Canadian
Institute
of
Actuaries
2007 General Meeting
Assemblée générale 2007
Montréal, Québec
L’Institut
canadien
des
actuaires
2007 General Meeting
Assemblée générale 2007
Agenda
• Moving Forward on IFRS
• All is “Fair” in Financial Reporting
• Canadian GAAP
– New Canadian Standards
– Canadian Proposals and Other Developments
– Emerging Issues Committee
• Canadian Securities Administrators
• US GAAP
– New US Standards
– Emerging Issues Tax Force / FASB Staff Positions
– US Proposals and Other Developments
• SEC Updates
Moving Forward
on IFRS
Moving forward on IFRS
IFRS Timetable
Fiscal
2007
Fiscal
2008
Fiscal
2009
Fiscal 2010
Q1
New IFRS standards
Training and knowledge
of IFRS
Q2
Q3
IFRS
transition
date
Fiscal 2011
Q4
Q1
Q2
Q3
Filing date of
IFRS accounts
2009 and 2010 statements - local standards
Convergence Plan
IFRS
convergence
plan disclosure
Statements - IFRS
IFRS
detailed
plan disclosure
Project Structure and Governance
(budget implications, resourcing, etc.)
Published
IFRS Statements
Q4
2007 General Meeting
Assemblée générale 2007
Convergence Plan
• Gain familiarity with IFRS
• Communications plan – internal & external
• Impact on financial / management reporting
systems
• Impact on key performance indicators
• Corporate finance / tax planning /
compensation plans
• Operational improvement opportunities
New IFRS Standards
2007 General Meeting
Assemblée générale 2007
• Short Term Convergence Projects
– Business Combinations (CICA -first half
2008)
– Consolidations (IASB – first quarter of
2008)
– Earnings per Share (CICA standard – late
2007)
– Income Taxes (CICA Exposure Draft late
2007)
New IFRS Standards
2007 General Meeting
Assemblée générale 2007
• Other Selected Convergence Projects
–
–
–
–
–
Revenue Recognition
Pension Benefits
Impairment Insurance Contracts
Research & Development
Fair Value Measurement
All is Fair in
Financial
Reporting
2007 General Meeting
Assemblée générale 2007
All is “Fair” in Financial
Reporting
Accounting standard setters are increasingly focused on the
fair value of assets and liabilities as the primary elements
of financial statements
Implications:
• Shift away from historical cost and transaction-based
recognition model
• Shift away from matching principle
• Shift away from prudence – “conservatism”
• Increased volatility in earnings
2007 General Meeting
Assemblée générale 2007
All is “Fair” in Financial
Reporting
Significant Developments
•
•
•
•
IASB Exposure Draft, based on SFAS 157
SFAS 157, Fair Value Measurement, FY beginning after
November 15, 2007
SFAS 159, Fair Value Option, FY beginning after November
15, 2007
Measurement
– linking accounting to recognized valuation techniques
– specification of relevant market inputs
•
Disclosure
– reliability of estimates and effect on earnings
Canadian GAAP
2007 General Meeting
Assemblée générale 2007
3862 Implementation Issues
• Risk Management
• Details around FIs
• March 30, 2008 statements at the
latest
• Benefits of early adoption
S.1535 – Capital Disclosures
2007 General Meeting
Assemblée générale 2007
Qualitative disclosures include:
•
•
•
A description of what the entity manages as capital
Externally imposed capital requirements – nature, management,
compliance
How an entity is meeting its objectives for managing capital
Quantitative disclosures include the accounts that the
entity manages as capital along with any changes
in the period.
S.1400 – Going Concern
2007 General Meeting
Assemblée générale 2007
•
•
•
•
Management is required to make an assessment of an entity’s ability
to continue as a going concern at any time in which financial
statements are prepared
Assessment must be made for a period of at least 12 months from the
balance sheet date
Disclosure is required of material uncertainties related to events or
conditions that may cast significant doubt on the entity’s ability to
continue as a going concern
When financial statements are not prepared on a going concern basis,
that fact must be disclosed
2007 General Meeting
Assemblée générale 2007
S.1400 – Going Concern
(continued)
• Amendment clarifies the entity’s responsibility for assessing
the going concern assumption
• Convergence with IFRS
• Not-for-profit entities also addressed
• Effective for fiscal years beginning on or after January 1, 2008
Deferral of Costs / Internally
Developed Intangible Assets
2007 General Meeting
Assemblée générale 2007
•
•
•
•
Reinforce the recognition of assets based on asset recognition criteria
rather than matching of revenues and expense
Exposure draft proposes to eliminate recognition of assets that do not
meet recognition criteria (e.g., start-up and pre-production costs)
Proposed amendments are in line with IFRS and US GAAP and
include:
– Adoption of IASB’s guidance on the distinction between assets
and expenses
– Adoption of the IFRS’ definition of an intangible asset and the
rules surrounding recognition of internally generated intangible
assets (IAS 38)
– Withdraw/amend CICA guidance that does not comply with
principle based approach
Proposed amendments expected in early 2008, to be effective for
fiscal years beginning on or after October 1, 2008.
