Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement (formerly Redeemable Preferred Shares Issued in a Tax Planning Arrangement)

Current Status Next Steps

AcSB is seeking comments on its Exposure Draft, by January 15, 2018.

First quarter of 2018 – AcSB to deliberate comments received.

BACKGROUND

The title of this project has been modified to reflect the characteristics of the shares that are issued in tax planning arrangements. 

The accounting for retractable or mandatorily redeemable shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23, needs to be re-examined.

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A number of issues have arisen in respect of redeemable preferred shares. Issues include scope, reclassification and measurement.  The Accounting Standards Board (AcSB) discussed these issues and agreed that they were beyond the scope of an annual improvement. Accordingly, it agreed to undertake a separate project to address them.

Click here for a timeline of the activities of the Board on this project.

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PROJECT NEWS & DECISION SUMMARIES

Outreach Activities – Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement
October 26, 2017. Since the release of the 2014 Exposure Draft, the Board has heard from stakeholders through a number of outreach activities. See the detailed timeline of this project and learn who the Board consulted to develop its latest proposals.

Webinar – Exposure Drafts: Redeemable Shares and Financial Instruments
October 18, 2017. Are you a Canadian private enterprise, an advisor to one, or a user of private enterprises’ financial reports? If so, learn about proposed amendments to the accounting for Retractable or Mandatorily Redeemable Shares, Financial Instruments and the AcSB’s Priorities for Part II.

Roundtable Discussions – Stakeholders’ Views Sought on Exposure Drafts: Redeemable Shares and Financial Instruments
October 3, 2017. Register to attend the AcSB’s roundtable discussions to share your views on Section 3856 Exposure Drafts, Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement; and Financial Instruments – Narrow Scope Amendments. Attend in person, or by video or teleconference.

AcSB Exposure Draft – Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement (formerly Redeemable Preferred Shares Issued in a Tax Planning Arrangement)
September 29, 2017. The AcSB has issued an Exposure Draft re-examining the accounting for retractable or mandatorily redeemable shares issued in a tax planning arrangement under Part II of the CPA Canada- Handbook. Stakeholders are encouraged to submit their comments by January 15, 2018.

AcSB Decision Summary – July 13, 2017
The Board considered the proposed drafting of the amendments and key areas of the Basis of Conclusions. The Board also decided that:

  • shares classified as liabilities on initial recognition cannot subsequently be reclassified as equity; and
  • shares classified as a liability should be measured at the redemption amount. 

The Board considered a communication plan for the forthcoming exposure draft and decided on its outreach activities with stakeholders.

The Board directed staff to begin the balloting process for the proposals and will issue a re-exposure draft no later than September 30, 2017.

AcSB Decision Summary – June 22, 2017
The Board continued its discussion on the circumstances in which classification of redeemable preferred shares may need to be reassessed after initial recognition. The Board reaffirmed its view that the need to reassess classification should be based on the occurrence of an event or transaction and decided on some examples that should be provided in the guidance.

The Board also considered the proposed drafting of one of the conditions, in addition to retention of control of the enterprise, and decided on the guidance that should be provided in respect of this condition. 

The Board also decided that:

  • on transition, enterprises will be provided an option to not restate comparatives;
  • the proposed effective date of the amendments will be January 1, 2020; and
  • Section 1500, First-time Adoption, will be amended to allow the same transitional relief for enterprises applying Accounting Standards for Private Enterprises subsequent to the date that the amendments are made effective.

The Board will issue a re-exposure draft on these proposals no later than September 30, 2017.

AcSB Decision Summary – May 16, 2017
Initial measurement for shares issued to a related party
The Board discussed how redeemable preferred shares that are classified as liabilities and issued to a related party should be measured initially. The Board has decided that redemption amount is appropriate in these circumstances. In this regard, the Board considered the interactions of this project with the Board’s project relating to the narrow scope amendments to Section 3856, Financial Instruments

Reassessment criteria
The Board also considered when the classification of redeemable preferred shares may need to be reassessed after initial recognition. The Board agreed that:

  • the underlying principle for reassessment should be on the same basis as the classification exception;
  • an enterprise should reassess the classification of the shares upon the occurrence of transactions or events; and
  • this guidance should be included in the financial instruments section.

