Accounting Standards Oversight Council discusses the activities of Public Sector Accounting Board (PSAB), the Accounting Standards Board (AcSB) and related matters.
At its meeting in Toronto on October 26-27, 2017, AcSOC received presentations on, and discussed, the following:
Actuarial Guidance for IFRS 17 Insurance Contracts
The AcSB’s User Advisory Council
Indigenous Peoples and Governments
The Relevance of Audited Financial Statements to Analysts
AASOC/AcSOC Joint Subcommittee on Oversight of Standard Setting
Report-Back on AcSOC Members’ Attendance at AcSB and PSAB Meetings
AcSB Chair Linda Mezon acknowledged the presence of AcSB Vice-Chair, Karen Higgins, and AcSB members Nancy Anderson, Michel Charbonneau and Lara Gaede.
Ms. Mezon commented on the AcSB’s recent activities, stating that its priorities are to achieve its strategic objectives by continuing to implement its 2016-2021 Strategic Plan, manage its risks and advance its project work. Her comments included the following:
- The AcSB’s extensive and varied outreach activities are bearing fruit.
- The Board continues to deal with the global issue of balancing the need for timeliness in issuing standards with quality. It is instituting initiatives to improve its effectiveness and efficiency.
- The Board’s strategic focus over the next three years of its Strategic Plan is to:
- leverage technology;
- leverage its involvement with national standard setters around the world; and
- enhance its engagement with stakeholders.
- Except for its Agriculture project, the AcSB is on track to achieve the deliverables in its 2017-2018 Annual Plan. The delay in executing the Agriculture project, and the attendant risk, is due, in part, to matters related to the complexity of the industry, but also due to staffing issues.
- The Board and its staff are engaged in a high level of activities and staff training is a key element.
- Since the Council’s last meeting in June 2017, the only additional significant risk regarding the Board’s key projects relates to its Part I project, IFRS 9 Financial Instruments. This is because Canada’s financial institutions will adopt this standard on November 1, 2017. Therefore, Canada find itself as the initial implementer of IFRS 9.
The AcSB’s influence on the international stage
Ms. Mezon cited a number of examples of the AcSB’s influence on the international stage, encompassing matters such as making disclosures more meaningful, the Board’s collaboration with other standard setters on technical work, and its support for the international implementation of IFRS 17 Insurance Contracts.
She also commented that at a recent meeting of the International Accounting Standards Board’s Accounting Standards Advisory Forum, the IASB recognized the value of the advice on various topics that it received from the AcSB’s Academic Advisory Council, IFRS® Discussion Group and User Advisory Council.
A member commented that the cited examples are objective evidence of the AcSB’s international influence, and that stakeholders should be reminded regularly about the unquestionable benefit to them. This follows from the concern from some stakeholders about the Board’s decision to adopt IFRS® Standards for publicly accountable enterprises, effective January 1, 2011.
The AcSB supports the implementation of IFRS Standards by receiving input on emerging issues from volunteers and stakeholders, discussing these issues after receiving advice from its IFRS Discussion Group, and generally raising awareness of these issues. If necessary, the Board passes comments to the IASB, and, if appropriate, the U.S. Financial Accounting Standards Board (FASB).
The AcSB’s process to incorporate IFRS 17 into Canadian GAAP is underway. Both the Board and the IASB are forming transition resource groups. The IASB group includes a representative from one of Canada’s large life insurers. AcSB member Charles Henaire, Deputy Chief Financial Officer of Great-West Lifeco, will chair the Board’s group.
The AcSB’s risk attached to this project is that there will be a delay in the endorsement processes in Europe, and Canada will end up being the initial implementer of the new standard. Given that the Board has committed (through its Strategic Plan) to take the necessary action should this circumstance occur, the Board will closely monitor the situation.
The IASB has completed a case study to assess whether regulatory balances can be classed as assets or liabilities, and is exploring the measurement process. The IASB is developing an accounting model for this topic.
The AcSB considered AcSOC’s earlier recommendation to issue separately its updated research paper on the decision-usefulness of financial information that reflects the economics of rate-regulated activities. The Board affirmed its decision to issue the paper in conjunction with the IASB’s next document for comment.
