Working Draft — Proposed Private Enterprise Standards page 1 of 16 Enterprises in the Development Stage, AcG-11 TABLE OF CONTENTS Paragraph Purpose and scope 1 Development stage 2 Financial accounting and reporting 7 Financial statements 7 Classification of current and non-current assets and liabilities 8 Costs incurred 9 Impairment 12 Shares issued for non-monetary consideration 22 Share issue costs 26 Going concern 27 Disclosure during the development stage 29 General disclosure 29 Disclosure about projects under development 31 Disclosure of "cumulative from inception" information 33 An example of disclosure during the development stage Appendix PURPOSE AND SCOPE 1 This Guideline presents the views of the Accounting Standards Board on recognition, measurement, presentation and disclosure by enterprises in the development stage. The Accounting Standards Board believes that accounting treatment should be governed by the nature of a transaction rather than the degree of maturity of an enterprise. Consequently, concurrently with the publication of this Guideline, it removed exemptions for accounting for research and development costs and disclosure of current assets and liabilities for enterprises in the development stage. Removal of these exemptions results in enterprises in the development stage being subject to the same accounting standards of recognition, measurement, presentation and disclosure as enterprises in the operating stage. This Guideline covers only selected items and does not deal comprehensively with all aspects of accounting for enterprises in the development stage. It requires certain specific disclosures needed for fair presentation in accordance with generally accepted accounting principles of the financial position, results of operations and cash flows of these enterprises and encourages other disclosures that will help users to evaluate their performance. DEVELOPMENT STAGE Working Draft — Proposed Private Enterprise Standards page 2 of 16 2 An enterprise in the development stage typically will be devoting most of its efforts to activities such as financial planning, raising capital, exploring for natural resources, developing natural resources, research and development, establishing sources of supply, acquiring property, plant and equipment or other operating assets, such as mineral rights, recruiting and training personnel, developing markets and starting up production. 3 For purposes of this Guideline, an enterprise is in the development stage when it is devoting substantially all of its efforts to establishing a new business and planned principal operations have not commenced. Various factors indicate that planned principal operations have commenced. These would include, for example, one or more of the following: (a) significant revenue has been earned; (b) a significant portion of available funding is directed towards operating activities; (c) a significant percentage of employees is involved in operating activities; (d) a pre-determined, specified level of activity has been achieved; (e) a pre-determined, reasonable period of time has passed; or (f) a development project significant to the primary business objective of the enterprise has been completed. The determination of whether any of these factors is present is made in light of characteristics of the enterprise and its industry. 4 The following factors would not necessarily indicate that an enterprise is in the development stage: (a) lack of profitability; (b) uncertainty of cost recovery; or (c) difficulty in valuing the consideration received in exchange for share capital. These factors may be experienced by any enterprise regardless of whether it is an enterprise in the development stage. 5 Professional judgment is required in assessing whether an enterprise is in the development stage. It is not possible to classify an enterprise as being in the development stage solely by reference to the nature of activities undertaken by the enterprise. For example, the principal operations of some enterprises are the development of products, services or technologies. 6 The length of the development stage will vary significantly from enterprise to enterprise, depending on the nature of its business and the industry in which it operates. Some enterprises may become operational within weeks or months of inception, for example, an enterprise established to open a single retail store. Other enterprises may require several years of development activity before becoming operational, for example, an enterprise established to produce new and commercial applications of a bio-medical process. Working Draft — Proposed Private Enterprise Standards page 3 of 16 FINANCIAL ACCOUNTING AND REPORTING Financial statements 7 Financial statements for an enterprise in the development stage normally include: (a) a balance sheet; (b) an income statement; (c) a statement of retained earnings; (d) a cash flow statement; and (e) notes to financial statements (see paragraphs 29-35). Classification of current and non-current assets and liabilities 8 The balance sheet of an enterprise in the development stage normally segregates assets and liabilities between current and non-current in accordance with CURRENT ASSETS AND CURRENT LIABILITIES, Section 1510. Information about short-term liquidity has particular relevance for an enterprise in the development stage, because it is useful in judging an enterprise's ability to meet its obligations without the need for access or further access to outside sources of funds. Costs incurred 9 The kinds of transactions undertaken by enterprises in the development stage are common to other enterprises. Accounting treatment should be governed by the nature of the transaction rather than the degree of maturity of the enterprise. Costs incurred by an enterprise in the development stage are charged to income or capitalized on the same basis as costs incurred by an enterprise not in the development stage. For example, costs incurred for capital assets are accounted for in accordance with PROPERTY, PLANT AND EQUIPMENT, Section 3061, and GOODWILL AND INTANGIBLE ASSETS, Section 3064. 