How Does the Handbook Change with IFRS?

The Canadian Accounting Standards Board (AcSB) confirmed January 1, 2011¹ as the changeover date to replace Canadian Generally Accepted Accounting Principles (CGAAP). The changes will affect all entities within Canada whether they are a publicly accountable enterprise (PAE), private enterprise, not-for-profit or a pension plan. As a result, the AcSB has restructured the Canadian Handbook to consist of five parts as follows:

• Part I contains standards applicable to PAEs (IFRS);
• Part II contains accounting standards for private enterprises (ASPE);
• Part III will contain standards for not-for-profit organizations,
• Part IV contains accounting standards for pension plans; and
• Part V houses pre-changeover standards (i.e., existing Canadian standards prior to adoption of Part I, II, III or IV of the Handbook).

The table below sets out the GAAP which will be applicable to an entity, as well as a summary of the transition dates:

1. * The decision may be made at the changeover date or at a subsequent date if the circumstances of the entity change.
2. **Early adoption is generally permitted.

Publicly accountable enterprises (PAEs)

Canadian PAEs will be required to transition to International Financial Reporting Standards (IFRS) as of January 1, 2011. The IFRS standards are incorporated into Part I of the restructured Handbook. The International Accounting Standards Board (IASB) has a large number of projects underway which will impact transitioning entities.

The AcSB has recognized the impacts of changing standards on certain entities transition plans and has allowed a one year deferral of IFRS adoption for certain entities. Qualifying investment companies, segregated accounts of life insurance enterprises and entities with rate-regulated activities all may defer adoption by one year to January 1, 2012. Parents of qualifying entities may apply the deferral for their consolidated financial statements; however, the deferral does not apply to subsidiaries that do not meet the qualifying criteria.

For Canadian entities listed on a US stock exchange, the requirement to reconcile from CGAAP to US GAAP will be eliminated as the SEC permits foreign private issuers to use IFRS without reconciliation. Canadian companies who are also SEC registrants continue to have the option available to use US GAAP as their primary basis of reporting. Several Canadian companies have opted to take this route, most often for comparability with a peer group.

Private enterprises

Private enterprises will have a choice to adopt either Accounting Standards for Private Enterprise (ASPE) or IFRS as of January 1, 2011, with their choice being mainly driven by the businesses future prospects and objectives. In general, ASPE provides a simplified financial reporting framework which has been developed from current Canadian GAAP. When deciding whether to use IFRS or ASPE, an entity that has plans to complete a public offering, issue public debt, access foreign capital or who has a parent that reports under IFRS may consider it more appropriate to adopt IFRS. This change will impact private enterprises directly and also have an indirect impact on companies who use private enterprise financial statements to make business decisions, such as whether to lend to a private entity or not.

Transition guidance similar to that applied by companies adopting IFRS for the first time is also available to companies adopting ASPE. The AcSB plans to monitor developments in accounting standards globally and consider the adoption of these changes into ASPE. They expect to make substantive changes only every one or two years rather than on a standard-by-standard basis.

Not-for-profit

The final standard for not-for-profits is expected to be issued in late 2010. Upon completion, the new not-for-profit standard will be incorporated into Part III of the restructured Handbook. This proposed standard for not-for-profit entities that are not subject to the CICA Public Sector Accounting Handbook provides the choice to either:

• adopt IFRS (if it meets the needs of the users of the financial statements); or
• adopt the accounting standards for not-for-profit organizations in Part III of the Handbook and for all unique transactions or circumstances exist that are outside Section 4400 refer to guidance within ASPE.

The standards will be effective January 1, 2012. Until new guidance has been issued, not-for-profit entities should follow existing GAAP within Part V of the restructured Handbook.

Pension plans

Pension plans will prepare their financial statements in accordance with new accounting standards for pension plans within Part IV of the Handbook. These standards are an expanded form of the current Section 4100 of the Handbook. These standards apply to retirement and non-retirement benefits plans, such as benefit plans that have characteristics similar to pension plans and provide benefits other than pensions (i.e. long-term disability plans, retiree healthcare and life insurance benefits). The standards apply to all pension plans, not only those that meet the definitions of a defined benefit or a defined contribution plans (such as amalgamation, accumulation or hybrid pension plans). Currently, entities that are separate from a pension plan and whose sole purpose is to hold and invest assets received from pension plans and are not pension plans themselves (i.e. master trusts), are out of scope, but may become in scope in the future.

Where Section 4100 does not provide guidance, a pension plan may follow either IFRS or ASPE. The option selected should be disclosed in their first set of statements issued under Part IV of the restructured Handbook.

Due process in Canada

The AcSB will continue its due process in Canada post-transition to IFRS. There are a number of significant projects in process at the IASB and global accounting standards will continue to be evolving over the next few years. The AcSB is monitoring these projects and will expose them for Canadian comments as they occur. In addition, as the IASB publishes documents the AcSB due process might include:

• Holding public roundtables to facilitate discussion of amendments proposed by the IASB;
• Co-ordinating advisory groups in specific areas to provide support to Canadians who have been appointed to working groups of the IASB
• Conducting preliminary research, in collaboration with other national standard setters or on behalf of the IASB, in areas of particular interest to Canadian constituents.

What should directors be thinking about now?

2011 is a year of a change in financial reporting in Canada. Publicly Accountable Enterprises will be converting to IFRS. Other entities may have choices available to them which will need to be evaluated and acted upon. It is important for Directors to understand these requirements and options in order to evaluate management’s transition activities. In summary, we have tried to set out a brief overview of the range of changes coming to Canadian entities to equip Directors to ask appropriate questions, such as:

• For a private enterprise, has management assessed the cost-benefit of adopting ASPE or IFRS? If ASPE is the choice, how long would it take us to adopt IFRS in the event of a transaction or event which required IFRS financial information?
• If a one-year deferral is available, is management electing to take the deferral, and what are the implications of deferring? Are members of our peer group also deferring? What has the IFRS conversion team done to adapt their conversion activities to ensure a smooth transition on January 1, 2012?
• As a not-for-profit, do we have a plan to evaluate the final standards once released and are there any impediments to adoption of Part III of the Handbook?

1. The changeover date is for fiscal years beginning on or after January 1, 2011, i.e. non-calendar year end companies convert for the first fiscal year beginning after January 1, 2011 (January 1, 2012 for not-for-profit and specific exceptions noted above).