Document Sample
Flash… Powered By Docstoc
					                                                                                                                April 2009

   … Accounting Developments

New Standards for Business Combinations and Non-controlling Interests

In January 2009, the Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants
(CICA) issued new Section 1582, “Business Combinations”, which replaces Section 1581 of the same title. At the
same time, the AcSB also issued new Sections 1601, “Consolidated Financial Statements”, and 1602, “Non-
controlling Interests”, which replace Section 1600, “Consolidated Financial Statements”. These new Sections include
significant changes with respect to accounting for business combinations, transactions with non-controlling interests
and transactions that result in a loss of control of a subsidiary. We invite you to consult our issue of Flash, published
in March 2009, specially dedicated to these new standards. You can access to it on the Raymond Chabot Grant
Thornton’s Web site in the “Publications” section under “Assurance” at:


Credit Risk and the Fair Value of Financial Assets and Financial Liabilities

Section 3855, “Financial Instruments – Recognition and Measurement”, provides guidance on determining the fair
value of financial assets and financial liabilities. One of this guidance states that, among other factors, fair value must
take into account the credit quality of the financial instrument. There has been diversity in practice as to whether an
entity’s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair
value of a derivative instrument. Some entities have looked to the financial institution’s (the counterparty to the
instrument) confirmed indicative value as a proxy for fair value. The indicative value is the settlement value of the
instrument for the financial institution and does not consider either the entity’s or the financial institution’s credit
risk. Similarly, some commonly available valuation models either do not consider credit risk or assume a standard
measure of credit risk.

The Emerging Issues Committee (hereafter the “Committee”) issued EIC-173 entitled Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities to determine whether an entity’s own credit risk and the credit risk of the
counterparty should be taken into account in determining the fair value of financial assets and financial liabilities,
including derivative instruments, for presentation and disclosure purposes.

The Committee concluded that an entity’s own credit risk and the credit risk of the counterparty should be taken
into account in determining the fair value of financial assets and financial liabilities, including derivative instruments.
In this respect, the Committee mentioned that Section 3855 notes that when a market-quoted rate does not include
credit risk or other factors that market participants would include in valuing the instrument, the entity adjusts the
rate for those factors. Both the entity’s own credit risk and that of the counterparty are elements of credit quality or
risk. The Committee noted that Section 3855 requires an entity to make reasonable efforts to determine whether
                                                                                                               April 2009

there is evidence that there has been a change in factors of credit risk, and that when evidence of a change exists, the
entity would consider the effects of the change in determining the fair value of the financial instrument.

The accounting treatment in EIC-173 should be applied retrospectively without restatement of prior periods’
financial statements, to all financial assets and liabilities measured at fair value in interim and annual financial
statements for periods ending on or after January 20, 2009. Retrospective application with restatement of prior
periods’ financial statements is permitted but not required. Early adoption is encouraged.

It is also specified that retrospective application without restatement of prior periods financial statements should be
applied as follows. Entities would remeasure the financial assets and financial liabilities, including derivative
instruments, as at the beginning of the period of adoption, to take into account both own credit risk and
counterparty credit risk. Any resulting difference would be recorded as an adjustment to retained earnings, except:

    for derivatives in a fair value hedging relationship accounted for by the “shortcut method”, the resulting
    difference would adjust the carrying amount of the hedged item; and
    for derivatives in a cash flow hedging relationship, the resulting difference would be recorded in accumulated
    other comprehensive income.

The Committee also reached a consensus that entities that do not apply Section 3855 may defer application of the
accounting treatment in EIC-173 to interim and annual financial statements relating to fiscal years beginning on or
after January 1, 2010.

Illustration of transitional provisions
Consider, for example, an entity having a September 30 year-end. The first period in which EIC-173 would apply is
the six-month period ended March 31, 2009. If the entity chooses not to restate prior period’s financial statements, it
should adjust the opening balance of retained earnings as at October 1, 2008.

