by John Hughes
The Ontario Securities Commission has issued a new IFRS document, Top 10 Tips for Public Companies Filing their First IFRS Interim Financial Report, and as I try to cover the Canadian landscape fairly thoroughly here, I’d obviously be remiss if I didn’t mention it. That said, the guide doesn’t actually provide too much to engage with, assuming you’ve been paying some attention up to this point. It would be troubling if too many entities, even smaller ones, perceived a lot of the content as actually constituting useful ”tips,” although of course preventing regulatory problems is better than having to cure them afterwards, and it’s probably better to err on the side of repetition.
The most interesting section, perhaps, deals with auditor involvement with the initial IFRS filings. The document notes that the rules for interim reviews are unchanged, leaving in place the odd mechanism of providing disclosure when interim financial statements haven’t been reviewed by the auditor, while saying nothing when they have. It goes on: “Audit committee members should consider whether auditor involvement is warranted in an issuer’s circumstances as it is important that investors be provided with IFRS financial information for the first three quarters in 2011 that will not be subject to correction as a result of the annual audit. In addition, audit committee members should be mindful of the implications of any such changes on secondary market liability.” This seems like a pretty strong hint that the OSC considers auditor involvement to be (at the very least) advisable – the last sentence in particular could be read as a hint that any entity not having such involvement will undermine its due diligence defense in the event of anything going wrong. In this light though, it’s a little odd that the top ten tips don’t include anything on the financial literacy of the audit committee itself, which I’ve written about several times on this blog (for example here and here).
On the question of how to present the IFRS 1 reconciliations, the document presents the following “illustrative example of an equity reconciliation that would provide transparent disclosure of the material adjustments between Canadian GAAP and IFRS”:
In this respect as in others, while brevity may be the soul of wit, it’s not necessarily the soul of a stimulating discussion about financial statements. Third quarter MD&A (as documented here and in previous posts) contain numerous examples which go beyond this, for example in providing separate columns for reclassifications versus recognition/measurement changes, or for each separate topic. By simply asserting that this unremarkable example would provide transparent disclosure, the document lets those fuller possibilities slip away.
It also touches on another issue I’ve considered in the past: how much should those first IFRS financial statements provide disclosure beyond what would normally be included at an interim date, to compensate for the absence of a previous set of annual IFRS statements. Here’s what it says: “Many issuers will find that the disclosure requirements under IFRS are significantly greater than those currently required under Canadian GAAP. Whether an issuer is required to include expanded footnote disclosure for individual areas contained in the first IFRS interim financial report will be a matter of professional judgment. An issuer will have to weigh differences between Canadian GAAP and IFRS, disclosure in the previous annual financial statements prepared in accordance with Canadian GAAP and materiality when applying this judgment. For example, if property, plant and equipment is a material balance sheet item to the issuer, providing the gross carrying value and accumulated depreciation balances by class is necessary information for investors. After the first IFRS interim financial report this type of disclosure may only appear annually assuming it is not material to the understanding of subsequent interim periods.”
Again though, this seems too sketchy to be particularly helpful. Even on the example given, the main uncertainty about property, plant and equipment isn’t likely to focus on “the gross carrying value and accumulated depreciation balances by class,” but rather on whether to provide the full reconciliation of opening and closing balances required by IAS 16. The OSC’s example could be taken to imply that this isn’t necessary, that the gross balances will be sufficient, but it’s not at all clear on what basis one would craft that distinction. And this doesn’t say anything about all the additional narrative disclosures dotted through various IFRS standards. I guess, ultimately, it’ll come down to intuition as much as anything else.
It seems to me the emphasis at this late and crucial stage should be on bringing out the complexities of IFRS, which this document rather studiously avoids. But that’s fine, it just means more mental stimulation for the rest of us. Did I mention the first half of 2011 could be a bit busy?
The opinions expressed are solely those of the author.