Accounting Standards Oversight Council
Report on Public Meeting
October 27-28, 2011
Accounting Standards Oversight Council discusses international and domestic financial reporting activities
At its meeting in Toronto on October 27-28, 2011, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:
International Accounting Matters
Accounting Standards Board’s Recent Activities
Public Sector Accounting Board’s Recent Activities
Accounting for Rate-regulated Government Business Enterprises
The IFRS Foundation’s Due Process
IASB Agenda Consultation 2011
International Public Sector Accounting Standards Board
Report-back on AcSOC Members’ Attendance at AcSB and PSAB Meetings
Communications: Outreach Activities of the Accounting Standards Oversight Council
Joint Session: AcSOC and Auditing and Assurance Standards Oversight Council
Canadian Public Accountability Board
Towards Integrated Reporting: Communicating Value in the 21st Century
Leveraging Change: The New Pillars of Accounting Education
Paul Cherry, Chair of the IFRS Advisory Council, updated members on international financial reporting matters. His comments included the following:
- The search for a Chairman for the IFRS Foundation Trustees continues.
- Five trustees and the Foundation’s Chief Operating Officer will be retiring in the near future.
- The Foundation has completed its strategy review, substantially as exposed, but is awaiting completion of the corresponding strategy review of its Monitoring Board.
- The Foundation’s Due Process Oversight Committee has produced a draft protocol outlining its proposed procedures and processes.
- The Foundation will shortly be filling five upcoming vacancies on the International Accounting Standards Board (IASB).
- The IASB and the US Financial Accounting Standards Board (FASB) continue to work on financial instruments, leases, revenue recognition and insurance contracts. Progress has been made on converging financial instruments, leases will be substantially converged and revenue recognition will be fully converged. The FASB is one step behind the IASB in its due process for insurance contracts as it has only issued a discussion paper for comment and will have to issue an exposure draft. In the event the IASB aligns the timing of its due process with the FASB's, this might take several years, which might be untenable for countries lacking robust national standards on insurance contracts. There is also a possibility that the IASB might re-expose its proposals.
- The IASB Chairman has written a letter to the European Securities and Markets Authority expressing his concern about the visibly inconsistent application of International Financial Reporting Standards (IFRSs) by some European companies in arriving at fair value measurements and impairment losses that seem to differ from the objective of International Accounting Standard (IAS) 39 Financial Instruments: Recognition and Measurement.
- The Foundation has recognized that the criteria for the IFRS Interpretations Committee’s agenda requires revision, and recently appointed a senior and highly experienced IASB staff member as the Committee’s new Chairman.
- Three new regional organizations have been set up in Asia-Oceania, Latin America and Africa.
- The staff of the US Securities and Exchange Commission (SEC) is due to deliver three reports to the SEC Commissioners addressing issues related to the question of whether the US should adopt IFRSs.
Members discussed Mr. Cherry’s remarks and the possible implications of these developments for Canada.
Gord Fowler, Accounting Standards Board (AcSB) Chair, commented on the following matters:
- Ian Mackintosh, the IASB Vice-Chairman, visited Toronto earlier in the week and had extensive meetings with AcSB members and stakeholders (including representatives of the insurance and rate-regulated industries), attended a roundtable on the IASB’s 2011 agenda consultation, and met with staff of the AcSB and International Public Sector Accounting Standards Board and several AcSOC members.
- The AcSB has expressed concerns about the operations and conduct of the IFRS Interpretations Committee, and the fact that the Committee has finalized only one interpretation over the past 24 months. The AcSB brought these concerns to the attention of the IFRS Foundation Trustees. The Trustees are taking these concerns into account.
Peter Martin, Director, Accounting Standards, commented on recent AcSB activities, including the following:
- The changeover to IFRSs by Canadian publicly accountable enterprises has been relatively uneventful to date. It will not be completed until all publicly accountable enterprises have issued their first audited annual financial statements. Enterprises with calendar year ends have now completed and issued their first two interim reports on an IFRS basis, and are currently finalizing their third interim report and beginning final preparations for the year end.
- The AcSB is maintaining its policies of issuing its own “wraparound” exposure drafts of all IASB exposure drafts and other invitations to comment, gathering input through various contacts with stakeholders and issuing its own comment letters to the IASB.
- As previously reported, entities with rate-regulated activities continue to raise concerns with the lack of standards or guidance dealing with the specific types of regulatory assets or liabilities in IFRSs. The AcSB has given Canadian entities with rate-regulated activities until January 1, 2012 to complete the first-time adoption of IFRSs. The AcSB continues to take the view that, as a matter of general principle, it will not exempt entities with rate-regulated activities from the changeover to IFRSs or develop any modifications to IFRSs as issued by the IASB to address the effects of rate regulation. The AcSB will encourage the IASB to provide for interim relief until such time as it is in a position to address the issues of how to account for regulatory assets, and urges others to make the same representations to the IASB.
