internal audit function’s responsibilities and activities are related to
the entity’s financial reporting; and
o
the auditor expects to use the work of the internal auditors to modify the nature or
timing, or reduce the extent, of audit procedures to be performed.

Section 5050 uses similar terminology, namely “relevant to the engagement”, but does
not provide a definition.

If the internal audit function is likely to be adequate for the audit, the auditor must
evaluate:
o
the objectivity of the internal audit function;
131
o
the technical competence of the internal auditors;
o
whether the work of the internal auditors is likely to be carried out with due
professional care; and
o
whether there is likely to be effective communication between the internal auditors
and the external auditors.

Section 5050 did not impose these requirements, although it did suggest similar
guidance.

If the internal audit function is likely to be adequate for the audit, the auditor must then
determine the planned effect of the work of the internal auditors on the nature, timing
or extent of the external auditor’s procedures.

Section 5050 did not impose this requirement, although it did suggest similar guidance.

Furthermore, when determining the planned effect of the work of the internal auditors
on the nature, timing or extent of the external auditor’s procedures, the auditor has to
consider the three factors cited in the next three points.
o
The nature and scope of specific work performed, or to be performed, by the internal
auditors;
o
The assessed risks of material misstatement at the assertion level for particular
classes of transactions, account balances, and disclosures; and
o
The degree of subjectivity involved in the evaluation of the audit evidence gathered
by the internal auditors in support of the relevant assertions.

Section 5050 did not contain any requirements or guidance on these considerations.

Under CAS 610, when considering the adequacy of specific work performed by the
internal auditors, the auditor must consider the following five factors:
o
The work was performed by internal auditors having adequate technical training and
proficiency;
o
The work was properly supervised, reviewed and documented;
o
Adequate audit evidence has been obtained to enable the internal auditors to draw
reasonable conclusions;
o
Conclusions reached are appropriate in the circumstances and any reports prepared
by the internal auditors are consistent with the results of the work performed; and
o
Any exceptions or unusual matters disclosed by the internal auditors are properly
resolved.
132

Section 5050 did not impose this requirement, although it did suggest similar guidance
for the first four factors.

The last factor was not addressed in section 5050.

CAS 610 requires the auditor to document conclusions regarding the evaluation of the
adequacy of the work of the internal auditors, and the audit procedures performed by
the external auditor on that work.

Section 5050 did not impose this requirement, although it did suggest similar guidance.

Finally, section 5050 requires that the auditor’s report not refer to the use of internal
audit work.

CAS 610 is silent on this issue.
CAS 620 Using the Work of an Auditor’s Expert
(added Feb. 2010)

CAS 620, Using the Work of an Auditor’s Expert, replaces part of Handbook section
5049.

There are no new concepts introduced in CAS 620, but there are changes in the scope
and in the requirements.

Like CAS 610, CAS 620 applies only to audits of financial statements (adapted as
necessary for audits of other historical financial information).

Section 5049 applied to all assurance engagements.

CAS 620 deals only with the use of the work of the auditor’s expert.

Issues related to the auditor’s consideration of the work performed by management’s
experts in helping management to prepare the entity’s financial statements are
addressed in CAS 500.

Section 5049 dealt with both the use of the work of auditor’s experts and the auditor’s
use of work performed by management’s experts (that is, specialists employed or
engaged by an accountable party).

CAS 620 defines an auditor’s expert as an individual or organization possessing
expertise in a field other than accounting or auditing. Section 5049 does not exclude
expertise particular to accounting or auditing matters from its scope.

The requirement in CAS 620 dealing with determining the need for an auditor’s expert is
more explicit than the related requirement in section 5049.
133

Likewise, the requirements in CAS 620 dealing with obtaining an understanding of the
field of expertise of the auditor’s expert, providing direction to, and communicating with
that expert are more explicit than related requirements in section 5049.

CAS 620 requires the agreement with the auditor’s expert to be in writing when
appropriate.

There is no requirement in section 5049 requiring an agreement between the auditor
and the expert be in writing.

CAS 620 requires the auditor to evaluate the competence, capabilities, and objectivity of
the expert.

When an auditor’s external expert is used, there is an additional requirement to ensure
that there is no threat to that expert’s objectivity.

Both CAS 620 and section 5049 state that the auditor’s standard report should not refer
to the work of the expert.

However, CAS 620 contains the caveat that such reference would not be made unless
required by law or regulation.

Both CAS 620 and section 5049 permit reference to the work of the expert when the
opinion is modified.

