2011-12-16 Alberta Securities Commission Corporate Finance Disclosure Report and IFRS transition findings - 2011

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This Newsletter contains the Alberta Securities Commission's 2011 report on its Corporate Finance Disclosure Report.

ASC continuous disclosure review The Alberta Securities Commission (ASC) has issued its report detailing findings from the IFRS transition, continuous disclosure reviews and offering document reviews completed during the 12 month period ended November 30, 2011. This report details the ASC's findings and expectations with respect to a number of items. In addition, the report includes a number of disclosure examples, practice tips, and reminders that will be useful for reporting issuers.

The following newsletter summarizes the main items discussed by the ASC in their report.
Overall The ASC regulates 793 Alberta-based reporting issuers, representing a diverse range of industries, with the oil and gas industry making up the majority of reporting issuers (RIs) at 71% of the total Alberta market capitalization.

Two types of continuous disclosure (CD) reviews are performed:
  • 1. Full CD Reviews
  • 2. Issue Oriented Reviews (IOR)
For the year ended November 30, 2011 121 (2010: 159) Full CD reviews were conducted and 192 IOR's (2010: 104). There was an increase over the prior year in the amount of re-filings requested, many as a result of the IFRS-focused reviews.
IFRS Transition ASC reviewed all the first quarter IFRS interim filings of Alberta based RIs and some observations where ASC expectations were not met are summarized below:
  • Missing Financial Statements - most frequently omitted financial statement was the Statement of Changes in Equity for the 3 months ended at the interim balance sheet date, and the respective comparative period.
  • Unclear transition impact - the level of details and insight of the explanations in the reconciliations varied. Where RI's did not provide explanations for all material adjustments, or did not sufficiently explain the nature of the adjustments, they were asked to re-file.
  • Boilerplate accounting policy disclosure
  • IFRS 1 exemptions taken not disclosed
  • Inconsistent Terminology (i.e. asset retirement obligations in some disclosures and decommissioning obligations in other disclosures in same financial statements)
  • Mixed GAAP disclosure in MD&A
  • Decommissioning liabilities - Discount Rate
    • (a) Incomplete Disclosures - missing disclosure relating to the requirement to re-measure the provision at each reporting period in order to reflect rates in effect at that time and missing disclosures of the discount rates applied upon transition to IFRS or in the comparative first quarter.
    • (b) Inconsistent disclosure between policy and actual rates used
IFRS Transition (Expectations for Annual Filings) As entities are preparing for their first annual IFRS financial statements the ASC has highlighted a few areas where improvement can be made based on their reviews:
  • Equal prominence of all financial statements - the ASC will consider the presentation of any of the financial statements in the notes to the annual financial statements a deficiency requiring re-filing (i.e. opening IFRS BS at January 1, 2010)
  • Accounting policy disclosure - ensure complete, clear and entity-specific
  • Reconciliations - must differentiate between transition adjustments and other adjustments (i.e. errors), and explanations must be included for all material adjustments separately
  • Disclosure of judgements and estimation uncertainty - entities tended to group judgements and estimates together but did not properly address the judgements. Some common areas of judgement to consider are: determination of control or significant influence, determination of cash-generating units, determination of functional currency.
CD Reviews The following are recurring and / or pervasive issues that the ASC has highlighted in their report so that RI's are mindful of these items and ASC's expectations when entities are preparing their CD filings:
  • Financial Statements - ASC continues to identify issues with respect to gaps in the periods of financial statements filed both relating to reverse takeover transactions and after becoming an RI.
  • Financial Statement Disclosures - recurring deficiencies related to the following areas which require more judgement
    • Decommissioning and Restoration Provisions - ASC identified instances where RIs appeared to be conducting activities that would result in decommissioning and restoration liabilities, but did not recognize a provision.
    • Impairment - it is the ASC's expectation that RIs will clearly disclose events and circumstances that led to the recognition of impairment losses in their filings.
    • Financial Instruments (measurement and disclosure deficiencies) - warrants issued in a currency different to the functional currency, IFRS 7 disclosures (categorization, risk disclosure and sensitivity analysis).
    • Asset vs. Business Acquisition - in a few instances RIs accounted for certain acquisitions as asset purchases when they should have accounted for the transactions as business combinations.
    • Functional Currency - need to be able to support functional currency assessment for each entity within a group and must include IAS 21 disclosures.
    • Additional GAAP Measures - if additional GAAP measures are disclosed in financial statements they must be relevant and appropriate and consistent with MD&A disclosures. The ASC also commented on "Blank Subtotals," stating that their expectation is that generally entities shall appropriately label line items and subtotals presented in financial statements.
    • No Auditor Review of Interim Financial Statements - reminder that if auditor's have not reviewed interim financial statements to include the appropriate notice as required by securities law.
  • MD&A Disclosure
    • Venture issuers without significant revenue - reminder to provide more detailed disclosures with respect to expenditures, both capitalized and expensed, and analyze financial performance on expenditures and progress towards business objectives and milestones.
    • Forward looking information - avoid boilerplate disclosure.
    • Environmental disclosures - include environmental risks and consider integration with financial reporting functions.
  • Other Reporting Requirements
    • Business Acquisition Reports (BAR's) - errors were noted relating to when BAR's should be filed and which financial statements are required to be included.
    • Notices - change in corporate structure and change in year ends - errors have been found in terms of not filing these notices or filing them with deficiencies.
    • Material change report (MCR) - for restructuring transactions, to the extent that a filing statement, or other information, incorporated by reference in the MCR does not satisfy all of the prospectus level disclosure requirements, an RI must provide this information.
    • Executive compensation - RI's should be aware of the amendments to Form 51-102F6 Statements of Executive Compensation.
    • SEDI Filings - the filing deadline to report changes in a reporting issuer's holdings has been reduced from 10 calendar days to 5 calendar days.
Offering Documents ASC staff are also responsible for the review and clearance of offering documents. During the year, some of the deficiencies noted relating to prospectus filings are:
  1. Use of Proceeds - insufficient disclosure presented.
  2. Cover Page and Prospectus Summary - inappropriate promotional disclosure and non-essential information.
  3. Notice of Intention and Transition - An RI must file a notice of intention at least 10 business days prior to filing its first preliminary short form prospectus.
  4. Connection Test - when filing an IPO prospectus in cases where the primary reviewer is not evident, RIs should have an analysis prepared, documenting the determination of the primary reviewer.
  5. Oil and Gas Disclosures - common weaknesses include: inappropriate terminology and inconsistent disclosure.
Full report A copy of the full report can be obtained from the ASC website: www.albertasecurities.com.