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Private Enterprise Advisory Committee Notes – November 10, 2022

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.

Insurance Contracts with a Cash Surrender Value

The Private Enterprise Advisory Committee discussed alternative accounting treatments and presentation options for insurance contracts with cash surrender value. Committee members agreed that the cash surrender value meets the definition of an asset and thought the asset should be recognized in the financial statements at the cash surrender amount. The Committee provided feedback to the AcSB on presentation options for premium payments and the annual change in cash surrender value. In addition, the Committee discussed disclosure options.

The AcSB will consider the feedback from its Private Enterprise Advisory Committee and its Not-for-Profit Advisory Committee at the December 2022 Board meeting.

Revenue – Upfront Non-refundable Fees or Payments 

The Private Enterprise Advisory Committee received an update on stakeholder comments on the AcSB’s Exposure Draft “Revenue – Upfront Non-refundable Fees or Payments.” This Exposure Draft proposed deferring the effective date of the previously issued amendments for upfront non-refundable fees or payments to periods beginning on or after January 1, 2025.

The Committee then discussed possible alternatives to address stakeholder concerns about the amendments. Committee members considered whether additional illustrative examples, application guidance or an exception to the guidance would result in more decision-useful financial reporting outcomes for financial statement users.

The Committee also discussed whether any potential exception to the upfront, non-refundable fees guidance should apply to for-profit entities and non-for-profit organizations that have transactions with similar characteristics.

The AcSB will consider the feedback from its Private Enterprise Advisory Committee and its Not-for-Profit Advisory Committee at a future Board meeting in Q1 2023. 

Goodwill – UK Endorsement Board’s (UKEB) Research Report

The Private Enterprise Advisory Committee discussed findings from the UKEB’s research report, Subsequent Measurement of Goodwill: a Hybrid Model (the research report). The Committee also discussed whether Canadian private enterprises would benefit from a model that permitted the amortization of goodwill. Some Committee members observed that there is currently differentiation in the balance sheets of enterprises that grow through acquisitions versus organically. These Committee members questioned whether a potential future model should consider this distinction. Other Committee members thought the approach should primarily focus on the information needs of financial statement users.

The AcSB discussed the research report’s findings at its meeting in November 2022. The Board will consider the Committee’s comments when it begins deliberations of its 2023-2024 Annual Plan at its December 2022 meeting.

2023-2024 Annual Plan – Part II Priorities

The Private Enterprise Advisory Committee discussed topics the AcSB identified as future priorities to assist it in developing its 2023-2024 Annual Plan. If there is capacity in the Board’s work plan, the Committee advised the Board to consider projects on relief from recognition of intangibles and amortization of goodwill, and measurement of investments in a related party transaction.

The Committee also discussed whether there are any application issues in practice relating to new Sections or amendments that have been effective for two years or more. This assists the AcSB in determining whether a post-implementation review is needed, as part of its due process. The Committee suggested the Board consider a post-implementation review for the amendments to Section 3856, Financial Instruments, relating to retractable or mandatorily redeemable shares issues in a tax planning arrangement and accounting for related party financial instruments and significant risk disclosures.

The AcSB will consider feedback from its Private Enterprise Advisory Committee and its Not-for-Profit Advisory Committee in December 2022 when it begins developing the 2023-2024 Annual Plan. 

Due Process

Every three years, the AcSB reviews its Advisory Committees’ Terms of Reference and Statement of Operating Procedures. As part of this review, the Private Enterprise Advisory Committee considered proposed changes  .

Committee members agreed having shorter, more frequent virtual meetings may be more appropriate to allow more timely discussions on key issues and projects. They also agreed having at least one in person full-day meeting is important, particularly when discussing complex topics.

The AcSB will consider the Committee’s recommendations at the January 2023 Board meeting.

Other Topics

The Private Enterprise Advisory Committee discussed an application question related to the amendments for retractable or mandatorily redeemable shares (ROMRS)  issued in a tax planning arrangement. In the scenario, one individual owns 100 per cent of the shares, including preferred shares that are ROMRS, of an operating company. The individual sells 100 per cent of their shares, including ROMRS, to another unrelated party. Before the sale, the ROMRS were presented as equity because the criteria in Financial Instruments, paragraph 3856.23, were met. The Committee discussed whether the sale would require reclassification of the preferred shares to liabilities.

The Committee thought that because control is not retained, the criteria in paragraph 3856.23 would not be met, and the preferred shares would be reclassified to liabilities after the change of control.

The Committee also discussed whether Committee members are observing issues with financial reporting due to rising interest rates. Committee members noted that rising interest rates could impact many topics including discount rates and fair value measurement. The Committee recommended the AcSB consider guidance to aid stakeholders navigate the effects of rising interest rates.