2014 Annual Improvements

BACKGROUND

The Accounting Standards Board (AcSB) has adopted an annual process to make minor improvements to accounting standards for private enterprises (ASPE) in Part II of the Handbook as they are identified.

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The annual improvements process:

  • clarifies guidance or wording in the standards; or
  • corrects relatively minor unintended consequences, conflicts or oversights. 

Major improvements to the standards, such as the issuance of a new standard, are not included in the annual improvements process. Annual improvements to Part II may also apply to not-for-profit organizations that use Part III.

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PROJECT NEWS

Basis for Conclusions – 2014 Improvements to Accounting Standards for Private Enterprises
December 5, 2014. This document sets out how the AcSB reached its conclusions. As well, it sets out significant matters arising from comments received in response to its Exposure Draft and indicates how the Board dealt with the issues raised.

FYI Article – 2014 Annual Improvements: Clarifying the Standards
December 2, 2014. This article discusses the AcSB’s recently issued amendments regarding hedging and disclosure of impairments.

AcSB Decision Summary – July 16, 2014
The AcSB considered responses received from stakeholders to its March 2014 Exposure Draft, “2014 Improvements to Accounting Standards for Private Enterprises,” and the recommendations from its Private Enterprise Advisory Committee on how to proceed with the proposals based on that feedback. 

The AcSB agreed in principle with the proposed amendment to Section 3462, Employee Future Benefits, to clarify that the option to use a funding valuation for unfunded defined benefit plans can only be applied by entities that have at least one funded defined benefit plan.  However, in light of concerns raised by some stakeholders and the Committee, the AcSB directed the staff to redraft the relevant paragraphs to further clarify certain aspects.  The AcSB plans to re-expose this proposal for public comment.

The AcSB approved the proposed amendment to Section 3856, Financial Instruments, related to hedging, subject to drafting improvements in light of respondents’ comments and a written ballot. This amendment clarifies the accounting when a hedging instrument matures in an accounting period after the hedged item is recognized.

The AcSB agreed with the Committee’s recommendation that the disclosure requirement for the allowance for trade receivables in Section 3856 should be the allowance in total. Consequently, the further detail proposed in the Exposure Draft would not be required. The AcSB directed the staff to prepare a draft of the revised wording.

The AcSB reaffirmed that amendments to accounting standards for private enterprises resulting from the 2014 annual improvements process will be effective for years beginning on or after January 1, 2015, with earlier application permitted. The amendments are expected to be issued in October 2014.

The responses to the Exposure Draft included several suggestions for additional improvements to accounting standards for private enterprises that did not relate to issues in the Exposure Draft. The AcSB requested the Committee to assess the suggestions and recommend to the AcSB how to proceed on these issues.  The AcSB will decide whether, and how, to address the suggestions at a future meeting.

Private Enterprise Advisory Committee Notes – June 16, 2014
The Committee discussed the responses received on the Exposure Draft, “2014 Improvements to Accounting Standards for Private Enterprises,” issued in March 2014.  The Committee agreed to recommend the following to the AcSB:

  • The proposed amendment to Section 3462, Employee Future Benefits, to clarify when a funding valuation could be used to measure an unfunded defined benefit plan obligation, be approved substantively as exposed. However, the Committee also recommended that certain paragraphs in Section 3462 be redrafted to make the choices for measuring the defined benefit obligation easier to understand.
  • The proposed amendment to Section 3856, Financial Instruments, to clarify the accounting when a hedging instrument matures after the hedged item is recognized be approved substantively as exposed.
  • The disclosure requirement for the allowance for receivables should be the allowance in total and that the further detail proposed in the exposure draft should not be required.

The AcSB will discuss the responses to the Exposure Draft and the Committee’s recommendations at its July 2014 meeting.

The Committee noted that two of the responses included several additional issues that did not relate to issues in the Exposure Draft. The Committee requested staff to provide an analysis of these issues for its next meeting so it could recommend to the AcSB how to proceed on these issues.

