Accounting Standards Oversight Council
Report on Public Meeting
June 9-10, 2016
Accounting Standards Oversight Council discusses the activities of the AcSB and PSAB, and related matters.
At its meeting in Ottawa on June 9-10, 2016, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:
Accounting Standards Board Activities
The AcSB’s Academic Advisory Council
Update on International Accounting Matters
Public Sector Accounting Board Activities
Accounting and the Accountability of Indigenous Governments in Canada
Report-back on AcSOC Members’ Attendance at a PSAB Meeting
Linda Mezon, Accounting Standards Board (AcSB) Chair, introduced AcSB members Marc Joyal and Michel Magnan who were present as observers. She noted that Mr. Magnan is the Chair of the AcSB’s Academic Advisory Council.
Ms. Mezon said that she was intensifying the AcSB’s efforts to support new volunteers and enhance the effectiveness of its committees. The AcSB is also continuing to build its relationships with the U.S. Financial Accounting Standards Board and other national standard setters.
She commented on her key priorities and the changing risk patterns regarding the following projects:
- International Financial Reporting Standards (IFRSs) in Part I of the CPA Canada Handbook – Accounting
- Rate-regulated activities
- Insurance contracts
- Accounting standards for private enterprises in Part II of the CPA Canada Handbook – Accounting
- Redeemable preferred shares
- Accounting standards for not-for-profit organizations in Part III of the CPA Canada Handbook – Accounting
- Improvement projects
Ms. Mezon’s comments on the above included the following:
- There are diverse global views and pressure for progress on developing an IFRS for rate-regulated activities. The AcSB is compiling evidence of the economic value of rate-regulated activities to support developing a new standard and is increasing its efforts in this regard. She said the International Accounting Standards Board (IASB) Chair has expressed the view that a working model should be developed for exposure and that if this is not possible, the project should be suspended. An AcSOC member commented that this would be tantamount to shutting down the project. The project’s suspension might place pressure on the AcSB to come up with a solution for the rate-regulated industry in Canada. Members expressed support for the AcSB’s approach to demonstrate the economic value of rate-regulated accounting and involving Canadian stakeholders in that work.
- For insurance contracts, the AcSB will focus on participating, and working with relevant Canadian stakeholders, in a fatal flaw review on a final draft of the upcoming insurance contracts standard. In reply to a question from a member, Ms. Mezon commented on the magnitude of the AcSB’s efforts in working with the Canadian insurance industry.
- For redeemable preferred shares, the AcSB is assessing the viability of a classification exception based on retaining control over the enterprise.
- For agriculture, the AcSB is considering the written feedback on its Discussion Paper issued in December 2015. It is also planning to hold roundtables in 14 locations across Canada.
Commenting on the proliferation of non-GAAP measures, Ms. Mezon stated that there is a need to understand the roles of standard setters, preparers, regulators, auditors and others regarding these measures. Some assert that standard setters should be more involved in monitoring developments regarding non-GAAP measures. She noted that she is endeavouring to involve more stakeholders in the standard-setting process and that in time this might alleviate the concerns of some regarding the use of non-GAAP measures. Members were pleased to hear about the AcSB’s increased outreach activities.
Regarding accounting standards for not-for-profit organizations, the AcSB has continued work to improve these standards after considering the advice of its Not-for-Profit Advisory Committee. In addition, the AcSB is participating in a global working group regarding the development of standards for this sector.
2015-2016 Performance Report
Ms. Mezon stated that the AcSB had a successful year in 2015-2016. The Board:
- maintained a high level of accessibility to stakeholders;
- contributed to global best practices for all sectors,
- assessed preparedness for new major IFRSs;
- improved private enterprises standards; and
- established a Not-for-Profit Advisory Committee and began work on projects to improve standards for this sector.
She said that the AcSB achieved the key objectives in its 2015-2016 Annual Plan and achieved its long-term goals.