- The AcSB and its Private Enterprises Advisory Committee have continued work over the past four months on the separate programs to develop minor revisions to accounting standards for private enterprises through an annual improvements process, and major improvements over a two-year development cycle. The AcSB issued an Exposure Draft, in early May 2011, proposing minor changes to five separate standards to clarify certain points and remove inconsistencies. The most extensive and complex changes were those to the hedging provisions in the financial instruments standard. The changes have now been finalized.
- The AcSB/Public Sector Accounting Board (PSAB) Joint Not-for-Profit Task Force has a number of fundamental and pervasive issues to deal with over the next two years as it works its way through all of the current standards that are specific to the not-for-profit sector. The Boards anticipate that they will be considering recommendations from the Task Force later in 2012.
- The AcSB has maintained its ongoing communications programs and also instituted, or planned, some improvements to future communications activities
Tim Beauchamp, Director, Public Sector Accounting, provided an update on matters of interest to PSAB and its recent activities.
He discussed the issues related to the emergence of governments overriding the standards set by PSAB. For example, the government of the Province of Ontario is directing government organizations to treat capital-related grants for the purposes of acquiring or developing a depreciable tangible capital asset as deferred revenue. This could be contrary to the recently issued standard on government transfers, which requires that revenue should be recognized when the liability, if any, is settled.
Mr. Beauchamp also commented on the following items:
- A Consultation Paper on PSAB’s Conceptual Framework project was issued recently. This received many responses, which are being analyzed currently. PSAB expects a statement of principles to be issued by the end of 2012.
- A project on appropriations is underway, the objective of which is to issue a new accounting standard that addresses the recognition and disclosure of appropriations. PSAB recently discussed a draft statement of principles and approved the scope of application, the recognition criteria and disclosure requirements for the use of appropriations.
- PSAB continues to undertake many communications activities.
Mr. Beauchamp discussed the status of accounting by rate-regulated enterprises in the public sector. He said that there have been two instances identified where a government has passed legislation that departs from the direction set out in the CICA Public Sector Accounting Handbook, as follows:
- In British Columbia, government regulations appear to require that a rate-regulated enterprise adopt IFRSs, except that it should also adopt FASB Accounting Standards Codification 980, which requires the use of rate-regulated accounting.
- In Ontario, the government has taken a different approach, requiring that rate-regulated enterprises adopt US GAAP. This approach also requires these enterprises to continue using rate-regulated accounting.
For rate-regulated enterprises in the private sector, Canadian securities administrators have granted a deferral for adoption of IFRSs by rate-regulated enterprises until January 2015, even if they are not SEC registrants. Upon application, a Canadian rate-regulated enterprise can take advantage of this deferral and use US GAAP as an acceptable alternative to IFRSs. Some public sector rate-regulated enterprises have taken advantage of this by registering with the securities administrators.
Both the AcSB and PSAB remain of the view that rate-regulated enterprises should follow IFRSs; however, as stated above under the AcSB’s recent activities, the AcSB thinks that the IASB needs to provide interim relief to the industry until it can address the issue more fully.
AcSOC noted the importance of this topic in Canada and asked to be kept abreast of developments.
Peter Martin provided members with a summary of the IFRS Foundation’s oversight of the application of due process by the IASB.
In adopting IFRSs as Part I of the CICA Handbook – Accounting, the AcSB has effectively outsourced the development of one of its sets of standards to the IASB, and it now relies on the IASB’s due process procedures.
An important element of the AcSB’s basis for relying on the IASB’s work (although not the only element) is the presence of a well-designed and effectively operating system of oversight of the IASB provided by the IFRS Foundation Trustees. The design of the arrangement between the IFRS Foundation Trustees and the IASB is essentially the same as that between AcSOC and the AcSB. For this type of arrangement to work well, independent decision-making by the standard-setting body needs to be coupled with effective public interest oversight.
To obtain reasonable assurance as to the existence and functioning of a good system of IASB oversight, the AcSB has inquired into the details of the system, monitored its functioning, and is satisfied as to its rigour and effectiveness. The IASB has produced a Due Process Handbook. Although the AcSB does not have a fully codified version of due process, its practices are mostly the same as, or very similar to, those specified in the Due Process Handbook.
Members discussed Mr. Martin’s presentation and suggested that the AcSB’s due process should be documented more rigorously and that this documentation should be reviewed by the Council.