Exposure Draft – 2014 Improvements to Accounting Standards for Private Enterprises
March 3, 2014. The AcSB has issued an Exposure Draft proposing amendments that will affect private enterprisesand not-for-profit organizations. Stakeholders are encouraged to submit their comments, on the form provided, by June 2, 2014.

AcSB Decision Summary – January 15, 2014
The AcSB finalized its discussion of issues to be addressed in an exposure draft of the 2014 annual improvements, subject to written ballot. The proposed improvements are intended to provide clarification concerning:

  • the option to use a funding valuation to determine the obligation for an unfunded defined benefit plan;
  • accounting for a hedging item that is settled after the completion of the hedged transaction; and
  • disclosure about impaired financial assets when impairment is determined on a group basis.

The AcSB expects to issue the exposure draft in the first quarter of 2014. The final amendments are expected to be included in Part II of the CPA Canada Handbook – Accounting by the end of this year and be effective for fiscal years beginning on or after January 1, 2015.

Private Enterprise Advisory Committee Notes – December 10, 2013
The Committee discussed the following issues:

Employee Future Benefits — Use of an Actuarial Valuation for Funding Purposes in Determining a Defined Benefit Obligation
Employee Future Benefits
, paragraph 3462.031, permits the use of a funding valuation to determine the obligation for an unfunded defined benefit plan. This valuation is required to be “on a basis consistent with” other funding valuations. The Committee agreed that the option to use a funding valuation for unfunded defined benefit plans should only be permitted for entities that have at least one funded defined benefit plan. As a result, the Committee recommended that this clarification be considered by the AcSB as part of the 2014 annual improvements.

The Committee also discussed the following issues related to Section 3462 and agreed that they do not meet the criteria to be included in annual improvements at this time.

  • An entity that uses a funding valuation for an unfunded plan has to determine the discount rate and other assumptions to use. Members tentatively agreed that this issue could be addressed by professional judgment, as discussed in the February 2013 AcSB Staff Financial Reporting Commentary, “Making Judgment Professional.” The Committee agreed that staff should continue to monitor this issue while private enterprises adopt Section 3462 in 2014. 
  • An entity may obtain a funding valuation for a defined benefit plan at the end of the year in which Section 3462 is adopted but not have a funding valuation for the comparative period presented. The Committee agreed that a “roll-back” of the funding valuation would be consistent with the “roll-forward” technique in paragraph 3462.062 as well as the transitional provisions in paragraph 3462.122(b) that implicitly use a “roll-back”. However, the Committee noted that if a significant event such as a settlement occurred in the comparative period, paragraphs 3462.062-.063 require a new actuarial valuation of the defined benefit obligation.
  • Paragraph 3462.029(a) requires that if a funding valuation is used to measure a defined benefit obligation, it should be “the most recently completed” one. The Committee noted that paragraphs 57-58 of the Background Information and Basis for Conclusions for Section 3462 discuss the AcSB’s rationale in this regard. The Committee further noted that the application of the roll-forward technique in paragraph 3462.062 for years between valuations would require the use of the most current assumptions if a new actuarial valuation was not available. As a result, the Committee decided that this issue could be addressed through the use of professional judgment.

Business Combinations — Application of the taxes Payable Method
Business Combinations
, paragraph 1582.A39, states that when an acquirer accounts for income taxes using the taxes payable method in accordance with Section 3465, the fair value of an item reflects its tax base. The Committee noted that a fair value calculation would take into account the timing of when temporary differences can be claimed. The Committee agreed that professional judgment should result in appropriate accounting.  The Committee also noted that the use of different methods to account for income taxes would result in the recognition of different goodwill amounts for an acquisition. The fair values of assets recognized in an acquisition are different depending on the tax method used. This is considered to be a consequence of goodwill being a residual amount. The Committee agreed that the two issues should not be included in annual improvements.

