• IFRS – Latest News
• Top IFRS Issues in Canada
• IFRS – IAS 36 – Impairment of Assets
• Ontario HST
IFRS – Latest News
New Accounting Standards for Private Enterprises in Canada Now Available
The new accounting standards for private enterprises are now available. The Accounting Standards Board worked on an aggressive timeline to complete the standards – particularly given the effort undertaken to obtain stakeholder input. Approved in October, the standards take effect for fiscal years beginning on or after January 1, 2011 and early adoption is permitted….read more
US Perspective – interview with AICPA President
The next year will be an important one as the U.S. accounting profession continues on the path to adopting International Financial Reporting Standards. AICPA President and CEO Barry Melancon, CPA, addresses some of the questions and issues surrounding IFRS….read more
Top IFRS Issues in Canada during 2010 and beyond
The transition from Canadian generally accepted accounting principles to IFRS will be different for every company. However, most companies will experience some amount of change, and the degree of change will depend upon their particular situation and industry, changes in accounting policies required, specific first-time adoption issues and the extent of data needed to be obtained and maintained for IFRS financial reporting differences. Based on attending numerous IFRS seminars, discussions with companies, review of publications from Big 4 Accounting firms and accounting bodies in Canada, here are my views on the top IFRS accounting issues that will impact virtually all Canadian publicly accountable entities during 2010 and beyond.
Componentization – IAS 16 – an item should be separated into parts (components) when the cost of those parts is significant in relation to the total cost of the item. There is a similar concept in Canadian GAAP, but it has been applied only when practical to do so, which essentially meant that it has very rarely been applied at all. In contrast to Canadian GAAP, componentization will be an expectation and requirement under IFRS, but at the same time require significant professional judgement.
Impairment – IAS 36 – Impairment of Assets applies to Property, Plant and Equipment (PP&E), goodwill and intangibles and involves significant estimation complexities for mining companies. It also applies to joint venture interests and equity accounted investments. IAS 36 sets out significantly different guidance on identifying an asset that may be impaired and the measurement of impairment.
Provisions and Asset Retirement Obligations – IAS 37 – Provisions, Contingent Liabilities and Contingent Assets uses different concepts and terminology to address the broad area of “provisions” and contains more detailed guidance than GAAP on constructive obligations and contracts. IFRS does not have a direct equivalent to CICA 3110 Asset retirement obligations (ARO’s), but these obligations — as well as other kinds of environmental liabilities — fall within the scope of IAS 37.
IFRS 3 Business Combinations was revised in early 2008. Canadian guidance on business combinations is also being revised and a converged standard is expected to be issued in Canada prior to IFRS changeover. On conversion to IFRS, an entity can choose the date from which it retroactively applies the IFRS business combination standard. This considerably simplifies conversion. One of the more significant differences between revised IFRS 3 and GAAP includes the fair valuation of 100% of all identifiable assets and liabilities acquired once control is achieved.
Joint Ventures – Canadian GAAP requires that an interest in a jointly controlled entity be proportionately consolidated. IAS 31 Interest in Joint Ventures recommends this treatment but also allows equity accounting as an alternative measure. However, IASB proposals remove the proportionate consolidation alternative, except in certain specific circumstances, and introduce a requirement to equity-account all jointly controlled entities.
IAS 23 Borrowing Costs, as amended in 2007, became mandatory effective in 2009. It requires that an entity capitalize borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) as part of the asset’s cost. Under IFRS, an entity cannot choose to expense all borrowing costs as it can with Canadian GAAP.
IAS 21 – The Effects of Changes in Foreign Exchange Rates is more specific than Canadian GAAP about how an entity should determine its functional currency. Essentially, it depends upon identifying the entity’s primary economic environment, based in particular on the currency that mainly influences sales prices for goods and services, or labour, material and other costs of providing the company’s goods or services.
IAS 12 Income Taxes and CICA 3465 Income taxes follow substantially the same approach (a liability method focusing on temporary differences between the tax base of an asset or liability and its carrying amount in the balance sheet). However, there are many differences including a specific provision which exempts entities from recognizing temporary differences on items arising from other than business combinations that do not upon initial recognition affect profit and loss. For example, the initial recognition of provisions for Asset Retirement Obligations, are not considered as generating recognizable temporary differences.
IAS 32 – Financial Instruments: Presentation. The measurement of the components of convertible and compound instruments could be different depending on the facts and circumstances. Entities will need to review the financial instrument contracts to identify any potential differences between Canadian GAAP and IFRS.