Ms. Mezon said that the AcSB considered input from AcSOC on the its 2016-2017 Annual Plan and 2016-2021 Draft Strategic Plan at its meeting in March 2016. The AcSB approved both plans at that meeting and published them in April 2016. AcSOC members concurred with the amendments made to the AcSB’s approved 2016-2017 Annual Plan.
Rebecca Villmann, Director, Accounting Standards, commented that CPA Canada provides the financial resources for the boards under its aegis and that it has reiterated its oft-stated commitment to support Canada’s independent standard-setting functions.
Bob Muter, Performance Review Committee Chair, said that the Committee met twice to review the performance of the AcSB, and its members agreed that the AcSB had a successful year in 2015-2016.
The Council endorsed the Performance Review Committee’s conclusion and thanked existing and past AcSB members and the staff for their efforts to improve financial reporting in Canada in the public interest. The Council also thanked the Committee members for their work.
AcSB member, Michel Magnan, provided an overview of the AcSB’s Academic Advisory Council, which he chairs. He said that the AcSB established the Council in 2005 in order to improve communications with academe and to provide input to the AcSB.
The Council has up to 12 members at any point in time, including researchers, teachers and textbook authors, many with connections to the business community. The Council typically meets once a year and the discussions relate primarily to publicly accountable enterprises. Its activities are constrained by the pace of IASB activities in suitable topic areas.
Mr. Magnan noted that the Council represents a good step forward as an initial interface with scholarly research. The AcSB is looking for opportunities to expand its interactions and collaboration with the Council. He said that there is a global move towards evidence-based standard setting and that the AcSB is establishing a formal research program relating to all the major categories of reporting entities.
Academic research is useful to standard setters when it is relevant, timely, and presented in a format they can understand. Improved communications between standard setters and academics will assist in meeting past challenges in each of these areas. An excellent opportunity presents itself this fall, when the Contemporary Accounting Research Conference hosts the IASB’s 3rd Annual Research Forum, in Waterloo, Ontario. The AcSB is supporting these events by funding a live webcast of the Conference, and by its participation.
Sheila Fraser, Vice-Chair of the International Financial Reporting Standards (IFRS) Foundation Trustees, provided an update on a number of matters that were discussed at meetings held in Jakarta, Indonesia on May 24-26, 2016.
Review of the structure and effectiveness of the IFRS Foundation
The Trustees devoted a substantial amount of time in reviewing the progress of the review of the structure and effectiveness of the IFRS Foundation.
The review focused on three particular areas:
- to ensure that the relevance of IFRSs is maintained;
- to seek views on what the Foundation and the IASB were currently doing to support the consistent application of IFRSs and whether there is anything more that the organization could and should be doing in this area, taking account of its limited resources; and
- to seek views on the Foundation’s governance and financing, and proposals for improvements.
Relevance of IFRSs
- The Trustees concluded that, at this time, the IASB’s function should not be expanded to encompass financial reporting standards for the private, not-for-profit sector.
Consistent application of IFRSs
- The Trustees agreed on a strategy to support the consistent application of IFRSs, building on the Foundation’s present efforts. This strategy is based on the view that the IASB’s role is to develop IFRSs and that others are better positioned to deal with implementation and enforcement responsibilities.
Governance and financing
- The Trustees decided to propose rebalancing the geographic distribution of their members, namely to combine the North America and South America categories into one “Americas” category.
- The Trustees agreed that the strategy and effectiveness of the organization (including, if appropriate, its structure) should commence, at the latest, five years after the completion of the previous review.
- The Trustees decided to propose that the size of the IASB should be reduced to 13 members, albeit with the flexibility to appoint a 14th (at-large) member if appropriate.
- The Trustees also agreed to provide for the possibility that, while the normal renewal for IASB members remained three years, reappointments of up to five years might be available on a case-by-case basis in exceptional circumstances.