Rebecca Villmann, a Principal on the staff of the AcSB, provided the Council with a summary of the AcSB’s activities regarding the IASB’s Request for Views, “Agenda Consultation 2011,” and asked AcSOC to consider how it should respond to the IASB’s request.
The Council agreed that the AcSB should respond to the technical aspects of the consultation. To support the AcSB’s strategic recommendations and emphasize key issues that they have been involved with, AcSOC decided to submit a separate response to the IASB that would:
- commend the IASB for undertaking the agenda consultation initiative and improving the application of its due process by enabling its stakeholders to participate in how the agenda should be set;
- stress the need for the IASB to conduct a project on rate-regulated activities, given the importance of this industry to the Canadian economy and unacceptable diversity in practice that has resulted because some entities are applying US GAAP and not IFRSs;
- emphasize the importance of the United States being involved in the development of IFRSs in order for IFRSs to become the one set of standards that is applied globally; and
- strongly support the IASB in addressing implementation concerns to reduce the diverse application of IFRSs within and between jurisdictions.
As an oversight body that reviews the AcSB’s compliance with due process, AcSOC will also write a letter to the Trustees of the IFRS Foundation to recommend that they clarify what the IASB’s role should be in assisting jurisdictions to converge their national accounting standards with IFRSs. The letter will also encourage the Trustees and all existing and potential IFRS stakeholders to work together to identify how the IASB should balance its priorities of maintaining and developing IFRSs with assisting jurisdictions with their convergence activities.
Stephenie Fox, Technical Director, International Public Sector Accounting Standards Board (IPSASB), updated members on the importance of public sector reporting and other matters of interest. In particular, she said that:
- government finances are an important part of global financial markets;
- financial crises are caused by a lack of transparency;
- transparency and accountability in the area of public finances is a fundamental principle of democracy; and
- comparability is an essential ingredient for continuous improvement.
Ms. Fox said that the accounting profession has the methods and concepts to improve transparency, create comparability and enable efficient, continuous improvement through sound public sector management. She noted that IPSASB is an independent standard setter under the auspices of the International Federation of Accountants (IFAC). IPSASB is funded by IFAC and by voluntary contributions from governments and observers.
Unlike IFAC’s other standard-setting boards, IPSASB is not subject to oversight by the international Public Interest Oversight Board; however, it recognizes the need to establish an oversight regime and is exploring various options.
IPSASB has a complete suite of professional standards ready for the use of governments at all levels, which are being widely implemented around the world. Ms. Fox said that about 30 countries are adopting its standards on an accrual basis. In addition, a group of about 10 countries, including Canada and the US, are using IPSASB’s standards as a reference.
Members discussed Ms. Fox’s remarks and the Chair thanked her for a stimulating presentation.
Peter Jewett commented on his attendance during part of a PSAB meeting on September 7-8, 2011. He said that he found the discussions to be very informative and was struck by the differences between PSAB and the AcSB. Unlike the AcSB, PSAB has no legal authority behind its standards and depends entirely on moral suasion to persuade governments to use its standards. He was reassured to see the extent of the communications activities in PSAB’s work plan.
Kevin Nye attended part of the AcSB’s meeting on July 13, 2011. He said that attendance at the meeting was an excellent learning experience, and he was particularly impressed with the quality of the meeting reading material and the staff support.
Messrs. Jewett and Nye encouraged other AcSOC members to attend board meetings, as such attendance assists the oversight process.
Ron Salole, Vice-President, Standards, and Daniella Girgenti, Communications Manager, Standards, updated members on AcSOC’s communications objectives and activities, and reported on proposed communications outreach activities.
The objectives of AcSOC’s communications program are to:
- enhance AcSOC’s profile;
- communicate key messages proactively;
- encourage input from interested parties; and
- establish benchmarks to gauge progress in improving AcSOC’s communications.
Recent communication activities include publicizing the gathering of input on the IASB’s Request for Views, “Agenda Consultation 2011,” and the IASB Vice-Chairman’s visit to Toronto. AcSOC’s website also includes a notice seeking an exceptional individual to serve as PSAB’s Chair, beginning in January 2012. Finally, a strategic communications plan is under development.
AcSOC’s website (www.acsoc.ca) is being redesigned to provide visitors with a more complete picture of AcSOC, focusing on the role it plays in financial reporting in Canada, to increase the transparency of AcSOC’s activities and its role in serving the public interest. The new site is planned to be launched in January 2012.
Members suggested, and discussed, ideas to improve AcSOC’s communications activities.
