Emerging Issues Committee
Decision Summary
December 20, 2006

Amended Abstract Approved

EIC-88, Debtor's Accounting for a Modification of or Exchange of Debt Instruments

Draft Abstract D60, “Definition of Fees and Costs in Section 3855” was posted on the CICA website for public comment by November 20, 2006. The Committee approved the issue and consensus proposed in D60 and this will be added to EIC-88 as a second issue.

It is expected that amended EIC-88 will be posted on the CICA website in early January.

Potential Abstracts

Accounting Policy Choice for Transaction Costs on Initial Measurement, Paragraph 3855.57

The Committee discussed whether the accounting policy choice for transaction costs permitted under Financial Instruments — Recognition and Measurement, paragraph 3855.57, should be applied consistently to all of an entity’s financial instruments or whether an entity could make different choices for different financial instruments. The Committee agreed that the same accounting policy choice may not need to be made for all financial instruments classified as other than “Held for Sale” and that it might be possible for a different accounting policy choice to be made for financial instruments that have differing characteristics. An accounting policy choice could not be made on a transaction-by-transaction basis. The Committee also noted that an entity that capitalizes fees and costs in accordance with AcG-4 applies the accounting policy choice for transaction costs in Section 3855 to other categories of financial instruments.

The Committee agreed to develop guidance on which characteristics of financial instruments might justify the use of different accounting policy choices for transaction costs and to develop a draft abstract.

Accounting by an Investor for Its Proportionate Share of Accumulated Other Comprehensive Income of an Investee Accounted for Under the Equity Method Upon a Loss of Significant Influence

In accounting for an investment using the equity method, an investor may record certain amounts in other comprehensive income. The Committee discussed and approved a proposed Draft Abstract, based on FSP APB 18-1, that addresses how the investor should account for these amounts upon a loss of significant influence. The proposed Draft Abstract will align Canadian GAAP with US GAAP on this issue.

It is expected that the proposed Draft Abstract will be posted on the CICA website in mid January.

Future Income Tax Liabilities — Income Trusts and Other Specified Investment Flow-Throughs (SIFTs)

At its November 16, 2006 meeting, the Committee agreed to add an item to its agenda on the accounting issues arising from the recent government announcement of proposed changes to the taxation of income trusts and other SIFTs. These issues include when future income tax assets and liabilities should be recognized as a result of these proposals, how they should be measured and related disclosures.

The Committee reached the following tentative conclusions based on the Committee’s current understanding of the announced changes to the taxation of income trusts and other SIFTs.

• The proposed taxation changes, if substantively enacted, will trigger recognition of future income tax assets and liabilities with a corresponding impact on future tax expense, based on the temporary differences expected to reverse after the date that the taxation changes take effect (but not including existing temporary differences that will reverse before that date), and should be measured using income tax rates substantively enacted at the balance sheet date (see paragraph 3465.56).
• The future income tax assets and liabilities should be recognized in the financial statements when the proposed tax changes are “substantively enacted” (see EIC-111).
• The Committee noted that if the proposed taxation changes are enacted, the consensus in EIC-107 may not apply to those entities affected by these changes. The Committee will consider this further at a future date.
• The Committee discussed the implications of the announced taxation changes on goodwill impairment tests that are performed by income trusts and other SIFTs after the date of the announced changes but before those changes are substantively enacted. The Committee noted that the announced changes may have caused the fair value of a SIFTs reporting units to be below their carrying amounts. This would require the SIFT to proceed to step two of the goodwill impairment test and to determine the current implied fair value of goodwill in the same manner as the value of goodwill is determined in a business combination. The Committee discussed the potential for goodwill impairment that could result due to the fact that the proposed taxation changes are reflected in the fair value of the enterprise immediately, while the future income tax effects would not be recorded until the proposals are substantively enacted. The Committee tentatively agreed that it would be acceptable to consider the implications of the current proposed taxation changes in performing step two of the goodwill impairment test, using the principles enunciated in EIC-136 by way of analogy.
• It is common for income trusts and other entities not subject to taxation to disclose their tax status in their accounting policy disclosure and/or elsewhere in the notes to the financial statements. The Committee agreed that those entities affected by the proposals should also identify that their taxable status would change if the proposed tax changes are enacted and that this would result in recording future income tax assets and liabilities at the substantively enacted tax rates in respect of temporary differences that are expected to reverse after the date those tax changes take effect. The Committee also noted that a detailed discussion of the implications for the entity would be required in the Management Discussion and Analysis.

The Committee noted that these tentative conclusions are based on the announced proposals and the Committee’s formal consensuses to be included in an Abstract will be based on the actual legislation. The Committee will continue its discussion at its next meeting.