KPMG On-Screen Basic by rt3463df


									IFRS Implications for the
      Public Sector

         Andrew Newman, Audit Partner, Public Sector


 Canada’s Plan to Adopt IFRS

 IFRS-Canadian GAAP Similarities and Differences

 Key Success Factors


Canada’s Plan to Adopt IFRS

Canada’s plan to adopt IFRS – who and

 Canadian GAAP will cease for publicly accountable enterprises
 Change-over date to IFRS now confirmed as fiscal years
 beginning on or after January 1, 2011
 Currently ―publicly accountable enterprises‖ defined to be
 entities that:
    Issued any class of instruments in a public market; and
    Hold assets in a fudiciary capacity for a broad group of outsiders.
 Publicly accountable enterprises include Government Business
 Enterprises and Government Business Type Organizations

Private Enterprises

 AcSB has announced intention to develop unique set of
 standards for private enterprises
 Two key premises:
   The majority of the recognition and measurement standards in the
   existing Handbook are relevant to Canada’s private business and
   will be retained with few, if any, modifications
   Financial statement disclosure requirements will be considerably
   fewer than in the existing Handbook.
 Moving quickly—anticipated to be completed by end of 2008.
 Proposed approach and working drafts of some sections
 published on August 28th.

Not-for-Profit Organizations

 AcSB has not mandated adoption of IFRS by NPOs
 AcSB actively discussing the future direction of accounting
 standards for NPOs
 Possible options include:
    Providing a set of over-arching standards (liks S4400) that address
    unique aspects of NPOs
    Allowing NPO’s to select between IFRS and private business
    GAAP, under the umbrellas of the over-arching NPO standards
    Allowing, or requiring, the ―SUCH‖ sector (schools, universities,
    colleges, hospitals) to adopt PSAB standards


 PSAB has not signalled that governments or
 government NPOs will be required to adopt IFRS
 International Public Sector Accounting Standards
   Currently no plan to implement international Public
   Sector standards in Canada
   IPSASB relocated to Toronto
   Canada has two members on IPSASB (Rick Neville &
   Sheila Fraser)

  IFRS - Canadian GAAP
Similarities and Differences

Timeline for adoption of IFRS

                              Disclosure         Update convergence plan
                       of plan for convergence     and standards which
  Changeover date
                       and anticipated effects      may have material
                                                   effect in greater detail

 Jan 1/08                Dec 31/08                 Jan 1/10                         Jan 1/11

                    Calendar year periods
                         beginning                                     IFRS
                                                                    Comparative             IFRS
                                                                      figures              go-live

                                                 Balance                           Last reporting
                                                  Sheet                                under
                                                                                  Canadian GAAP

IFRS versus Canadian GAAP – Similarities

 Comprehensive set of principles-based standards
 Similar to Canadian GAAP in structure and form
 Similar basic concepts and recognition / measurement
 Similar structure and content of financial statements
 Many standards in IFRS provide similar approach as
 Canadian GAAP

IFRS versus Canadian GAAP – Differences

 Fewer bright lines and rules
 Some standards in IFRS differ considerably from
 Canadian GAAP – e.g. impairments, provisions
 More accounting policy choices and less interpretative

 Applying IFRS requires more professional judgement
      and results in greater volume of disclosures
 Many differences in application/interpretation

       BE CAREFUL – The devil is in the detail!

IFRS versus Canadian GAAP:
Areas with more significant differences

  Impairment of assets          Securitizations 
  Provisions (incl. asset        Stock-based compensation
  retirement obligations)
                                 Accounting for tax
  Financial instruments &        uncertainties
  hedging                        Consolidations, SPEs,
  Leases                         investments, JVs
  Property, plant and            Rate-regulated operations 
  equipment                      Industry-specific issues –
  Employee benefits              insurance, extractive industries

           Fundamentally different from Canadian GAAP

Impairment of Assets
      (IAS 36)

Impairment – Summary of approach

IFRS has one general impairment standard
           IFRS –                    Canadian GAAP –
      “1-step process”               “2-step process”
  Recoverable amount is higher             For an asset in use,
  of                                 undiscounted future cash flows
     fair value less cost to sell   from use establish recoverability
                                       and fair value used for the
     value in use (discounted            impairment calculation
  Discounting required in             Discounting occurs only in
      Evaluation stage                    the valuation stage

          Impairments more likely under IFRS!!
Impairment – Long-lived assets and
finite-life intangible assets

 Timing of impairment tests same as Canadian GAAP
 Estimate recoverable amount for
   individual asset or, if not possible
   the asset’s cash-generating unit
 Apply CGU concept when asset does not generate cash
 inflows which are independent from other assets
   similar to ―asset group‖ but could have differences
 Presume future cash flows beyond initial 5 years not
    extrapolation based on steady or declining rate of growth
 Reverse impairment charges if circumstances change
Property, Plant & Equipment
  and Investment Property
       (IAS 16, IAS 40)

