issuer’s net assets, then there should be disclosure to explain the
shortfall and why the carrying value of the net assets is supported.
Finally, the OSC reminds issuers to ensure that cash flow
projections are reasonable and supportable (e.g. forecast period,
discount rate, growth rate, sales trends, working capital and cap
ex requirements) as well as the approach for determining fair
values for assets having unobservable market prices.
Critical Judgments and Sources of Estimation Uncertainty
When applying the Company’s accounting policies, IFRS
requires disclosure of judgments having the most significant
effect on amounts recognized in the financial statements.
Canadian GAAP did not have a similar requirement and thus this
will be new to EMDs and reporting issuers. IFRS also requires
disclosure about assumptions made concerning sources of
estimation uncertainty at year end which have a significant risk
of resulting in a material adjustment to the carrying amount of
assets and liabilities within the next fiscal year. You have to ask
yourself, “Which estimates require management’s most difficult,
subjective or complex judgments?”
You will have to be concerned with not “cluttering up” the
financial statement with disclosures of insignificant or immaterial
judgments. The OSC also reminds issuers that disclosures will not
meet Staff expectations if disclosures are lacking in substance
(aka Boilerplate) and/or does not separate critical judgments from
sources of estimation uncertainty. This will result on EMDs putting
more time and effort into the assessment of critical judgments,
sources of estimation and more extensive tailored disclosures in
their financial statements.
Going Concern
The OSC expects that issuers differentiate uncertainties that
cast significant doubt on a company’s ability to continue as a
going concern from uncertainties that do not cast such doubt.
Here too, the OSC warns issuers not to use disclosures which
could be considered “boilerplate” and lack specificity. As such,
an issuer will need to explicitly identify the material uncertainties
which cast significant doubt upon the company’s ability to
continue as a going concern. Of course, where there is now a
going concern condition, the auditor’s report should include a
matter of emphasis paragraph (which was newly introduced to
Canada in late 2010).
Non-GAAP Financial Measures and Additional GAAP Measures
Many EMDs will want to review CSA Staff Notice 52-306
Non-GAAP Financial Measures and Additional GAAP Measures
which has been recently revised to provide additional information
on Staff’s expectations for disclosure of additional GAAP
measures presented under IFRS.
The notice describes practices that help issuers and certifying
officers address their obligations to ensure that the information
they provide to the public is not misleading. The practices
contain examples of subtotals that should not be presented in
the statement of comprehensive income. These examples include
subtotals without labels, “income before the under noted items”,
adjusted EBITDA and adjusted EBIT. The OSC also reminds
issuers who include “operating earnings” or similar subtotals to
include all items of an operating nature within the subtotal.
In addition, the OSC provided a summary of areas of interest
on which they will focus their reviews in 2012, including:
• Provisions - in particular, disclosure of whether the discount
rate used is credit adjusted or not and the nature and
changes in estimates where an estimate previously reported
is significantly changed).
• Fair value measurement (consideration of the impact of
current economic conditions on risk adjustments and
discount rates).
• Debt classifications.
• Statement of comprehensive income - presentation.
For those EMDs now finalizing their December 31st financial
statements or preparing for future year ends, you may wish to
take a review of the OSC Financial Reporting Bulletin to ensure
that you have addressed the applicable areas of OSC focus in
your year end financial statements.
For more information contact:
Stephen Warden
stephen@parker-simone.com