Financial Instruments — Use of the Fair Value Election Option
Questions have been raised as to whether the fair value election option in Financial Instruments, paragraph 3856.13, can be used for the subsequent measurement of financial instruments that were initially measured in accordance with Section 3840, Related Party Transactions. Members agreed that the fair value option can only be applied if the financial instrument is initially measured at fair value and that they had not seen evidence of this issue in practice. The Committee agreed that this issue should not be included in annual improvements.

Income Taxes — Acquisition of Tax Losses when the Taxes Payable Accounting Policy Is Chosen
This issue relates to the accounting for the purchase of tax losses by an entity that accounts for taxes using the taxes payable method rather than the future income taxes method. The Committee noted that the acquisition of tax losses falls within the scope of Section 3465, Income Taxes, and that the taxes payable method precludes recognition of an asset related to future income tax payments. The taxes payable method is a simplification that an entity may choose to adopt or not. The Committee agreed that this issue should not be included in annual improvements.

Related Party Transactions — Interaction with Section 1582
Paragraph 3840.44(a) requires that a business transferred between two enterprises under common control is accounted for in accordance with Section 1582 when the criteria in paragraph 3840.29 are met and the transaction is measured at the exchange amount.  The Committee noted that the interaction of Sections 1582 and Section 3840 is not always clear, and requested additional research by the staff.  The Committee will continue its discussions on this topic at a subsequent meeting.

Stock-based Compensation — Scope Exemption for Related Party Transactions
Questions have arisen regarding the wording of the scope exemption in Stock-based Compensation and Other Stock-based Payments, paragraph 3870.06(b). Some stakeholders have commented that the words used in the scope exemption are confusing. The Committee noted that the intent of paragraph 3870.06(b) is to:

  • include stock-based compensation plans with a principal shareholder and management stock compensation arrangements in the scope of Section 3870; and
  • exclude all other stock-based payments to related parties from the scope of Section 3870 and account for these in accordance with Section 3840.

The Committee agreed that this issue should not be included in annual improvements because the scope exemption is clear and has not created diversity in practice.

AcSB Decision Summary – December 3, 2013
The AcSB decided to address the following issues as part of the 2014 annual improvements:

  • accounting for a hedging item that is settled after the completion of the hedged transaction; and
  • disclosure about impaired financial assets when impairment is determined on a group basis.

The AcSB expects to issue an exposure draft of the proposed 2014 annual improvements in the first quarter of 2014.

AcSB Decision Summary – November 6-7, 2013
The AcSB discussed two possible changes to Section 3856, Financial Instruments. No decisions were made.

Private Enterprise Advisory Committee Notes – September 17, 2013
The Committee discussed the following issues:

Translation of Foreign Currency Hedging Instruments
Some stakeholders have found Financial Instruments, paragraph 3856.33(c), unclear about how to account for a foreign currency-denominated hedging forward contract that matures after the hedged anticipated transaction occurs. The issue arises when a year-end occurs after the hedged transaction occurs but before the forward contract matures. The Committee agreed that a contract denominated in a foreign currency is a monetary item that should be remeasured in accordance with Section 1651, Foreign Currency Translation, using the exchange rate in effect at the balance sheet date with any exchange gain or loss included in net income. As a result, the Committee recommended that this issue should be considered by the AcSB as part of the 2014 Annual Improvements project.

Disclosure of Impaired Accounts Receivable
Questions have been raised regarding how to apply the requirements of paragraph 3856.42 to accounts receivable.  Stakeholders have questioned whether this paragraph requires the carrying amount of impaired accounts receivable to be disclosed. The Committee noted that many businesses calculate an allowance for doubtful trade accounts receivable on a portfolio basis rather than by identifying individual receivables as impaired.  The Committee agreed that the existing disclosure in paragraph 3856.42 should only apply to financial assets other than accounts receivable. For accounts receivable, there should be a requirement to disclose the allowance for doubtful accounts separately.  As a result, the Committee recommended that this issue should be considered by the AcSB as part of the 2014 Annual Improvements project.

 

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.