Mining Exploration Costs (EIC-174)

In March 2009, the Committee issued the above-mentioned EIC-174 and withdrew EIC-126, Accounting by Mining
Enterprises for Exploration Costs. The publication of EIC-174 covers all guidance in EIC-126 and provides additional
guidance for mining exploration enterprises in circumstances where a test for impairment is required.
Under Section 3063, “Impairment of Long-lived Assets”, a significant adverse change in the business climate is an
indicator that the carrying amount of a long-lived asset may not be recoverable and that a test for impairment is
required. For a mining exploration enterprise, the Committee considers that a significant drop in mineral prices or a
significant deterioration in the availability of the financing necessary to continue exploration or to develop a property
are examples of situations that would generally indicate a significant adverse change in the business climate.
However, even if certain indicators could significantly affect the economics for most mineral properties, they would
not automatically, in themselves, indicate the need for an impairment test for a property. The Committee concluded
that the implications of a significant adverse change in the business climate for mining exploration enterprises should
be considered on a case-by-case basis. EIC-174 provides examples to illustrate these situations. EIC-174 also
indicates that a significant adverse change in the business climate is often accompanied by a decline in a mining
exploration enterprise’s share price. The implications of a substantial decline in the share price of a mining
exploration enterprise may differ depending on the circumstances and the enterprise should consider whether this
reflects events or changes in circumstances that indicate the carrying amount of some or all of its mineral properties
may be impaired.
Should mining exploration enterprises need to test for impairment, many will have insufficient information about an
exploration property to estimate future cash flows to test the recoverability of the capitalized costs for that property.
In these circumstances, the Committee concluded that the enterprise should test the exploration property for
impairment by comparing the fair value, determined using the most appropriate technique for that property, to the
carrying amount, without first performing a test for recoverability.
The accounting treatment in EIC-174 applies to financial statements issued after March 27, 2009.
                                                                                                             April 2009


Consolidated Financial Statements

In January 2009, the AcSB issued an Exposure Draft entitled Consolidated Financial Statements. This Exposure Draft
proposes that the new consolidation standard proposed by the International Accounting Standards Board (IASB) be
incorporated into Canadian generally accepted accounting principles (GAAP) as part of the International Financial
Reporting Standards (IFRS) to be adopted by publicly accountable enterprises at the changeover date in 2011. This
new consolidation standard was proposed in December 2008 by the IASB in an Exposure Draft entitled ED 10,
Consolidated Financial Statements. In this respect, the IASB and the AcSB’s Exposure Drafts propose to replace the
current consolidation requirements in IAS 27, Consolidated and Separate Financial Statements, and interpretation SIC-12,
Consolidation – Special Purpose Entities. The AcSB therefore intends to replace the consolidation requirements in IFRS
that are exposed in the AcSB’s March 2009 Exposure Draft, Adopting IFRS in Canada II.

Furthermore, as the proposed standard might be applicable to Canadian private enterprises and Canadian not-for-
profit organizations (NFPO) in the future, the AcSB encourages all entities to evaluate the proposals and provide

The purpose of the new standard proposed by the IASB is to simplify the current accounting guidance by providing
a single definition of control for assessing whether a reporting entity controls another entity; and enhance required
disclosures about consolidated and unconsolidated entities. As a consequence, the IASB expects that entities will be
consolidated on a more consistent basis than previously, making the financial statements of groups more comparable
and understandable.

The proposals in the IASB and the AcSB’s Exposure Drafts would apply to all entities, except a parent that meets
several conditions allowing it not to present consolidated financial statements. Furthermore, an entity would not be
required to consolidate post-employment benefit plans or other long-term employee benefit plans to which IAS 19,
Employee Benefits, applies. Moreover, investment companies and their parents would not be exempted from the
requirement to consolidate their subsidiaries.

Control of an Entity
Control of an entity would be defined as the power of a reporting entity to direct the activities of another entity to
generate returns for the reporting entity. The concept of control would be widened compared to existing Canadian
GAAP. Control could be based on power to direct the strategic policies of another entity, as regards of operating,
investing and financing or through other ways. Control could be achieved for example by having voting rights,
options or convertible instruments, by means of contractual arrangements, or a combination of these, or by having
an agent with the ability to direct the activities of the controlled entity for the benefit of the controlling entity.