However, CAS 620 stipulates that when such a reference is made, the auditor’s report
must clearly indicate that the reference does not diminish the auditor’s responsibility for
the report.
CAS 700 Forming an Opinion and Reporting on Financial
Statements
(added Feb. 2010)

CAS 700, Forming an Opinion and Reporting on Financial Statements, replaces
Handbook section 5400 as well as Auditing Guidelines AuG-21, AuG-40 and AuG-45.

There is no change in the scope, but there are changes to the concepts and in the
requirements.

The primary difference is that under CAS 700, the auditor may report on financial
statements prepared using a financial reporting framework that is a fair presentation
framework or a compliance framework.

In other words, GAAP is no longer the only basis for reporting.

CAS 200 defines a “fair presentation framework” as a financial reporting framework that
requires compliance with the requirements of the framework.
134

The definition also imposes two additional conditions set out below.

A fair presentation framework acknowledges:
o
either explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond
those specifically required by the framework; or
o
for management to depart from a requirement of the framework to achieve fair
presentation of the financial statements.

A compliance is a financial reporting framework that requires compliance with the
requirements of the framework, but does not contain the acknowledgements set out
above.

CAS 700 also impacts the date of the auditor’s report.

As noted when covering CAS 560, the auditor’s report is dated no earlier than the date
on which the auditor has obtained sufficient appropriate audit evidence on which to base
the opinion on the financial statements.

In particular, CAS 700 requires that:
o
all the statements that comprise the financial statements, including the related
notes, have been prepared; and
o
those with the recognized authority have asserted that they have taken responsibility
for those financial statements.

Previously, section 5405 required the date of substantial completion of examination to
be used as the date of the auditor’s report.

Consequently, the auditor’s report would often (usually?) be dated before the date on
which those with recognized authority approved the financial statements.

CAS 700 is designed to enable the auditor to report on financial statements prepared in
accordance with any acceptable financial reporting framework.

Paragraphs 20 to 41 of CAS 700 set out the structure and form of the auditor’s report —
a report that is different from the one presently defined in section 5400.

Conceptually, it is similar to the current report, but it is much more specific.

One key point to take away is that unlike current GAAS, CAS 700 permits the “true and
fair view” notion as part of the opinion.

Unless otherwise required by law or regulation, the audit opinion must use one of the
following phrases:
135
o
the financial statements present fairly, in all material respects, … in accordance with
the applicable financial reporting framework [whatever it might be]; or
o
the financial statements give a true and fair view of … in accordance with the
applicable financial reporting framework [whatever it might be].

When expressing an unmodified opinion on financial statements prepared in accordance
with a compliance framework, the notion of “presents fairly” (or a true and fair view) is
not considered.

Instead, the auditor’s opinion must be that “the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework
[whatever that may be].

If the auditor is engaged to report on other matters (such as ICFR under section 5925),
these other reporting responsibilities must be addressed in a separate section in the
auditor’s report that is titled “Report on Other Legal and Regulatory Requirements.”

Alternatively, the entire report can be broke down into sections such as “Report on the
Financial Statements” and “Report on Other Legal and Regulatory Requirements.”

Notwithstanding, the “Report on the Financial Statements” must always be first.

Unlike section 5400, CAS 700 includes requirements when the auditor’s report is
prescribed by law or regulation.

If such laws or regulations mandate a specific layout or wording of the auditor’s report,
reference to Canadian generally accepted auditing standards is permitted only if the
auditor’s report includes, at a minimum, the elements listed in paragraph 43.

Similarly, unlike section 5400, CAS 700 includes requirements when the auditor
conducts the audit in accordance with the auditing standards of both a specific
jurisdiction and the CASs.

The auditor’s report may refer to Canadian generally accepted auditing standards in
addition to the national auditing standards, but the auditor shall do so only if the
conditions in the next three points are met.

There is no conflict between the requirements in the national auditing standards and
those in CASs that would lead the auditor either to form a different opinion, or not to
include an Emphasis of Matter paragraph that, in the particular circumstances, is
required by CASs.

The auditor’s report includes, as a minimum, each of the elements set out in CAS 700
when the auditor uses the layout or wording specified by the national auditing
standards.
136

Furthermore, when the auditor’s report refers to both national auditing standards and
Canadian generally accepted auditing standards, the auditor’s report must identify the
jurisdiction of origin of the national auditing standards.
CAS 705 Modifications to the Opinion in the Independent
Auditor’s Report
(added Feb. 2010)

CAS 705, Modifications to the Opinion in the Independent Auditor’s Report, replaces
Handbook section 5510.

There is no change in the scope, nor are any new concepts introduced in CAS 705.

However, there are many changes in the requirements.

For example, CAS 705 provides more detailed requirements with respect to the
consequences when management imposes a limitation after the auditor has accepted the
engagement.

