Under National Instrument 31-103 Registration Requirements,
Exemptions and Ongoing Registrant Obligations, a registered
firm must establish, maintain and apply policies and procedures
that create a system of controls and supervision. This includes
maintaining records to accurately document your business
activities, financial affairs, and client transactions. These books
and records will also be required for your financial statement audit.
An audit in accordance with Canadian Auditing Standards and IFRS
requires documentation of your internal controls.
The audit team will need to understand and observe all
significant control cycles – revenue recognition, cash receipts,
procurement, cash payments etc. If you are concerned that your
firm does not have any internal controls, don’t worry. Even simple
bank reconciliations, dual signatures on cheques, or review of
monthly disbursements are all examples of good controls.
Most often, you are required to travel for business purposes,
and in your first year these expenses may be the largest operating
expense in your financial statements. In my experience this is a
common area for deficient record keeping. I strongly recommend
that you keep your receipts, and document the business purpose
for each expenditure. Credit card statements are not necessarily
sufficient. This will also help in case your firm undergoes a
Canadian Revenue Agency tax audit.
Accounting for Broker Warrants
As a cost-reducing strategy, your firm’s clients may issue broker
warrants to your firm, a registered EMD. Broker warrants provide
your firm with the option to purchase securities of the issuer at a
pre-determined exercise price during a specified period of time. The
warrants which have been provided to you for services rendered
are financial instruments which must be recorded at fair value.
Moreover, these instruments will need to be fair valued at the end
of each reporting period. The initial and subsequent valuation of
these instruments can be complex and requires extensive estimates.
Consultation with your audit firm may be required.
Excess Working Capital
Excess working capital, for the purpose of completing and
filing Form 31-103F1 Calculation of Excess Working Capital,
is based on IFRS financial statements. However, the working
capital calculated using the current asset and current liability
classification in the financial statements will not necessarily give
you the excess working capital calculated for Form 31-103F1
Here are some points to consider in your calculation:
• Ensure that you are using the right minimum capital in your
calculations. Remember that the minimum capital is $25,000
for a registered adviser or a registered investment fund
manager, $50,000 for a registered dealer, including EMDs,
(that are not also a registered investment fund manager), and
$100,000 for a registered investment fund manager.
• The financial institution bond (FIB) insurance deductable
reduces your minimum capital requirement.
• If you hold short-term investments, a reduction for market
risk must be calculated.
• Prepaid expenses, intercompany receivables and certain
deferred amounts are excluded from your current assets.
• If there are shareholder loans due on demand then you
should consider signing a subordination agreement to
exclude these amounts from the calculations.
In summary, remember that as a registrant, your financial
reporting requirements are different than that of a regular private
company. If you are not doing so already, you will need to
maintain adequate books and records that provide an audit trail.
Advance planning will allow you to achieve your tax planning
objectives. Monitor your excess working capital which includes
the necessary adjustments.
Finally, as you would expect of your clients, make sure you
align your business with the right advisors.
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