PP&E – Recognition and measurement

 Components approach – more rigorously applied
 and broader than under Canadian
   allocate cost to significant parts of the asset (including non-
   physical components such as major overhaul/inspection)

 Borrowing costs directly attributable to
 construction of ―qualifying‖ assets – must be
 Subsequent measurement options are cost or
 revaluation model; apply to all items in a category of

 Investment property – Two options

     Property held for rental or capital appreciation
   Fair value model               Cost model
      Initially measure at cost     Initially measure at cost
      Adjust carrying value to      Depreciate
      fair value                    Impairment losses
      Do not deduct disposal        Determine and disclose
      costs in arriving at FV       fair value
      Recognize changes in
      FV in P&L, not equity
      No depreciation or
      impairment losses
Apply accounting policy choice to all investment properties
      Pension and
Post Employment Benefits
        (IAS 19)

Defined benefit pension plans and OPEBs –
Actuarial gains and losses

 Can choose to recognize:
   immediately in equity (with no amounts ever
   recognized in P&L); or
   using corridor method; or
   another systematic approach to recognize faster

 Required to apply accounting policy choice
 consistently to all plans

Defined benefit pension plans and OPEBs
– Past service costs

 Accelerated recognition of past service costs relative
 to Canadian GAAP
   Recognize past year service cost on straight-line
   basis over average remaining vesting period
   To the extent that benefits are already vested at
   time of amendment, recognize past service costs

 (IAS 37)

Scope of IAS 37 – Provisions

 Applies to all enterprises in accounting for provisions,
 contingent liabilities and contingent assets, except
   those covered by another IFRS (e.g. financial instruments,
   insurance contracts, employee benefit obligations)

           HB 1000       134, 135, 159

                                                IAS 37
                                             (IFRIC I, 5, 6)
            HB 3290

                          HB 3110

 Provisions – liabilities of uncertain timing or amount
Provisions – Recognition and measurement

 Recognize if probable a liability has been incurred
 Recognize on basis of legal OR constructive obligation
 Probable = ―More likely than not‖ rather than ―likely‖
 Measure at ―best estimate‖ – may be one of
    most likely outcome – single best estimate
    expected value – probability weighted expected value
    midpoint – where a range of probable estimates
 Discounting required when effect is material

More items to be recognized…measurement may differ

                    IFRS              Canadian GAAP

Provisions under     Best                Best estimate
                               amount required to settle at balance
IAS 37             estimate
                               sheet date or transfer to a third party

                                      Reasonable estimate
Loss                 Best
contingencies      estimate   of ultimate loss (or low end of range if
                              no estimate more likely than any other)

Asset retirement
obligations and      Best                   Fair value
                              (amount liability could be settled for in
restructuring      estimate
                              a current transaction by willing parties)

Other Potential Differences

Related Parties

No special rules – RPTs accounted for in accordance with
requirements of relevant IFRSs
Should take into account substance over form
 –Consider transactions with shareholder, particularly non-
  reciprocal amounts received in the form of cash or non-
  monetary assets
    If any possibility of having to repay, then recognize
    If no requirement to repay under any circumstance,
      then normally will be an equity contribution and not
 –potential issue for GBE/GBTOs—applicability of PS3800

Other Potential Differences

  Revenue recognition
      Don’t blindly assume that your revenue recognition
      policies are consistent with IFRS
  Accounting for Investments
      No VIE standard; consolidate controlled SPEs
      No exemption from consolidation of subsidiaries;
      no AcG-18 equivalent standard

Key Success Factors

Two Sources

1) IFRS Implementation Experience from Europe and
2) The Canadian Experience with Significant Accounting
   Changes in the Public Sector

Experiences from Europe and Australia

Companies found that they
   Underestimated the effort needed to convert
   Lacked early support from senior management
   Waited too long to get started
   Suffered from poor project management
   Failed to fully embed IFRS into their primary systems

More experiences from Europe and Australia

Companies found that they
   Invested heavily in training finance & accounting staff
   Required systems upgrades / adjustments
    (IT and management reporting systems)
   Needed to renegotiate contracts
    (e.g. bank and compensation agreements)
   Spent considerable time communicating with

Key Success Factors

1) Support from highest levels of management
        Corporate Priority
2) A robust & flexible project plan
        Accounting & Financial Reporting
        Systems
        People/Training
        Operations/Business/External
3) A multi-functional implementation team
4) An energetic and dedicated team leader committed to
   successful completion
5) Prioritization of tasks (Complexity, Time & Resource
   Requirements, Risk, Momentum)

Key Success Factors

6) Resources (financial, human, technical)
7) Engaging non-financial managers and staff
8) Communications / Managing Expectations
9) Engaging external stakeholders consistently (Audit
   Committee, Board, TBS, OAG)
10)Seek value-added benefits:
       enhance skill / knowledge of financial and non-financial staff
       streamline and standardize processes
       enhance your control environment
       improve knowledge of organization
       cross-functional interaction


Andrew C. Newman


To top