Emerging Issues Committee
Decision Summary
December 19, 2007

Abstract Approved

Embedded Foreign Currency Derivatives

Draft Abstract D69, “Determining Whether a Contract is Routinely Denominated in a Single Currency,” provides guidance on applying Financial Instruments — Recognition and Measurement, paragraph 3855.A34(d)(ii), which states that an embedded derivative is not accounted for separately from the host contract if “the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the world.”

The Draft Abstract was exposed on the CICA website for public comment by August 20, 2007. The Committee made some editorial changes as a result of comments received, and agreed to issue a final Abstract that is substantively the same as the draft Abstract. The basis of application reads as follows:

“The Committee reached a consensus that the accounting treatment in this Abstract should be applied retrospectively to embedded foreign currency derivatives in host contracts that are not financial instruments accounted for in accordance with Section 3855 in financial statements issued for interim and annual periods ending on or after March 15, 2008. Earlier adoption is encouraged.”

It is expected that EIC-169 will be posted on the CICA website by the middle of January 2008. D69 will remain on the website until EIC-169 is posted.

Draft Abstracts Approved

Conversion of an Unincorporated Entity to Corporate Form

It is expected that a number of income trusts and other specified investment flow-throughs (SIFTs) will convert to a corporate structure as a result of changes to the Income Tax Act enacted in 2007. The Committee considered a proposed Draft Abstract to provide guidance on accounting issues related to the conversion of an unincorporated entity to a corporation. The proposed Draft Abstract requires the following:

• The accounting treatment of a conversion transaction that is not a business combination transaction should be treated as a change in business form and as a continuity of interests. If there is a change in the control of the entity that would constitute a business combination transaction, the transaction would be treated in accordance with the relevant guidance for business combinations at the time of the transaction.
• A conversion without the introduction or redemption of equity interests would be treated as a continuity of interests transaction. A conversion transaction in which new equity interests are introduced, but control is not transferred, would also be treated as a continuity of interests coincident with a new equity issue, regardless of the sequence of events in which the conversion and new equity occurred. The conversion of an entity from an unincorporated to an incorporated form of business without a change in control is only a change in legal form and should, therefore, be measured at the carrying amount. Contemporaneous issuances and redemptions of equity interests should be treated as separate transactions unrelated to the conversion transaction in these circumstances. If a conversion transaction results in the redemption of ownership interests, that element of the transaction should be treated as a capital transaction. This principle would be followed whether or not such redemption results from a pre-existing right or is only the result of the transaction.
• For the purposes of interpreting Income Taxes, paragraph 3465.68, changes in tax balances would be included in tax expense if the transaction involves the conversion of prior equity interests into shareholders’ interests without a change in control. This interpretation would apply even if the transaction required unitholder or shareholder approval. The effect would be recorded in the period that the conversion occurred.
• When no change in control has occurred, transaction costs should be treated as an expense in the period in which they are incurred.
• Comparative statements should be provided for all conversion transactions. The comparative information would be that of the pre-conversion entity, as previously reported. Supplementary information which presents pro forma adjustments for the effects of conversion on the prior period’s financial statements would be permitted but not required, in a manner similar to Section 1625, Comprehensive Revaluation of Assets and Liabilities. It would be inappropriate to present the pre-conversion balances of equity accounts as share capital when such amounts were not in fact share amounts, but unit based. A reconciliation of changes in the nature of the equity balances should be provided in accordance with Section 3251, Equity. When the conversion of units to shares is not one-to-one, earnings per share should be presented in accordance with the guidance on stock splits in Section 3500, Earnings Per Share.
• If the converted entity had a retained earnings balance under the application of GAAP, (i.e., the entity had applied Section 3251) the retained earnings of converted entities should be the retained earnings balance of the pre-conversion entity carried forward.
• Post-conversion dividends in excess of retained earnings at the date the dividend is declared should be recorded as charges to retained earnings. Any distributions or changes in shareholders’ equity that have the effect of distributing amounts in excess of accumulated retained earnings carried forward would be reported as a deficit.
• As a general principle, changes in contractual arrangements should reflect the substance of the change, which may differ from the substance of the conversion transaction.

The Committee agreed to issue Draft Abstract D68. It is expected that D68 will be posted on the CICA website for public comment by the middle of January 2008.

Abstract Amended

EIC-27, Revenues and Expenditures During the Pre-operating Period

EIC-27 provides guidance on accounting for revenues realized and expenditures incurred during the pre-operating period. The guidance provided in this Abstract is superseded by Section 3064, Goodwill and Intangible Assets. The Committee agreed to amend the status of this Abstract to note that it is not applicable to entities that have adopted Section 3064.

EIC-94, Corporate Transaction Costs

EIC-94 provides guidance on whether costs for a proposed corporate transaction (such as a debt or equity issue or a business combination) that are incurred prior to the transaction should be expensed. The Committee agreed to make editorial revisions to this Abstract as a consequence of the issuance of Section 3064, Intangible Assets, and related changes to Section 1000, Financial Statement Concepts. The guidance on accounting for transaction costs related to the issue of debt securities was also modified to be consistent with Section 3855, Financial Instruments — Recognition and Measurement, and the guidance on transaction costs related to the sale of an asset, or all or portion of a business, was removed as it was superseded by Section 3475, Disposal of Long-Lived Assets and Discontinued Operations.

The Committee agreed to issue a revised Abstract.

Potential Projects

At its November meeting, the EIC agreed to add the two issues described below to its agenda. In December, the AcSB decided that decisions to add an issue to the EIC agenda should be approved by the AcSB. The EIC decided to refer these two items to the AcSB and to recommend that the AcSB approve their addition to the EIC agenda.

Determination of “Substantively Enacted” for Changes to Income Tax Regulations.

EIC-111, “Determination of Substantively Enacted Tax Rates under CICA 3465,” provides guidance on the application of the term “substantively enacted” when changes are proposed to the income tax laws. However EIC-111 does not address changes to regulations, and there is diversity in practice as to when proposed changes to regulations are applied in measuring income tax assets and liabilities in accordance with Income Taxes, paragraph 3465.56.

Accounting for Maintenance and Inspection Costs

Under paragraphs 13 and 14 of IAS 16, Property, Plant and Equipment, major maintenance and inspections costs can be accounted for as a component of the asset and amortized over the period between one major maintenance and the next. The Committee believes it would be useful to provide an interpretation of whether similar accounting is consistent with Property, Plant and Equipment, paragraph 3061.30, which discusses accounting for components of an asset but does not specifically discuss major maintenance.