10 An intangible asset may only be recognized in accordance with GOODWILL AND INTANGIBLE ASSETS, Section 3064, if: (a) the asset is identifiable; (b) the entity controls the asset; (c) it is probable that the entity will receive future economic benefits from the asset; and (d) the cost of the asset is reliably measurable. Guidance on these criteria is provided in Section 3064. 10A GOODWILL AND INTANGIBLE ASSETS, Section 3064, specifies that development costs might qualify for recognition as intangible assets if, in addition to meeting the definition and recognition criteria, the entity can demonstrate all of the following: (a) The technical feasibility of completing the intangible asset so that it will be Working Draft — Proposed Private Enterprise Standards page 4 of 16 available for use or sale. (b) Its intention to complete the intangible asset and use or sell it. (c) Its ability to use or sell the intangible asset. (d) How the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset. (e) The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. (f) Its ability to measure reliably the expenditure attributable to the intangible asset during its development. 11 The cost of an intangible asset includes costs directly attributable to preparing it for its intended use. General and administrative costs, such as salaries for executive activities, office rent and supplies and general legal and accounting costs are not considered directly related to any of the enterprise's assets and therefore are not capitalized. 11A Costs incurred for research are not recognized as intangible assets because it is not possible to determine the probability that future economic benefits will flow from the research. Impairment 12 When development costs have been recognized as an intangible asset, an enterprise in the development stage should assess at the end of each accounting period whether the recovery of the unamortized balance of these costs from the future operations can continue to be regarded as probable. When the expected amount of recovery through future related revenues, less relevant costs, is exceeded by the unamortized balance of such costs and the carrying amount of the asset exceeds its fair value, the asset is impaired and should be written down to fair value in accordance with IMPAIRMENT OF LONG-LIVED ASSETS, Section 3063. (Where the enterprise has other long-lived assets, capitalized development costs will normally be tested for impairment as part of an asset group that includes some or all of these other long-lived assets.) (paragraphs 13-14 deleted) 15 IMPAIRMENT OF LONG-LIVED ASSETS, Section 3063, provides some examples of conditions that may indicate a write-down of a capital asset is required. Of these conditions, the following may be of particular relevance to enterprises in the development stage: (a) a significant decrease in its market price; (b) a significant adverse change in legal factors or in the business climate that Working Draft — Proposed Private Enterprise Standards page 5 of 16 could affect its value, including an adverse action or assessment by a regulator; and (c) an accumulation of costs significantly in excess of the amount originally expected for its acquisition or construction. 16 Other factors that may indicate the need for a write-down of a capital asset held by enterprises in the development stage engaged in extractive operations include: (a) unfavourable changes in the property or project economics; (b) an inability to access the site; (c) environmental restrictions on development; (d) an inability to create an efficient distribution mechanism; and (e) political instability of the region in which the property is located. 17 The enterprise's progress in its development activities towards its planned principal operations is a key factor to be considered as part of the ongoing assessment of the recoverability of the carrying amount of capital assets and capitalized development costs. Brief interruptions in activities, interruptions that are externally imposed and interruptions that are inherent in the asset acquisition process would not necessarily signal a need for a write-down. However, when there has been a delay in development activity that extends beyond three years, there is a presumption that a write-down of capitalized costs is necessary. This presumption can be rebutted only by persuasive evidence to the contrary. Property, plant and equipment and intangible assets are assessed for impairment and written down in accordance with IMPAIRMENT OF LONG-LIVED ASSETS, Section 3063, and GOODWILL AND INTANGIBLE ASSETS, Section 3064. 