Members of the Auditing and Assurance Standards Oversight Council (AASOC) joined the meeting for a discussion of matters of interest to both Councils. Members discussed:
- the main concerns of each Council;
- differences in the structure and processes of each Council;
- providing oversight to the standard-setting boards, while respecting the independence of those boards; and
- challenges in an environment in which the Canadian standard-setting boards are adopting international standards.
Main concerns of the Councils
AcSOC’s concerns include the following:
- The pushback from certain stakeholders regarding IFRSs; for example, the life insurance industry and the rate-regulated activities industry.
- The need to monitor the implementation of IFRSs in Canada.
- The danger of “standards fatigue” in Canada owing to the issue of multiple standards by the IASB.
- The migration of some Canadian entities to US GAAP as a result of these factors.
- Ensuring a meaningful role for Canadians in the IFRS Foundation’s processes and structures.
- The threat that governments in Canada will not adopt PSAB’s standards without modification.
- Advising stakeholders of AcSOC’s existence and getting input from stakeholders.
AASOC is concerned that there is an effective transition in the role of the Auditing and Assurance Standards Board (AASB) in the light of its adoption of international auditing standards. AASOC would like to ensure that Canada has a role in the international arena. It was noted that AASOC also oversees the activities of the AASB dealing with matters that are not covered by international standards, such as capital market requirements and other public interest issues. AASOC also oversees the development of the independence rules of the Chartered Accountancy profession.
Structure and processes of the Councils
AcSOC’s main purpose is to protect the public interest by overseeing, and providing input to, the activities of the AcSB and PSAB. AcSOC performs this function through a Performance Review Committee, which assesses the performance of the AcSB and PSAB and the Boards’ adherence to due process. AcSOC has also established a Strategy Committee to deal with strategic issues, such as AcSOC’s proposed responses to the IFRS Foundation’s and the IASB’s strategic activities.
AcSOC is a self-perpetuating body. It appoints its own members, as well as the members of the AcSB and PSAB, by acting on the recommendations of its Nominating Committee. This includes appointing Chairs and Vice-Chairs.
AASOC performs its main function of overseeing the AASB by ensuring that due process was followed by using a checklist and certification approach to ensure that the public interest is served. In addition, unlike for the AcSB and PSAB, AASOC requires one of its members to attend all AASB meetings. (AcSOC members are welcome to, and sometimes do, attend AcSB and PSAB meetings.) AASOC also has a Nominating Committee, which nominates its own members and the Chair and Vice Chair of the AASB.
Providing oversight to the standard-setting boards, while respecting the independence of those boards
AcSOC recognizes the independence of the AcSB and PSAB and their right to set accounting standards. AcSOC confines itself to oversight, providing advice on strategic matters, gathering input from stakeholders and appointing members of the Boards.
Regulators are an important component of AASOC. They contribute to due process by informing the AASB and AASOC of the diversity of stakeholders’ views and ensuring that the public interest is served. Because of their connections, they also bring an international perspective to AASOC’s deliberations.
Challenges facing the Councils
AcSOC is monitoring closely the activities of the SEC regarding the possible adoption of IFRSs by the US.
Some AcSOC stakeholders are concerned about the loss of sovereignty in standard setting and the perceived loss of influence over the IASB. Some are also concerned about the excessive exercise of professional judgment by preparers of financial statements.
Other issues of interest to both Councils include the expected modification of auditor reports, possible higher levels of assurance regarding Management’s Discussion & Analysis, and developments regarding joint audits and mandatory auditor rotation.
Brian Hunt, Chief Executive Officer, Canadian Public Accountability Board (CPAB), detailed CPAB’s strategic initiatives, the major themes from its 2010 inspections, items of interest from the agenda of the International Forum of Independent Audit Regulators, emerging international themes relating to audit quality, and CPAB’s challenges.
He said that CPAB is committed to using a state-of-the-art risk-based methodology, recruiting highly qualified professional staff, building a high-quality culture, elevating its national and regional profile across Canada, as well as developing relationships with its stakeholders. He commented on the increasing number of foreign firms that are subject to CPAB oversight (about 40 per cent of the total number of firms). Mr. Hunt also expressed CPAB’s concern regarding the increase in the number of audit files inspected in 2010 that exhibited significant audit deficiencies.
CPAB strongly believes that all audit firms must embrace a commitment to zero tolerance for audit deficiencies as the cornerstone of their ongoing efforts to improve audit quality. This approach does not mean there will never be audit problems but it greatly reduces the likelihood that they will occur.
