In an effort to provide timely input to issuers, last week on
February 28, 2012 the OSC’s Office of the Chief Accountant
released OSC Staff Notice 52-720, Financial Reporting Bulletin
highlighting areas of interest that the OSC has observed from
their review of IFRS adoption experiences by issuers in 2011.
Those EMDs with year ends beginning on or after January 1, 2011
similarly need to prepare their financial statement in accordance
with IFRS and file these with the OSC.
The OSC had observations and recommendations in the
following key areas:
Business combination accounting is not usually a major
issue for many EMDs as non-consolidated financial statements
must be prepared for regulatory reporting under NI 31-103. On
the other hand, EMDs involved with private placements and
deals should be aware that the OSC has noted recognition
and measurement issues with step acquisitions, the method of
acquisition accounting (IFRS requires identifiable assets and
liabilities assumed be recognized at full fair value even when the
acquired interest is less than 100%).
Further, the new disclosure requirements for acquisitions are
far more extensive under IFRS and this will put more demands
on dealer due diligence, those preparing and/or auditing financial
statements. Based on review of 2011 interim filings, the OSC
noted deficiencies in new IFRS disclosure requirements including:
• a qualitative description of what makes up goodwill.
• revenue and profit or loss of the acquiree since the acquisition
• pro-forma revenue and profit or loss of the combined entity.
• the reason for the acquisition.
• gross contractual amounts of acquired receivables and an
estimate of the contractual cash flows expected to be collected.
The OSC asks, “From reading the financial statements, do
investors understand what was acquired, how it was acquired
and why it was acquired?”
Common Control Business Combination Transactions
IFRS does not currently provide guidance on accounting for
common control transactions where the businesses are controlled
by the same group before and after the business combination
transaction. This sometimes impacts EMDs when they are
combining or reorganizing related EMDs or other entities under
a holding company ownership. The OSC identified 3 approaches
in use including:
• Book value accounting ( carry-over basis) for the current
and comparative years as though they had always been
combined ( similar to what had been required under previous
EIC 89 Canadian GAAP).
• Book value accounting (carry-over basis) from only the date
of acquisition, without combining from the beginning of the
fiscal year nor restating the comparative year results.
• Applying purchase accounting on the basis that the acquirer
is a separate unrelated entity.
The OSC‘s view is that investors should have financial information
both before and after the common control transaction without any
gaps in the periods presented. Thus the first method above would
appear to be the preferred method to apply (which is consistent
with previous Canadian GAAP). The OSC encourages consultation
with them regarding an entities’ proposed accounting treatment
for complex common control transactions.
EMDs need to be aware that there are significant differences
between the recognition and measurement of impairment losses
(and reversals) under IFRS compared to previous Canadian GAAP.
Key areas of OSC interest include:
• Disclosures relating to each material impairment loss or reversal
of impairment provisions (under IFRS what has gone down in
value may go up and the provision reversed if appropriate).
• Disclosures required for estimates used to measure
recoverable amounts of cash generating units (CGUs)
containing significant goodwill or intangible assets with
indefinite lives irrespective of whether there has been any
impairment or not.
The OSC is focusing on whether the financial disclosures
provide the necessary information for investors to easily
understand how recoverable amounts and fair values (including
assumptions) are determined. The OSC also suggests that where
the market cap of an issuer is less than the carrying amount of an
EMDs should heed recent OSC advice!
By Stephen Warden, CA, EMDA Director and Partner, parker simone LLP
ACCOUNTING & FINANCE