IFRS 1 First-time Adoption of International Financial Reporting Standards provides direction for the first time application of IFRS. It generally requires the complete retrospective application of all current IFRS standards. However, IFRS 1 also provides a first-time adopter with a variety of options that provide some relief from retrospective application in certain specific areas that would otherwise be extremely onerous to apply on a retrospective basis. The exceptions and exemptions in IFRS-1 will significantly assist the implementation, but will require careful consideration of accounting policy choices. IFRS-1 is definitely an important standard to become familiar with and should be carefully reviewed with your accounting professional.
Disclosures – As IFRS is principles based, it gives entities more choice with regard to how to account for something, it then compensates for this by requiring more disclosures so companies can explain how an item was actually accounted for. The additional information and note disclosures is designed to assist with comparability – the notion is that if companies are able to have a little more flexibility in the accounting with IFRS, then companies should explain exactly how the item was accounted for. Organizations will need to take a look at everything that is already being disclosed under Canadian GAAP, and then determine what IFRS disclosures are required. Then, the company must evaluate which additional disclosures must be included in the financial statements and then proceed one step further and pose the questions – what information is required to meet these disclosures, and how can it be collected on an ongoing basis? Perhaps information systems and business processes will need to be revamped in support of IFRS disclosure requirements.
IFRS vs Canadian GAAP – IAS 36 – Impairment of Assets
The following topic generates a great deal of attention on the Edelkoort Smethurst Schein CPA’s LLP web-site, so I thought it would be helpful to provide further information to readers in this e-Newsletter.
Identification and measurement of impairments under IAS 36 are significantly different than Canadian GAAP 3063 – Impairment of Long Lived Assets. First of all, let’s take a quick refresher on the requirements under Canadian GAAP, which has a 2 step approach to identifying impairments. The first step is assessing the “recoverable” amounts using undiscounted cash flows.
Example – Building – assessing if the carrying amount is impaired. Under Canadian GAAP you assess the amount that is on the Balance Sheet and compare that to the undiscounted cash flows that are expected to be received from the building. If you expect the building to have a life of 50 years, then cash flows are expected for 50 years. If the estimated cash flow totals over the 50 years exceeds the Balance Sheet carrying value, then there is no impairment and you continue to amortize the building. (Note – the cash flow projections will be influenced by the anticipated cost of repairs in relation to construction quality, weather conditions, long-term refurbishing plans, interest rates, anticipated revenue streams, competitive factors in the real estate market etc).
If however, the undiscounted cash flows are less than the carrying value of the asset, there is impairment. Under Canadian GAAP, you then go to the second step, which involves determining the Fair value, comparing it to the Carrying value, and recognizing the difference as impairment, and expensing the amount to the Income Statement. This is done by calculating the fair value of the asset which, as defined in 3063, is essentially market pricing or its equivalent.
Under IAS 36, there is a one step process, where you take the carrying amount and compare it to the “recoverable” amount. The recoverable amount is the higher of 2 amounts:
• Fair Value (market value) less selling costs or,
• Value in use – this is determined by the company’s use of the asset.
Under IAS 36, there is impairment if the carrying value is less than the recoverable amount (the higher of the 2 valuation measurements as described above). IAS 36 paragraph 19 indicates that it is not always necessary to determine both an asset’s fair value less costs to sell and its value in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.
IAS 36 paragraphs 25-29 provide definitions and guidance for the determination of fair value, but essentially it is based on an arm’s length sales transaction, or current bid price, or the best information available to reflect the amount that an entity could obtain, at the end of the reporting period, from the disposal of the asset in an arm’s length transaction between knowledgeable, willing parties, after deducting the costs of disposal.
IAS 36 paragraphs 30-57 provides guidance for the determination of value in use, but essentially is based on estimating discounted cash flows from the asset or group of assets. The requirement to use discounted cash flows under IFRS is a key difference between Canadian GAAP and IFRS, and it is the main reason that companies may have impairment under IAS 36 that they would not otherwise have had under Canadian GAAP 3063. An example is an asset that has a carrying cost of $100 and generates cash flows of $10 year for the next 12 years. The undiscounted cash flows would be $120 (10 x $12), and under Canadian GAAP no impairment would be recognized. However, if the cash flows are discounted at 10%, the net present value is about $68, which is less than the carrying amount of $100, and the impairment under IFRS would be $32. As can be seen, if a company has assets with future cash flows of 20 or 30 or 40 years, it can have a significant impact, and will result in impairments under IFRS that would not have occurred under Canadian GAAP.
