Accounting Standards Oversight Council discusses the activities of PSAB, the AcSB and related matters.
At its meeting in Toronto on October 20-21, 2016, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:
Update on International Public Sector Accounting Matters
Public Sector Accounting Board Activities
International Working Group on Not-for-Profit Standards
Accounting Standards Board Activities
The AcSB’s Private Enterprise Advisory Committee
The Public Interest
Triennial Review of the Terms of Reference and Statements of Operating Procedures of AcSOC, the AcSB and PSAB Communications Activities
Update on International Public Sector Accounting Matters
Ian Carruthers, International Public Sector Accounting Standards Board (IPSASB) Chair (and a resident of the U.K.), provided an update on that Board’s developments, challenges, demands and opportunities. He was accompanied by John Stanford, Technical Director.
Mr. Carruthers noted that IPSASB’s 18-member Board comprises members from all over the world. He commented on the extensive involvement by Canadians in its activities since its original inception, including significant financial support from Canada. He said that worldwide, jurisdictions are adopting, or planning to adopt, International Public Sector Accounting Standards (IPSASs), with more than 40 countries currently applying accrual IPSASs.
Mr. Carruthers said that IPSASB is developing six important public sector projects (social benefits, revenue and non-exchange expenditures, financial instruments, heritage, measurement and infrastructure assets) from scratch. These are technically difficult projects and require relatively longer timelines owing to the need for extensive stakeholder engagement.
IPSASB is building its relationships with national standard setters and, because it cannot mandate adoption of its standards, is looking to help strengthen advocacy from key international institutions, such as the International Monetary Fund, World Bank and regional development banks.
IPSASB is confronted with external demands from the Public Interest Committee (see below), existing and potential adopters of IPSASs and potential funders. There are, however, various opportunities regarding the adoption of IPSASs by jurisdictions. IPSASB is beginning to think about developing its next work plan to implement and operationalize its proposed strategy from 2019 onwards, following a public consultation during 2018.
The Public Interest Committee provides assurance that IPSASB’s standard-setting activities are in the public interest, through having applied its approved due process. Currently, it is comprised of representatives from the World Bank, International Monetary Fund, Organization for Economic Co-operation and Development and the International Organization of Supreme Audit Institutions, .
The Public Interest Committee’s work is now complemented by input from the IPSASB Consultative Advisory Group, which is an integral and important part of IPSASB's formal process of consultation. The recent formation of the Consultative Advisory Group marks an important milestone in the strengthening of the governance arrangements for IPSASB.
Replying to questions, Messrs. Carruthers’ and Stanford’s remarks included the following:
- To clarify if a user of IPSASs has fully adopted IPSASs, IPSASB issued its first-time adoption standard (IPSAS 33) so that readers of the financial statements can be clear if an adopter is in full or part compliance with these standards.
- Most jurisdictions that have adopted IPSASs have done so “indirectly” through an endorsement mechanism, but have essentially adopted the standards with virtually no or only minimal changes.
- IPSASB is involved in a dialogue with national standard setters and other institutions regarding the adoption and implementation of IPSASs, but it does not have the resources to support jurisdictions with adoption and implementation assistance itself.
- The Public Sector Accounting Board (PSAB) has some standards for which IPSASB has no counterparts. When IPSASB develops an IPSAS equivalent to an existing PSAB standard, it will be essential to examine thoroughly the PSAB standard and decide if there are any fundamental issues and challenges to be addressed. IPSASB’s relationships with PSAB and other national standard setters assist in the timely development of IPSASs, particularly when national standard setters provide direct staff input to support the process. A member commented that when Canada adopted International Financial Reporting Standards, there were very few critical issues that required resolution.
- Regarding consistency in financial reporting by sovereign governments, the trade in government bonds is very significant and credit rating agencies and others are likely to demand more and more financial information from governments in the next five to ten years as the number of governments adopting IPSASs is projected to grow significantly.
- Most governments are heavily indebted because of post-employment benefits promised to current and former employees. The risks involved in government indebtedness differ from those in the private sector in that governments have the power to raise funds via taxation. Placing lease obligations on government balance sheets will only worsen the indebtedness disclosed in government balance sheets.