The 2017 IFRS® Conference: The Americas
Ms. Mezon commented that this prestigious conference, sponsored by CPA Canada and the IFRS® Foundation, would be held in Toronto on November 1-2, 2017. Participants will include the Chairs of the IASB, FASB and AcSB.
Rebecca Villmann, Director, Accounting Standards commented on the following matters:
Private enterprises: Part II of the CPA Canada Handbook – Accounting
Retractable and mandatorily redeemable preferred shares
The proposed exception in the recently issued Exposure Draft to treat shares issued in a tax planning arrangement as equity when certain specified conditions are met is a compromise, as these shares are conceptually financial liabilities. This would result in a change in practice that would be significant for some, but represents a compromise from the full removal of the option for an exception from liability treatment.
The AcSB has formulated a comprehensive consultation plan and will consult with stakeholders across Canada.
The range of agricultural producers is significant and there is a lack of consistency in financial reporting for this sector. The AcSB project’s objective is to balance user needs with the costs to apply the proposed standard.
Not-for-profit organizations (NFPOs): Part III of the CPA Canada Handbook – Accounting
The AcSB issued the Exposure Draft, “Accounting Standards Improvements for Not-for-Profit Organizations,” in February 2017 to improve the accounting for tangible capital assets, intangible assets and collections. Overall, stakeholders have expressed substantial support for the Board’s proposals.
Joint private enterprise and NFPO activities
After considering the feedback from surveys and other consultations, the AcSB decided that, in addition to its existing activities on revenue, it would prioritize the following topics over the next three years for further research:
- Related party transactions
- Financial instruments
- Goodwill and intangible assets
The AcSB also discussed the interaction of its research activities with Section 1000, Financial Statement Concepts. The Board decided that a review of financial statement concepts in Part II and Part III of the CPA Canada Handbook – Accounting is warranted in the context of its other research activities.
The AcSB will act based on stakeholders’ needs and leverage the work between its Parts II and III frameworks.
The AcSB’s compliance with due process
Ms. Villmann advised that there were no reportable departures from due process or “comply or explain” actions, nor was there any unusual event in the application of due process during the May to September 2017 period.
Translation of AcSB material
Stephenie Fox, Vice-President, Standards, reported on the ongoing challenge of translating the Standards group’s material into French to enable its posting to the website in a timely manner. She noted the hiring of two additional translators and the entering into a contract for translation services with one of the large accounting firms in Montreal.
Members discussed the AcSB’s activities. The Chair congratulated Ms. Mezon and Ms. Villmann for the quality and quantity of the Board’s consultations and the extent of its international influence in the standard-setting world.
Actuarial Guidance for IFRS 17 Insurance Contracts
Micheline Dionne, a member of the Executive Committee of the International Actuarial Association (IAA) and Chair of its Insurance Accounting Task Force charged with writing the actuarial model standards on insurance, provided details of a model standard of actuarial practice (ISAP 4) being developed to accompany IFRS 17 Insurance Contracts.
Ms. Dionne’s comments included the following:
- The IAA is a worldwide association of local professional actuarial associations, and its international standards of actuarial practice (ISAP) are intended to be widely accepted both as a basis for convergence by local standard setters and contributing to the public good.
- An exposure draft of ISAP 4, with a four-month exposure period, is expected to be issued in the first quarter of 2018 and final approval by the IAA governing body is expected in the fourth quarter of 2019.
- ISAP 4 will be, among other things, principles-based, adding to the content of IFRS 17. The International Actuarial Notes will cover examples of practices. These Notes are non-authoritative and are generally educational in nature.
- Once ISAP 4 is issued, it will be subject to due process by the Canadian Institute of Actuaries (CIA) with the intention of adopting it in Canada without modification.
- A designated group from the CIA is currently examining ISAP 4 to identify changes to the existing Canadian standard. To date, no potential modifications to ISAP 4 have been identified.
- ISAP 4 is a high-level standard to fit all products in many countries. It will require acceptance by a large majority of IAA member associations for it to be approved.