18 In addition to the above general presumption, there should be a presumption of impairment in the carrying amount of property, plant and equipment and intangible assets of enterprises in the development stage engaged in extractive operations when any of the following conditions exist: (a) the enterprise's work program on a property has significantly changed so that previously identified resource targets or work programs are no longer being pursued; (b) exploration results are not promising and no more work is being planned in the foreseeable future; or (c) remaining lease terms are insufficient to conduct necessary studies or exploration work. 19 The assessment of the recoverability and need for a write-down of the carrying amount of capitalized development costs from future operations requires the preparation of a projection. The lack of an operating track record for an enterprise in the development stage may make it difficult to prepare this projection. Information that may assist in the preparation of a projection includes: Working Draft — Proposed Private Enterprise Standards page 6 of 16 (a) initial feasibility studies adjusted for any known changes; (b) the performance of other entities engaged in similar activities; (c) marketing studies; and (d) other sources that provide objective corroboration of the assumptions used. In cases where the capitalized development costs are related to a new technology or product, it may be appropriate to prepare the projection on the basis of an existing technology or product that is considered most similar in nature to the one under development. 20 The existence of uncertainties during the development stage may make it difficult to estimate the amount of any necessary write-down, and therefore may necessitate disclosure of measurement uncertainty in accordance with MEASUREMENT UNCERTAINTY, Section 1508. However, note disclosure of the contingent or uncertain nature of the asset's carrying value should not be used as a substitute for proper accounting treatment. (paragraph 21 deleted) Shares issued for non-monetary consideration 22 The general principle is that transactions should be measured at the fair value of the consideration given (i.e., the shares) except where the fair value of the consideration given is not clearly evident. During the development stage, because of the lack of cash flow from operations and the difficulty in obtaining credit financing, an enterprise will often issue share capital in exchange for capital assets, services or as settlement of debt. Judgment is needed in determining the value to be attributed to the consideration given in such transactions. 23 If the shares of an enterprise in the development stage are traded in a public stock exchange or an over-the-counter market, the quoted value of the shares may be used as the basis for determining the value to be used in recording the transaction. BUSINESS COMBINATIONS, Section 1581, provides guidance on using the quoted market price for shares. Fair value of the shares is determined by establishing an average of quoted market prices for shares of the same class over a reasonable period before and after the date the terms of the business combination are agreed to and announced, and then adjusting the average to recognize the possible effects of price fluctuations, quantities traded, issue costs and similar items. 24 In some cases the quoted value of shares may not be an appropriate basis for recording the transaction because the market for the class of shares issued is inactive or illiquid, or the shares being issued are subject to significant restrictions preventing them from being traded for some time following their issuance. In such cases, and also when shares are not traded in a public stock exchange or in an over-the-counter market,The fair value of the assets acquired, the services Working Draft — Proposed Private Enterprise Standards page 7 of 16 received or the debt settled should be used in recording the value of the consideration given. BUSINESS COMBINATIONS, Section 1581, provides guidance on determining the fair value of assets and liabilities. Related party transactions should be measured in accordance with RELATED PARTY TRANSACTIONS, Section 3840. 25 The method for determining the value of the shares issued should be disclosed. Depending on the circumstances, it may also be necessary to disclose the existence of measurement uncertainty in accordance with MEASUREMENT UNCERTAINTY, Section 1508. Share issue costs 26 CAPITAL TRANSACTIONS, Section 3610, states that changes in capital, including expenses related to the issue of capital, are excluded from the determination of net income and shown separately in the statement to which they relate. Therefore, all costs relating to the issue of share capital for enterprises in the development stage should be either deducted from the proceeds of the share capital issued or included in the statement of retained earnings (deficit) in the year incurred, since such costs are capital transactions. Going concern 27 FINANCIAL STATEMENT CONCEPTS, Section 1000, states that financial statements are prepared on the assumption that the entity is a going concern and that different bases of measurement may be appropriate when the entity is not expected to continue in operation for the foreseeable future. When assessing whether an enterprise in the development stage is a going concern, it is important to consider the enterprise's ability to continue in the process of development and to achieve planned principal operations, as pre-defined by management. Where the going concern assumption appears questionable or invalid, the effect on the financial statements will depend on the degree of uncertainty regarding the enterprise's ability to realize assets and discharge liabilities in the normal course. When the going concern assumption is not appropriate, it may be necessary to use a different basis of measurement. 28 In certain situations, the going concern assumption may be dependent upon a party advancing funds or converting debt to equity. Such economic dependence should be disclosed in accordance with ECONOMIC DEPENDENCE, Section 3841. DISCLOSURE DURING THE DEVELOPMENT STAGE General disclosure 29 The fact that the enterprise is in the development stage should be disclosed. This disclosure should identify the nature of development activities and the planned principal operations of the enterprise. The factors management has evaluated in determining that the enterprise is in the development stage should be disclosed. 