2007 General Meeting
Assemblée générale 2007
Employee Future Benefits
• Proposed changes would have:
– Required balance sheet recognition of the funded
status of defined benefit plans
– maintained substantial harmonization with US
GAAP
• AcSB has decided not to proceed with the proposed
amendments
• Decided that focus should be on the implications of
adopting IAS 19, Employee Benefits, upon transition to
IFRS
2007 General Meeting
Assemblée générale 2007
Joint Ventures
• AcSB goal is to converge joint venture accounting under
Canadian GAAP with IAS
• Timeline of convergence is dependant upon current
IASB project on JV accounting
• IASB is currently considering:
– The removal of differences between IAS and US GAAP
(e.g., option of proportionate consolidation for jointly
controlled entities)
– The adequacy of the current IAS definitions/categories of
JVs
• AcSB will issue an ED to follow the IASB’s ED
2007 General Meeting
Assemblée générale 2007
EIC 163 – Determining the
Variability to be Considered in
Applying AcG-15
• Based on FSP FIN 46(R)-6
• Variability to be considered should be based on
an analysis of the design of the entity, using a
two-step process:
– Step 1: Analyze the nature of the risks of the entity
– Step 2: Determine the purpose(s) for which the
entity was created and determine the variability
created by the risks identified in Step 1 that the
entity is designed to create and pass along to its
interest holders
2007 General Meeting
Assemblée générale 2007
EIC 164 – Convertible and Other
Debt Instruments with Embedded
Derivatives
• Provides guidance on the accounting for 2 convertible
debt instruments (Instruments “A” and “B”) each
convertible at any time at the holder’s option into a fixed
number of common shares and that may also contain an
issuer call option or a holder put option
• Instrument A – requires issuer to satisfy the obligation in
cash either upon conversion, redemption or maturity
• Instrument B – provides issuer with the option of
satisfying the obligation in cash or in shares either upon
conversion, redemption or maturity
EIC 164 – Convertible and Other
Debt Instruments with Embedded
Derivatives (continued)
2007 General Meeting
Assemblée générale 2007
• The issues discussed included:
– (1) Initial balance sheet treatment; (2) inclusion of
any embedded derivatives; (3) accounting after
inception; (4) classification (current vs. non-current);
(5) presentation of embedded derivatives; (6)future
taxes; (7) EPS treatment
• Applied retrospectively to financial
instruments accounted for in accordance with
S.3855 for fiscal periods ending on or after
June 30, 2007
EIC 165 – Accounting by an
2007 General Meeting
Assemblée générale 2007
Investor Upon Loss of
Significant Influence
• Guidance relates to components of OCI related to the
investee that had been reflector in investor’s OCI
• Amount in accumulated OCI for the investor's
proportionate share of an investee's equity
adjustments for OCI should be deducted from or
added to the carrying value of the investment when
significant influence is lost
• Carrying value of investment should not go below
zero – any further adjustments would be reflected in
income
2007 General Meeting
Assemblée générale 2007
EIC 166: Accounting Policy Choice
for Transaction Costs
• The same accounting policy choice of either expensing
transaction costs or adding them to the carrying amount
of related financial assets and liabilities should be made
for all similar financial instruments
• “Similar” based on characteristics of the instrument
• Disclose policy choice
• Applied retrospectively to transaction costs accounted
for in accordance with S.3855 in the financial statements
for fiscal periods ending on or after September 30, 2007
2007 General Meeting
Assemblée générale 2007
EIC 168: Accounting by Pension
Plans for Transaction Costs
• Addresses whether transaction costs should be included
in the fair value measurement of investment assets held
by pension plans
• Transaction costs should not be included in the fair value
of investments
• All transaction costs should be included in the statement
of changes in net assets in the period incurred
2007 General Meeting
Assemblée générale 2007
EIC 119: The Date of Acquisition
in a Business Combination
• Abstract now clarifies that when control of a recently
acquired entity is pending regulatory approval – the
buyer should not apply the VIE consolidation principals
set forth in AcG 15
• In other words – consolidation is not required until
regulatory approval of the transaction has been received
and buyer can exercise control
Canadian
Securities
Administrators
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
PROPOSED CHANGES
•
CEO and CFO will have to:
– Evaluate the effectiveness of ICFR
– Disclose conclusions about the effectiveness of ICFR
– Include a description of the process for evaluating ICFR
•
•
Unlike SOX 404 – there is no requirement for auditors to attest on
management’s evaluation of ICFR
Proposed threshold for disclosure is “reportable deficiency”
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
PROPOSED CHANGES (continued)
• Certifying officers may qualify their certification of design of
DC&P and ICFR for:
– A reportable deficiency relating to design,
subject to a remediation plan;
– A reportable deficiency relating to design that a
venture issuer cannot reasonably remediate;
and
– A scope limitation for certain investments and
recently acquired businesses.