The Trustees were advised that the comments received on the IASB’s Agenda Consultations suggested that the focus of the IASB’s activities should now switch from transaction-specific standards-level projects to show a greater emphasis on the following areas:
- implementation and support of consistent application;
- reflecting the factor of “change fatigue” among stakeholders;
- standard setting that enhances consistency between individual standards and the conceptual framework;
- promoting more effective communication of relevant financial information from preparers to users of financial statements; and
- a research program that was realistic and achievable.
The IASB is finalizing the following:
- the insurance contracts standard; and
- the proposed amendments to IFRS 4 Insurance Contracts to address the possible accounting consequences of the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts standard.
IFRS taxonomy due process
The Due Process Oversight Committee decided that the IFRS Taxonomy due process should be incorporated into its Due Process Handbook and that the existing XBRL Handbook should be withdrawn.
In reply to questions, Ms. Fraser’s comments included the following:
- Financing for the organization from jurisdictions and countries continues to be based on relevant GDPs.
- The Trustees are keen to have representatives from the developing countries on the Foundation. There is unlikely to be more than one representative from Canada at any one time.
- Candidates for appointment to the IASB should possess a sound technical knowledge and be able to work collegially with a range of individuals. Ideally, candidates from the investor community would be desirable. Much depends on the personality of candidates and their style during the interview process.
Rod Monette, Public Sector Accounting Board (PSAB) Chair, introduced PSAB member Professor Nola Buhr, who was present as an observer. He noted that Professor Buhr would be making a presentation on the accounting and the accountability of Indigenous governments in Canada (see later in this report).
Mr. Monette’s comments on PSAB’s operations, certain key files and stakeholder concerns, and international matters included the following:
- PSAB is now at a full and appropriate capacity, resolving the overall resource concerns, which have been expressed over the prior two years.
- PSAB’s 2017-2020 Strategic Plan was approved by the Board in March 2016, and it is posted on PSAB’s website for stakeholder comment for a five-month exposure period.
- PSAB’s Public Sector Accounting Discussion Group held a meeting on March 3, 2016, during which it discussed, inter alia, professional judgment and the definition of government in relation to First Nations’ trusts.
- A stakeholder survey is currently posted online and has also been sent to a broad range of stakeholders for their input.
- Key files and stakeholder concerns
- The Employment Benefits Task Force held its first meeting in March 2016. The first phase of the project is to develop an invitation to comment that addresses the deferral provisions in the current employment benefits standards.
- A task force to assist PSAB in addressing accounting for public private partnerships held its first meeting in April 2016.
- Contact with the Aboriginal Finance Officers Association is planned in order to develop a further understanding of the Indigenous community’s use of public sector accounting standards. A financial professional from the Indigenous community has been recruited as a member of the Public Sector Accounting Discussion Group.
- PSAB has approved and issued a Feedback Statement on the Post-implementation Review of its government transfers standard, which is now posted online. In the Statement, PSAB informs stakeholders that it is currently exploring whether an authoritative Guideline would help clarify interpretations of the government transfers standard.
- In June 2015, PSAB deferred the effective date on its financial instruments standards to April 1, 2019 from April 1, 2016. The staff has consulted stakeholders across Canada to understand the challenges in applying the standards to specific transactions, and the Board will decide whether the standards need a hedge accounting option, or if the current standards sufficiently meet stakeholder needs.
- Michael Puskaric, Director, Public Sector Accounting, met with a representative of the Ontario Treasury Board to discuss the following concerns raised by the Ontario provincial government: the consolidation of rate regulated government business entities currently following U.S. GAAP; and the request from the Ontario government to amend the Introduction to Public Sector Accounting Standards in the CPA Canada Public Sector Accounting (PSA) Handbook to allow for other fair presentation frameworks (i.e., U.S. GAAP). The AcSB Chair and Director will update PSAB later this month on the status of ongoing AcSB rate-regulated standard-setting activities.
- PSAB’s Conceptual Framework Task Force has been working on determining the most appropriate reporting model for the Canadian public sector, considering all the comments received from its second and third Consultation Papers. The goal is to have all chapters of the statement of principles completed by mid-2017.