- The intention is to promote global convergence, and jurisdictions are unlikely to add to the model ISAP 4 to avoid being at a global disadvantage. The natural tendency for many jurisdictions will likely be to try to retain as much as possible of their current local practices to the extent they can fit under IFRS 17.
- Global convergence will be best helped through public disclosure.
In reply to questions, Ms. Dionne’s comments included the following:
- The wide range of current actuarial practice across the globe has been a big challenge when developing IFRS 17, and ISAP 4 is facing a similar challenge.
- The exposure draft of ISAP 4 is expected to elicit many comments and re-exposure is a possibility.
- The Canadian Actuarial Standards Board will expose in 2018 how it will approach ISAP 4 and modify the Canadian actuarial standard to be ready for the IFRS 17 effective date of January 1, 2021.
- Because ISAP 4 is a principles-based standard, it will likely not include many examples. Examples are better placed in an International Actuarial Note.
- Entities will need to justify their actuarial assumptions in the notes to their financial statements. Actuaries will need to disclose in their report any assumptions management mandates, unless they can support these assumptions.
- Actuaries resigning or whose engagements with entities are terminated must advise the relevant board of directors and the Office of the Superintendent of Financial Institutions that they have left and why. In addition, newly engaged actuaries must contact departing actuaries to learn the reason for the departures.
- IFRS 17 details the required disclosure of management’s assumptions. This is to help investors make their own adjustments to an entity’s financial statements for various scenarios.
- The IAA provided extensive input into IFRS 17. This standard includes some requirements that would normally be in an actuarial standard and is a good step in the right direction.
Mr. Jewett thanked Ms. Dionne for an excellent and enlightening presentation.
The AcSB’s User Advisory Council
Ms. Mezon introduced AcSB member Lara Gaede, Chair of the Board’s User Advisory Council (UAC). Ms. Mezon commented that the UAC is an important group that the Board uses to interact with the IASB and other interested parties to the advantage of all concerned.
Ms. Gaede provided an overview of the UAC’s activities, stating that it was formed in 2004 to increase financial statement user participation in the accounting standard-setting process. Its purpose is to understand how users use financial information and to advise the Board.
The UAC comprises 20 members who have significant experience in many areas, including financial statement analysis, the provision of buy-side and sell-side advice, and portfolio management. The members have experience across a wide array of industries. She noted that the UAC could benefit from having additional sell-side members and individuals experienced in debt portfolio management.
In addition to covering public issuers, quite a few members are experienced in analyzing private enterprise and NFPO financial statements. With the possible exception of Asia (and with no coverage in Africa), members have good coverage of investments in the rest of the world.
Ms. Gaede commented that standard setters have always had difficulty in hearing first hand from financial statements users on aspects of standard setting that affect their understanding and use of financial reports. The UAC is one of a few such bodies in existence; therefore, the IASB and its staff are extremely keen to consult with it.
The interaction of the IASB and its staff with the UAC, and the resulting feedback from the UAC Chair to the AcSB, assists the Board in playing a prominent role in providing input to the IASB, particularly on matters important to Canada’s capital markets.
Ms. Gaede presented a number of examples of how the UAC’s input has been used by the IASB and others. She noted that the UAC’s input influenced the AcSB’s 2016-2021 Strategic Plan.
Ms. Mezon comments on a number of matters, including responses to members’ questions, included the following:
- Some group members are asking for action by the AcSB to counteract the proliferation of non-GAAP measures. Others are satisfied with the increasing display of these measures, stating that they prefer to use the measures to make their own adjustments to entities’ financial statements.
- The Board is following activities related to Indigenous peoples.
- The IASB has a formal program to interact with the investor community, including a Capital Markets Advisory Committee, which includes a Canadian member. It regards the UAC as a valuable source of input from users.
Members’ comments included the following:
- The UAC’s input is very important to the standard-setting process.
- A member complimented the AcSB on obtaining so much user participation and encouraged the AcSB to keep the UAC membership as large as possible. He noted that users bring a great many perspectives to the discussions. It is particularly important to get the views of users who manage, or invest in, debt instruments.
- A member stated that the IASB values the diversity, and differing perspectives, of users’ opinions.
The Chair thanked Ms. Gaede for her presentation.
Charles-Antoine St-Jean, PSAB Chair, commented on recent key Board activities, including its international strategy, NFPO strategy and conceptual framework. His comments on the following matters, which flow from the Board’s 2017-2020 Strategic Plan, included the following:
In line with the 2017-2020 Strategic Plan, PSAB is reviewing its approach to International Public Sector Accounting Standards (IPSAS).
At its meeting in September 2017, PSAB endorsed a staff proposal to use a business-case approach as an effective way to generate actionable reaction from stakeholders. This novel approach will accelerate the consultation process to meet the pre-agreed proposed timeline. The business-case approach will initially set out four different options.
The approach will be paired with an extensive cross-country outreach program led by the PSAB Chair and Director. The program will maximize awareness of the issues with Canadian stakeholders and develop support for whatever decision the Board makes in March 2020. It is expected that Board staff will also participate in a series of presentations across the country. The Public Sector Accounting Discussion Group will be asked to help with the outreach program.
In reply to a question, Mr. St-Jean said that a number of G20 countries already follow IPSASs to varying degrees, with some notable exceptions such as Germany. The European community is progressing quickly in assessing IPSASs as the basis for public sector accounting. Given its multiplicity of sovereign governments, it might emerge as a relevant model for Canada but it is too early to tell. The International Public Sector Accounting Standards Board is conducting an initial worldwide survey of countries’ relative positioning regarding IPSASs adoption. The results will be available in 2018.
Although PSAB will learn from the IFRS adoption experience in Canada, Mr. St-Jean commented that the private sector drivers to go international are different from those in the public sector. Access to global capital was seen as the main rationale for Canadian public companies to adopt IFRS; there is no such imperative for public sector accounting standards. Further, the sovereign feature of the federal and provincial governments in Canada is a reality that has no private sector equivalent. The rationale to decide if international standards should be adopted in Canada will be different. It is understood that sovereign governments will likely want to keep the option open to legislate their own accounting standards, if they feel it best serves their needs.
To understand user’s needs in this sector, PSAB staff have consulted with more than 60 NFPOs across Canada. Consultations will continue until the end of December. The staff will present a final report to PSAB in March 2018, with the intention of implementing an NFPO strategy that is in the public interest.
PSAB has arranged a staff exchange with the AcSB, in part to support the AcSB’s NFPO project. A PSAB staff member will work part-time on the AcSB user consultations that focus on contributions. This exchange will leverage knowledge and strengthen the final report presented to PSAB in March 2018. In addition, PSAB is exploring the use of an advisory group.
In response to a member’s question, Mr. St-Jean said that NFPO preparers in the public sector are confronted with four different accounting frameworks.
The project to replace two Public Sector Accounting Handbook sections and develop a new reporting model started in 2010 and consists of 10 chapters. The project is progressing concurrently with PSAB’s international strategy work.
The Task Force will present the full Statement of Concepts, “A Revised Conceptual Framework for the Canadian Public Sector,” and the full Statement of Principles, “A Revised Reporting Model for the Canadian Public Sector,” to PSAB in December 2017. The Board is expected to approve both documents for issuance in the first half of 2018. The staff is creating a robust communications and outreach plan to coincide with the documents’ release.
Mr. St-Jean commented that it is not the standard setter’s role to mediate between an auditor and a preparer when differences arise between them. It is important for PSAB to understand the issue and whether the relevant standard is unclear, which might require the Board to take action.
Indigenous Peoples and Governments
Michael McIntyre, Chief Financial Officer for the Membertou band located in the Cape Breton Regional Municipality, provided information to help AcSOC to understand better the needs of Indigenous stakeholders. He explained some of the unique issues facing First Nations, provided an update on recent developments and identified some gaps with Public Sector Accounting Standards (PSAS).
Mr. McIntyre said that there are 634 First Nations communities with about one million reserve residents in Canada. The Indian Act, administered by Indigenous and Northern Affairs Canada, provides the legal framework for control over the communities. Program responsibilities fall to the communities. He commented that the Indian Act has been amended many times, but it is still flawed and impedes business on reserves.
The First Nations face many unique issues including the following:
- They comprise isolated communities.
- They have limited opportunities.
- They face onerous reporting requirements.
- They have difficulty in attracting qualified financial professionals.
- The population growth rate exceeds the program-funding growth rate.
- Financial institutions consider First Nations clients as high risk, so they have difficulty securing capital.
Regarding financial reporting:
- standard setters have largely ignored First Nations for many years;
- First Nations have no specific financial reporting framework;
- PSAB does not refer to them as distinct stakeholders;
- accounting practices are inconsistent across First Nations; and
- there is a lack of financial statement comparability among First Nations.
Since 1997, PSAS have been deemed the best fit for all the First Nations across Canada. However, they are not implemented and enforced evenly.
The First Nations have a number of issues with PSAS, including the following:
- Liquidity calculations are meaningful for First Nations, but are not required in PSAS financial statements.
- Because PSAB’s conceptual framework prohibits the recognition of intangible assets, First Nations’ financial statements exclude valuable assets such as fishing licences and timber permits.
- The PSAS relating to government business enterprises (GBE) is clear, but the modified equity approach provides little information on consolidation. The requirement that GBE stand-alone financial statements should follow IFRS Standards instead of the AcSB’s accounting standards for private enterprises adds complexity, and has no additional value for users.
- Some First Nations choose to include all recipient government transfers as income owing to the large number of transfers received. This causes significant budget variances, and results in the reporting of “normalized” earnings as additional information to First Nations financial statements users.
Mr. McIntyre closed by stating that PSAS are a good starting point but they need to evolve to take into account specific First Nations user needs, including updating some existing standards and addressing various gaps. In addition, First Nations’ needs should be considered during the review of PSAB’s conceptual framework. Finally, the Board should seek First Nations’ active participation in its activities.
In reply to questions, Mr. McIntyre’s comments included the following:
- The Aboriginal Financial Officers of Canada is a well-organized association with chapters across Canada. These chapters would be happy to work closely with PSAB.
- He agreed with a member that part of the problem arises from trying to force two entirely different revenue streams, from government activities and business commercial activities, into a single model.
- First Nations communities are all different; some remote reserves have sufficient resources, while others are in dire need.
- The Membertou band has a development corporation, which is an NFPO.
The Chair thanked Mr. McIntyre for a valuable and informative presentation. It is very helpful for AcSOC to understand the unique issues facing First Nations and the needs of their users.
The Relevance of Audited Financial Statements to Analysts
AcSOC member Tom Trainor and Linda Mezon provided an update on the developments on this topic since the discussions at AcSOC’s last meeting on June 8-9, 2017. They also commented on the proceedings at the Canadian Public Accountability Board’s fourth Audit Quality Symposium held in May 2017.
Points made by the presenters regarding the above symposium included the following:
- Investors and analysts use a wide array of information, 80 to 90 per cent of which is not subject to audit.
- Users are not always aware if non-GAAP financial information has been subject to due process. Symposium participants said that audit committees could possibly do more regarding due process on this type of information.
- Symposium participants said that the auditor’s role should be expanded to cover non-GAAP financial information. The problem is that there are no standards against which the auditor could audit non-GAAP information. It is unclear who, if anyone, should set such standards. The Canadian Public Accountability Board supports the establishment of a multi-stakeholder group to determine next steps and priority areas of attention to address the attendant risk to capital markets.
Mr. Trainor questioned what AcSOC’s role should be regarding the relevance of audited financial statements, before the next inevitable financial crisis.
Comments by members included the following:
- It appears that 80 to 90 per cent of the information that investors and analysts use is unaudited. Accordingly, should some organization set appropriate standards, or is it merely a disclosure issue? Is there a role for AcSOC in this regard, and because analysts appear to be unaware that some information that they use is unaudited?
- Although non-GAAP financial information is not subject to a formal audit, many entities put in a large effort to ensure the validity of such information. In this regard, Mr. Trainor noted the lack of comparability between entities and lack of consistency between periods in presenting non-GAAP financial information.
- The solution would require international standards because portfolio managers need to compare the performance of entities around the world. This would be a daunting task. Mr. Trainor suggested that if a starting point could be established, then Canada could work with international bodies to establish appropriate standards. Ms. Mezon commented that the IASB is aware of the topic, but that there are constraints to making substantial progress.
- Entities are increasingly presenting non-GAAP measures, almost all of which improve performance versus that shown by the GAAP financial numbers. Many non-GAAP measures are derived by removing so-called non-recurring and non-operating amounts. This suggests that the current GAAP financial statements, which are heavily aggregated, might be better disaggregated. Users would then see more audited granular numbers to calculate their own performance measures. This might be a good topic for the UAC to discuss.
- Standard setters could consider defining the term “non-recurring”. The IASB has started by considering the disclosure of earnings before interest or taxation (EBIT) as a separate sub-total on the statement of financial performance.
- A member expressed concern about the costs to preparers in expanding the information subject to audit.
- A member suggested that more could be done to standardize common non-GAAP measures such as EBIT. Two members suggested that standard setters should pay more attention to improving the content of the cash flow statement.
- A member was not persuaded that the non-audit of non-GAAP financial information is the core issue. The member was more concerned about the lack of transparency and the inconsistent use of non-GAAP measures.
- A member said it might be useful for the AcSB to research users’ perception regarding the usefulness of GAAP financial statements.
- A member commented that rather than the AcSB dealing with this topic, AcSOC should raise it with the IFRS Foundation Trustees, for possible action on the international front.
Members concluded that it is premature for AcSOC to consider any possible action, but that the topic should remain on the Council’s agenda for discussion at future meetings.
AASOC/AcSOC Joint Subcommittee on Oversight of Standard Setting
As discussed, the Auditing and Assurance Standards Oversight Council (AASOC) and AcSOC established a joint subcommittee a year ago to review the oversight processes of each Council.
The joint subcommittee met a number of times, discussed differences and similarities in the operations of both Councils and has now wrapped up its work. The joint subcommittee’s recommendations included the following:
- The Councils’ Terms of Reference should be aligned so that any differences in wording or process are purposeful and reflect substantive differences in the Councils’ mandates and approaches.
- AcSOC’s annual self-assessment process to identify improvements in its operating policies and practices, including reporting to the public, should be improved and strengthened.
- The Nominating Committee should be reconstituted as the Nominating and Governance Committee with responsibilities for AcSOC’s nominations and self-assessment process.
Members discussed and agreed with the joint subcommittee’s recommendations and agreed to related amendments to AcSOC’s Terms of Reference. Members also agreed that the joint subcommittee should be disbanded.
Daniella Girgenti, Communications Manager, Standards, updated members on digital engagement analytics regarding AcSOC’s and the Boards’ website and social media presences, enhancement of communications in the public interest, and the website redesign.
She said that, generally, stakeholders’ recent engagement with the AcSOC and Board websites have remained constant year over year, although visitors are spending more time on webpages this year. There is, however, significant growth in the social media area. The communications team will focus heavily on, and expand use of, LinkedIn and Twitter.
The website redesign is based on stakeholder feedback gathered through research activities such as surveys, phone interviews and in-person focus groups. Stakeholder feedback shows a need for video, audio, visual, and plain-language content, and enhancing time to market of content. For example, reports on public meetings are being rethought because it currently takes some time to externalize such reports. To enhance time to market, podcasting is being considered to provide stakeholders with information soon after meetings take place. In addition, allowing stakeholders to watch AcSOC meetings via livestreaming will be considered for future meetings, to ensure inclusivity and give stakeholders across the country the opportunity to participate.
The Chair thanked Ms. Girgenti for an informative presentation.
Report-Back on AcSOC Members’ Attendance at AcSB and PSAB Meetings
Two members reported on their attendance at recent AcSB and PSAB meetings. The meetings were very well chaired and organized, and included thorough discussions. The members of both Boards were well prepared and the proceedings provided valuable insights to the AcSOC observers.
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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.