Private Enterprise Advisory Committee Meeting Notes – May 3, 2018
The Private Enterprise Advisory Committee assists the Accounting Standards Board (AcSB) with maintaining and improving accounting standards for private enterprises (ASPE) in Part II of the CPA Canada Handbook – Accounting and with identifying the need for non-authoritative guidance about the standards. The Committee makes recommendations to the AcSB but is not authorized to interpret or provide authoritative guidance on ASPE.
The AcSB staff has prepared this document based on discussions held during the Committee’s meeting. The meeting notes do not necessarily represent the AcSB’s views and nothing in them constitutes authoritative guidance on acceptable or unacceptable application of ASPE. Only the AcSB can make such a determination.
Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement
The Committee continued discussing feedback from outreach activities and response letters on the Exposure Draft, “Retractable or Mandatorily Redeemable Shares Issued in a Tax Planning Arrangement.” Committee members advised the Board to:
- provide an option to present the effect of liability classification of retractable or mandatorily redeemable shares in either retained earnings or a separate component of equity;
- provide guidance on assessing whether a tax planning arrangement undertaken in a series of steps should be viewed as one tax planning arrangement; and
- clarify whether the decision tree in Financial Instruments, paragraph 3856.A29 also applies to retractable or mandatorily redeemable shares issued in a tax planning arrangement.
The Committee also provided staff feedback on an initial draft of guidance to assess the related party unit of account.
Accounting for Related Party Financial Instruments and Significant Risk Disclosures
The Committee continued discussing feedback obtained from outreach activities and response letters on the Exposure Draft, “Accounting for Related Party Financial Instruments and Significant Risk Disclosures.”
The Committee discussed a proposal to require an enterprise to initially measure debt instruments, exchanged between related parties, with an observable market at fair value. Members recommended that the Board clarify what is meant by fair value in these transactions.
The Committee also discussed how to account for the difference when the initial cash proceeds of a loan between related parties does not equal its undiscounted cash flows (for example, the loan’s cash proceeds are $100,000 and the undiscounted cash flows are $110,000). Members advised the Board that the loan be measured at its undiscounted cash flows and that any difference be recognized in accordance with the Classification of the difference (discussed below).
Classification of the difference
The Committee discussed related party transactions involving financial and non-financial instruments. In these transactions, individual elements may be measured at fair value (financial instrument); cost (financial instrument); carrying amount (non-financial item) or exchange amount (non-financial item). The Committee advised the Board that the difference be accounted for based on the characteristics of the transaction rather than how the elements in the transaction are measured. The Committee also recommended that the characteristics used to determine the classification of the difference in a related party transaction be based on the characteristics included in Section 3840, Related Party Transactions.
The Committee discussed a proposal to amend Section 3856, Financial Instruments, to clarify that disclosure is only required when the information is relevant and entity-specific. Overall, Committee members thought that the clarification will act as a starting point to encourage better, more entity-specific disclosure.
The Committee discussed the complexity of proposed changes to Section 3856 and advised the Board to consider what implementation activities are needed to assist stakeholders with applying the new requirements.
Future income tax
The Committee considered staff’s proposals on the following two amendments in Section 3465, Income Taxes:
- Delete example (f) in paragraph 3465.14, which is no longer applicable given recent changes to the Income Tax Act (Canada).
- Remove the requirement to segregate future tax assets and liabilities into current and non-current portions when the future tax method is applied.
The Committee noted that presenting all future taxes as non-current may affect the financial information reported in some situations. For example, future tax liabilities resulting from holdbacks in the construction industry, which typically unwind in 12-18 months, would no longer appear as current liabilities. The Committee advised the Board to consider supplementing the classification of future tax proposal with additional note-disclosure requirements.
Application of the cost method
The Committee discussed a proposal to clarify whether cost-method guidance in Section 3051, Investments, applies to jointly controlled enterprises. The issue arises because paragraph 3051.07A refers only to investments subject to significant influence while Section 3056, Interests in Joint Arrangements, directs stakeholders to Section 3051 when the cost method is used.
Committee members considered whether cost-method guidance should be included in Section 3056 or whether paragraph 3051.07A should be amended to specify that it also applies to jointly controlled enterprises. The Committee advised the Board to include a reference to jointly controlled enterprises within paragraph 3051.07A to maintain consistency within the standard.
The Committee discussed whether there are common characteristics between combinations of not-for-profit organizations (NFPOs) and for-profit enterprises. The Committee noted that, similar to combinations of some NFPOs, combinations of some for-profit enterprises may not involve the transfer of consideration.
The AcSB staff will incorporate the comments received from the Committee into the Business Combinations project proposal being developed. This proposal will explore the similarities and differences in the characteristics of combinations completed by NFPOs applying Part III of the Handbook and for-profit enterprises applying Part II of the Handbook.
Consultation on Project Priorities – Revenue
The Committee discussed staff research on the financial reporting effects of applying IFRS 15 Revenue from Contracts with Customers by reviewing financial statement disclosures on those effects from publicly accountable enterprises in the real estate, construction and professional, scientific and technical service industries. The Committee also considered the differences between a control-based and risk/rewards model for revenue recognition.
The Committee advised that more research is necessary to understand the effects of a control-based model by analyzing the first-quarter financial statements of entities in these industries, as well as the technology sector.
The Committee also recommended that the Board consider adding application guidance or illustrative examples in Section 3400, Revenue, while research continues on the effects of a control-based revenue model.
The Committee also discussed:
- whether Section 1500, First-time Adoption, provisions apply to enterprises re-adopting ASPE. Committee members advised the Board to clarify whether Section 1500 applies to such enterprises; and
- an update on its member-feedback survey for the 2017-2018 fiscal year.