- International matters
- As part of its strategy review for 2017-2020, PSAB is reviewing its international strategy. The Chair of the International Public Sector Accounting Standards Board will address PSAB in September 2016 and AcSOC at its October 2016 meeting.
Members’ comments include the following:
- While acknowledging that AcSOC’s role is limited to due process matters, members suggested that a Guideline on PSAB’s government transfers standard should only be done if diversity in the application of the standard is negatively affecting the public interest. The purpose of a guideline is to assist stakeholders in applying a standard, not to change the standard’s requirements.
- Members again commented on the benefits of field testing.
2015-2016 Performance Report
Mr. Monette said that PSAB had a successful year in 2015-2016. He noted that PSAB could do more in the areas of field testing and preparing a long-term work plan. He expressed satisfaction that PSAB was now at full capacity and that the staff was reinvigorated in its thinking. He commented on PSAB’s successful interaction with stakeholders (although it could do more to reach out to stakeholders that were not particularly vocal, such as local governments).
Mr. Puskaric, stated that PSAB achieved the key objectives set out in its 2015-2016 Work Plan and the long-term outcomes of its 2013-2016 Strategic Plan.
Mr. Muter said that the Performance Review Committee met twice to review PSAB’s performance, and its members agreed that PSAB had a successful year in 2015-2016.
The Council endorsed the Performance Review Committee’s conclusion and thanked existing and past PSAB members and the staff for their efforts to improve public sector financial reporting in Canada in the public interest. The Council also thanked the Committee members for their work.
Following comments by members at previous AcSOC meetings on First Nations financial reporting matters, Professor Buhr, Professor Emerita, Edwards School of Business, University of Saskatchewan, delivered a presentation on this topic.
She said that Indigenous peoples in Canada comprise three groups: Indians (who prefer to be called First Nations), Inuit and Métis. She commented that accountability is
“the duty to provide an account of the actions for which one is held responsible” (Gray et al 1997, p.334). She discussed past, present and future accounting matters.
Professor Buhr’s remarks included the following:
- There are three basic accountability relationships between First Nations governments and others:
- the community and members of the First Nations;
- private capital providers; and
- other levels of government (mainly the Department of Indian Affairs and Northern Development, also known as Indigenous and Northern Affairs Canada).
- The accountability of First Nations regarding:
- municipal matters, such as drinking water, roads and youth centres;
- provincial matters, such as health care and education; and
- federal matters (First Nations consider themselves to be sovereign in that they existed prior to the establishment of Canada).
- First Nations discharge their accountability obligations via:
- financial information governed by GAAP (general purpose financial statements);
- financial information not governed by GAAP (special information demanded by users);
- quantitative information (not GAAP) (required by the federal government); and
- qualitative information (not GAAP).
Professor Buhr noted that the current introduction to the PSA Handbook simply refers to ‘governments’, (i.e., the PSA Handbook is applicable to all governments including First Nations, Métis and Inuit governments).
She said that there are possible concerns regarding the requirement in the PSA Handbook that government business enterprises, such as casinos, wineries and golf courses, should use IFRSs in Part I of the CPA Canada Handbook – Accounting. In addition, the requirements of the PSA Handbook (and Part I of the CPA Canada Handbook – Accounting) might be too extensive for small businesses such as gas bars and grocery stores.
In reply to questions, Professor Buhr’s remarks included the following:
- AcSOC’s involvement in the area of financial reporting by Indigenous governments should be restricted to oversight regarding due process matters and the involvement of Indigenous peoples in the standard-setting process.
- Although financial statements are a necessity, several First Nations people have commented that other forms of financial and non-financial reporting would be more meaningful to community members.
- PSAB should specifically ask the Aboriginal Financial Officers Association for its input on exposure drafts. The Association, which was formed to develop capacity among financial officers on reserves, should also be kept abreast of other due process documents.
- It is important for PSAB to understand users’ needs and the financial reporting capabilities of Indigenous governments.