30 The financial statements prepared at the end of the first period in which the Working Draft — Proposed Private Enterprise Standards page 8 of 16 enterprise is no longer considered to be in the development stage should disclose that in prior periods it was in the development stage. Disclosure about projects under development 31 Whether an enterprise is in the development stage or already operating, users of financial statements want information that helps predict the enterprise's ability to earn income and generate cash flows in the future to meet its obligations and to generate a return on investment. They are interested in both past performance and expected future performance. Enterprises in the development stage, however, have, by their nature, only limited information on past performance. The absence of a track record for these enterprises removes one important means of predicting how well the enterprise will do in the future. In order to make these assessments, users of financial statements of enterprises in the development stage are interested in information regarding the significant projects being undertaken. 32 Enterprises in the development stage should provide the following disclosure, where applicable, about each significant project under development, including those abandoned, during the reporting period: (a) identification and description of the project; (b) amounts capitalized on the project to date for capital assets, separately for property, plant and equipment (see PROPERTY, PLANT AND EQUIPMENT, Section 3061) and intangible assets (see GOODWILL AND INTANGIBLE ASSETS, Section 3064); (c) amounts expensed on the project to date; (d) revenue earned from the project; and (e) details of contractual rights and obligations related to the project (see CONTRACTUAL OBLIGATIONS, Section 3280). This information may be provided in the notes or on the face of the financial statements. Disclosure of "cumulative from inception" information 33 In addition to traditional comparative information, enterprises in the development stage are encouraged to disclose in the income statement and in the cash flow statement cumulative balances from the inception of the development stage. The disclosure of cumulative information provides users with useful information about the activities of enterprises in the development stage without sacrificing the advantages of retaining the familiar format and content of basic financial statements of enterprises which are not in the development stage. 34 Enterprises in the development stage are also encouraged to disclose in the notes to the financial statements details of issuance of shares, warrants, rights or other equity securities from the date of inception of the enterprise. 35 When a dormant enterprise is reactivated to undertake development activities, the Working Draft — Proposed Private Enterprise Standards page 9 of 16 cumulative balances to be disclosed are those from the inception of the development stage. Working Draft — Proposed Private Enterprise Standards page 10 of 16 APPENDIX AN EXAMPLE OF DISCLOSURE DURING THE DEVELOPMENT STAGE This appendix provides a specific example to illustrate only the disclosures that are required or encouraged by this Guideline. It does not purport to show all of the disclosures required by generally accepted accounting principles. The format used is not a required format and may not be the best format for all enterprises. For example, the following illustrations are for a hypothetical enterprise in the development stage in a specific industry. Another format might be more meaningful for another industry. Disclosures should be made using a format that displays the enterprise's information in a clear and understandable manner. Securities regulators may require additional disclosures by publicly traded enterprises in the development stage. General disclosure (paragraph 29) Nature of operations Technologies Inc. is engaged in the business of developing anti-pollution technologies. Since inception, the efforts of the Company have been devoted to the development of a new anti-pollution technology for diesel engines. To date, the Company has not earned significant revenues and is considered to be in the development stage. Disclosure about projects under development (paragraph 32) For the purposes of this example, assume that management has determined that all projects meet the requirements of GOODWILL AND INTANGIBLE ASSETS, paragraph 3064.40, for recognition as an intangible asset. Project A — Diesel engine device (automotive industry) Emissions from heavy duty diesel engines are coming under more stringent regulation throughout the world. Technologies Inc.'s electronic charger aims at reducing pollution by preventing it in the first place through enhanced combustion. It increases airflow to the engine with an associated increase in power and reduction in pollutants which has been considered to be a major technological breakthrough. The company has the exclusive right and license to all applications of this technology. Technologies Inc.'s diesel engine device is currently undergoing final evaluation trials by major automotive and trucks engine manufacturers. Project B — Diesel engine (marine industry) For two years, Technologies Inc. research staff has been working on a new application of its electronic charger system for the marine industry. In this