2015 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

FYI Article – 2015 Annual Improvements: Clarifying the Standards
November 3, 2015. This article discusses the AcSB’s recently issued amendments regarding disclosures of business combinations, investments, leases, and property, plant and equipment; and the measurement of a defined benefit plan obligation.

Basis for Conclusions – 2015 Annual Improvements to Accounting Standards for Private Enterprises
October 1, 2015. 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.

AcSB Decision Summary – July 23, 2015
The AcSB considered responses from stakeholders to its Exposure Draft, “2015 Annual 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 approved the proposed amendments to Section 1582, Business Combinations, as exposed, subject to a written ballot. The amendments clarify the requirement to disclose the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed when a business combination is achieved through the acquisition of an asset or a group of assets.

The AcSB approved the proposed amendments to Section 3051, Investments, and Section 3065, Leases, subject to drafting changes and a written ballot. The amendments require disclosure of the amount of any impairment loss or reversal of a previously recognized impairment loss. The drafting changes include revising the consequential amendments to Section 1520, Income Statement, to incorporate subsidiaries that are accounted for using the cost or equity method.  

The AcSB approved the proposed amendments to Section 3462, Employee Future Benefits, to clarify when a funding valuation can be used to measure a defined benefit obligation for a defined benefit plan, subject to drafting changes and a written ballot.  The AcSB agreed with the recommendation of the Committee and several respondents to clarify that funding valuations prepared in accordance with legislative and contractual requirements (such as the Income Tax Act and for supplemental executive retirement plans) are permitted, provided these funding valuations also meet the existing criteria (i.e., not prepared using a solvency, wind-up or similar valuation basis).

The AcSB decided that the non-authoritative decision tree to accompany Section 3462 would provide a useful aid to preparers in understanding when an entity can use a funding valuation to measure a defined benefit obligation for a defined benefit plan. Accordingly, the AcSB decided to include the decision tree with the final amendments, subject to drafting changes.

The AcSB reaffirmed that amendments to accounting standards for private enterprises resulting from the 2015 annual improvements process will be effective for years beginning on or after January 1, 2016, with earlier application permitted. The amendments are expected to be issued in October 2015.

The responses to the Exposure Draft also included several suggestions for additional improvements to accounting standards for private enterprises that did not relate to the specific proposals in the Exposure Draft. The AcSB requested the Private Enterprise Advisory 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 11, 2015
The Committee discussed the responses received on the Exposure Draft, “2015 Annual Improvements to Accounting Standards for Private Enterprises,” issued by the AcSB in February 2015.  Respondents generally agreed with the proposed amendments.  The Committee agreed to recommend the following to the AcSB:

  • The proposed amendments to Section 1582, Business Combinations, be approved as exposed.  The proposals clarify the requirement to disclose the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed when a business is acquired through the acquisition of an asset or a group of assets.
  • The proposed amendments to Section 3051, Investments, and Section 3065, Leases, be approved substantively as exposed. The proposals require disclosure of the amount of any impairment loss or reversal of a previously recognized impairment loss. Furthermore, the Committee recommended that consequential amendments to Section 1520, Income Statement, be amended to also include subsidiaries that are accounted for using the cost or equity method, as suggested by respondents.     
  • The proposed amendments to Section 3462, Employee Future Benefits, to clarify when a funding valuation could be used to measure a defined benefit plan obligation, be approved substantively as exposed, with the following additional clarifications as suggested by respondents:
    • Funding valuations prepared in accordance with contractual requirements or with the Income Tax Act be permitted, provided these funding valuations also meet the existing criteria (i.e., not prepared using a solvency, wind-up or similar valuation basis);
    • The (non-authoritative) decision tree distinguish between plans for which the choice to use a funding valuation is an accounting policy choice that must be made consistently and plans for which this choice is made on a plan-by-plan basis.

The AcSB will discuss the responses to its Exposure Draft and the Committee’s recommendations at its July 2015 meeting.

The Committee noted that the responses included several additional issues that did not relate to the specific proposals 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.

FYI Article – 2015 Annual Improvements: Proposed Clarifications to the Standards
March 10, 2015. This article discusses the AcSB’s recently issued Exposure Draft regarding disclosures of business combinations and impairments, and the measurement of a defined benefit plan obligation.

Exposure Draft – 2015 Annual Improvements to Accounting Standards for Private Enterprises
February 25, 2015. The AcSB has issued an Exposure Draft proposing amendments that will affect private enterprises and not-for-profit organizations. Stakeholders are encouraged to submit their comments, on the form provided, by May 26, 2015.