Similarly, CAS 705 requires that if the auditor is unable to obtain sufficient appropriate
audit evidence, the auditor must consider the implications and act accordingly

Actions can range from a qualified opinion to a denial of opinion to an outright
resignation from the engagement.

CAS 705 requires the use of headings (for example, Basis for Adverse Opinion) when the
auditor includes a paragraph in the report that provides a description of the matter
giving rise to the modification.

When the modification arises from an inability to obtain sufficient appropriate audit
evidence, the auditor’s report must use the phrase “except for the possible effects of the
matter(s) ...” for the modified opinion.

This is the opposite of section 5510 which proscribes such actions.

Section 5510 disallows wording that bases the qualification on the limitation itself (for
example, …, except for the above-mentioned limitation on the scope of my
examination).

On the other hand, section 5510 and CAS 705 are consistent in some of the
requirements related to an adverse opinion and a disclaimer of opinion — for example,
the financial statements do not present fairly … or the auditor does not express an
opinion on the financial statements.

However, unlike section 5510, when the auditor expresses a qualified or adverse
opinion, CAS 705 requires a statement that the auditor believes the audit evidence
137
obtained is sufficient and appropriate to provide a basis for the auditor’s modified audit
opinion.

Likewise, when there is a disclaimer of opinion, the auditor must amend the introductory
paragraph, the description of the auditor’s responsibility and the description of the scope
of the audit.

When the auditor expects to modify the opinion, this decision, as well as the
circumstances that led to the expected modification and the proposed wording of the
modification must be communicated to those charged with governance.
CAS 706 Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Reports
(added Feb. 2010)

CAS 706, Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Reports, replaces part of Handbook section 5701.

There is no change in the scope, but there are changes to the concepts and in the
requirements.

CAS 706 provides guidance on the use of Emphasis of Matters and Other Matter
paragraphs in the auditor’s report.

Section 5701 does not separately distinguish between these two types of paragraphs.

An Emphasis of Matter paragraph in the auditor’s report is used to draw the attention
of users to a matter presented or disclosed in the financial statements that, in the
judgment of the auditor, is of such importance that it is fundamental to users’
understanding of the financial statements.

An Emphasis of Matter paragraph should only be used when the auditor has obtained
sufficient appropriate audit evidence that the matter is not materially misstated in the
financial statements.

Most importantly, the auditor’s opinion is not modified with respect to the matter
emphasized — and that fact must be made clear in any reference to the matter being
emphasized.

An Other Matter paragraph in the auditor’s report is used to communicate information
relating to a matter other than one that is presented or disclosed in the financial
statements that, in the auditor’s judgment, is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.

The Other Matter should come immediately after the Opinion paragraph and any
Emphasis of Matter paragraph, unless the content of the Other Matter paragraph is
138
relevant to the Other Reporting Responsibilities section, in which case it can be placed
accordingly.

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in
the report, this decision and the proposed wording must be communicated to those
charged with governance.
CAS 710 Comparative Information — Corresponding Figures
and Comparative Financial Statements
(added Feb. 2010)

CAS 710, Comparative Information — Corresponding Figures and Comparative Financial
Statements, replaces part of Handbook section 5701 and Auditing Guideline AuG-8.

There are no new concepts, but there are changes to the scope and the requirements.

CAS 710 does not deal with an auditor’s responsibility on the auditing of opening
balances in an initial engagement.

CAS 510 addresses such matters

CAS 710 addresses two different approaches to comparative information in financial
reporting frameworks: corresponding figures and comparative financial
statements.

The distinction between the two approaches affects the reporting requirements.

Under the corresponding figures approach the auditor’s report refers only to the
financial statements of the current period.

This is the typical approach of the auditor’s report on financial statements of non-listed
entities.

Under the comparative financial statements approach, the auditor’s report refers to
each period for which the financial statements are presented.

This approach is most often applicable to a report on annual financial statements filed
with securities regulators.

Consequently, there are significantly more requirements about the auditor’s
responsibilities for:
o
corresponding figures or comparative financial statements under each approach, and
o
when the prior period financial statements were audited by another auditor or were
not audited.
139

For example, if the matter(s) that gave rise to a reservation in the auditor’s report in the
prior period continue to affect the corresponding figures, the auditor’s report on the
current period’s financial statements must be modified.

Another example would be if the prior period financial statements were not audited.

Here, the auditor must always state in the report that the prior period financial
statements were not audited.

A third example would be where another auditor has reported on the prior period
financial statements.

Here, the auditor must provide the date of the predecessor auditor’s report, the type of
opinion expressed, and if that opinion was modified, the reasons in an Other Matter
paragraph.
CAS 720 The Auditor’s Responsibility in Relation to Other Information in
Documents Containing Audited Financial Statements
(added Feb. 2010)

CAS 720, The Auditor’s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements, replaces Handbook section 7500 to the extent
that section 7500 covers aspects of the audit of financial statements.