Identifying at what level to do the impairment testing is the key. Under IFRS, it is the CASH GENERATING UNIT, which is somewhat similar to the ASSET GROUP under Canadian GAAP. However, IFRS is concerned only with CASH INFLOWS, without regard to overhead sharing. On the other hand, Canadian GAAP looks at NET CASH FLOWS. For example, suppose there are 4 retail stores in a company that are being supported by a shared warehouse and head office. Each of the retail stores has independent cash inflows. Under Canadian GAAP, the relevant statistic would be the cash flows resulting from the retail stores combined with the supporting operations – in other words, the NET CASH FLOWS. However, under IFRS, only the CASH INFLOWS for each independent retail store would be relevant in calculating the future cash flows. These cash inflows would then be discounted at the appropriate rate to determine the net present value, or fair value. The key points are that with IFRS, you must review the facts and determine lowest level at which a group of assets can generate independent cash inflows, and these cash flows must discounted when calculating the fair value.
Another point to remember is that under IFRS, impairments can be reversed, but not above carrying amount. Under Canadian GAAP, impairments cannot be reversed. The result is that under IFRS, there may be greater volatility in net income, as companies reverse previously recorded asset impairments. However, the theory is that in reversing asset impairment, it more accurately portrays the financial position of the company.
Sales tax harmonization in Ontario next July 1, 2010 appears closer to reality with Ontario’s Bill 218 receiving third reading on December 9, 2009 and the federal government’s Bill C-62 receiving second reading in the Senate on December 11, 2009. It is proposed that, effective July 1, 2010, Ontario’s Retail Sales Tax (RST) be replaced with the HST. The HST would have a combined tax rate of 13 per cent — combining the existing five per cent federal Goods and Services Tax (GST) and an eight per cent Ontario component. The HST would be administered by the Canada Revenue Agency. All businesses currently registered for GST will automatically be registered for the Ontario HST (and BC HST) on July 1, 2010.
HST is intended to reduce business costs. GST-registered organizations will be able to claim refunds of the 13% HST they pay if they make GST-taxable supplies. However, organizations providing exempt supplies, such as financial and healthcare services, will see their cost of some purchased services rise by 8%, subject to any rebates and credits to which they may be entitled. Generally speaking, public sector organizations eligible for HST rebates should not suffer a higher overall tax cost because of HST.
Transitional rules were released by the Ontario Government on October 14, 2009 and generally determine when suppliers must collect HST on supplies of goods or services to be provided after June 30, 2010 and when purchasers have to pay HST. They also provide for the winding down of RST and the circumstances in which suppliers do not collect RST on goods and services to be supplied after June 30, 2010. Generally, suppliers do not collect HST until May 1, 2010 if they supply goods or services for delivery after June 30, 2010. Instead, certain purchasers may have to self-assess HST on transactions between October 14, 2009 and April 30, 2010 for goods or services to be supplied after June 30, 2010. Suppliers who are registered for GST should consult the transitional rules to determine whether they must collect HST after April 30, 2010 on goods and services to be supplied after June 30, 2010. HST will generally apply to the portion after June 30, 2010, unless the services are substantially all performed before July 1, 2010. Furthermore, selected services and supplies of goods are subject to special rules.
It is anticipated that all laws and rules relating to harmonization will be formalized by March 31, 2010. However waiting until then to start the implementation process will be too late for many businesses to have all changes completed by July 1, 2010. To begin the preparation process, consider all facets of an organization that are affected by sales taxes (for example, accounts receivable, accounts payable, payroll, purchasing, forecasting and budgeting). This can be a very time consuming task. The benefit of spending time preparing for implementation is a reduction in costly errors, surprises for overlooked issues, and future audit exposures. A few of the areas that businesses need to consider for the sales tax implementation include; amend software and/or tax tables used to generate invoices, debit and credit notes to accommodate additional tax rates/codes, amend automated system-generated entries, perform a product and service sales tax analysis to determine which goods and services previously non-taxable under the old Ontario sales tax legislation are now taxable as a result of harmonization, and develop updated or new tax tables/codes for accounts payable systems that automatically record input tax credits or rebates based on embedded taxes. There are numerous other areas that need to be reviewed including transitional rules and specified restricted expenses. The Ministry of Ontario has HST information available on its website, and CRA is conducting informational seminars during 2010. Please see below for web-site links. You can also contact the Ontario government HST information line at 1-800-337-7222. However, tax rules and regulations can be complex, and therefore it’s in your best interest to review this carefully with your accounting and tax professionals, and to do this as soon as possible.
Free Seminars – Ontario Ministry of Revenue and CRA….read more
I hope this helps. Thank you for taking the time to read this. Please don’t hesitate to contact Edelkoort Smethurst Schein CPA’s LLP If you have any questions or require assistance. Best wishes to you.
The views and opinions expressed in the Edelkoort Smethurst Schein CPA’s LLP E-Newsletter are those of Edelkoort Smethurst Schein CPA’s LLP, and include excerpts from other authors and web-sites as identified in the Newsletter. Readers should discuss details with their accounting and tax professionals. Edelkoort Smethurst Schein CPA’s LLP disclaims any responsibility whatsoever in regards to interpretation and use of any of this information.