The International Accounting Standards Board’s (IASB) standard on leases (IFRS 16) is a challenge for IPSASB in that it has changed the accounting for lessees but not lessors. IPSASB must decide whether to adopt a symmetrical accounting approach that differs from the IASB’s approach.
The Chair and members thanked Messrs. Carruthers and Stanford for an insightful and informative discussion.
Public Sector Accounting Board Activities
Rod Monette, PSAB Chair, introduced a number of PSAB staff members who were observing the proceedings and welcomed observers from the government sector.
Mr. Monette’s comments on PSAB’s stakeholder relations, certain key files and public interest matters included the following:
- PSAB has good relations with its stakeholders.
- To understand the challenges in applying the financial instruments/foreign exchange standards to specific transactions, since February 2016, the staff has visited the Comptrollers of nine jurisdictions and eight provinces, and the Auditor General of the federal government. PSAB had previously deferred the effective date of these standards to April 1, 2019 from April 1, 2016.
- The Public Sector Accounting Discussion Group is operating very well and resulting in good discussions.
- CPA Canada’s Public Sector Conference attracted about 500 participants last year and a similar number is expected in Ottawa on November 8-9, 2016. The conference features a robust, multi-track agenda that allows participants to customize their learning experiences, includes important PSAB updates and the most innovative practices in government financial management.
- The staff is well engaged with the public sector community and stakeholders feel that PSAB is paying attention to their concerns.
- PSAB is well resourced, and is operating effectively and dealing with a number of key files, such as the following:
- its Draft Strategic Plan for 2017-2020, which is out for public comment until October 28, 2016;
- its Invitation to Comment, “Employment Benefits: Deferral Provisions in Sections PS 3250 and PS 3255,” which expected to be issued in November 2016;
- Public Private Partnerships project for which a statement of principles is expected to be issued early in 2017;
- Revenue project for which an exposure draft will be issued early in 2017; and
- a review of its financial instruments/foreign exchange standards.
- PSAB is well-prepared to deal with the following important files:
- International matters – As part of its strategy review for 2017-2020, PSAB is reviewing its international strategy. PSAB is reassessing its long-term convergence strategy and plans to publish a consultation paper to seek stakeholder views.
- Employment benefits – The forthcoming Invitation to Comment will demonstrate to stakeholders that key issues are being addressed by PSAB.
- Conceptual Framework – PSAB’s Task Force is working on determining the most appropriate reporting model for the Canadian public sector, considering all the comments received from PSAB’s second and third Consultation Papers.
- Pursuant to its Draft 2017-2020 strategic plan, PSAB will reassess the way forward for not-for-profit organizations. The staff is developing an appropriate consultation plan that includes monitoring the activities of the Accounting Standards Board (AcSB) with respect to developments in not-for-profit accounting in the private sector.
- In all its activities, PSAB constantly considers the public interest, including matters such as the understandability of its pronouncements and the capacity of stakeholders to adopt its guidance.
- Key file – Government transfers standard
- In a Feedback Statement issued in March 2016, PSAB informed stakeholders that it would explore whether an authoritative guideline could help clarify interpretations of the government transfers standard. After further consideration, PSAB was not convinced that a new project, task force and use of staff resources would result in a markedly different standard than the one currently in place. Nor would it align efforts and resources with the key public interest objectives in PSAB’s work plan.
- Members’ comments included the following:
- One member expressed concern that two identical sets of facts could be accounted for differently, and that in some instances the identical treatment receives a clean audit opinion and in another case a qualified opinion is issued by the auditors. Another member stated that it is not in the public interest when there are diametrically opposed treatments of the same facts.
- One member noted that the standard-setting Boards are not responsible for enforcing compliance with their standards. When a preparer takes a position that is not a reasonable interpretation of a standard, no amount of embellishment of a standard will alter this behaviour.
Mr. Monette said that PSAB had discussed extensively stakeholders’ concerns with the government transfers standard and that members were satisfied that appropriate due process had been undertaken.
