CONFERENCE CALL
4th Quarter
Oil & Gas Update
January 11, 2007
KPMG LLP
Agenda
John Gordon
Introduction
Wayne Chodzicki
Trusts: Permitted “Normal Growth”
Keith Raskob-Smith
Flow-Through Shares
Murray Suey
Financial Reporting Update
John Gordon
Derivatives and Hedging Activities
Continuing professional education credit: You may qualify for
up to 2 hours of professional education credit by attending this event.
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
2
Trusts: Permitted “Normal Growth”
Wayne Chodzicki
Partner, Tax
403.691.8004
wchodzicki@kpmg.ca
Summary of Announcements
•
On October 31, 2006, Department of Finance announced new tax regime
for Publicly traded Canadian income trusts, royalty trusts and partnerships—
now called “Specified Investment Flow-Through’s” (“SIFT’s”)
•
On December 15, 2006 the Department of Finance issued guidance
on “Undue Expansion”
•
–
Safe Harbour and permitted transactions
–
Conversions of SIFT’s to Corporations
On December 21, 2006 the Department of Finance issued Draft Legislative
proposals
–
Distributions of certain SIFT income will be subject to tax at corporate income
tax rates in the SIFT
–
SIFT’s will not be able to deduct distributions of this income for tax purposes,
and distributions by partnerships that are SIFT’s will be taxed in the SIFT
–
Investors will be taxed as if the distributions were dividends
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
4
“Normal Growth” During
Transition Period
• On December 15, 2006, Department of Finance provided
further guidance on “Normal Growth”
• “Normal Growth” of a SIFT during the transition period
would be allowed
• On the other hand, an aggressive interpretation of the term
“undue expansion” may cause the Department to propose
further legislative changes
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
5
“Normal Growth” During
Transition Period (Cont'd)
Department of Finance proposed the following safe harbour guidelines:
Period
Normal Growth
(Safe Harbour)
November 1, 2006 to December
31, 2007
New Equity ≤ the greater of:
a) $50 million; and
b) 40 per cent* of market capitalization (as of October 31, 2006)
For each year, from January 1,
2008 to December 31, 2010
New Equity ≤ the greater of:
a) $50 million; and
b) 20 per cent* of market capitalization (as of October 31, 2006)
New Equity = includes units and debt that is
convertible into units
* Allowed percentages are cumulative (for a total of 100 per cent growth). The $50 million
annual threshold allows smaller income trusts with market capitalization less than $200 million
to more than double in size during the 4 year transition.
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
6
“Normal Growth” During
Transition Period (Cont'd)
•
Measured by ‘issuance of new equity’
•
Based on market capitalization—October 31st
•
Cumulative: 60 per cent for 2008, 80 per cent for 2009
and 100 per cent for 2010
•
Merger of two Trusts not part of growth limit
•
Special rules around debt repayment and issuance
•
Tax rates will be an incentive for change
2006
2007
2008
2009
2010
2011
Public Corporation (Alberta) 32.12%
32.12%
30.5%
30.0%
29.0%
28.5%
SIFT - New
34.0%
33.5%
33.0%
32.0%
31.5%
•
0%
Press Release available at:
http://www.fin.gc.ca/news06/06-082e.html
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
7
Consultations
• The Department of Finance is accepting submission on
the December 21st draft legislation until January 31st, 2007
• The “undue expansion” rules are not contained in the draft
legislation of December 21, 2006
• The rules for tax free conversion from SIFT to Corporate
status are not contained in the draft legislation of December 21,
2006—Finance not able to draft before Christmas
• Important to model out the effects of the draft legislation to
(1) develop a strategy and (2) to ensure that the expected tax
result occurs
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
8
Additional Considerations
• Possibly reducing discretionary deductions until 2011
and increasing the taxable portion of distributions in the
transition period
• The future tax accounting implications of the announcements
including timing of recognition and required disclosures
• Impact of “normal growth” room on mergers and acquisitions
• Future structure
• Going private (rules do not apply to non-listed entities,
including pension funds)
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
9
Flow-Through Shares
Keith Raskob-Smith
Manager, Tax
403.691.7982
kraskobsmith@kpmg.ca
Flow-Through Shares
It is Flow-Through Share (FTS) season!