prototype phase, efforts have concentrated on a 5000 horse power marine engine. Initial testing has proved to be satisfactory. Performance enhancements are currently being conducted. Working Draft — Proposed Private Enterprise Standards page 11 of 16 Project C — Other applications (recreational area) Various other anti-pollution applications are in the development stage with potentially breakthrough benefits in global pollution reduction in the recreational industry (notably for all-terrain vehicles). However upon review of the recoverability of capitalized development costs undertaken at the end of Year 20X1, management determined that a write-down of $ 500 was necessary. Costs Incurred for Projects under Development (a) ($ thousands) 20X1 20X0 To Date PROJECT A Research costs expensed $ — $ — $ 400 Development costs Balance at the beginning of 2,600 600 — the period Additions 2,970 2,000 5,570 Balance at the end of the 5,570 2,600 5,570 period Capital assets Balance at the beginning of 500 — — the period Additions 600 500 1,100 Balance at the end of the 1,100 500 1,100 period Total Project A costs for the $3,570 $2,500 $7,070 period ==== ==== ==== PROJECT B Research costs expensed $ — $ 600 $ 800 Development costs Balance at the beginning of 1,200 — — the period Additions 2,500 1,200 3,700 Balance at the end of the 3,700 1,200 3,700 period Working Draft — Proposed Private Enterprise Standards page 12 of 16 Total Project B costs for the $2,500 $1,800 $4,500 period ===== ===== ===== PROJECT C Research costs expensed $ — $ 500 $ 500 Development costs Balance at the beginning of 700 — — the period Additions 1,400 700 2,100 Write-down (500) — (500) Balance at the end of the 1,600 700 1,600 period Total Project C costs for the $1,400 $1,200 $2,600 period (before write-down) ===== ===== ===== TOTAL PROJECT COSTS FOR THE PERIOD Research costs expensed $ — $1,100 $1,700 Development costs incurred 6,870 3,900 11,370 Write-down of development (500) — (500) costs Capital assets 600 500 1,100 Total $7,470 $5,500 $14,17 0 ===== ===== ===== = (a) Disclosed in the accounting policies note: Research costs are expensed as incurred. Development costs which meet generally accepted criteria, including reasonable assurance regarding recoverability, are capitalized and amortized from the beginning of commercial production. Annually, the Company reviews the recoverability of development costs through an evaluation of the expected future cash flows from commercialization of the associated products to determine if there has been an impairment in the recoverable amount. Working Draft — Proposed Private Enterprise Standards page 13 of 16 Disclosure of "cumulative from inception" information (paragraphs 33 and 34) Techonologies Inc. Income Statement Cumulative For the year ended December 31, from 20X1 20X1 20X0 inception on ($ thousands) April 1, 1999 Revenue Interest $ 2 $ 1 $ 4 Expenses Research costs — 1,100 1,700 Advertising and trade shows 29 40 111 Travel and business development 160 336 741 Finders' fees — 42 42 Filing fees — 30 37 Investors relations 57 103 235 Office rent, administration and 177 167 419 sundry Printing 52 103 155 Consulting fees 163 156 410 Bank charges and interest on long- 9 105 154 term debt Salaries and employee benefits 210 127 423 Amortization 15 7 22 Write-down of development costs 500 — 500 Net loss (1,370) (2,315) $(4,945) ====== Deficit, beginning of year (3,575) (1,260) Deficit, end of year $(4,945) $(3,575) ====== ====== Working Draft — Proposed Private Enterprise Standards page 14 of 16 Technologies Inc. Cash Flow Statement Cumulative For the year ended December 31, from 20X1 20X1 20X0 inception on ($ thousands) April 1, 1999 Operating activities Loss for the period $(1,37 $(2,315) $(4,945) 0) Amortization and write-down 7 522 515 (855) (2,308) (4,423) Change in non-cash components of 188 333 working capital 105 (2,120) (4,090) (750) Financing activities Proceeds from the issuance of 6,800 4,200 12,700 shares Proceeds from long-term debt 2,000 2,700 5,200 Repayment on long-term debt (800) (550) (200) 8,250 6,700 17,100 Investing activities Acquisition of capital assets (700) (650) (1,650) Project development costs (6,870) (3,900) (11,370) (7,570) (4,550) (13,020) Change in cash (70) 30 (10) Cash, beginning of year 30 — 60 Cash, end of year $ (10) $ 60 $ (10) ====== ====== ====== Working Draft — Proposed Private Enterprise Standards page 15 of 16 Note X: Share capital (a) The changes in the issued common shares of the Company are as follows: Consideration Number (net of of shares selling costs) Balance April 1, 1999 2,000,000 $1,322,445 Cash 700,000 377,555 Balance, December 31, 1999 2,700,000 1,700,000 Services 150,000 100,000 Cash 5,600,000 4,200,000 Debt settlement 1,120,000 800,000 Balance, December 31, 20X0 9,570,000 6,800,000 Exercise of options 65,000 43,000 Cash 8,700,000 6,757,000 Payment of consulting fees 140,000 105,000 Balance, December 31, 20X1 18,475,000 $13,705,000 ======== ========= The fair value of shares issued for non-monetary consideration was determined on the basis of the average of quoted market prices. (b) Common shares have been reserved for warrants and stock options on the following basis: Number of shares Exercise price Warrants Balance December 31, 20X1 Granted 1,500,000 $0.80 The warrants expire between June 30 to December 31, 20X2 Options Balance, December 31, 20X0 Granted 400,000 $0.70 Exercised in 20X1 (65,000) Working Draft — Proposed Private Enterprise Standards page 16 of 16 Balance, December 31, 20X1 335,000 ======= Outstanding options expire between January and December 20X2 and were issued to directors and employees. See Accounting Policies Note 17.