The Board also directed the staff to explore further situations when redeemable preferred shares that are initially classified as liabilities may subsequently be reclassified as equity. 

Presentation and disclosures
The Board also considered feedback from users of private enterprise financial statements and decided that an enterprise should:

  • charge the offset for the liability to equity;
  • present redeemable preferred shares classified as a liability on the face of the balance sheet separate from other liabilities;
  • explain why there is an equity balance; and
  • describe the arrangement that gives rise to the redeemable preferred shares.

Transition requirements
The Board considered the implications of applying the proposed exception on a retrospective or prospective basis. The Board decided that retrospective application was appropriate, but based on the terms and conditions that exist at the date of initial application. In addition, the Board decided to provide transitional relief for redeemable preferred shares that are extinguished prior to the date the amendments are effective.

Next steps
The Board will issue a re-exposure draft on these proposals no later than September 30, 2017.

Private Enterprise Advisory Committee Notes – May 25, 2017
The Committee discussed the decisions made by the AcSB at its March 21-22, 2017 and May 16, 2017 meetings. The Committee assessed the articulation of the conditions for a classification exception based on:

  • retention of control of the enterprise;
  • control of the enterprise being retained by the party receiving the redeemable preferred shares; and
  • other conditions that reflect changes in the future cash outflows of the enterprise.

The Committee also provided input on situations when redeemable preferred shares that are initially classified as liabilities may subsequently be reclassified as equity.

AcSB Decision Summary – March 21-22, 2017
The AcSB considered the feedback obtained from additional outreach with financial statement users and the most recent advice from its Private Enterprise Advisory Committee relating to its discussions of the field test results. The AcSB reaffirmed its view that the basis for the exception should be on the condition of retention of control of the enterprise and decided that the control of the enterprise must be retained by the party receiving the redeemable preferred shares. The AcSB further decided on the additional conditions necessary to qualify for equity classification which determine that control of the future cash outflows of the enterprise has not changed.

The AcSB also decided that additional guidance relating to substantive rights should be added in Section 1591, Subsidiaries, to provide sufficiently robust guidance to address the characteristics of the redeemable preferred shares issued in a tax planning arrangement.

The AcSB further discussed the feedback received from field test participants about whether additional guidance was necessary when assessing control of an enterprise held by a group of related parties. The AcSB decided not to provide additional guidance on related parties because it was concerned about the potential implications on a broader range of transactions. The AcSB will explain its rationale in the basis for conclusions.

The AcSB discussed when redeemable preferred shares that initially qualify for equity classification may need to be reclassified as liabilities. The AcSB directed staff to explore when an enterprise would need to reassess its classification of redeemable preferred shares.

The AcSB considered the advice from its Private Enterprise Advisory Committee on the effect of the proposals on current practice and discussed different transitional approaches that could be provided.  The AcSB will continue its discussion on transitional provisions and begin its discussion on disclosure requirements at its May 2017 meeting. Accordingly, the AcSB is expecting to issue a re-exposure draft during the third quarter of 2017.

Private Enterprise Advisory Committee Notes – February 2, 2017
The Committee discussed the decisions made by the AcSB at its January 12, 2017 meeting and the results of field testing conducted to assess the viability of permitting a classification exception on the condition of retention of control of an enterprise. In particular, the Committee discussed:

  • whether the current guidance in Section 1591, Subsidiaries, is sufficiently robust to address the characteristics of redeemable preferred shares issued in a tax planning arrangement;
  • the perspective from which control of the enterprise should be considered; and
  • other conditions that are necessary, in addition to retention of control over the enterprise.

Committee members provided feedback on the types of arrangements that would not meet the classification exception and the potential effect on practice. Committee members also provided input on the overall project timeline.

AcSB Decision Summary – January 12, 2017
The AcSB discussed the results of field testing conducted to assess the viability of permitting a classification exception on the condition of retention of control of an enterprise. The field testing consisted of analyses conducted by assurance and tax practitioners of actual tax planning arrangements commonly executed.