- Key file – Rate-regulated activities
- Mr. Monette said that earlier in 2016, the Province of Ontario had written to PSAB requesting that the Introduction to Public Sector Accounting Standards in the CPA Canada Public Sector Accounting Handbook be amended to acknowledge other fair presentation frameworks used by publicly accountable enterprises in Canada. PSAB considered the request and decided not to accede to it. The Province of Ontario was advised that PSAB believes that Part I of the CPA Handbook – Accounting continues to be the appropriate source of accounting direction for government business enterprises. It is not considered prudent at this time to affect changes to rate-regulated accounting for public sector entities while the AcSB is undertaking significant review activities.
- Key file – Financial instruments/foreign exchange
- Many stakeholders have commented on the measurement of derivative instruments at fair value contained in the existing financial instruments standard. In addition, stakeholders have identified application challenges, suggesting that a hedge accounting model could resolve these issues. PSAB has requested the staff to present a work plan to include a hedge accounting option in the standard.
Replying to a question, Mr. Monette said that when commencing a new project, PSAB examines what other standard setters are doing on the topic. However, it does not automatically default to guidance issued for use in the private sector.
International Working Group on Not-for-Profit Standards
In his capacity as Standards Chair of the U.K. Chartered Institute of Public Finance and Accountancy, Ian Carruthers provided an update on aspects of not-for-profit reporting. He said that in 2013/2014, the Consultative Committee of Accountancy Bodies, an organization representing five accounting bodies in the U.K. and the Republic of Ireland, funded research on financial reporting practices and perceptions internationally about the purpose of not-for-profit reporting. He also commented that as part of this work an online survey was conducted in November/December 2013. Over 600 responses were received, which revealed that more consistent accounting for not-for-profit organizations is seen as important in jurisdictions around the world. Seventy-two per cent of respondents to the survey advised that an international standard would be useful.
Mr. Carruthers said that the International Financial Reporting Standards (IFRS) Foundation Trustees had discussed and decided not to extend the IASB’s remit to develop standards for entities in the not-for-profit sector. He said that following the meeting of the International Forum of Accounting Standard Setters in April 2016 a not-for-profit working group, on which Canada is represented, had been formed to determine whether a problem exists and, if so, to discuss a possible solution. The Group has identified certain pressing issues and determined which aspects of these issues could be taken forward on a shorter- and longer-term basis. The results were presented to the International Forum of Accounting Standard Setters at its meeting in September 2016, when it was agreed to develop an online resource on current national not-for-profit reporting frameworks as the first step.
Replying to questions, Mr. Carruthers’ comments included the following:
- From the point of view of large not-for-profit organizations, such as the Gates Foundation, developing standardized reporting should be useful. Such reporting would remove the need for multiple different reports by funding recipients, which result in unnecessary effort and divert funds from where they are needed.
- There is no easy dividing line between setting not-for-profit standards for entities in the private and public sectors, and there is a range of approaches to setting standards. (Some jurisdictions have no specific not-for-profit standards.) Accordingly, there are many issues regarding not-for-profit reporting because of the fragmented structures around the world.
- Increasingly, jurisdictions are using International Financial Reporting Standards (IFRSs) or IPSASs as a starting point for not-for-profit requirements.
The Chair and members thanked Mr. Carruthers for providing AcSOC with valuable information.
Accounting Standards Board Activities
Linda Mezon, Accounting Standards Board (AcSB) Chair, introduced AcSB member Garnet Garven who was present as an observer.
Ms. Mezon discussed:
- risks relating to the AcSB, including cross-cutting matters;
- matters regarding Parts I, II and III of the CPA Canada Handbook – Accounting;
- building stakeholder relationships;
- the IASB’s Disclosure Initiative project; and
- the AcSB’s compliance with due process.
Risks and cross-cutting matters
Ms. Mezon said that the number of pending new appointments to the AcSB is relatively high and commented on the risks if suitable members are not recruited. The staff is virtually at full complement and she discussed the associated risks related to developing many of the staff members, quite a few of whom lacked extensive standard-setting experience.
The AcSB is responding to the needs of stakeholders, many of whom have indicated that the AcSB should be aware of the potential effect on other Parts of the Handbook when there is a change to a standard in one of the Parts. There is a need for consistency across the frameworks, including collaboration and in-depth issues analysis.