This narrows the scope of CAS 720.

For example, section 7500 states that information “in”, “included in” or “contained in” a
document includes information “incorporated by reference” in the document.

CAS 720 does not discuss the concept of incorporated by reference.

For CAS 720, documents containing audited financial statements refers to annual reports
(or similar documents), that are issued to owners (or similar stakeholders), containing
audited financial statements and the auditor's report thereon.

Material dealing with the auditor’s responsibilities for other information in documents
containing summary financial statements is included in CAS 810 and not in CAS 720.

The narrowing of scope means that some of the requirements of section 7500 were not
carried forward.

For example, the auditor does not have to determine whether the financial statements
and, when applicable, the report of the auditor thereon, are accurately reproduced or
appropriately summarized in a designated public document.

Another example relates to other information.
140

Section 7500 prohibited the auditor from expressing any assurance on “other
information” in any public document (unless the auditor had audited or reviewed the
information in accordance with assurance standards) or on the document as a whole.

CAS 720 simply states that the auditor’s opinion does not cover other information.

Lastly, CAS 720 does not have any requirements dealing with the auditor’s
responsibilities for translated material.

Current requirements have been carried forward to section 5020.
CAS 800 Special Considerations — Audits of Financial Statements Prepared
in Accordance with Special Purpose Frameworks
(added Feb. 2010)

CAS 800, Special Considerations—Audits of Financial Statements Prepared in Accordance
with Special Purpose Frameworks, replaces Handbook section 5600.

There is no Canadian auditing standard that addresses the auditor’s report on special
purpose financial statements.

Accordingly, the scope, concepts and requirements are “new”.

However, “new” is a relative term.

Basically, an auditor can accept an engagement to report on special purpose financial
statements if the auditor has determined that the applicable financial reporting
framework is acceptable in the circumstances of the engagement, using the criteria set
out in CAS 210.

Because “special purpose reports” are based on acceptable financial reporting
frameworks, the auditor must apply the standards and guidance in CAS 700 — and any
other applicable CAS.

To make sure nobody confuses the basis of the statements with GAAP, the auditor’s
report must describe the purpose for which the financial statements are prepared and, if
necessary, the intended users, or refer to a note in the special purpose financial
statements that contains that information.

Additionally, the auditor’s report must contain an Emphasis of Matter paragraph alerting
users of the auditor’s report that the financial statements are prepared in accordance
with a special purpose framework and that, as a result, the financial statements may not
be suitable for another purpose.

If management has a choice of financial reporting frameworks in the preparation of the
financial statements, the explanation of management’s responsibility for the financial
141
statements must also make reference to its responsibility for determining that the
applicable financial reporting framework is acceptable in the circumstances.

However, where section 5600 required the auditor to modify the report to state that the
financial statements had not been prepared and were not intended to be prepared in
accordance with GAAP, this is not required with CAS 800 since other acceptable
frameworks are permitted.
CAS 805 Special Considerations — Audits of Single Financial Statements
and Specific Elements, Accounts, or Items of a Financial Statement
(added Feb. 2010)

CAS 805, Special Considerations—Audits of Single Financial Statements and Specific
Elements, Accounts or Items of a Financial Statement, replaces Handbook section 5805.

There are no new concepts although the scope and requirements are different.

Section 5805 provided guidance to an auditor engaged to express an opinion on financial
information other than financial statements.

CAS 805 deals with matters relevant to the audit of a single financial statement and/or a
specific element, account or item of a financial statement.

When the auditor is not also engaged to audit the entity’s financial statements, the
auditor must determine whether an audit of the element in accordance with CASs is
practicable.

This consideration was not addressed in section 5805.

Conversely, when the auditor undertakes an engagement to report on an element in
conjunction with an engagement to audit the entity’s financial statements, the auditor
must express a separate opinion for each engagement.

This was not a requirement in section 5805.

Section 5805 required the auditor to disclose in the auditor’s report (any) significant
interpretations of an agreement, statute or regulation made by management of the
entity.

CAS 805 does not contain this requirement.

CAS 210 requires that the agreed terms of an audit engagement include the expected
form of any reports to be issued by the auditor.

In the case of an audit of an element, the auditor must also consider whether the
expected form of opinion is appropriate in the circumstances.
142

When an audited single financial statement or an audited specific element of a financial
statement is published together with the entity’s audited complete set of financial
statements, the presentation of the element must differentiate it sufficiently from the
complete set of financial statements.