AcSB Decision Summary – January 14, 2015
The AcSB finalized its discussion of issues to be addressed in an exposure draft of the 2015 annual improvements, subject to written ballot. The exposure draft will include the following proposed improvements:

  • Require disclosure of the amounts recognized for each major class of assets acquired and liabilities assumed when a business is acquired through the acquisition of an asset or a group of assets in Section 1582, Business Combinations. This disclosure is already required for a subsidiary that is consolidated.  
  • Require disclosure of an impairment loss or reversal of a previously recognized loss in Section 3051, Investments, and Section 3065, Leases, similar to the existing disclosure requirement in Section 3856, Financial Instruments.
  • Clarify that the option to use a funding valuation for unfunded defined benefit plans in Section 3462, Employee Future Benefits, can only be applied by entities that have at least one funded defined benefit plan. This issue was originally included in the proposed 2014 annual improvements. The revised proposal responds to stakeholder concerns about the clarity of the original proposal.

The AcSB expects to issue the exposure draft in the first quarter of 2015. The final amendments are expected to be included in Part II of the CPA Canada Handbook – Accounting in the fourth quarter of 2015.  The amendments would be effective for fiscal years beginning on or after January 1, 2016.

Private Enterprise Advisory Committee Notes – December 17, 2014
The Committee discussed the following issues raised by stakeholders:

Disclosure of Acquisition of Assets in a Business Combination
Business Combinations
, paragraph 1582.62A(a), requires disclosure of the amounts recognized for each major class of assets acquired and liabilities assumed in a business combination when a subsidiary is consolidated. Some business combinations are achieved through the direct acquisition of assets and assumption of liabilities rather than the acquisition of a subsidiary. The Committee recommended to the AcSB a proposed amendment to Section 1582 to also require this disclosure when a business is acquired through the acquisition of an asset or a group of assets.

Disclosure of Impairment Loss or Reversal of a Previously Recognized Loss
Section 3856, Financial Instruments, requires the disclosure of the amount of any impairment loss or reversal of a previously recognized loss for financial instruments. However, similar disclosures are not required for investments, interests in a joint arrangement or leases. The Committee recommended to the AcSB proposed amendments to Sections 3051, Investments, 3056, Interests in Joint Arrangements, and 3065, Leases, to require such disclosure.

Employee Future Benefits
The Committee continued its discussion on when a funding valuation can be used to measure the obligation for an unfunded defined benefit plan in Section 3462, Employee Future Benefits. This issue was originally included in the 2014 Annual Improvements project.

The Committee decided to recommend to the AcSB that:

  • the wording should be clear that an accounting valuation can always be used to measure the obligation of a defined benefit plan while a funding valuation can only be used if certain criteria are met;
  • a funding valuation can only be used for a funded defined benefit plan when a funding valuation is required to be prepared as a result of pension legislation or regulation; and
  • a funding valuation can only be used for an unfunded defined benefit plan when the entity uses a funding valuation for its funded plans permitted in accordance with the previous bullet.

The Committee also agreed to recommend to the AcSB that a non-authoritative decision tree be included in the proposed amendment to Section 3462.

AcSB Decision Summary – November 5-6, 2014
The AcSB considered the recommendations of its Private Enterprise Advisory Committee and decided to include proposals in the 2015 annual improvements to:

  • require the disclosure of the amounts recognized for each major class of assets acquired and liabilities assumed when a business is acquired through the acquisition of a group of assets, in the disclosure requirements in Section 1582, Business Combinations; and
  • require the disclosure of an impairment loss or reversal of a previously recognized loss in Section 3051, Investments, and Section 3065, Leases, similar to the existing disclosure requirement in Section 3856, Financial Instruments.

In finalizing the 2014 annual improvements at a prior meeting, the AcSB decided to make additional clarifications and re-expose proposed amendments to Section 3462, Employee Future Benefits. The original proposed amendment was 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.  After further deliberations, the AcSB decided to consider amended wording of the original proposed amendment at a future meeting.  (Amended this sentence to agree with the minutes of the AcSB’s November 5-6, 2014 meeting approved on December 10, 2014.)

The AcSB decided that the wording of Section 3061, Property, Plant and Equipment, could imply that the amount of amortization of each item of property, plant and equipment is required to be disclosed, but the Board was not aware of such an interpretation being made in practice. The AcSB is concerned that requesting input on this proposed clarification would not be seen as an effective use of stakeholders’ time and directed the staff to determine whether, in accordance with its due process, the wording could be clarified without exposing the change for public comment.

The AcSB decided to not include several other issues raised by stakeholders in the 2015 annual improvements.  Some of these issues relate to Section 3856 and will be considered as part of the ongoing Post-Implementation Review of that Section.

The AcSB expects to issue an exposure draft of the proposed 2015 annual improvements in the first quarter of 2015.

Private Enterprise Advisory Committee Notes – September 16, 2014
The Committee discussed the following issues raised by stakeholders:

Disclosure of Acquisition of Assets in a Business Combination
Business Combinations
, paragraph 1582.62A(a), requires disclosure of the amounts recognized for each major class of assets acquired and liabilities assumed in a business combination when a subsidiary is consolidated. Some business combinations are achieved through the direct acquisition of assets and assumption of liabilities rather than the acquisition of a subsidiary. The Committee agreed to recommend to the AcSB that this disclosure also be required when a business is acquired through an asset acquisition.