In particular, the AcSB considered the following, based on the results of the field testing:

  • whether the current guidance in Section 1591, Subsidiaries, is sufficiently robust to address the characteristics of redeemable preferred shares issued in a tax planning arrangement;
  • the perspective from which control of the enterprise should be considered; and
  • other conditions that are necessary, in addition to retention of control of the enterprise.

The AcSB decided that the basis for the classification exception should be on the condition of retention of control of an enterprise and that additional guidance may be needed relating to the control assessment. In addition, the AcSB decided that other conditions are necessary in order to qualify for the classification exception.

The AcSB noted that at least some of the tax planning arrangements that meet the classification exception under the current guidance will not qualify for the exception under the proposed basis.  Accordingly, the AcSB directed the staff to obtain feedback from its Private Enterprise Advisory Committee on the effect of its decisions on current practice. At its March 21-22, 2017 meeting, the AcSB will consider the input received from the Committee. The AcSB will also begin to discuss transitional provisions.

Private Enterprise Advisory Committee Notes – December 1, 2016
The Committee discussed the status of ongoing field testing to assess the viability of applying “retention of control of an enterprise” as a condition for a classification exception. The Committee also reviewed details of one of the tax planning arrangements being analyzed by the field testing participants. Committee members provided input on the arrangement. 
Committee members provided further input into an analysis of the following issues:

  • other conditions that should be met in order for the classification exception to be permitted, in addition to retention of control of the enterprise; and
  • reclassification considerations.

AcSB Decision Summary – July 20, 2016
The AcSB continued its discussions relating to the viability of a classification exception and the conditions under which such an exception might be permitted.  In addition, the AcSB discussed when redeemable preferred shares falling within any exception should be reclassified from equity to liability subsequent to initial application of the classification exception and what information should be disclosed. The AcSB directed staff to begin field testing to assess whether the current control guidance in Section 1591, Subsidiaries, is sufficiently robust to address the various characteristics of tax planning arrangements and the additional conditions necessary in order to qualify for a classification exception.

Private Enterprise Advisory Committee Notes – June 14, 2016
The Committee discussed an analysis of the viability of a classification exception on the basis of retention of control over the enterprise.  Specifically, the Committee discussed the challenges with applying the concept of control as a condition to the various characteristics of tax planning arrangements.  

The Committee also provided further input into an analysis of the following issues for consideration:

  • the definition of tax planning arrangements;
  • conditions that should also be met in order for the classification exception to be permitted, in addition to the retention of control;
  • reclassification considerations; and
  • presentation and disclosure.

AcSB Decision Summary – May 18, 2016
The AcSB discussed an analysis of the viability of a classification exception on the basis of retention of control over the enterprise.  In particular, the AcSB discussed the potential challenges with basing the classification exception solely on control, and what further work should be done.  In that regard, the AcSB directed staff to take the time necessary to conduct further testing of the characteristics of tax planning arrangements and to identify the arrangements that would and would not meet the classification exception if it were based on retention of control over the enterprise.

AcSB Decision Summary – March 22-23, 2016
The AcSB received a summary of the additional analysis conducted relating to the scope of the classification exception and the characteristics of tax planning arrangements, as well as feedback from the Private Enterprise Advisory Committee on that analysis.  In addition, the AcSB discussed alternative bases under which a classification exception might be considered.  In that regard, the AcSB directed the staff to further explore the viability of a classification exception on the basis of retention of control over the enterprise, as advised by the Committee.

Private Enterprise Advisory Committee Notes – February 17, 2016
The Committee received an update on the additional analysis conducted relating to the scope of the classification exception and the characteristics of tax planning arrangements. The Committee also discussed possible bases for a classification exception. Specifically, the Committee discussed whether a classification exception might be restricted to:

  • estate freezes in which there is no change in control over the entity that is subject to the freeze;
  • estate freezes and roll-over transactions, by focusing the classification exception on transactions with the controlling shareholder; and
  • estate freezes that are non-reciprocal or when the only consideration exchanged is common or preferred shares that had been held by the common shareholder.

The Committee agreed to recommend to the AcSB that a classification exception on the basis of a change in control be further explored.

AcSB Decision Summary – November 24, 2015
The AcSB continued its deliberations and, in particular, discussed next steps in response to the comment letters and roundtable discussions on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”  The AcSB agreed that alternatives to the manner in which the classification exception is described in Financial Instruments, paragraph 3856.23, should be explored.  To facilitate the development of alternatives, the AcSB directed the staff to further analyze the scope of the exception and the characteristics of inter-generational transfers.

Private Enterprise Advisory Committee Notes – October 6, 2015
The Committee discussed the comments received by stakeholders in response to the AcSB’s Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement,” which was issued in October 2014. In particular, the Committee considered the respondents’ suggested amendments to Section 3856, Financial Instruments, to address the concerns raised that precipitated the proposal. Those suggestions included:

  • amending paragraph 3856.23 to remove references to specific sections of the Income Tax Act and instead restrict the use of the paragraph by describing the types of transactions to which it applies;
  • providing application guidance to support the use of judgment in determining when the paragraph is applicable and to address application issues, such as the requirement to reclassify as a liability “when redemption is demanded”;
  • adding disclosure requirements to better inform users about the nature of the arrangement that gave rise to the issuance of the preferred shares and the characteristics of those shares; and
  • allowing an accounting policy choice, as was previously permitted under pre-changeover GAAP.

The Committee discussed the possible amendments to paragraph 3856.23, including revising its scope and adding disclosure requirements.

Webinar – Redeemable Preferred Shares Issued in a Tax Planning Arrangement – Update
August 26, 2015. Tune in to this webinar on September 18, 2015 (English) or September 21, 2015 (French) to understand the views of stakeholders regarding the AcSB’s October 2014 Exposure Draft.  

AcSB Decision Summary – May 25-26, 2015
The AcSB continued discussions of respondents’ comments, including the results of the roundtable discussions with stakeholders, on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”

Many respondents noted that the Exposure Draft proposals were based on discussions with creditors and suggested that additional types of users should be consulted.  These respondents noted that other users may not understand the results of reporting redeemable preferred shares issued in a tax planning arrangement as liabilities.  In respect of its strategy for maintaining the accounting standards for private enterprises, the AcSB noted that the Invitation to Comment on its 2016-2021 Draft Strategic Plan seeks input on the other types of users of private enterprise financial statements and their information needs.  The AcSB decided to consider the results of the user outreach on the Invitation to Comment before further deliberating this issue. 

In light of the above decision, and the time needed to fully consider other issues and comments raised by respondents, the AcSB agreed that any change as a result of this project will not be published prior to January 1, 2016.  Accordingly, the AcSB decided that the effective date of any such change will be no earlier than January 1, 2018.

AcSB Decision Summary – March 18-19, 2015
The AcSB began considering responses to its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement,” as well as the results of all roundtable discussions with stakeholders, including the additional discussions conducted in January and February 2015 with practitioners and lenders that use financial statements.

The AcSB agreed that redeemable preferred shares issued in a tax planning arrangement (as addressed in Financial Instruments, paragraph 3856.23) meet the definition of a liability.  The AcSB will consider whether there are sufficient cost/benefit considerations to retain equity treatment for certain redeemable preferred shares issued in a tax planning arrangement.

The AcSB also discussed whether further consultations with financial statement users should be undertaken.  No decisions were made on this issue.

The AcSB will continue discussions of this topic at its May 2015 meeting.

AcSB Decision Summary – January 14, 2015
The AcSB considered additional feedback received from consultations conducted in December 2014 and other sources on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” No decisions were made.

Roundtable Discussions – Stakeholders’ Views Sought on Section 3856, Financial Instruments – January 2015
December 18, 2014. The AcSB is holding roundtables to obtain input on its Post-Implementation Review of Section 3856, Financial Instruments, and on its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” Register to attend a roundtable discussion to share your views.

AcSB Decision Summary – December 10, 2014
The AcSB considered the feedback received to date from the public roundtable discussions held in Vancouver and Calgary, and from other discussions with stakeholders on the Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.”  No decisions were made. 

The AcSB encourages stakeholders to submit their comments by January 15, 2015.

Roundtable Discussions – Stakeholders’ Views Sought on Section 3856, Financial Instruments – November 2014
November 7, 2014. The AcSB is holding roundtables to obtain input on its Post-Implementation Review of Section 3856, Financial Instruments, and on its Exposure Draft, “Redeemable Preferred Shares Issued in a Tax Planning Arrangement.” Register to attend a roundtable discussion to share your views.

FYI Article – Accounting for Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 29, 2014. This article discusses the AcSB’s recently issued Exposure Draft regarding redeemable preferred shares issued in a tax planning arrangement, specifically for shares issued in transactions commonly known as an “estate freeze”.

Webinar – Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 17, 2014. Tune in to this webinar on November 20, 2014 (English) or November 25, 2014 (French) to learn about the AcSB’s proposed amendments to standards on redeemable preferred shares issued in a tax planning arrangement.

Exposure Draft – Redeemable Preferred Shares Issued in a Tax Planning Arrangement
October 1, 2014. The AcSB has issued an Exposure Draft that proposes to delete Financial Instruments, paragraph 3856.23, and includes a Basis for Conclusions. Stakeholders are encouraged to submit their comments, on the form provided, by January 15, 2015.

AcSB Decision Summary – July 16, 2014
The AcSB reviewed a draft exposure draft and accompanying basis material.  The AcSB expects to issue the exposure draft for comment in the third quarter of 2014 with a 90-day comment period.  The AcSB plans to make the change effective for fiscal years beginning on or after January 1, 2016, subject to comments received on exposure.

AcSB Decision Summary – May 14-15, 2014
The AcSB discussed the effect of recognizing redeemable preferred shares issued in a tax planning arrangement as liabilities.  The AcSB tentatively decided that the previously unrecognized increase in value of the business reflected by newly issued redeemable preferred shares should be presented in a separate category of equity, as set out in Equity, paragraph 3251.06.  The AcSB noted that affected entities may also have the existing option of applying Section 1625, Comprehensive Revaluation of Assets and Liabilities.

The AcSB approved a proposal to withdraw Financial Instruments, paragraph 3856.23, subject to reviewing a draft of an exposure draft and a written ballot.  The AcSB plans to make the change effective for fiscal years beginning on or after January 1, 2016, subject to comments received on exposure.

Private Enterprise Advisory Committee Notes – April 3, 2014
The Committee discussed presentation requirements related to the recognition of redeemable preferred shares issued in a tax planning arrangement as a liability.

The Committee noted that the AcSB had agreed that such redeemable shares should be classified as a liability. That liability would be measured on initial recognition at fair value. The Committee agreed to recommend to the AcSB that the resulting debit should be presented as a separate component of equity that would be reclassified to retained earnings as the preferred shares are redeemed. The Committee also recommended disclosure of a description of the transaction that resulted in the separate component of equity.

AcSB Decision Summary – March 18-19, 2014
The AcSB discussed the special treatment provided by Section 3856, Financial Instruments, for redeemable preferred shares issued in a tax planning arrangement. The AcSB considered whether the presentation requirement in paragraph 3856.23 should be retained or modified. The AcSB agreed that the redeemable shares should be classified as a liability and directed staff to perform further analysis of presentation issues associated with the redeemable shares.

Private Enterprise Advisory Committee Notes – December 10, 2013
The Committee continued its discussion on whether the simplification in Financial Instruments, paragraph 3856.23, which requires redeemable preferred shares issued in certain tax planning arrangements to be classified as equity, should be retained. The Committee will discuss this topic again at a subsequent meeting.

 Private Enterprise Advisory Committee Notes – June 18, 2013
The Committee continued its discussions on the accounting for redeemable preferred shares issued in a tax planning arrangement. The Committee requested the staff to consider alternative approaches for amending Financial Instruments, paragraph 3856.23. The Committee will continue its discussions on this topic at a subsequent meeting.

Private Enterprise Advisory Committee Notes – April 3, 2013
The Committee commenced a re-examination of the accounting for redeemable preferred shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23.

The Committee had a preliminary discussion in respect of the cost/benefit arguments that justify equity treatment of these preferred shares. The Committee will continue its discussions on this topic at a subsequent meeting

AcSB Decision Summary – March 19-20, 2013
The AcSB approved a project to re-examine the accounting for redeemable preferred shares issued in a tax planning arrangement, as set out in Financial Instruments, paragraph 3856.23.

 

Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.