Therefore, the auditor cannot issue a report containing an opinion on a single financial
statement or on a specific element of a financial statement until satisfied that the single
financial statement or the specific element is sufficiently differentiated from the
complete set of financial statements.

Finally, CAS 805 contains specific requirements relating to circumstances when the
auditor’s report on the entity’s complete set of financial statements contains a modified
opinion, Emphasis of Matter paragraph or Other Matter paragraph.

Refer to paragraphs A17 and A18.
CAS 810 Engagements to Report on Summary Financial Statements
(added Feb. 2010)

CAS 810, Engagements to Report on Summary Financial Statements, replaces Auditing
Guideline AuG-25.

CAS 810 introduces new concepts, and the scope and requirements are different from
that of AuG-25.

CAS 810 deals with an auditor’s report on summary financial statements prepared from
either general purpose financial statements or from special purpose financial statements.

AuG-25 deals only with the first alternative.

If the auditor concludes that the criteria applicable to the engagement are unacceptable,
or the auditor is unable to obtain the agreement of management as to its
responsibilities, CAS 810 allows the auditor to refuse the engagement.

Under AuG-25 the auditor could accept the engagement.

When an auditor concludes that an unmodified opinion on summary financial statements
is appropriate, unless otherwise required by law or regulation, CAS 810 limits the
wording to be used to one of two choices.

AuG-25 required the auditor to express an opinion on whether the summarized financial
statements, in all material respects, fairly summarized the related complete financial
statements in accordance with the criteria.

Under CAS 810, the auditor’s report on the summary financial statements may be dated
later than the date of the auditor’s report on the audited financial statements.
143

Accordingly, the auditor’s report must state that the summary financial statements and
audited financial statements do not reflect the effects of subsequent events, which may
require adjustment of, or disclosure in, the audited financial statements.

CAS 810 requires the auditor to date the report on the summary financial statements no
earlier than the date on which the auditor obtained sufficient appropriate evidence on
which to base the opinion and the date of the auditor’s report on the audited financial
statements.

Sufficient appropriate evidence includes evidence that the summary financial statements
have been prepared and that management has takes responsibility for them.

This may be different from current practice under AuG-25.

When the auditor becomes aware of facts that existed at the date of the auditor’s report
on the audited financial statements — facts of which the auditor was previously unaware
— CAS 560, Subsequent Events, kicks in.

The auditor cannot issue the report on the summary financial statements until the
subsequent event has been dealt with in accordance with CAS 560.

AuG-25 did not address this situation.

Under AuG-25, the auditor’s report cautioned readers that the summary financial
statements might not be appropriate for their purposes, and that the summary financial
statements fairly summarized, in all material respects, the related complete financial
statements.

CAS 810 does not contain such a caution.

When the auditor’s report on the audited financial statements contains an Emphasis of
Matter paragraph, or an Other Matter paragraph, the auditor’s report on the summary
financial statements must refer to these paragraphs as appropriate.

Under AuG-25 the auditor’s opinion referred only to the audited financial statements.

When the auditor’s report on the audited financial statements contains an adverse
opinion or a disclaimer of opinion, CAS 810 requires the auditor to it indicate that it
would be inappropriate to express an opinion on the summary financial statements.

AuG-25 does not prevent an auditor from issuing an opinion on the summary financial
statements when the auditor’s report on the audited financial statements contains an
adverse opinion or a disclaimer of opinion.

If the summary financial statements are not consistent, in all material respects with, or
are not a fair summary of the audited financial statements, and management does not
agree to make the necessary changes, the auditor must express an adverse opinion on
the summary financial statements.
144

Under AuG-25, the auditor would have to withdraw from the engagement to report on
the summarized financial statements and could not agree to be associated with the
summarized financial statements.

CAS 810 contains requirements on topics not addressed in AuG-25:
o
auditor association;
o
unaudited supplementary information presented with summary financial statements;
and
o
other information in documents containing summary financial statements.
145
CICA Handbook  Assurance  Part I  Other Canadian
Standards  General Assurance and Auditing (5000-5970)
CSAE 3416, Reporting on Controls at a Service Organization

In August 2010, CSAE 3416 Reporting on Controls at a Service Organization was issued,
replacing section 5970 Auditor's Report On Controls At A Service Organization.