- With regard to its conceptual framework, PSAB has a duty to consult stakeholders. This would include Indigenous peoples and governments.
- It is difficult to learn from Aboriginal communities around the world regarding financial reporting, as their varying histories have determined differing circumstances and outcomes.
Glenn Campbell, Director, Financial Institutions Division, Financial Sector Policy, Finance Canada, updated members on Finance Canada’s proposals (which are now before Parliament) to introduce a bank recapitalization (or bail-in) regime in Canada. This is part of the international response to those banks deemed “too-big-to-fail”, following the last global financial crisis. It is hoped that the legislation will receive Royal Assent by the end of June 2016.
The proposals, which are part of an overall resolution strategy, are designed to reduce the probability of future bank failures and to enhance the capacity to manage any failures that might occur. The bail-in regime would make creditors (and not just shareholders) responsible for absorbing losses and recapitalizing a failed bank. Hopefully, it would also increase market discipline and reduce the incentive for banks to take excessive risks.
Replying to questions, Mr. Campbell’s remarks included the following:
- This initiative does not apply to insurance companies.
- Finance Canada is aware of the potential difficulties of holders trading their bail-in debt and non-viable contingent capital (both of which will be convertible to common shares) and of their potential losses.
- The tax payer’s contingent liability for too-big-to-fail banks will not be wholly removed.
- Finance Canada is not insensitive to the issue that there will be changes in banks’ cost of capital and that this is likely to be passed on to shareholders and clients.
- Finance Canada is aware of the activities of financial technology companies in the banking and insurance field. Finance Canada is in favour of competition and innovation among financial institutions. It is reluctant to affect adversely economic growth or financial liquidity.
The Chair thanked Mr. Campbell for discussing a very interesting and topical issue.
At AcSOC’s request, Julie Desjardins, Director, Reporting and Capital Markets, Research, Guidance and Support, CPA Canada, delivered a presentation on the increasing prevalence and variety of non-GAAP financial measures employed by Canadian reporting entities. She was accompanied by Alex Fisher, Principal, Reporting and Capital Markets, Research, Guidance and Support, CPA Canada.
Members commented that that there is often pressure from users of financial statements to provide non-GAAP measures. Members also noted that there is a tendency for preparers to use non-GAAP measures to mitigate the effect of “bad news”.
Because non-GAAP measures frequently appear in management’s discussion and analysis, they are not covered by the auditor’s opinion. If it were to be determined that non-GAAP measures should be audited, it might be necessary to consider definitions and disclosures.
One member asserted that most entities were trying to provide quality information to users and were using non-GAAP measures owing to the shortcomings of GAAP measures. He commented that it is a flawed concept that investors (both retail and institutional) are entitled to be passive. Users should do adequate work to assess the quality of the financial information they are relying on. Another member said that the present GAAP financial statements require improvement, so that the historic information could better indicate potential future cash flows.
The Chair thanked the presenters for addressing, and presenting on, a very thorny topic.
Two members reported on their attendance at a recent PSAB meeting, noting that they were impressed with the focus on due process procedures, the attention given to addressing public interest matters and the high quality of the meeting materials. Also, the meeting was very well chaired.
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The Accounting Standards Oversight Council (AcSOC) is an independent, volunteer body established by the Canadian Institute of Chartered Accountants (CICA)* in 2000. It serves the public interest by overseeing and providing input on the activities of the Accounting Standards Board (AcSB), which sets financial reporting standards for profit-oriented enterprises and not-for-profit organizations, and the Public Sector Accounting Board (PSAB), which sets financial reporting standards for governments and their organizations. AcSOC's responsibilities include appointing the AcSOC, AcSB and PSAB members. Reporting to the public and made up of representatives that include regulators, investors and other users, preparers and auditors of financial reports, AcSOC brings a broad perspective to complex issues facing standard setters in both the private and public sectors.
* The CICA, CGA-Canada and CMA Canada have since consolidated under the CPA Canada banner as the profession’s national body.