Accounting Standards Board
Decision Summary
September 23-24, 2008

International Activities

The AcSB received reports on recent meetings of the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) (see www.iasb.org and www.fasb.org, respectively).

The AcSB was informed that the IASB is expected to publish an exposure draft containing amendments to IFRS 1, First-time Adoption of International Financial Reporting Standards, on September 25, 2008. Canadian constituents who will be assisted by these proposed amendments, which include relief for oil and gas assets previously accounted for using full cost accounting and for property, plant and equipment used in operations subject to rate-regulation, are encouraged to comment to the IASB on the proposals.

The AcSB was advised that AcSB staff have submitted a comment letter to the IASB on its February 2008 Discussion Paper, “Financial Instruments with Characteristics of Equity,” concluding that they do not support any of the three proposed approaches in the paper and are of the view that IAS 32, Financial Instruments: Presentation, is not sufficiently flawed that it requires replacement at this time.

Also, a letter has been submitted to the IASC Foundation (IASCF), on behalf of the AcSB and the Accounting Standards Oversight Council’s Strategy Committee, commenting on the first part of the IASCF Constitution review. The letter supports the establishment of a Monitoring Group, but disagrees strongly with the proposals to increase the size of the IASB to 16 members and to introduce a geographical representation requirement.

Publicly Accountable Enterprises Strategy

The AcSB redeliberated the definition of a publicly accountable enterprise (PAE) proposed in its April 2008 omnibus Exposure Draft, “Adopting IFRSs in Canada,” (omnibus ED), based on comments received from the public. The AcSB decided the following:

• A PAE should be described as 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” should be described as in Section 1300, Differential Reporting.
• The definition should be followed by an explanation of what is meant by “fiduciary capacity,” and examples of entities considered to hold assets in such a capacity. This explanation will clarify that, for purposes of the definition of a PAE, an entity is not considered to have a fiduciary responsibility when it holds and manages financial resources entrusted to it by outsiders for reasons that are incidental to its primary business.
• As proposed in the omnibus ED, only pension plans should continue to apply Section 4100, Pension Plans, after the adoption of IFRSs by PAEs. The AcSB observed that pension fund financial statements prepared solely for regulatory purposes (or, for example, for inclusion in the consolidated financial statements of its parent) are not general purpose financial statements and, therefore, are unaffected by the AcSB’s IFRS strategy unless a pension fund decides otherwise.
• Decisions on the applicability of IFRSs to public sector entities fall within the mandate of the Public Sector Accounting Board. Therefore, the definition should be silent on this issue and refer such entities to the Public Sector Accounting Handbook.
• NFPOs 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. The AcSB will reserve judgment on the applicability of IFRSs to NFPOs pending the completion of its deliberations on the appropriate financial reporting model for this sector.

These decisions will be reflected in the Preface to be included in the CICA Handbook – Accounting once IFRSs have been incorporated into it. A draft Preface will be included in the second omnibus ED currently expected to be issued later this year.

Financial Reporting by Private Enterprises

Application of Financial Instruments Standards to Private Enterprises
The AcSB decided that a private enterprise will not be required to apply the current financial instruments standards, including Sections 1530, Comprehensive Income, 1651, Foreign Currency Translation, 3051, Investments, 3251, Equity, 3855, Financial Instruments — Recognition and Measurement, 3862, Financial Instruments — Disclosures, 3863, Financial Instruments — Presentation, and 3865, Hedges. Private enterprises may choose to apply the requirements of the XFI version of the Handbook. The AcSB agreed to waive exposure of the Handbook changes giving effect to this decision. New financial instruments standards will be included in the proposed set of GAAP standards for private enterprises expected to be exposed early in 2009.

Separate GAAP for private enterprises
The AcSB considered the Private Enterprises Advisory Committee’s recommendations in respect of a number of key issues in developing a separate GAAP for private enterprises. The following tentative decisions were made for purposes of developing an exposure draft of the standards for private enterprises. Specific disclosure requirements of the standards were not discussed.

Financial Instruments
A new financial instruments standard will be developed for exposure incorporating the following features:

• Existing differential options will be required rather than being optional.
• There will be fewer measurement categories of financial instruments than in Section 3855 and no measurement choices for individual instruments. Investments in equity securities with readily determinable fair values and free-standing derivatives outside a hedging relationship will be measured at fair value. All other financial instruments will be measured at cost or amortized cost, with no option to measure them at fair value.
• Impairment of financial assets will be recognized and measured in accordance with the requirements of various standards currently in the XFI version of the Handbook.
• A simplified hedge accounting model will be available. Derivative instruments in a qualifying hedging relationship may be accounted for on an accrual basis or when settled on sale or maturity.
• All contracts to buy or sell non-financial items, and derivatives embedded therein, will be scoped out of the standard.

A simplified model for dealing with equity derivatives embedded in liabilities, such as convertible debt, will also be explored.

Leases
The distinction between capital and operating leases will be retained, as well as the recognition and measurement aspects of Section 3065, Leases.

Employee Future Benefits
A simplified approach will be adopted for accounting for defined benefit plans whose sole beneficiary is the controlling owner. Many, but not all, individual pension plans will qualify for this simplified approach. The proposed approach will use the actuarial valuation report prepared for funding purposes to measure the obligation and recognize all actuarial gains and losses and past service costs in income when they occur.

Goodwill and Other Intangibles
Consistent with the current differential option, goodwill and other indefinite lived intangibles will be tested for impairment when events or circumstances indicate, rather than annually. A goodwill impairment loss will be recognized when the carrying value of a reporting unit exceeds its fair value. This eliminates the requirement to allocate values to the net identifiable assets

Stock-based Compensation
The recognition and measurement aspects of Section 3870, Stock-based Compensation and Other Stock-based Payments, will be retained. The AcSB did not identify any simplifications to the calculations. The AcSB considered whether the minimum value method should be retained or whether guidance should be provided on how private enterprises might estimate volatility, and referred this issue back to its Advisory Committee.

