Edelkoort Smethurst Schein CPA’s LLP – February 2011 e-Newsletter

//Edelkoort Smethurst Schein CPA’s LLP – February 2011 e-Newsletter

Newsletter Content
• Bill 198 C-SOX Update – IFRS Impact – Testing controls around IFRS transition
• CEO CFO Certification templates – updated for IFRS
• The Canadian Securities Administrators Staff Notice 52-327 – Certification Compliance Update

Bill 198 C-SOX update – IFRS Impact
As Canadian companies transition to IFRS during 2011, CEOs and CFOs must continue to provide their internal control certifications throughout this period. Most companies are in the final stages of their changeover to International Financial Reporting Standards (IFRS), because IFRS will replace Canadian generally accepted accounting principles (GAAP) for fiscal years beginning on or after January 1, 2011.

The majority of Canadian-listed domestic issuers will be required to report their first set of IFRS financial statements in the first quarter of 2011. At the same time, certifying officers of non-venture issuers will also need to certify on the design and implementation of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR).

Management will be required to make significant choices in the selection of accounting policies and elective exemptions as part of the company’s transition to IFRS. This e-newsletter highlights ICFR considerations regarding the design of controls for certain IFRS accounting policy choices and elective exemptions available on transition to IFRS. This includes only a sample of ICFR considerations and does not represent a complete list. In addition, these considerations are directional in nature only, as specific control impacts will depend on the facts and circumstances of each company. How can companies maintain effective control throughout the IFRS conversion and beyond? Read on…

Potential Impact of IFRS on Internal Control over Financial Reporting
• Accounting Policies
• Reconciliations
• Financial Statement Disclosures
• Certifying design of DC&P and ICFR
• Certifying operating effectiveness of DC&P and ICFR
• Testing Considerations

Accounting Policies
The conversion to IFRS requires numerous accounting policy selections. Some choices are required in applying IFRS for the first time through IFRS 1, while others relate to on-going accounting policies. In many areas, a company’s choices can have significant and wide-ranging implications for the design of its controls. As an example, a choice that will affect all companies—the IFRS requirement for financial statement presentation…

IFRS accounting treatment – IFRS requires, as an accounting policy choice, that expenses be presented either by nature or by function on the face of the statement of operations. This requirement as well as other aspects of IFRS can result in significant changes to captions in the statement of operations.

Implications for controls – having made its choice, a company may need to put in place controls over the creation of general ledger accounts and the mapping of these accounts to the financial statements. In addition, the company may need to consider any program change controls required for consolidation software and the related IT application controls.

Communication of accounting policies – the company will need to communicate new accounting policy selections to all affected parties throughout the organization. To the extent that written policy documents exist, they will require updating and distribution on a timely basis. The form of communication should be tailored, depending on the complexity of the changes being communicated. For example, simple changes may be handled via e-mail communication, while complicated changes should be communicated via in-person training sessions to facilitate knowledge sharing.

Reconciliations to previously reported Canadian GAAP
The first interim financial statements must include comparative figures restated to IFRS, and reconciliations between IFRS and Canadian GAAP. The condensed set of interim financial statements for the first reporting period must meet the requirements of IAS 34 Interim Financial Statements including:

• Complete set of significant accounting policies, including the selection of various ongoing IFRS accounting policy options and the elective exemptions at the transition date made under IFRS 1 First-Time Adoption of IFRS (IFRS 1).
• Reconciliation of equity from Canadian GAAP to IFRS at the date of transition, to the end of the comparative annual period, and the end of the comparative interim period.
• Reconciliation of comprehensive income from Canadian GAAP to IFRS for the end of the annual period, and the end of the comparative interim period.
• Additional financial statement disclosures.

Controls should be in place over both the creation of the opening balance sheet and the reconciliation process. The reconciliation process will need to be repeated for each quarter and for the annual financial statements. The reconciliations are most transparent and informative when done on a line-by-line basis.

The nature of the controls over the reconciliation process will depend on the number of reconciling adjustments expected and how your company chooses to track its accounting records concurrently under IFRS and Canadian GAAP. Your company’s current information systems will largely determine the available options.

Adjustments will be required to convert from Canadian GAAP to IFRS. If Excel spreadsheets are used to track the adjustments for the reconciliation, then detailed review over entries may be necessary, and end-user controls such as locking formulas and password protecting contents should be considered for implementation.

Financial statement disclosures
IFRS has significant additional disclosure requirements compared to Canadian GAAP. For example, additional disclosure is required when impairment losses are recognized or reversed at the date of transition, or material adjustments are made to the statement of cash flows. Possible additional disclosures may also be required around significant judgments made in applying IFRS accounting policies and new key sources of measurement uncertainty.

Companies will need to establish a process to:
• Identify the required quarterly and annual disclosures,
• Ensure the information is appropriately gathered,
• Consider whether the required disclosures are fairly presented.