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
2007 General Meeting
Assemblée générale 2007
PROPOSED CHANGES (continued)
• Additional guidance for the design and evaluation of DC&P
and ICFR including:
– Top-down, risk-based approach
– Designing DC&P and ICFR
– Key features of ICFR and related design challenges
• Comment period ended June 28, 2007
• Proposed effective date for fiscal years ending on or after
June 30, 2008
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
AUDITOR RESPONSIBILITIES
• Unlike S-Ox 404 – there is no requirement for auditors to
attest on management’s evaluation of ICFR
• However, a Canadian GAAS financial statement audit requires that
we obtain an understanding of the Company and its environment,
including internal control, sufficient to:
– Identify and assess the risks of material misstatement of the
financial statements whether due to fraud or error
– Design and perform further audit procedures, which may
include tests of controls
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
AUDITOR RESPONSIBILITIES (continued)
• The work we perform in conjunction with a Canadian GAAS
financial statement audit is:
– Designed to render an opinion on the financial
statements (and may include tests of controls)
– Insufficient to enable us to separately opine on the
design, implementation or effectiveness of internal
control
– Not designed to identify all matters that may be of
interest to management or the audit committee
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
AUDITOR RESPONSIBILITIES (continued)
• Our responsibility do include:
– Reading the information in a designated public document
and assessing whether any of the information appears to
be inconsistent with the financial statements, or with
information uncovered in the course of the audit
– Discussing with management and the audit committee
other information contained in a designated public
document, that appears to be a material misstatement of
fact or a misrepresentation
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
AUDIT COMMITTEE RESPONSIBILITIES
•
•
•
Review the financial statements, MD&A, and annual and interim
earnings press releases
Become satisfied that adequate procedures are in place for the
review of the public disclosure of financial information extracted or
derived from the issuer’s financial statements, and must periodically
assess the adequacy of those procedures
Review disclosures relating to ICFR in the MD&A
2007 General Meeting
Assemblée générale 2007
Management Certification of
Internal Control Over Financial
Reporting (Proposed NI 52-109)
AUDIT COMMITTEE RESPONSIBILITIES
(continued)
•
•
•
Oversight responsibility related to the effective design of ICFR,
therefore should be involved in understanding management’s
process to design and evaluate ICFR
Approve all statements and disclosures relating ICFR
No auditor attestation has the potential to create new liabilities for
the Company and its Directors.
US GAAP
New US Standards
2007 General Meeting
Assemblée générale 2007
FAS 157 – Fair Value
Measurement
• New singular definition of fair value & valuation framework
• Modifies long standing presumption that transaction price is
equal to initial fair value
• Fair value hierarchy used to classify the sources of information
used in fair value measurements (i.e. market based vs. nonmarket based)
• Enhances disclosures about fair value, particularly those in
hierarchy that are non-market based
• Applies when other FASB standards require fair value
measurements; no new fair value items
FAS 157 – Fair Value
Definition
2007 General Meeting
Assemblée générale 2007
•
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
2007 General Meeting
Assemblée générale 2007
FAS 157 – Measurement Model
2007 General Meeting
Assemblée générale 2007
Fair Value Hierarchy by Level
•
1
Quoted prices in active markets for identical
assets / liabilities (unadjusted); no blockage
factors (i.e., Price X Quantity).
•
2
Other observable inputs – including quoted
prices for similar assets / liabilities (adjusted)
and market corroborated inputs.
•
•
3
Unobservable inputs – entity’s own
assumptions about market participant
assumptions, including assumptions about
risk, developed based on the best information
available in the circumstances (subject to the
cost-benefit constraint); may include the
entity’s own data.