While CPAB’s 2010 inspections included indications that audit quality was generally sound, CPAB is disappointed to note that the inspections showed no significant improvement in audit quality from the previous year. CPAB is also of the view that audit committees should be encouraged to play a significant role in improving audit quality.
CPAB is a member of the International Forum of Independent Audit Regulators (IFIAR), which provides a forum for members to discuss and exchange information about inspection methodology and findings.
CPAB plays an active role in the Global Public Policy Committee (GPPC)/IFIAR Working Group. This Working Group, which includes members from the international networks of the largest auditing firms, as well as IFIAR members, has established a framework for discussing topics on audit quality that are of interest to both the GPPC and IFIAR members.
Inspection findings discussed by IFIAR/GPPC include the following:
- professional skepticism;
- group audits;
- revenue recognition; and
- engagement quality review.
Mr. Hunt also discussed some of the international emerging themes related to audit quality, including those detailed above, and matters related to auditors operating in emerging markets and performing group audits in those markets. Off-shoring and its impact on audits also requires attention.
Mr. Hunt concluded by detailing the challenges faced by CPAB, including:
- the pressures being placed on audit firms and reporting issuers due to the uncertain economic times;
- the transition to IFRSs;
- building international relations;
- transparency regarding the reporting of inspection results; and
- reaching out to key stakeholders.
Members discussed Mr. Hunt’s presentation and posed a number of questions. The Chair thanked him for updating AcSOC on CPAB’s initiatives and challenges.
AcSOC member Bob Herz discussed the work of the International Integrated Reporting Committee, a high-profile, international cross-section of leaders from the corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors as well as civil society. Integrated reporting demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting can help business to take more sustainable decisions and enable investors and other stakeholders to understand how an organization is really performing
Mr. Herz referred to the Committee’s recent Discussion Paper, “Towards Integrated Reporting – Communicating Value in the 21st Century,” which considers the rationale for integrated reporting, offers initial proposals for the development of an international integrated reporting framework and outlines the next steps towards its creation and adoption. Its purpose is to prompt input from all those with a stake in improved reporting, including producers and users of reports. The deadline for submission of comments is December 14, 2011 and an exposure draft is expected in 2012.
Next steps will include:
- working with others on measurement and reporting matters;
- exploring with regulators and others the opportunities to harmonize reporting requirements within and across jurisdictions;
- conducting regional roundtables (including one in Toronto on November 23, 2011 organized by the Canadian Institute of Chartered Accountants) and other engagement and communications activities; and
- public consultation regarding ongoing governance of integrated reporting.
Members discussed Mr. Herz’s interesting and topical presentation.
Irene Wiecek, Senior Lecturer in Accounting at the Rotman School of Management, University of Toronto, and Gordon Beal, Director of the Canadian Institute of Chartered Accountants’ (CICA) Guidance and Support Group, reviewed and discussed a joint education initiative between the CICA and the University of Toronto.
Within a few short years, a new, multi-GAAP environment has emerged in Canada. This is the result of changes such as the adoption of IFRSs by publicly accountable enterprises, new accounting standards for private enterprises, along with continuing changes in not-for-profit and public sector accounting standards.
In November 2010, the CICA partnered with the University of Toronto to respond to the challenge of preparing tomorrow's accountants for the opportunities that lie ahead. The result was “Leveraging Change – The New Pillars of Accounting Education,” a one-day symposium during which leading academics from Canada, the United States, and the United Kingdom, along with 100 delegates from across Canada, explored five pillars of accounting education.
The five pillars that were identified for this project are:
- accounting principles and concepts;
- ethical decision-making;
- professional judgment;
- professional and personal attributes; and
The pillars are not based on a formal research process and are not necessarily that new. They reposition and re-emphasize areas that have long been of interest to educators and to the accounting profession alike. The purpose of the Pillars project, which includes the symposium and a resulting publication, is to ask the questions that must be asked so that professional accountants and educators can move forward on the path of educational change.
The Chair thanked the presenters and said that the Council is very interested in the evolution of accounting education.
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The AcSB and PSAB are each accountable to AcSOC, an independent body established in September 2000 by the Canadian Institute of Chartered Accountants to oversee their activities. Reporting to the public and consisting of up to 25 prominent business and government leaders, AcSOC brings a broad perspective to complex issues facing standard setters in both the private and public sectors. AcSOC supports the AcSB and PSAB in setting accounting standards in Canada and in contributing to the development of internationally accepted accounting standards. AcSOC's responsibilities include appointing AcSB and PSAB members, providing input on strategic priorities, and evaluating the Boards’ performance. The AcSOC members, many of whom represent particular constituencies, include regulators, investors and other users, preparers and auditors of financial reports.