Discussing the AcSB’s activities, Ms. Mezon said that she attaches the highest risk to rate-regulated activities. To demonstrate why an IASB project is needed, the AcSB staff researched the decision-usefulness of financial information that reflects the economics of rate- regulated activities. The IASB and many national standard setters have commented on the quality of the resulting research paper and the IASB is currently exploring a suitable accounting model. However, it is not certain that the IASB will develop a standard for these activities.
Other important projects that have a medium amount of risk are:
- insurance contracts in Part I;
- redeemable preferred shares and agriculture in Part II; and
- not-for-profit organizations improvements in Part III.
Matters regarding Parts I, II and III of the CPA Canada Handbook – Accounting
Publicly accountable enterprises (Part I)
Accounting for rate-regulated activities is important for Canada. This is a topic on which national standard setters hold differing views. The AcSB intends to identify how to extend its research findings, including working with standard setters in Brazil, Peoples Republic of China, Europe and the U.S.
Members complimented the AcSB on the research paper.
The IASB expects to issue its new insurance standard in early 2017 after completing an additional round of field testing (from July to October 2016) and a fatal flaw review of the new guidance. In reply to questions from members, Ms. Mezon said that Canadian insurers have a number of concerns with the new proposals, including how contracts will be grouped into portfolios.
The U.S. Financial Accounting Standards Board (FASB) issued a second insurance Exposure Draft in September 2016 with proposed targeted amendments to the proposals in its initial Exposure Draft. While the FASB’s proposed changes would result in U.S. GAAP being more similar to the IASB’s forthcoming new insurance standard and the Canadian asset and liability method used today, the discount rate proposals are different. The AcSB will be discussing the U.S. proposals and the potential differences with the IFRS guidance with Canadian insurers, the FASB and IASB.
Private businesses (Part II)
There are approximately 1.2 million private businesses in Canada, with the majority consisting of small- to medium-size enterprises. (Only some of these businesses prepare financial statements in accordance with the AcSB’s private enterprise standards, depending on their users’ needs.)
The AcSB is grappling with the issue of writing standards for organizations ranging from the very complex to relatively simple. The AcSB continues to gather data about private enterprises. This will help the AcSB to set priorities for standard setting for this sector of the economy. In reply to a question, Ms. Mezon said that this includes collecting data to ascertain the purposes for which private enterprises prepare financial statements.
Revenue recognition and related party transactions have been identified as topics of concern. The AcSB is consulting its advisory groups and conducting surveys to understand the issues.
The AcSB is receiving extensive feedback on its Agriculture project. It will consult more lenders and users and evaluate the feedback.
In the fourth quarter of 2016, the AcSB intends to issue final amendments to:
- Section 1591, Subsidiaries, and Section 3051, Investments (major improvement); and
- Section 1591 and Section 3056, Interests in Joint Arrangements (narrow-scope amendments).
Not-for-profit organizations (Part III)
There are approximately 160,000 not-for-profit organizations (NFPOs) in Canada and this is a very important sector of the economy. The AcSB has concentrated on gathering data on this sector to assist it in its outreach activities and to result in evidence-based standard setting.
The AcSB is seeking to understand current practice in the not-for-profit sector and is responding to current needs, including proposing changes to Part III of the Handbook. An exposure draft is expected to be issued in February 2017 for public comment by May 31, 2017. (One member commented that this was an inopportune time to ask stakeholders to comment owing to practitioner work pressures at that time of the year.)
The U.S. market is important to Canada and there is a significant trade interaction between the countries. Developments in U.S. GAAP are important to many foreign private issuers in Canada. Of the 292 foreign private issuers domiciled in Canada filing with the U.S. Securities and Exchange Commission (SEC), 70 per cent apply IFRSs and 30 per cent apply U.S. GAAP. (Canada issuers comprise 32 per cent of the 923 foreign private issuers.) To assist these issuers, the AcSB is fostering its ongoing good relations with the FASB and building a relationship with the SEC.