CSAE 3416 addresses audit engagements undertaken by a service auditor to report on
controls at organizations that provide services to user entities when those controls are
likely to be relevant to user entities' internal control over financial reporting. It
complements CAS 402, Audit Considerations Relating to an Entity Using a Service
Organization, in that reports prepared in accordance with this CSAE may provide
appropriate evidence under CAS 402

CSAE 3416 is based on the Statement on Standards for Attestation Engagements 16,
Reporting on Controls at a Service Organization, which was issued in March 2010 by the
American Institute of Certified Public Accountants' Auditing Standards Board, modified in
limited circumstances, where considered necessary to meet unique Canadian
circumstances

CSAE 3416 covers the same subject matter as section 5970, but there are some
significant differences between the two. CSAE 3416

o
contains requirements and application material to address those matters necessary
for a service auditor to conduct the engagement (that is, CSAE 3416 is a selfstanding standard);
o
requires the service auditor to obtain a written assertion by management that is
included in or attached to the description of the service organization's system;
o
requires procedures to be performed dealing with matters related to assessing the
suitability of criteria;
o
deals with the concept of "intentional acts" requiring follow-up action when
information about such acts is identified;
o
requires wording in the service auditor's report to restrict distribution as well as use
of the service auditor's report.
CSAE 3416 is effective for service auditors' reports for periods ending on or after
December 15, 2011, with earlier implementation permitted.
Section 5925 An Audit of Internal Control over Financial Reporting That Is
Integrated With An Audit Of Financial Statements
Background
146

In January 2008, the AASB issued section 5925, establishing standards and providing
guidance regarding the auditor’s responsibilities when engaged to perform an audit of
internal control over financial reporting that is integrated with an audit of financial
statements.

Section 5925 provides requirements related to:
o
management’s written assessment about the effectiveness of internal control over
financial reporting;
o
integrating the audit of internal control over financial reporting with the audit of
financial statements;
o
the use of suitable criteria;
o
planning and performing the audit, using a risk-based approach;
o
identifying and selecting controls to test, using a top-down approach;
o
testing controls selected;
o
evaluating identified deficiencies;
o
forming an opinion;
o
communicating certain matters; and
o
reporting on internal control over financial reporting.

Section 5925 requires the use of a top-down approach to select controls to test.

A top-down approach begins at the financial statement level and with the auditor’s
understanding of the overall risks to internal control over financial reporting.

The auditor then focuses on entity-level controls and works down to significant accounts
and disclosures and their relevant assertions.

This approach directs the auditor’s attention to accounts, disclosures, and assertions
that present a reasonable possibility of material misstatement to the financial
statements and related disclosures.

The auditor then verifies this understanding of the risks in the entity’s processes and
selects for testing those controls that sufficiently address the assessed risk of
misstatement to each relevant assertion.

Section 5925 is intrinsically linked with CSA MLI 52-109.
147

The definitions and requirements of the Handbook section are intended to ensure that an
entity required to comply with MLI 52-109 is able to do so.

Anyone affected by MLI 52-109 will need to be aware of section 5925’s requirements.

Section 5925 differs from many other Handbook sections in that virtually all of the
section is italicized.
Effective Date

The section is effective for audits of internal control over financial reporting that are
integrated with audits of financial statements for periods beginning on or after January
1, 2008.
148
CICA Handbook  Assurance  Part I  Other Canadian
Standards  Specialized Areas (7050-7600)
Section 7050 Auditor Review of Interim Financial Statements

In August 2010, section 7050 Auditor Review of Interim Financial Statement, paragraphs
7050.20(f), 7050.26(iii), and 7050.54 were amended to clarify that when the auditor is
required to include a reservation in his or her interim review report because of a
departure from Canadian generally accepted accounting principles and the matter giving
rise to the reservation is as a result of an exemption permitted by securities regulations,
the auditor is not required to request that the written interim review report be included
in documents containing interim financial statements.
Section 7200 Auditor Assistance to Underwriters and Others
(no changes Feb. 2010)
Background

Section 7200 was the first stage in a project to revise and expand section 7100, The
auditor’s involvement with prospectuses and other offering documents.

Section 7200 represents a codification of the best practices already in effect in Canada
and the United States.
Summary of Changes
Terms

The term “auditor” is used in section 7200 to refer to any public accountant engaged by,
or on behalf of, an issuer of securities to provide assistance to an underwriter or other
party requesting a comfort letter, regardless of whether the public accountant is the
auditor or the issuer.
Communication Issues

Section 7200 does not deal with communications issued in connection with the purchase
or sale of a business through securities transactions other than through an offering
document (for example, a report on a purchase investigation).
Due Diligence Meetings

Paragraphs 7100.55-.62 dealing with letters to underwriters were withdrawn and the
material was incorporated into section 7200.

Recommendations dealing with an auditor’s participation in “due diligence” meetings
with underwriters were added.
149
Four Principles

The recommendations are based on four underlying principles:
o
Only the underwriter can determine what is necessary for a reasonable
investigation.
o
A statement made by a professional accountant or auditor, written or oral, will be
taken to add credibility to the subject matter of the statement.
o
In order to make a statement that would be appropriately supported, an auditor:
o

needs to possess adequate knowledge of the subject matter;

act with due care and an objective state of mind.
An auditor should not provide assurance, positive or negative, unless there are
suitable criteria that can be applied in reaching the conclusion expressed.
International Offerings

When all or part of a securities offering is made in other countries, the auditor needs to
consider whether procedures need to be extended or otherwise modified in response to
foreign regulatory requirements or the request of the underwriters.

When asked to carry out an audit under foreign standards, a Canadian auditor may use
the standards of the country in which the offering is made, provided that the auditor
meets the general and examination standards set out in section 5100 and adheres to the
applicable rules of professional conduct.

Reporting in accordance with the reporting standards of another country would require
knowledge of, and adherence to, all of the auditing standards of that country.

In a cross-border offering, if the audit has been conducted in accordance with Canadian
GAAS, the auditor may draw attention to that fact in the comfort letter and point out
that there may be differences between Canadian auditing standards and those of the
foreign country or countries in which the offering is made.
150
CICA Handbook  Assurance  Part I  Other Canadian
Standards  Related Services (9100-9200)
Section 9110 Agreed-upon Procedures Regarding Internal Control over
Financial Reporting
(no changes Feb. 2010)
Background

Section 404 of the Sarbanes-Oxley Act (SOX) requires the auditor to provide an opinion
on management’s assessment of internal control over financial reporting (ICFR).

Section 404 of SOX also requires the auditor to provide his own opinion on the entity’s
system of internal control over financial reporting.

In March 2003, the AASB approved a project to develop general standards for reporting
on ICFR and to revise Section 5220 as required.

In December 2003, the AASB began work to develop a generic Canadian standard that
would be harmonized with both the PCAOB standard for public companies and with the
AICPA standard for other entities.

In October 2004, the AASB issued an exposure draft that reflected the US standard
approved by the PCAOB in March 2004 and by the US SEC in June 2004.

In February 2005, the AASB approved, subject to written ballot, a new standard, An
Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit
of Financial Statements.

In February 2005, the CSA issued for comment its proposed MLI 52-111 to deal with the
fact that MLI 52-109 did not require certification regarding ICFR.

The MLI was supposed to be effective for fiscal periods ending on or after June 30, 2006,
subject to certain exemptions, including the market capitalization of issuer.

In July 2005, the CSA announced a one-year delay in the effective date of the proposed
MLI, ostensibly to allow time to study the impact of SOX 404 in the US.

On March 10, 2006, the CSA announced that it would not proceed with MLI 52-111.
Instead, MLI 52-109 would be expanded to require certain disclosures intended for 52111.

Unlike section 404, an issuer would not be required to obtain from its auditor an audit
opinion concerning management’s assessment of the effectiveness of ICFR, nor would
the auditor be required to provide an opinion on ICFR.

In February 2007, the PCAOB proposed revisions to Auditing Standard No. 2.
151

In March 2007, the CSA proposed revisions to MLI 52-109 to require the certification of
the operating effectiveness of internal control over financial reporting.

Accordingly, the AASB decided that a Canadian standard regarding the audit of ICFR
should be developed based on the PCAOBs proposed revisions to Auditing Standard No.
2. The standard would be “generic” in that it may be applied in any case when an entity
is required or opts to have an audit of internal control over financial reporting. As noted,
the CSA amended MLI 52-109 to require that management provide specific certifications
related to ICFR.

Worried that practitioners would not be able to function on their own, the AASB
concluded that a standard was needed to assist public accountants in providing services
to their clients in relation to their regulatory certifications. The outcome was section
9110, Agreed-upon Procedures Regarding Internal Control over Financial Reporting.
Effective Date

Section 9110 is effective for agreed-upon procedures engagements regarding ICFR
entered into on or after May 1, 2007.
Summary of Requirements

Section 9110 specifies that that the public accountant is not engaged to provide
assurance or an opinion on internal control, but to report findings from performing the
agreed-upon procedures engagement so that the engaging party may use the public
accountant’s report and other available information to form their own opinion on internal
control over financial reporting.

Section 9110 also specifies that responsibility for the sufficiency and appropriateness of
the agreed-upon procedures remains with the engaging party, although the public
accountant may discuss the procedures to be performed and come to agree on the
procedures.

The key is that it is the engaging party who is responsible for specifying the procedures
to be performed. Moreover, it is the engaging party who is responsible for determining
that the agreed-upon procedures are sufficient and appropriate for their purposes.