November-December
– Majority of 2006 FTS issuances
January-March
– Forms and admin for 2006 shares
– Classifying expenses for 2005 shares
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
11
FTS filings and deadlines
If you issued in December
• Form T100A (FTS registration) due by the end of January 2007
• Penalty if late (0.25 per cent up to $15k)
If you are renouncing effective December 31, 2006
• Have until March 31, 2007 to issue T101 slips to investors
(although end of Feb is good practice)
• T101A summary/T101 copies—end of next month after slips
issued—penalty if late
• If “Look-Back”—have until Dec 31, 2007 to spend, but Part XII.6
tax if not all spent by Feb 28, 2007
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
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FTS filings and deadlines
If you issued/renounced in December 2005
• Had until December 31, 2006 to incur qualifying expenses
• Part XII.6 tax return due by Feb 28, 2007
– Accumulate and apply costs month by month from 2006
– Penalty if late
– File NIL return if uncertainty in January/February costs
• Not coincidently, February 28, 2007 is also the deadline to file
a T101B if an amendment is required to a December 31, 2005
renunciation
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
13
Classifying expenses—CEE
If you need CEE from 2006 to fulfill a 2005 renunciation
• Drilling and/or completing
– Must be NEW pool discovery or FULL abandonment—do NOT
rely on Lahee well licence classification
– Six month window—have until June 30, 2007 to abandon and get
CEE treatment of 2006 drilling costs. Consider standing wells—
you may need that CEE
• Seismic
– Cost to acquire used data (“off the shelf”)—cannot renounce
– Current processing costs—okay
• General and Administration (G&A)—90 per cent rule
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
14
Financial Reporting Update
Murray Suey
Partner, Audit
403.691.8474
msuey@kpmg.ca
Accounting for Taxes of Trusts—
2006
• Issues being considered by EIC but process not yet complete
• Previously most trusts did not provide for taxes on temporary
differences at the trust level if conditions in EIC 107 are satisfied
• When tax changes are substantively enacted, many trusts
will be required to record additional future income taxes
• As changes were not substantively enacted in 2006,
no accounting is required at this point
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
16
Accounting for Taxes of Trusts—
2006
• Consider disclosure requirements from CICA 3465.99
– Nature and extent of temporary differences for entities not
providing for taxes—would include most trusts/LPs
• Most trusts will be required to assess goodwill for impairment
in Q4-2006. Market cap may be an indicator of fair value,
but further analysis often required
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
17
Non-GAAP Financial Measures
CSA Staff Notice 52-306 issued in 2003 and revised in August
2006. Revisions focused on:
• Appropriate explanations for purpose and merits of disclosures
• Inconsistent disclosures from period to period
• Inappropriate exclusion of and inadequate discussion
of “non-recurring” amounts excluded
• Lack of appropriate reconciliations
• Clarified that distributable cash is a cash flow measure and
needs to be reconciled to cash flow from operating activities
after changes in non-cash working capital
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
18
Certification of Design of Internal
Controls
• September 2006 guidance issued on reporting when
weaknesses exist
– MD&A should include disclosure of nature of weakness, associated
risks, plans to remediate (if any)
– We expect many smaller issuers to disclose some weaknesses,
such as lack of segregation of duties or lack of resources to
address complex accounting requirements
• Some indicators of weaknesses for smaller entities might
include
– Audit adjustments
– Prior period adjustments
– Lack of resources to apply complex accounting requirements, like
hedging, VIE’s or future income taxes
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
19
US GAAP—SAB 108
Considering the Effect of Prior Year Differences when Quantifying
Effect of Misstatements in Current Year (effective for 2006)
• Registrants required to quantify misstatements using both the
balance sheet (iron curtain) method and income statement
(rollover) method to assess if differences are material
• Clarifies that assessment of impact of differences is first
an accounting requirement (management) and secondly
an auditing requirement
• Impact on CDN GAAP is unclear, but would be unusual to
have a CDN/US GAAP difference due to materiality differences
• Tip of the day—record all known differences each period
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
20
Derivatives and Hedging Activities
John Gordon
Partner, Audit
403.691.8118
johngordon@kpmg.ca
Derivatives and Hedging Activities
• New rules are effective for 2007 for the recognition
and measurement of derivatives
• For existing hedges, documentation and analysis of
effectiveness needs to be completed for last quarter of 2006,
even if hedge accounting will not be followed for future periods
• MD&A should probably include disclosures of expected future
accounting policy changes
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
22
Derivatives and Hedging Activities
• Certain analysis and actions required by January 1, 2007
– Modify hedge documentation if hedge accounting to be continued.
2006 documentation probably will not cover all required matters
– Identify non-financial derivatives, such as fixed price physical contracts
– Identify embedded derivatives
– Prepare documentation for “expected usage” exemption where
required
• Mark to market accounting would be required for all derivatives, including
non-financial derivatives for prior to the preparation of the documentation
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
23
Derivatives and Hedging Activities
If hedge accounting not adopted for future periods
• Balance sheet
– All derivatives recorded at fair value on balance sheet
• Income statement
– Derivatives adjusted to fair value each period
– Realized and unrealized amounts should be grouped together
• Cash flow statement
– Expect that cash flows on settlements will be included
as operating activity
– Unrealized gains and losses will be added back as non-cash item
• Expect most entities will add back before funds from operations amount
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
24
Contact Information
Contact details:
Mailing Address for all:
KPMG LLP
Wayne Chodzicki
WChodzicki@KPMG.CA
403.691.8004
2700 205 5th Avenue SW
Calgary, Alberta
T2P 4B9
Keith Raskob-Smith
KRaskobSmith@KPMG.CA
403.691.7982
Murray Suey
MSuey@KPMG.CA
403.691.8474
John Gordon
JohnGordon@KPMG.CA
403.691.8118
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved.
25
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