Assessing Control
A single approach would be used to assess whether the reporting entity controls another entity by considering power
and returns together, and how the reporting entity can use its power to affect the returns. Returns would vary with
that entity’s activities and could be positive or negative.

Control would be assessed continuously based on whether the reporting entity has the power and returns, and not
whether the reporting entity has a continuing ability to have that power. Assessing control would also consider the
terms and conditions of all related arrangements.

A reporting entity should assess whether it has power to direct the activities:

    of an entity by having voting rights or other arrangements;

    of a structured entity.

                                                                                                               April 2009

The proposed new standard would retain the presumption that a reporting entity that can exercise more than half of
the voting rights in another entity has power to direct the activities in the absence of circumstances that indicate
otherwise. The two Exposure Drafts also contain indications when an a reporting entity has a majority of voting
rights but does not have the power to direct activities, or when it has the power to direct the activities without
having a majority of voting rights.

Concepts of a variable interest entity under AcG-15, Consolidation of Variable Interest Entities, or special purpose entity
under SIC-12 would be replaced by the concept of a structured entity. A structured entity is an entity whose activities
are restricted to the extent that those activities are not directed with or without a majority of voting rights. When
assessing control of a structured entity, it would be necessary to identify how returns from the entity’s activities are
shared and how decisions, if any, are made about the activities that affect those returns. All relevant facts and
circumstances should be considered, including the purpose and design of the structured entity.

Disclosures would be more comprehensive and detailed to enable users of the financial statements to evaluate the
following two aspects:

    Control assessment;

    Involvement with structured entities.

The current consolidation procedures from IAS 27 have not been reconsidered by the IASB but are included as they
are in Exposure Draft (also include in the AcSB’s Exposure Draft). IAS 27 would not be withdrawn but would only
discuss recommendations relating to separate financial statements.

Application of the proposed new consolidation standard would only become mandatorily effective in Canada for
publicly accountable enterprises upon changeover to IFRS. However, early adoption of IFRS, including the
proposed new consolidation standard, would be permitted. The IASB plans to issue its final standard in the second
half of 2009 and the AcSB intends to incorporate the new standard into Canadian GAAP, as part of the IFRS to be
adopted by publicly accountable enterprises, at the same time.

Effective Interest Rate after Recognition of Impairment Loss (Amendment to
Section 3855)

In January 2009, the AcSB published an Exposure Draft, Effective Interest Rate after Recognition of Impairment Loss, which
proposes to amend Section 3855. The CICA Handbook – Accounting (hereafter the “CICA Handbook”) is currently
silent on whether the effective interest rate on an interest-bearing asset should be changed after recognition of an
impairment loss for financial assets other than loans and receivables. The Exposure Draft proposes to change the
effective interest rate method in order to clarify the calculation of interest on interest-bearing financial assets after
recognition of an impairment loss.

According to the proposals, an entity would be required to calculate and recognize interest income after recognition
of an impairment loss using the rate of interest used to discount the future cash flows for the purpose of measuring
the impairment loss. This requirement would only apply in the case of financial assets that are not loans and
receivables. With regard to loans and receivables, Section 3025, “Impaired Loans”, prescribes the recognition of
interest income subsequent to impairment.

The proposed amendment will make the application of the effective interest method under Section 3855 consistent
with the corresponding provision of IAS 39, Financial Instruments: Recognition and Measurement. The AcSB expects to
issue the proposed amendment in the second quarter of 2009, to be effective on issuance. Retrospective application
would be permitted.

                                                                                                            April 2009

Financial Reporting by Not-for-Profit Organizations (Invitation to Comment)

In December 2008, the AcSB and the Public Sector Accounting Board (PSAB) jointly issued an invitation to
comment on the future of financial reporting by NFPO. This invitation to comment asks significant questions about
the future of financial reporting by NFPO. In particular, it raises issues affecting how accounting standards will deal
with the special needs of such organizations.