Section 9110 also provides guidance on the form and content of the report that the
public accountant issues in connection with such an engagement.
Section 9200 Compilation Engagements
Background

In 2005, the AASB proposed to converge section 9200 with International Standard on
Related Services 4410, Engagements to Compile Financial Statements (ISRS 4410),
taking into consideration Canadian specific circumstances.
152

In March 2006, the AASB decided to reduce the scope of the project until such time as
the Accounting Standards Board (AcSB) completed its research into reporting models for
non-publicly accountable enterprises.

At the same time, pressure to amend section 9200 came from those who argued that
the enactment of the Independence Standards placed an unreasonable burden on
practitioners who prepared compilation reports.

They noted that section 9200 focused on what the practitioner didn’t do (has not
audited, reviewed or otherwise attempted to verify the accuracy or completeness of the
information …), rather than what was done (book-keeping services), and they suggested
that this was inconsistent with the Independence Standards.

In June 2006, the AASB issued an exposure draft proposing changes to section 9200.

In April 2007, the AASB released Handbook update 28 with revisions to section 9200.
Effective Date

The amendments are effective for compilation engagements and Notice to Reader
communications issued on or after July 1, 2007.
Summary of Changes

The two most critical changes relate to the scope of the section and the wording of the
Notice to Reader communication attached to compilation engagements.

The change in scope relates to tax-based engagements.

Section 9200 does not apply to financial information presented solely in, or incorporated
by reference in, government-prescribed tax or other forms such as corporate, trust or
personal income tax return forms.

Financial information excluded from section 9200 must be accompanied by a disclaimer
from the public accountant stating “prepared solely for income tax purposes without
audit or review from information provided by the taxpayer.”

The troublesome aspect of this exclusion is that it should only take place “when it does
not purport to convey the financial position and the results of operations of the
enterprise” — a full set of statements for tax purposes does purport …

The other change relates to the Notice to Reader communication itself:
o
Previously, the report [paragraph 9200.23(b)] included the disclaimer that the
public accountant has not audited, reviewed or otherwise attempted to verify the
accuracy or completeness of such information. The italicized material is now
gone.
153
o
The report [paragraph 9200.25(b)] now states that the public accountant has not
performed an audit or a review engagement on such information.
o
There is no comment regarding the accuracy or completeness of the information.
o
Readers, you’re on your own.
154
CICA Handbook – Assurance – Part I – Other Canadian
Standards – Assurance and Related Services Guide
AuG-46, Communications with Law Firms under New Accounting and
Auditing Standards

In August 2010, AuG-46, Communications with Law Firms under New Accounting and
Auditing Standards was issued.

This new Assurance and Related Services Guideline provides interim guidance to assist
financial statement preparers (clients), auditors, and law firms to communicate with
respect to claims and possible claims in circumstances outside the scope currently
contemplated by the "Joint Policy Statement Concerning Communications with Law Firms
Regarding Claims and Possible Claims in Connection with the Preparation and Audit of
Financial Statements" appended to CAS 501, Audit Evidence — Specific Considerations
for Selected Items. These circumstances are as follows:
o
when the financial statements are prepared in accordance with International
Financial Reporting Standards, including in particular IAS 37 Provisions, Contingent
Liabilities, and Contingent Assets in Part I of the CICA Handbook — Accounting; or
o
when the auditor is conducting the audit in accordance with the CASs and, therefore,
must follow the requirements for dating the auditor's report in CAS 700, Forming an
Opinion and Reporting on Financial Statements, paragraph 41, that will affect the
dating of the inquiry and response letters sent under the Joint Policy Statement.
AuG-47, Dating the Review Engagement Report on Financial Statements

In December 2010, AuG-47 Dating the Review Engagement Report on Financial
Statements was issued.

This new Assurance and Related Services Guideline provides guidance to financial
statement preparers (clients) and practitioners that explains why the public accountant
would not date his or her review engagement report on financial statements before he or
she has
o
obtained management's written representations regarding its responsibility for the
fair presentation of the financial statements and its belief that the financial
statements are complete and presented fairly; and
o
performed sufficient procedures to support the content of his or her report.
155
AuG-48, Legislative Requirements to Report on the Consistent Application
of Accounting Principles in the Applicable Financial Reporting Framework

In December 2010, AuG-48 Legislative Requirements to Report on the Consistent
Application of Accounting Principles in the Applicable Financial Reporting Framework was
issued.

This Assurance and Related Services Guideline (formerly named Legislative
Requirements to Report on the Consistent Application of Generally Accepted Accounting
Principles) was revised to

properly reflect the requirements in CAS 700, Forming an Opinion and Reporting
on Financial Statements, with respect to how the auditor addresses in the
auditor's report reporting responsibilities that are in addition to the auditor's
responsibility under the CASs to report on the financial statements (referred to in
CAS 700 as other reporting responsibilities); and

correct outdated references to certain accounting and auditing standards.
156