So what are some of the factors at play in this field of grey?
The CPA Canada Handbook defines a publicly accountable
entity as: “An entity, other than a not-for-profit organization that:
a. Has issued or is in the process of issuing, debt or equity
instruments that are,
b. or will be, outstanding and traded in a public market (domestic
or foreign stock exchange or an over-the-counter market,
including local and regional markets); or,
c. Holds assets in a fiduciary capacity to a broad range of
outsiders as one of its primary business”.
For many entities, their particular circumstance is a “
no-brainer”. For example, if a mutual fund is sold by prospectus and all
documents and financial reports are filed on SEDAR, IFRS has to be
applied. Similarly, National Instrument 31-103 (NI 31-103) requires
that exempt market dealers, investment fund managers and portfolio
managers follow IFRS. Similar IFRS reporting requirements are also
in place for other regulated financial institutions such as banks and
investment dealers.The new financial reporting requirements for
certain prospectus exemptions under National Instrument 45-106
(NI 45-106) are also clear: starting in January 2016, if you raise
money under the OM exemption, issuers are mandated to report
under IFRS. Others will adopt IFRS in anticipation of a go-public
transaction down the road.
This issue of what is a PAE becomes a far more difficult
judgment call when a private investment fund is sold privately
“over-the-counter” or perhaps through a debt or equity offering
on crowdfunding portal. It is often overlooked that just because
an entity’s debt or shares are not listed on a recognized exchange,
that it does mean that it is not publicly accountable. Management
will need to assess the particular facts and circumstances, consult
with its Board, stakeholders, advisors and auditors.
Many groups have decided not to implement an explicit
bright line threshold to determine whether they are a publicly
accountable entity and thus should apply ASPE or IFRS. Rather,
the assessment is made on a case by case basis. So what can you
do if you are in the grey zone?
A possible framework could look at the following criteria:
• Whether there are laws or regulations which prescribe the
applicable financial reporting framework (IFRS or ASPE)? Is
the entity regulated and if so, does their regulator prescribe the
accounting standards that must be applied? As noted above,
this is the case for example, for EMDs are required to follow
IFRS under NI 31-103 as are issuers using certain prospectus
exemptions under NI 45-106.
• What is the nature of the entity? Does the investment
entity hold and manage financial resources entrusted to
them by clients, customers or members not involved in the
management of the entity?
• What are the number of unitholders or potential shareholders
in an offering? The greater the number, the more difficult it is to
argue that there is not a broad group of outsiders.
• What are the purpose of preparing the financial statements?
Who are the users and how will they be using the financial
statements? Are the financial statements prepared to meet the
common financial information needs of a wide range of users
or the financial information needs of specific users?
• Whether the substantial majority of stakeholders depend
primarily on the annual financial statement for external
reporting? Do they have other means of accessing financial
information? What are the expectations of the financial
This type of assessment will need to be made by private
companies who are considering the merits of raising capital by
an offering memorandum or perhaps through one of the new
crowdfunded or business start-up rules. In Ontario, the OSC’s
new crowdfunding and OM exemption rules require private
entities follow IFRS. NI 45-106 now requires that audited financial
statements prepared in accordance with IFRS be provided both
with the OM and annually thereafter to investors. That is part of
the regulators new “quid pro quo” for increased access to capital
in Ontario. On the other hand, the Alberta Securities Commission
proposal under the new business start-up rules would allow a
start-up issuer to use ASPE with a big warning across the front face
of the financial statement. This is bound to cause some sticking
points for issuers and their auditors regarding which accounting
framework to use under which circumstances. .
So where can you go for more guidance?
CPA Canada’s IFRS Discussion Group noted in its March
2010 meeting that these questions relate primarily to whether
a particular entity meets criterion (ii) of the definition (i.e.,
whether it “holds assets in a fiduciary capacity for a broad group
of outsiders as one of its primary businesses.”). The Group
members also noted that there are many questions about what
constitutes a broad group of outsiders. CPA Canada observed
that there are bound to be grey areas requiring judgment in
determining whether a particular entity meets the definition. The
IFRS Discussion Group members noted that the definition in the
CPA Canada handbook had been developed from the IASB’s
definition of public accountability (found in the IFRS for Small
and Medium-sized Entities) and recommended that stakeholders
be made aware of the training modules developed by the
International Accounting Standards Committee Foundation on
the IFRS for Small and Medium-sized Entities.
In summary, it’s not always black and white that a private
entity will be required to follow IFRS or ASPE. Plan early and
consult your stakeholders and auditors. It’s not required that they
have turned grey but they do have to be adept at seeing it.
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