The AcSB is currently responsible for the standards for private sector NFPO contained in the CICA Handbook and
the PSAB has authority for standards for public sector NFPO. The PSAB currently directs public sector NFPO to
adhere to standards in the CICA Handbook. This supports comparisons between similar entities and among all

Change brought about by the AcSB Strategic Plan (the AcSB has adopted IFRS for profit-oriented publicly
accountable enterprises and is currently developing standards for profit-oriented private enterprises) necessitates
consideration of the financial reporting by NFPO in the future. Several paths are proposed in the invitation to
comment. In the case of public sector NFPO, the PSAB has tentatively concluded that public sector standards alone,
or public sector standards supplemented by the 4400 series of Sections in the CICA Handbook (4400 series), are the
possible solutions. In the case of NFPO that are not part of the public sector, the AcSB has tentatively determined
that the possible solutions are either IFRS, or the private enterprise standards currently under development
supplemented by the 4400 series. The option of supplementing IFRS with the 4400 series is not possible given the
decision of the AcSB that interpretations, implementation guidance or other modifications of IFRS will be provided
only in very rare circumstances.

It should be noted that the boards have tentatively rejected developing a set of stand-alone standards.

Comments are requested by June 30, 2009. You can consult this invitation to comment on the AcSB’s Web site at
the following address:


Non-bank-sponsored Asset-backed Commercial Paper: Implementing the
Restructuring Plan

The above-mentioned document, which was published by the AcSB in February 2009, is the fourth AcSB
commentary on non-bank-sponsored asset-backed commercial paper (ABCP). In the three previous published
commentaries, the AcSB staff provided guidance on the measurement, presentation of and disclosure about
investments in ABCP in interim and annual financial statements. The guidance contained in these commentaries
remains relevant for fiscal years ended on December 31, 2008. The fourth commentary discusses, in particular, the
accounting of ABCP immediately before implementation of the restructuring plan (developed by the Pan-Canadian
Investors Committee for Third-party Structured Asset-backed Commercial Paper), of the exchange of ABCP for
new notes and the accounting of new notes. It only deals with accounting issues for those entities that have adopted
Section 3855.

Accounting for ABCP up to the Implementation of the Restructuring Plan
Immediately before the restructuring is given effect, measurements of ABCP investments must be reconsidered in
light of all current information available to investors. Accumulated cash in the conduit trusts payable on the
exchange of notes is included in the determination of the fair value of the ABCP and is not reported as interest
income. Any adjustment of the carrying amount of the ABCP will be recognized in net income or in other
comprehensive income, depending on how these financial assets have been classified according to Section 3855.

Accounting for the Exchange of ABCP for New Notes
According to the commentary, the exchange of ABCP for new notes is a transaction of substance and therefore,
investments in ABCP are derecognized. The new notes received in exchange for ABCP are initially recognized at

                                                                                                               April 2009

their fair value and the entity recognizes, as applicable, a gain or loss in net income. Furthermore, all unrealized gains
or losses related to ABCP accumulated in other comprehensive income related to ABCP classified as available for
sale are reclassified to net income on the exchange of the ABCP for new notes.

Accounting for the New Notes
The new notes, which are financial assets, are classified as being held for trading, available for sale or held to maturity
in accordance with their substance. They do not meet the definition of loans and receivables because they are debt
securities. Therefore, they cannot be classified under this category. The investor must also determine whether the
new notes contain embedded derivatives under the definition in Section 3855. The fourth commentary provides
some guidance on this topic.

Since the investor has a new financial asset, it must provide disclosures about the new notes with particular emphasis
on the risks and uncertainties. Furthermore, if the restructuring occurs after the balance sheet date, but before the
completion of the financial statements, the investor must provide disclosures on the nature and financial effect of
this event.

The AcSB commentary is available on its Web site at the following address:

Financial Reporting by Private Enterprises

In this article, we present the AcSB’s latest developments regarding private enterprises since the December 2008
issue of Flash. On January 6, February 3 and March 5, 25 and 26 of 2009, the AcSB made some provisional decisions
in connection with its project to develop separate GAAP for private enterprises. The following are some of these

    The proposed standard on impairment of financial assets would require an entity to review its financial assets at
    each reporting date for indicators of impairment. Significant assets would be assessed individually, but assets that
    are individually insignificant could be assessed in groups on the basis of similar credit risk characteristics. An
    impairment loss would be recognized when the carrying amount of the asset at the assessment date exceeds the
    highest of:
    o   the present value of the future cash flows expected from holding the asset;
    o   the net amount that could be realized from selling the asset; and
    o   the net amount that could be realized from exercising any rights to collateral.

