Financial Instruments

Current Status Next Steps

AcSB is seeking comments on its Exposure Draft, by January 29, 2018.

Second quarter of 2018 – AcSB to deliberate comments received.

BACKGROUND

There is diversity in accounting for related party financial instruments. There are also concerns regarding the usefulness of some financial statement disclosures related to financial instruments.

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Based on feedback received from respondents to its Post-implementation Review: Section 3856, Financial Instruments, the Accounting Standards Board (AcSB) understands that the guidance pertaining to the following areas are not clear and the lack of clarity leads to diversity in practice:

  • scope of accounting for related party financial instruments after initial recognition; and
  • measurement of related party compound financial instruments.

We also understand that disclosures about risks related to financial instruments are not entity-specific and therefore not useful.

Issues to be considered during this project include:

  • clarifying the scope of related party financial instruments;
  • clarifying the measurement of related party compound financial instruments; and
  • amending the financial instrument risk disclosure requirements.

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PROJECT NEWS & DECISION SUMMARIES

AcSB Exposure Draft – Accounting for Related Party Financial Instruments and Significant Risk Disclosures – Proposed Amendments to Section 3856, Financial Instruments
October 31, 2017. The AcSB has issued an Exposure Draft proposing amendments to Section 3856, related to the accounting for financial instruments between related parties and significant risk disclosures. Stakeholders are encouraged to submit their comments by January 29, 2018.

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.

AcSB Decision Summary – September 20-21, 2017
The Board considered the proposed drafting of the amendments. The Board decided that:

  • the scope of the standards should clarify when an enterprise applies Section 3856, Financial Instruments or Section 3840, Related Party Transactions for related party transactions;
  • enterprises should not be permitted to initially measure related party financial instruments at fair value; and
  • enterprises should only be permitted to subsequently measure related party financial instruments at fair value when the instrument is an investment in equity instruments that are quoted in an active market.

The Board members 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 plans to issue the exposure draft no later than October 31, 2017.

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 Decision Summary – July 13, 2017
The Board considered feedback received from its Not-For-Profit Advisory Committee on current practice of not-for-profit organizations on the topics in this project.

The Board decided:

  • that the modification of all related party financial instruments will be accounted for as an extinguishment and that the modified instrument will be measured using the initial measurement concepts for related party financial instruments;
  • to amend the Section to clarify that an entity needs to disclose significant risks arising from derivatives although it need not be done separately;
  • that the amendments will be applicable to for-profit enterprises and not-for-profit organizations; and
  • on the transition requirements and the proposed effective date.

The Board directed the staff to conduct testing of the initial measurement proposals. The Board expects to issue an exposure draft no later than the fourth quarter of 2017.

AcSB Decision Summary – June 22, 2017
The Board received an update on additional stakeholder feedback received and confirmed that the initial measurement of related party financial instruments will continue to be included in the scope of the project.

In that regard, the Board discussed possible initial measurement concepts for related party financial instruments, and directed the staff to explore further how those concepts can be described. The Board also decided on the approach to the accounting for impairment and forgiveness of related party financial instruments.

The Board will consider the remaining issues and next steps, as well as the project timeline to issue an exposure draft by no later than the fourth quarter of 2017, at its next meeting.

AcSB Decision Summary – May 16, 2017
The Board considered feedback received from the “Post-implementation Review of Section 3856, Financial Instruments” and additional targeted advice from members of its Private Enterprise Advisory Committee on alternatives to resolve the following narrow-scope issues:

Initial measurement of related party financial instruments
The Board decided that initial measurement guidance for related party financial instruments should be added to Section 3856, Financial Instruments. The Board also discussed measurement concepts for these instruments and directed the staff to explore these concepts further.

Measurement of related party compound financial instruments
The Board discussed acceptable methods for the initial measurement of the separate liability and equity elements of related party compound financial instruments. The Board decided that the allocation of proceeds should be consistent for both related party and third party compound financial instruments.

Classification of impairment and forgiveness of related party loans
The Board agreed that the financial asset impairment indicators in paragraph 3856.A15 are not exclusive to third party financial assets. The Board discussed potential approaches to distinguish between impairment and forgiveness of related party loans and directed the staff to obtain feedback from additional financial statement users on this issue.

Scope of accounting for modifications and extinguishments of related party loans
The Board discussed the application of the 10% threshold assessment in paragraph 3856.A52(a) and directed the staff to consider how it would be applied to modifications of related party loans.

Usefulness of financial instrument risk disclosures
The Board discussed the risk disclosure requirements and directed the staff to obtain feedback from additional financial statement users, such as lessors and private equity investors, regarding the usefulness of this disclosure.

Application by not-for-profit organizations
The Board directed the staff to research whether these proposed amendments would be appropriate for application by not-for-profit organizations given there is no guidance for measuring financial instruments with related not-for-profit organizations. The results of the research will enable the Board to determine whether and when the amendments would be applied by not-for-profit organizations.

Next steps
The Board will issue an exposure draft on these narrow-scope issues no later than the fourth quarter of 2017.

AcSB Decision Summary – January 12, 2017
The AcSB approved a project to address several narrow-scope issues identified during the Post-implementation Review of Section 3856, Financial Instruments, associated with the scope of related party transactions and measurement of related party compound financial instruments and disclosure.

The AcSB discussed whether several other topics, including fair value measurement, hedge accounting, derecognition and classification of equity and financial liabilities, have merit in being added to its work plan. The AcSB agreed that if these topics are added to its work plan, they would need to be addressed through major projects. Therefore, the AcSB will consider these topics in the context of its consultation with stakeholders about the relative priorities for Part II projects.

AcSB Decision Summary – September 21-22, 2016
The AcSB discussed the merits of adding to its project plan:

  • topics identified during the Section 3856 Post-implementation Review; and
  • additional financial instrument issues raised by other stakeholders.

The AcSB directed staff to draft project proposals to address several of the issues raised but noted that the priority of these project proposals should be considered in the context of the AcSB’s broader agenda priorities. 

Private Enterprise Advisory Committee Notes – June 14, 2016
The Committee discussed the feedback to the “Post-implementation Review of Section 3856, Financial Instruments.” The purpose of this review was to assess the effectiveness of Section 3856 for preparers and financial statement users.

The Committee agreed to suggest to the AcSB that the issues noted below merit being added to the AcSB’s project plan and addressed through either a major project or a narrow-scope amendment:

  • issues associated with the following related parties items should be dealt with concurrently:
    • scope of accounting for related party financial assets and financial liabilities after initial recognition;
    • measuring related party compound financial instruments;
    • classification of impairment and forgiveness of related party loans; and
    • challenges in determining the carrying amount or exchange amount of newly issued related party financial instruments;
  • classification of certain instruments as either equity or financial liabilities; and
  • some disclosure requirements.

The Committee also agreed to suggest to the AcSB that the issues noted below be researched further:

  • initial measurement of financial instruments with non-market conditions or uncertain cash flows is challenging; and
  • determination of fair value for some financial assets (including mutual or pooled funds).

The Committee noted that the latter issue is prevalent with not-for-profit organizations and, accordingly, suggested that it be raised with the Not-for-Profit Advisory Committee at its next meeting.

AcSB Decision Summary – November 24, 2015
In response to stakeholder feedback, the AcSB agreed to revise the timing of the annual improvements process, such that the exposure draft will be issued in September rather than February and final amendments will be released in the Handbook the following July as opposed to October.   As a result, the next cycle of annual improvements will be issued in 2017.  Stakeholders are encouraged to submit issues.

The AcSB considered recommendations of its Private Enterprise Advisory Committee and decided to include proposals in the 2017 annual improvements to remove the requirements for an enterprise to disclose:

  • its accounting policies “as the first note to the financial statements” as described in Section 1505, Disclosure of Accounting Policies; and
  • the carrying amount of impaired operating lease receivables set out in Section 3065, Leases.

The AcSB also decided not to include several other issues raised by stakeholders during the 2015 annual improvements process and the Post-implementation Review of Section 3856, Financial Instruments.  The AcSB determined that the issues identified in the Post-implementation Review either were not within the scope of an annual improvement or thought the issues should be addressed as part of broader projects.

The AcSB expects to issue an exposure draft of the proposed 2017 annual improvements in September 2016.

Private Enterprise Advisory Committee Notes – October 6, 2015
The Committee discussed the issues summarized in the Feedback Statement, “Post-implementation Review: Section 3856, Financial Instruments,” to determine whether any of those issues should be included in the scope of the 2016 annual improvements.

Items to Be Considered as Part of the 2016 Annual Improvements 

Related Party Transactions – Scope of Accounting for Related Party Financial Assets and Financial Liabilities after Initial Recognition
Many respondents to the AcSB’s Request for Information, “Post-implementation Review: Section 3856, Financial Instruments,” agreed that there is a lack of explicit guidance on accounting for related party financial instruments after initial recognition. The Committee agreed that the standards may be unclear as to whether Section 3840 or Section 3856 applies to the accounting for related party financial assets and financial liabilities after initial recognition. Therefore, the Committee agreed to recommend to the AcSB that the scope of the two Sections should be clarified.

Clarification of Accounting Requirements for Embedded Derivatives
Respondents also identified challenges in determining whether embedded derivatives require bifurcation. The Committee agreed that Section 3856 may be unclear on this issue. Therefore, the Committee agreed to recommend that the AcSB consider clarifying the Section to address the accounting requirements for embedded derivatives.

Items that Require Further Analysis to Determine Whether They Could Be Addressed as an Annual Improvement

For each of the issues noted below, the Committee agreed to recommend that the AcSB consider clarifying the relevant Section(s), but thought that further analysis should be done to determine whether the issue could be addressed as an annual improvement.

Subsequent Measurement – Identification of Whether Certain Instruments Are Considered to Be Traded in an Active Market
Some respondents expressed concerns that Section 3856 is unclear as to when some equity instruments are considered to be traded in an active market and had suggested that the AcSB clarify whether thinly traded equity securities are considered actively traded. The Committee agreed that Section 3856 may be unclear as to when some equity instruments are considered to be traded in an active market.

Derecognition of Liabilities – Scope of Accounting for Modifications and Extinguishments of Related Party Financial Liabilities
A few respondents thought that there is not sufficient guidance on how to account for a modification that does not result in an extinguishment. The Committee agreed that the standards may be unclear as to whether Section 3840 or Section 3856 applies to the accounting for modifications or extinguishment of related party financial liabilities.

Disclosure – Clarification of Certain Disclosure Requirements
A few respondents thought that some of the disclosure requirements in Section 3856 are unclear and suggested the AcSB provide additional guidance to ensure consistent application. The Committee agreed with these respondents.

 

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.