Disclosure of Impairment Loss or Reversal of a Previously Recognized Loss
Section 3856, Financial Instruments, requires the disclosure of the amount of any impairment loss or reversal of a previously recognized loss for financial instruments. However, similar disclosures are not required for investments, interests in a joint arrangement or leases. The Committee noted that Section 1400, General Standards of Financial Statement Presentation, requires disclosure of amounts that do not typify normal business activities of the entity. Financial statement users on the Committee commented that disclosures about impairment provide important information. The Committee agreed to recommend to the AcSB that disclosure about impairments similar to that in Section 3856 be added to Sections 3051, Investments, 3056, Interests in Joint Arrangements, and 3065, Leases.

Disclosure of Amortization of Property, Plant and Equipment
Section 3061, Property, Plant and Equipment, requires the amount of amortization of an item of property, plant and equipment be disclosed. This could imply that the amount of amortization of each item of property, plant and equipment be disclosed. The Committee agreed to recommend to the AcSB that the words “an item of” should be removed from paragraph 3061.26. As a result, the disclosure requirement in Section 3061 would be consistent with that in Section 1521, Balance Sheet.

Financial Instruments
The Committee discussed several issues related to financial instruments that were raised by respondents. For each of these issues, described below, the Committee agreed to recommend that the AcSB not address these issues as part of the 2015 Annual Improvements project but rather consider them as part of the post-implementation review of Section 3856. This review is an opportunity to broadly assess the effectiveness of Section 3856 for preparers and financial statement users, and to permit the AcSB to review these (and other) issues in a holistic manner. None of these issues were seen as sufficiently urgent that they needed to be addressed separately from the post-implementation review project. Several of these issues are also outside of the scope of the annual improvement process, which is designed to address corrections of errors and clarify existing guidance:

  • Remove the requirement to fair value interest-free loans. The Committee noted that this requirement can be onerous for private enterprises. Members acknowledged, however, that this would be a fundamental change.
  • Review the requirements for disclosures of risks and uncertainties. The Committee agreed that concerns about the effectiveness of this requirement are widespread among private enterprises.
  • Clarify how to account for modifications of financial liabilities that do not result in extinguishment. The Committee noted that they have not seen a material divergence in practice in how private enterprises account for such modifications.
  • Clarify whether the 10 percent cash flow test should include or exclude cash flows related to the conversion option to determine if convertible debt instruments qualify as extinguishments. Committee members noted that they have not seen a widespread divergence in practice.
  • Clarify how to recognize a net measurement gain or loss on a hedging item after the date the hedge transaction occurs. One stakeholder noted there is divergence in practice on whether measurement gains or losses are included in cost of goods sold. The Committee agreed that the issue was sufficiently clarified in the 2014 Annual Improvements hedge accounting amendment and professional judgment can be applied to determine how the cost of goods should be reflected.
  • Clarify whether the contract rate or effective rate of interest expense on financial liabilities should be disclosed. The Committee indicated that they have not seen significant divergence in practice. The Committee noted that discounts or premiums that could cause material differences are not common for private enterprises and, therefore, this issue is not widespread.
  • Clarify whether the disclosures relating to redeemable preferred shares should include share repurchases. The Committee agreed that professional judgment can be used to determine what should be included in the disclosures for redeemable preferred shares.

Other Issues
The Committee discussed several other issues that were raised by respondents and agreed to recommend that the AcSB should not consider any changes for these issues:

  • Clarify whether the carrying amount of the investment or interests in a joint venture can be reduced through the use of an allowance account when an impairment loss has occurred. The Committee noted that this issue has been addressed in the amendments to Section 3051and new Section 3056 that will be effective at the same time as the 2015 annual improvements.
  • Address the lessor’s accounting on renegotiation of an operating lease in Section 3065. The Committee agreed that this issue is not widespread in practice and, accordingly, did not meet the criteria as an annual improvement.
  • Improve Section 1520, Income Statement, and Section 1521 by adding paragraph references and using words that directly correspond to other Sections, and grouping items in separate paragraphs to distinguish between presentation and disclosure requirements. The Committee agreed that the suggested improvements would not provide significant benefit as there does not appear to be confusion in practice in applying guidance in Section 1520 and Section 1521.
  • Remove the option to recognize lease rentals or rental revenue on “another systematic and rational basis” (i.e., other than a straight-line basis) or provide examples to illustrate this concept. The Committee noted that using a straight-line basis is not always appropriate and professional judgment should be applied.
  • Provide guidance on onerous contracts. The Committee noted that while private enterprises do sometimes have onerous contracts, this is not a common issue. Section 1000, Financial Statement Concepts, includes the definition of a liability as well as recognition criteria. The Committee also noted that reviewing all contracts to identify any that might be onerous could be an expensive undertaking for private enterprises and this had not been a significant issue in practice. Consequently, the Committee agreed that this issue could be addressed through professional judgment and additional guidance is not required.

 

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.