    When there has been an improvement in the circumstances that previously indicated impairment of an asset, the
    entity would reverse a previously recognized loss. The carrying amount of the asset would be increased to an
    amount no greater than the amount at which it would have been measured if there had been no impairment;

    The AcSB decided to develop a standard, new Section 1500, ‘‘First-time Adoption’’, for transition issues related
    to the proposed standards for private enterprises, providing for retrospective application of the new standards to
    comparative figures for prior periods with limited exceptions. It would be proposed:
    o   that an entity’s first financial statements prepared in accordance with the new set of standards include an
        opening balance sheet and comparative information for the corresponding comparative period; and
    o   provisions to facilitate the adoption of those standards where full retrospective application would not meet a
        cost-benefit test.

The AcSB plans to issue an Exposure Draft on all of the proposed standards in April 2009. It also plans to make the
new standards available by late 2009 for early application to fiscal years ending December 31, 2009. The AcSB
tentatively decided that existing accounting standards for the private enterprise sector will be superseded by 2011.
Working Drafts of individual standards issued on the AcSB’s Web site may be consulted at the following address:
                                                                                                                             April 2009


Our Firm is publishing IFRS Newsletter, a bulletin dedicated exclusively to new developments in IFRS. You can
access this document on the Raymond Chabot Grant Thornton’s Web site in the “Publications” section under
“Assurance” at: For your information, the list of IFRS published or modified and of Exposure
Drafts and Discussion Papers published since the December 2008 issue of Flash is as follows:

IFRS Interpretation Published
      IFRIC 18, Transfers of Assets from Customers.
IFRS Modified
      Change in effective date of restructured IFRS 1, First-time Adoption of International Financial Reporting Standards (no
      accounting changes);
      Improving Disclosures about Financial Instruments (amendments to IFRS 7, Financial Instruments: Disclosures);
      Embedded Derivatives (amendments to IFRIC 9, Reassessment of Embedded Derivatives, and IAS 39);
      Improvements to IFRSs (amendments to some IFRS following the annual improvements project of 2008).
IFRS – Exposure Drafts
      Post-implementation Revisions to IFRIC Interpretations (proposed amendments to IFRIC 9 and IFRIC 16, Hedges of a
      Net Investment in a Foreign Operation);
      Consolidated Financial Statements (project aims to replace the existing IAS 27 and SIC-12 by one standard only);
      Derecognition (proposed amendments to IAS 39 and IFRS 7);
      Income Tax (project aims to replace the existing IAS 12, Income Taxes);
      Due Process Handbook for XBRL Activities (description of the mandatory procedures followed in developing the
      IFRS taxonomy and in all other eXtensible Business Reporting Language activities (this language is a form of
      interactive data under which financial data is tagged so that it can easily be understood and processed by
IFRS – Discussion Papers
      Review of the Constitution – Identifying Issues for Part 2 of the Review (review of the International Accounting Standards
      Committee Foundation’s constitution);
      Preliminary Views on Revenue Recognition in Contracts with Customers;
      Leases Preliminary Views.

This bulletin provides a summary of recent publications from standardization and regulatory organizations. It is intended to keep readers
informed about recent developments in accounting. Readers should, however, refer to the original publication before making any decisions on
the basis of these developments.
Translation. In case of discrepancy, the original French text shall prevail.

About Raymond Chabot Grant Thornton
Founded in 1948, Raymond Chabot Grant Thornton is a leader in the fields of assurance,
taxation, consulting, recovery and reorganization. Its strength relies on a team of more than
2,000 people, including over 240 partners, in more than 90 offices throughout Quebec, eastern
Ontario and New Brunswick.
Raymond Chabot Grant Thornton is a member firm within Grant Thornton International Ltd. (Grant
Thornton International). Grant Thornton International and the member firms are not a worldwide
partnership. Services are delivered independently by the member firms.


Shared By: