This newsletter discusses implications to full cost accounting under Canada's move to adopt International Financial Reporting Standards (IFRS).
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Overview | The Canadian Accounting Standards Board ("AcSB") has indicated their intention to adopt International Financial Reporting Standards ("IFRS") as Canadian GAAP by approximately 2011.
Many Canadian companies that account for oil and gas interests using the full cost method (AcG-16) have been asking, "How does full cost accounting apply under IFRS?" |
| How does full cost accounting apply under IFRS? | The staff of the AcSB has prepared an analysis of Canadian to IFRS differences. Specifically, the staff notes:
"AcG-16, EIC-126 and certain portions of Section 3061 are more comprehensive than IFRS 6 as IFRS 6 only provides guidance during exploration and evaluation of mineral resources up to the point that technical feasibility and commercial viability of extracting is demonstrated. IFRS 6 would permit a form of full cost accounting only during the exploration and evaluation phases but the full cost accounting model cannot be extended to the development and production phases. Accounting during these phases will generally be by analogy to IAS 16 and IAS 36." [emphasis added] |
| Does the Accounting Standards Board plan any relief or exemptions on adoption for full cost companies? | The AcSB decided on May 29, 2007 not to provide any exemptions or amendments on the adoption IFRS as Canadian GAAP. Specifically, the AcSB tentatively concluded:
"that after adoption of IFRSs in Canada, oil and gas enterprises should account in accordance with IFRSs and should not continue to apply existing GAAP that is inconsistent with IFRSs. The AcSB recognized that this could represent a significant change for oil and gas companies that use the full cost method. In accordance with the AcSB's due process, this tentative decision will be exposed for comment as part of the proposed 'omnibus' exposure draft."
We understand that the Board's general position is that, on cross over, Canadian GAAP for publicly accountable enterprises will be IFRS and is concerned that making any exceptions will lead to a demand for more.
The discussion on full cost accounting did include consideration of the size of the oil and gas industry in Canada, that almost all companies use full cost and that there might be a significant effort for full cost companies to comply with IFRS.
Consistent with the Board's due process, this is a tentative decision that will be exposed for comment. Copies of all comment letters will be provided to all Board members and the Board will then formally redeliberate its tentative decisions.
The AcSB agreed that, based on current projections of the International work programme, it does not expect to make any modifications to IFRSs to accommodate work in progress at the changeover date because there do not appear to be any projects that:
- are likely to be changed by the IASB shortly after the Canadian change over date; and
- would require significant transitional effort followed by a possible additional change shortly thereafter.
The Decision Summary is available from the CICA website.
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| What else is the IASB doing about oil and gas accounting? | The International Accounting Standards Board ("IASB") has commenced a research project on extractive industries. The IASB expects to issue a discussion paper in the first quarter of 2008. Among other things, the research project is considering the applicable of fair value accounting for resource properties.
In our view it is very unlikely that the IASB will complete this project before the changeover to International Accounting Standards in Canada.
Further information on the IASB project can be obtained from the IASB web site.
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| Commentary | The adoption of IFRS could have significant implications for Canadian oil and gas companies using the full cost method. The accounting for exploratory dry holes and the application of the cash generating unit for impairment purposes are significant changes which should not be considered lightly.
We strongly encourage preparers and users to comment on the proposals being put forth by the AcSB.
It has been suggested that some Canadian Public Companies could choose to adopt U.S GAAP to continue to apply the SEC version of full cost accounting. This is currently allowed by the Canadian Securities Administrators ("CSA") under NI 52-107; however, only SEC issuers can adopt such an approach and a reconciliation to Canadian GAAP is required for 2 years after adopting U.S GAAP. Adoption of U.S GAAP cannot be done on a piecemeal basis. Adopting U.S GAAP primarily to be able to use full cost accounting carries with it the burden of complying with U.S GAAP in its entirety. This should not be chosen lightly. It is also unclear whether or not the Canadian Securities Regulators will continue to allow Canadian public companies to apply U.S GAAP once change over to IFRS occurs. The ability for an SEC issuer to use US GAAP may be removed by the CSA. In our view there is a low probability that the CSA will allow Canadian companies in general to move to US GAAP. |
| What should Companies be doing? | Canadian companies that apply full cost accounting may be significantly impacted by both the adoption of International Accounting Standards and the IASB project on extractive industries.
We strongly encourage companies impacted by these potential changes to:
- Begin evaluating how these changes would impact their business (including financial reporting, covenants, bonus calculations, etc.),
- Actively participate in the debate with standard setters in Canada and Internationally, and
- Make their views on these issues known to the Canadian Accounting Standards Board.
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| Where can I get more information? | The CICA Implementation Plan for Incorporating IFRSs into Canadian GAAP and the CICA Advisory Committee on IFRS meeting notes are available at the CICA website. |
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