2007-12-12 CICA 3862 and CICA 1535 Disclosures: New Requirements and Comparison with Existing Requirements

Introduction – New capital and financial instruments disclosure standards

New disclosures are required in Q1 2008 statements if not applied in 2007 year-end statements!

These standards apply to all profit oriented enterprises and not-for-profit organizations, including those that have few financial instruments. There are limited differential reporting options available for qualifying enterprises.

The standards converge Canadian GAAP for capital and financial instruments disclosures with IFRS 7, Financial Instruments: Disclosure,and IAS 1, Presentation of Financial Statements.

The purpose of CICA 3862 is to provide financial statement users with more information about an entity’s financial assets and liabilities, and their associated risks. It requires disclosures about:

• The significance of financial instruments for an entity’s financial position and performance, including many of the requirements currently in CICA 3861; and
• The nature and extent of risks arising from financial instruments.

• Requiring capital and risk disclosures to be made "through the eyes of management";
• Expanding required quantitative disclosures of risks; and
• Introducing a requirement to provide sensitivity analysis.

Under CICA 1535, such information includes qualitative disclosure about an entity’s objectives, policies and processes for managing capital, as well as summary quantitative data about what it manages as capital.

CICA 3862 focuses, in part, on an entity’s exposure to each type of risk arising from financial instruments, risk concentrations, risk management objectives, policies and processes, and methods used to measure these risks.

All this information is to be given "through the eyes of management", i.e. based on internal reports provided to management. Certain minimum disclosures are also required to the extent they are not already covered by "through the eyes of management" information.

In particular, quantitative disclosures for credit risk include the amount of exposure to credit risk at the reporting date by each class of financial instrument; credit quality of assets neither past due nor impaired; the carrying value of assets that would be past due or impaired but were renegotiated; aging of assets that are past due but not impaired; if impairment is not considered other than temporary, respective carrying amounts and fair values; and description and fair value (unless impracticable ) of collateral. Note that trade accounts receivable are captured by these requirements.

In addition, liquidity risk disclosures must include a maturity analysis, based on contractual undiscounted cash flows, and a description of how the entity manages the liquidity risk inherent in these financial liabilities. For example, an entity that uses a stand-by line of credit to manage their liquidity risk should disclose this fact.

Every company is required to disclose the impact of reasonably possible movements in each relevant market risk variable on profit and loss and equity. The format and presentation of this disclosure is not prescribed but the implementation guidance to the standard offers advice on preparing the analysis.

• Assess whether they need to develop new systems and processes to capture the required data for some of the more challenging disclosures.
• Be aware that CICA 1535 and CICA 3862 require disclosure of the information used by key management to measure and manage risk.
• Consider whether the systems used to produce internal risk management information are subject to the appropriate level of internal control over financial reporting.
• Decide whether to provide required risk disclosures as part of the financial statements, or incorporate such disclosures by cross-reference from the financial statements to MD&A or some other statement (such as a management commentary or risk report) that is available to users of the financial statements on the same terms as the financial statements and at the same time.