The AcSB continues to connect with Canadians via its IFRS Discussion Group. It also continues to meet with national standard setters via meetings of the World Standard Setters, International Forum of Accounting Standard Setters, Accounting Standards Advisory Forum and through other organizations.
Ms. Mezon commented on an Accounting Alert issued by Veritas Investment Research in September 2016 that discussed the rise of non-GAAP metrics in performance measurement. Typically these metrics present a rosier picture of a company’s performance to convince investors that the company is worth more than the GAAP figures might indicate.
She said that the IASB has undertaken a disclosure initiative research project to improve guidance to assist entities to provide more relevant disclosures. The research project is also considering the issue of non-GAAP measures.
Members’ comments included the following:
- One member commented on the difficulties sometimes faced by auditors in providing assurance on non-GAAP metrics.
- Enterprises have perceived a need to provide non-GAAP measures. Standard setters have a responsibility to investigate the perceived need for these metrics.
- Analysts are asking for non-GAAP measures, including standardized information.
- One member said that the criticism of non-GAAP measures is one-sided and does not deal with the fact that GAAP measures themselves might be at the core of the problem and not always relevant for investors.
- One member referred to a recent paper written by two world-renowned members of academe suggesting that there must be a better way of displaying an enterprise’s results in the income statement to give that statement more meaning and consistency.
The AcSB’s compliance with due process
Ms. Mezon advised that the AcSB had one potential reportable departure from due process during the period May to September 2016, in that the AcSB did not consult with its full Private Enterprise Advisory Committee in considering the input received on its Exposure Draft, “Clarifications to Sections 1591 and 3056.” Instead, the AcSB consulted with a few members of its Private Enterprise Advisory Committee.
In reply to a question, Ms. Mezon said that all the members of the Advisory Committee were aware of the discussions.
Apart from the above, there were no unusual events in the application of due process in the May to September 2016 period.
In wrapping up, the Chair commended Ms. Mezon on the AcSB’s concentration on evidence-based standard setting.
The AcSB’s Private Enterprise Advisory Committee
Ms. Mezon introduced AcSB member Armand Capisciolto, Chair of the AcSB’s Private Enterprise Advisory Committee.
Mr. Capisciolto provided an overview of the Advisory Committee’s activities, stating that it was formed in 2010 to assist the AcSB in retaining and improving accounting standards for private enterprises. The Advisory Committee currently comprises up to 15 members. It has:
- discussed the strategic direction for Part II standards;
- continues to discuss practice issues, proposals for Part II projects; and
- monitors developments in accounting standards for not-for-profit organizations in Part III.
The AcSB is currently discussing ways to increase the Advisory Committee’s effectiveness.
Replying to questions, Ms. Mezon’s comments included the following:
- She has asked the Advisory Committee’s Chair to provide a clear report-back to the AcSB so that it is aware of the extent of differences of opinion on topics discussed by the Advisory Committee.
- She would advise AcSOC if the AcSB did not agree with the Advisory Committee’s views on significant matters.
- The Advisory Committee is interested in NFPO matter but does not include NFPO practitioners.
- The AcSB posts a report on each Advisory Committee meeting on its website.
The Chair thanked Mr. Capisciolto for his report.
The Public Interest
Bruce Winter, member of the Auditing and Assurance Standards Oversight Council (AASOC), discussed a paper, “Clarity: What the Public Interest Means to AASOC,” which was recently approved by AASOC. The paper was written by him and fellow AASOC member Phil Cowperthwaite. The paper expands upon what the “public interest” means to AASOC to fulfil its responsibility to be satisfied that the standard-setting process is appropriate and responsive to the public interest. The paper was prepared as a series of considerations in lieu of a short definition. The paper draws from many sources and received input from many individuals.
The most contentious consideration is the “judgment call”. The crux of the paper is to decide if the exercise of due process necessarily results in the public interest being served. A view has developed more recently that the exercise of due process and regard for the public interest are two distinct matters. AASOC has indicated that if it had concerns that the public interest was not being served, it would normally be expected that the issues would be identified and dealt with on a timely basis.
