by John Hughes
The CSA has issued CSA Staff Notice 52-328 Disclosures about Accounting Policies in the Year of Changeover to International Financial Reporting Standards. The notice focuses on the MD&A requirements, in Form 51-102F1, for disclosures about newly-adopted accounting policies; these include (among other things) describing the events or transactions giving rise to the policy change, discussing its effect and – if it’s an area where a choice of accounting policies exists – identifying the alternatives and describing why the issuer made the choice that it did. However, this requirement specifically doesn’t apply to the initial adoption of accounting policies resulting from adopting new accounting standards. At face value then, it wouldn’t apply to policy changes as a result of adopting IFRS.
Still, given the regulatory focus on IFRS disclosures in MD&A, many issuers and advisors may have wondered if it was quite that simple. For instance, one of the first companies to file its IFRS statements this year, 407 International Inc., included a brief summary of the main policy changes in its MD&A, even while specifying that the impact of each one was immaterial. The staff notice reports that CSA staff received questions about how to interpret the instruction in the context of IFRS, and this is what it says:
- Item 1.13(b) does not apply to accounting policies initially adopted as a result of changeover to IFRS. However, in its year of adopting IFRS, if an issuer voluntarily changes an accounting policy subsequent to filing its first interim financial report (other than due to the early adoption of a new or revised IFRS standard), Item 1.13(b) applies to the change in accounting policy. In this case, an issuer should provide the disclosure specified in Item 1.13(b) to the extent it is not provided in the financial statements.
- An issuer’s interim financial reports and annual financial statements in its year of changeover to IFRS will include information about the transition to IFRS and the issuer’s accounting policies. In the accompanying MD&A, management has the opportunity to supplement this information by highlighting significant entity-specific features of the issuer’s transition to IFRS. Although Item 1.13(b) does not apply to accounting policies initially adopted on changeover to IFRS, management may conclude that investors would benefit from further information.
- For example, management may discuss an issuer’s choices among alternative acceptable accounting policies under IFRS, including the reasons for a particular choice. MD&A disclosure should not simply replicate disclosure in the financial statements but instead should complement the information provided in the financial statements.
That certainly seems like the right answer. For example, many issuers noted in their MD&A during the pre-changeover period that IAS 16 allows measuring property, plant and equipment using either a cost model or a revaluation model, and that they’d selected the cost model. I’ve often wondered about the utility of describing a hypothetical alternative they may never have thought for a second of selecting, but I suppose it’s what they felt they had to do. Still, it would be pretty farcical at this late stage still to be kicking at that dead horse: it’s enough of a challenge for investors to absorb what impact IFRS actually had on an entity, without being distracted by what impact it might have had in an alternate universe. To take a more sophisticated example, although an entity could choose to explain why it measures the non-controlling interest in acquired businesses using the proportionate share in the recognized amounts of the acquiree’s identifiable net assets rather than using fair value, it’s likely that only geeks like yours truly would thank them for it.
There may be some situations though where investors would benefit from this “further information.” For example, some exploration-stage mining companies that previously capitalized exploration costs under Canadian GAAP are now expensing them under IFRS. Since they had the choice of retaining the previous policy (subject perhaps to some adjustment around the edges), it may be reasonable to address why adopting IFRS prompted this change in philosophy. Real estate entities have a very prominent choice between measuring investment property at cost or fair value, and since the industry doesn’t seem uniform in how it made that choice, it may make sense for such an entity to explain the merits of the path it went down. More broadly, any policy choice that generates additional volatility may warrant greater explanation: the choice may be entirely beneficial, but investors may need a little help in understanding how. But then, that’s equally true if the volatility flows from an accounting policy for which the issuer didn’t have a choice. Similarly, policy choices impacting on key performance indicators will be more significant to investors than those that don’t, but in the great majority of cases investors aren’t likely to worry about the choice as such, as long as they understand what the KPIs reflect under IFRS, and (crucially) how that might differ from key competitors.
Of course, a proactive entity shouldn’t have waited until now to address these issues, and the MD&A isn’t the only medium it might use to get out its message. But one way or another, some companies probably still have a bit of explaining to do.
The opinions expressed are solely those of the author.