•
•
Listed equity / fixed income securities
traded in an active market (e.g. TSX)
Exchange traded derivatives
A privately placed bond whose value
is derived from a similar publicly
traded bond
Emerging market equity, inactive
market
Derivatives valued with implied,
interpolated, or trader derived inputs
Residual interests in securitized assets
2007 General Meeting
Assemblée générale 2007
FAS 157 – Significant changes
• Recognition of Day 1 gains (e.g. transaction price
may not be exit price)
• Transfer vs. settle a liability
• Fair value of liabilities affected by credit
worthiness
– (e.g. decline in credit rating may lead to earnings being
recorded)
• Blockage factors for Level 1 inputs & transaction
costs excluded
Fair Value Disclosure
Information about fair value amounts
2007 General Meeting
Assemblée générale 2007
•
•
Fair value estimates for each major category of assets and
liabilities
– Re-measured each reporting period on a recurring basis
(e.g., AFS securities)
– Re-measured on non-recurring basis & reason for remeasurement (e.g., impairment)
Where within the FV Hierarchy the estimates fall (Level 1, 2 , 3)
Information on how amounts are determined
•
•
Valuation technique used to measure fair value, including a
discussion of any changes in the valuation techniques (annual
disclosure)
For Level 3 non-recurring measurements a description of the
inputs used to develop FV measurements & information used to
develop the inputs
FAS 157 – Disclosure for
Recurring Items
2007 General Meeting
Assemblée générale 2007
• Effect of re-measurements on earnings (for recurring level 3
measurements):
– Reconciliation of beginning and ending balances for
recurring Level 3 measurements (by major category
of asset and liability)
• Total realized and unrealized gains and losses (included in
income vs. OCI)
• Purchases, issuances and settlements
• Transfers in and out of Level 3 (for example, due to change
in observability of inputs)
– For gains and losses included in earnings:
• Amount of total gains and losses attributed to unrealized
gains and losses for Level 3 assets/liabilities still held at
reporting date
• Description of where gains and losses are in the income
statement
2007 General Meeting
Assemblée générale 2007
FAS 158 – Employers’ Accounting
for Defined Benefit Pension and
Other Postretirement Plans
• Recognize the funded status on the balance
sheet (i.e. difference between the fair value of
plan assets and the projected benefit
obligations)
• Measure the funded status as at the end of the
employer’s fiscal year
• Recognize changes in the funded status in
other comprehensive income
FAS 159 – The Fair Value Option
for Financial Assets and Financial
Liabilities
2007 General Meeting
Assemblée générale 2007
•
•
•
•
•
Provides for a voluntary irrevocable election by
management, that must be documented, to initially
and then subsequently measure certain financial
assets and liabilities and some commitments at fair
value using FAS 157 guidance
Applied on an instrument-by-instrument basis
At adoption – “one-time” election with cumulative
adjustment to retained earnings
Disclosure requirements to address comparability
issue among entities due to optionality of standard
Fiscal periods commencing after November 15,
2007
Proposed US
Standards
Business Combinations & Noncontrolling Interests
2007 General Meeting
Assemblée générale 2007
• Key Changes Associated with the Acquisition
Method:
– Definition of a business combination
– Recognizing contingent consideration obligations and
contingent gains (assets) acquired and contingent losses
(liabilities) assumed at their acquisition-date fair values, with
subsequent changes in fair value reflected in income
– Expensing acquisition-related transaction costs and restructuring
costs
– Capitalizing in-process research and development (IPR&D)
assets acquired
– Changes in the acquirer's valuation allowance resulting from a
business combination are accounted for separately from the
business combination in the FIT provision
– Recognizing the full fair values of assets, liabilities, and noncontrolling interests in acquisitions of less than a 100%
controlling interest
2007 General Meeting
Assemblée générale 2007
Business Combinations & Noncontrolling Interests (continued)
• Accounting and Reporting of Non-controlling
Interests:
– Classifying non-controlling interest as a separate component of
consolidated stockholder’s equity
– Earnings attributed to non-controlling interest are reported as part
of the consolidated earnings and not as a separate component of
net income or expense
– Losses are attributed to the non-controlling interest even if those
loses exceed the non-controlling interest in the equity of the
subsidiary (i.e., debit balances are now permitted)
– Changes in a Parents Ownership Interest:
• No loss of control  an equity transaction of the consolidated entity
• Loss of control  a new-basis recognition event with resulting gain
or loss
2007 General Meeting
Assemblée générale 2007
Business Combinations & Noncontrolling Interests (continued)
• Final statements expected before the end of 2007
• The new standards will be applied prospectively and
is effective for fiscal years beginning on or after
December 15, 2008
Earnings Per Share
2007 General Meeting
Assemblée générale 2007
• Proposed statement intended to clarify guidance for:
– Mandatorily convertible instruments
– Treasury stock method
– Contracts that may be settled in cash or shares
– Contingently issuable shares
• New Exposure Draft expected in 2007 - timing of final
statement and effective dates have not yet been
determined
• Ongoing project between FASB and IASB
Earnings Per Share
2007 General Meeting
Assemblée générale 2007
• Some of the FASB decisions to date include:
– Mandatorily convertible instruments that could participate
in current earnings should be included in basic EPS
calculation using the two class method
– Dilutive effect of options and warrants should be reflected
by applying the treasury stock method for the year-to-date
period independently from any interim computation for
annual and year-to-date diluted EPS calculations
– When a contract may be settled in shares or in cash at the
entity’s option, the entity presumes that the contract will
be settled in shares if dilutive. That presumption may not
be overcome, regardless of past practice or a stated policy
to the contrary.