In reply to questions, Mr. Winter’s remarks included the following:
- Performing a cost/benefit analysis is more difficult in overseeing the setting of auditing and assurance standards, compared with those for accounting.
- Asked why the paper did not refer to unintended economic consequences, Mr. Winter said that the considerations in the paper include a provision that the benefits related to the interests of the public should be achieved at a reasonable cost.
Members’ comments included the following:
- AcSOC is able to ascertain if the AcSB and PSAB follow due process but it is not always easy to ascertain that something is not in the public interest.
- The paper is an important and significant contribution to the role of an oversight council.
- AcSOC examined the meaning of the public interest. It decided that it would be very difficult to define and that a series of considerations was superior to a formal definition.
- AcSOC has a responsibility to ensure that due process is part of the public interest. It would be too onerous for AcSOC to state that something does not meet the public interest. That is the responsibility of the Boards.
- It is imperative to articulate the meaning of the public interest and who is responsible for what. Most concerns relate to due process and the Boards should allow stakeholders to evaluate whether the interests of the public have been met. Post-implementation reviews of standards address issues raised by the public and the Boards have an obligation to be responsive to these issues in a timely manner.
The AcSB Chair commented that the AcSB does not focus on the public interest per se. It concentrates on setting high-quality standards that provide decision-useful information and that this equates with the notion of the public interest. She also noted that the AcSB has endorsed and adopted a document prepared by the IASB, “Model for National Standard Setters.” This document includes information on qualitative characteristics and the importance of due process and accountability.
The PSAB Chair commented that he had prepared a paper on “PSAB Public Interest Framework Considerations” that his Board and staff follow in preparing guidance and agreed that a formal definition is not feasible.
The AcSOC Chair posed the question whether it would be worth the effort to arrive at a common articulation of the public interest that would be applicable to AcSOC, AASOC and the Boards that they oversee.
Members agreed that there is no need for a common document on the public interest matters. It is liable to either be very vague or very lengthy as it attempted to cover the requirements of all the aforementioned bodies. They suggested that it might be beneficial for the staff to meet and discuss the public interest issues affecting their own boards or oversight councils every two years or so.
The Chair thanked Mr. Winter for a very worthwhile presentation and discussion.
Triennial Review of the Terms of Reference and Statements of Operating Procedures of AcSOC, the AcSB and PSAB
Stephenie Fox, Vice-President, Standards, commented that the Terms of Reference of AcSOC, the AcSB and PSAB require that their respective Terms of Reference and Statements of Operating Procedures be reviewed at least once every three years.
Members discussed the documents, suggested various minor amendments and asked that the documents be represented to AcSOC at its next meeting on February 23-24, 2017 for approval or ratification, as appropriate.
Daniella Girgenti, Communications Manager, Standards, updated members on recent communications activities. She discussed various communications-related projects, including proactive communications planning, social media activities, website redesign and rebranding.
A comprehensive communications strategy for the Standards Group, made up of the accounting, public sector, and auditing and assurance departments, is currently being drafted. She noted that:
- Twitter and LinkedIn are the social media platforms used by the Standards Group;
- the current website, www.frascanada.ca, is undergoing a major redesign that will better support standard-setting activities; and
- the current branding identity will undergo an extensive rebranding exercise, including a new look for board and oversight council logos and an articulated story – stakeholders will be able to understand better the value that the boards and oversight councils provide to them.
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The Accounting Standards Oversight Council (AcSOC) is an independent, volunteer body established by the Canadian Institute of Chartered Accountants (CICA)* in 2000. It serves the public interest by overseeing and providing input on the activities of the Accounting Standards Board (AcSB), which sets financial reporting standards for profit-oriented enterprises and not-for-profit organizations, and the Public Sector Accounting Board (PSAB), which sets financial reporting standards for governments and their organizations. AcSOC's responsibilities include appointing the AcSOC, AcSB and PSAB members. Reporting to the public and made up of representatives that include regulators, investors and other users, preparers and auditors of financial reports, AcSOC brings a broad perspective to complex issues facing standard setters in both the private and public sectors.
* The CICA, CGA-Canada and CMA Canada have since consolidated under the CPA Canada banner as the profession’s national body.