Future Income Taxes
In addition to the future income taxes method in Section 3465, Income Taxes, the taxes payable method will be an alternative available to private enterprises.

Internally Generated Intangible Assets (including Research and Development)
Enterprises will be allowed a choice to expense development costs or follow the capitalization model as set out in Section 3064, Goodwill and Intangible Assets. The Advisory Committee was asked to consider whether this choice should be applied consistently to all development costs or on a project-by-project basis.

Asset Retirement Obligations
The measurement aspects of IAS 37, Provisions, Contingent Liabilities and Contingent Assets, will be adopted in place of the measurement requirements in Section 3110, Asset Retirement Obligations. The AcSB was advised that, while these approaches are generally similar, the IAS 37 methodology may be easier to apply.

Consolidations
The existing differential options in Sections 1590, Subsidiaries, 3051, Investments, and 3055, Interests in Joint Ventures, will continue to be available. The AcSB recognized that AcG-15, Consolidation of Variable Interest Entities, is often difficult for private entities to apply, but also noted that both the IASB and FASB are expected to issue new consolidation proposals in the near future. These proposals might be appropriate for private enterprises and the AcSB did not wish to subject these enterprises to two changes. Since consolidation will be optional, the AcSB decided to retain AcG-15 pending further work by the IASB and FASB.

Extraordinary Items
Section 3480, Extraordinary Items, will not be retained. Extraordinary items are rare in this sector, users do not find significant benefit from the application of this Section, and IFRSs do not permit separate presentation for extraordinary items.

Approach to Disclosures
The AcSB expects that disclosure requirements for private enterprises will be significantly reduced from those in the existing Handbook. The AcSB agreed with the Advisory Committee’s intention to focus disclosure requirements on those matters most important to users in this sector. These are disclosures about accounting policies, risks and uncertainties and unusual events, rather than detailed breakdowns of numbers in the financial statements and reconciliations. The AcSB will review the specific requirements for individual standards after the Advisory Committee has completed its deliberations on disclosure.

Credit Environment — Accounting Implications

The AcSB reviewed and discussed disclosure proposals being developed by the IASB to:

• enhance disclosure requirements about liquidity risk in IFRS 7, Financial Instruments: Disclosures;
• improve and promote consistency of disclosures about fair value measurements of financial instruments; and
• require new disclosure requirements about an entity’s involvement with off-balance sheet entities.

The AcSB will continue to monitor the further development of the IASB’s proposals and evaluate whether some or all of the new IASB requirements should be adopted into Canadian GAAP prior to the adoption of IFRSs in 2011.

As well, the AcSB noted other activities by the IASB and the FASB to address credit and liquidity risks in financial instruments. The IASB’s Expert Advisory Panel recently issued a draft report on “Measuring and Disclosing the Fair Value of Financial Instruments in Markets that Are No Longer Active.” The document provides guidance about the processes used, and the judgments made, when measuring and disclosing fair values to be useful in meeting the objectives and requirements in IFRSs. Comments on the document are to be provided to the Expert Advisory Panel by October 3, 2008.

The FASB has issued:

• amendments to its Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, and Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, intended to improve disclosures about credit derivatives;
• an Exposure Draft proposing amendments to its Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (FAS 140), intended to improve disclosures about transfers of financial assets (including through securitization transactions);
• an Exposure Draft proposing amendments to the guidance contained in Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (FIN 46(R)), for determining whether an enterprise must consolidate a special purpose entity (SPE), including those previously considered qualifying SPEs; and
• an Exposure Draft proposing amendments to FAS 140 and FIN 46(R) to require public entities to provide additional disclosures about transfers of financial assets, and their involvement with variable interest entities, respectively, in order to improve disclosures in both areas until the pending amendments to FAS 140 and FIN 46(R) are effective.

Not-for-Profit Organizations

The AcSB continued discussions on the future direction for setting accounting standards applicable to not-for-profit organizations. The AcSB considered the relevance of the proposed new set of GAAP standards for private enterprises to many, if not most, not-for-profit organizations. Not-for-profit organizations are encouraged to monitor and comment on the AcSB’s private enterprise initiative. The AcSB also considered discussions being held by the Public Sector Accounting Board related to government not-for-profit organizations and concluded that there should be a coordinated approach by both Boards to consult not-for-profit organizations’ stakeholders. The AcSB expects to issue a joint Invitation to Comment later in 2008.

Financial Instruments — Amendment to Effective Interest Method

The AcSB agreed to issue an exposure draft proposing an amendment to the guidance on the application of the effective interest method in Section 3855, Financial Instruments — Recognition and Measurement. The change clarifies that, when an impairment loss has been recognized on a financial asset that is classified as held to maturity or available for sale, the interest rate used to recognize interest income in future periods should be the rate used to discount the future cash flows for the purpose of measuring the impairment loss. This change would be applied prospectively on issuance of the amendment, with retrospective application permitted.

Insurance

The AcSB considered whether to retain its current guidance on insurance-related topics as guidance for applying IFRS 4, Insurance Contracts, after the adoption of IFRSs. Consistent with its general policy of adopting IFRSs without modification, the AcSB decided not to carry forward Section 4211, Life Insurance Enterprises — Specific Items, AcG-3, Financial Reporting by Property and Casualty Insurance Companies, AcG-8, Actuarial Liabilities of Life Insurance Enterprises — Disclosures, and AcG-9, Financial Reporting by Life Insurance Enterprises.