– Modification of the treasury stock method for all
instruments that are not remeasured at fair value at each
reporting period
Proposed FASB Statement on
Disclosures about Derivative
Instruments and Hedging Activities
2007 General Meeting
Assemblée générale 2007
•
Proposed additional disclosures include:
– Discussion of underlying risk being modified (e.g.,
interest rate, credit, for ex)
– The following details in relation to primary underlying
risk and accounting designation:
• Notional amounts and fair values of derivative instruments
• Location and fair values of derivatives instruments and
related gains and losses reported in the balance sheet and
income statement
• Location and amount of gains and losses reported in the
income statement on hedged items designated and
qualifying in hedging relationships
• Instances in which derivative instruments contain leverage
factors
•
– The existence and nature of contingent features in
derivative instruments
– Counterparty credit risk in derivatives
Final standard expected before the end of 2007
Insurance Contracts
(includes reinsurance)
2007 General Meeting
Assemblée générale 2007
•
Considering the bifurcation of contracts into insurance and
financing components
– Insurance component (transfer of risk) – follow
existing practice that provides an income statement
benefit in the period of an insured loss
– Financing component (deposits) – recorded as a asset
by the policy holder with recoveries reducing the
deposit rather than recoding an income statement
benefit
•
Larger objective – proposed joint project between FASB and
IASB to develop a comprehensive standard on accounting for
insurance contracts
SEC Updates
2007 General Meeting
Assemblée générale 2007
SAB 108
• Provides SEC staff views on how the effects of prior
year uncorrected errors must be considered in
quantifying misstatements in the current year financial
statements
• Diversity in practice exists among techniques used to
accumulate and quantify misstatements by companies
and auditors
• Exclusive reliance on a method biased toward either
income statement or balance sheet is inappropriate
• Effective for fiscal years ending after November 15,
2006
Sarbanes Oxley Act Section 404
Updates
2007 General Meeting
Assemblée générale 2007
•
•
Recent PCAOB/SEC S-Ox 404 initiatives:
– Decided wholesale changes not necessary
– Reinforced key concepts (e.g., principles-based and
flexible, top-down and risk-based, scalable to a company’s
size and complexity)
Developments include:
– Acknowledgment that auditor is not evaluating
management's evaluation process but is opining directly on
ICFR
– Defined material weakness as a deficiency, or combination
of deficiencies, in ICFR, such that there is a reasonable
possibility that a material misstatement of the
company's…financial statements will not be prevented or
detected on a timely basis
– PCAOB voted to adopt Auditing Standard #5, replacing
AS#2
• Summary of AS#5 on following slide
2007 General Meeting
Assemblée générale 2007
Overview of PCAOB Auditing
Standard No. 5
Focus the Audit on Most
Important Matters
Include Only
Requirements Necessary
for Effective Audits
 Top-down, risk-based approach
 Focus on areas with the greatest
risk of a material misstatement
 Risk assessment drives scope of
work, including amount of
evidence needed to conclude on
control effectiveness
 Emphasizes significance of fraud
risk and anti-fraud controls, and the
period-end closing process
 Single opinion on effectiveness
of ICFR
 Focuses multi-location scoping
on risk, not coverage (no “large
portion” requirement)
 Removes barriers to using the
work of others (no “principal
evidence” requirement’)
 Assess risk at assertion level, not
control level
Scale the Audit for
Smaller Companies
 Scalability is a natural extension
of a risk-based approach
 Scaling concepts discussed
throughout, but no requirement to
document size and complexity
 Retains list of attributes of smaller,
less complex companies, which
also might apply to certain
business units of larger companies
Simplify the
Standard
 Simpler and easier to read
 Focuses more on general
principles than detailed
requirements
 Certain key terms and concepts
more clearly defined
 Aligns key terms and concepts
with SEC rules and management
guidance
2007 General Meeting
Assemblée générale 2007
Thank you.
Questions?