To illustrate, controls over such a process might include the following elements:

A responsible person obtains, from the company’s auditor, a disclosure checklist to identify required disclosures. The person then amends any reporting package templates so that the required information is obtained from operating locations upstream for external reporting. Relevant controls could also be added at these locations to review the information provided for completeness and accuracy. At the time of external reporting, the disclosure checklist would be completed and approved as part of the financial statement review process.

Certifying design
For financial statements produced in compliance with IFRS, the CEO and CFO of a non-venture issuer will be required to certify for the first quarter of 2011 on the design of their DC&P and ICFR. “Design” refers to both developing and implementing the controls, policies and procedures that comprise DC&P and ICFR, and encompasses the documentation of these controls. Companies should put in place plans that will allow certifying officers to assess whether newly designed controls have been implemented. An assessment may be accomplished, for example, by completing a walkthrough. Plans should also consider how the documentation (“narratives”) required to support the certification of design will be updated.

Certifying operating effectiveness
For financial statements produced in compliance with IFRS, certification of the operating effectiveness of DC&P and ICFR will be required for the first annual period ending after January 1, 2011. However, in both 2010 and 2011, companies will need to address the impact of the IFRS conversion on the nature, extent and timing of testing required.

Testing considerations
If controls that affect the 2011 financial reporting year have already operated in 2010, companies may be well advised to complete the testing of these controls as early as possible in 2011. For example, if new IFRS accounting policy selections were approved in 2010, the approval of these policies could be tested as part of the 2011 Q1 test plan. Similarly, controls over IFRS systems development projects that were completed in 2010 could also be tested during 2011 Q1. This approach may contribute to both efficiency and effectiveness by reducing resource constraints in the year of transition, allowing for early detection and remediation of any DC&P or ICFR issues, and facilitating interviews of individuals involved in the conversion process while the details are still fresh.

In making risk assessments in 2011, certifying officers should consider whether the risk of error or fraud has increased due to resource constraints, system conversion projects or other ongoing change management issues arising out of the IFRS conversion project. Changes to the assessed risk of fraud or error may, in turn, require testing plans to be amended.

A company should reconsider its previous risk assessments, particularly in areas that have undergone a significant change in accounting policy or a retroactive restatement when IFRS was adopted. Management should consider whether the prior testing approach needs to be modified because employees’ level of knowledge of IFRS will not immediately approach their previous familiarity with Canadian GAAP. This knowledge difference may have particular impact when a company previously relied heavily on monitoring controls to reduce the extent of detailed process-level testing. In general, IFRS is less predictive than Canadian GAAP because IFRS uses more fair value measures, thus creating more earnings volatility, particularly in areas such as provisions and stock-based compensation. These factors may reduce the effectiveness of monitoring controls.

For example, as part of the certification process, management may have relied on centralized monitoring of the operating performance of subsidiary results in order to reduce or eliminate the need to test process level controls at certain locations. As results will be reported under a new framework, management should consider whether the degree to which amounts are predictable, and whether they have sufficient technical expertise in IFRS to perform an effective review at a level that would detect a material error. Until management becomes well versed in IFRS, and expectations and trends are predictable, management may choose to lower the threshold for amounts requiring investigation, so that more matters are reviewed. Alternatively, management could reduce the extent of reliance on monitoring controls and introduce some testing of process level controls.

In 2011, the monitoring of actual results versus budget will be effective only to the extent that relevant budgeting was also completed under IFRS. Management will need to put in place a process to ensure that employees developing budgets in 2010 are appropriately trained in IFRS and also receive appropriate communications regarding final approved accounting policy selections. Management must proactively make the appropriate changes to the company’s budgeting process. A flawed process may lead to significant budget to actual variances and make the monitoring of such variances a much less effective control.

In developing test plans, companies may be well advised to modify their test plans in areas where more significant changes in processes have occurred or where new knowledge of IFRS is required because of increased risk. Adjustments could include:

• Testing earlier. This approach will allow for remediation efforts if required, such as additional training, or the identification and testing of additional controls. In particular, areas with new controls or significant accounting policy choices should be targeted for early testing.
• Testing more. The extent of testing should reflect risk assessments. The extent of testing can be adjusted by either testing more of a particular control or by testing more than one control related to an assertion. For example, testing both a preventative control and a monitoring control might be appropriate.
• Changing the nature of a test. More persuasive evidence should be gathered as the degree of risk increases. For example, re-performance of revaluation adjustments is more persuasive than inquiry and inspection directed to such judgments. Entity Level controls may not be able to detect errors as effectively as substantive testing during the IFRS transition.
• Reviewing the major business cycles. IFRS will likely impact all of the major processes including; Accounting Policies, Note Disclosures, Revenue, Expenditures, Compensation, PP&E, Capital, Taxes and Inventory. Within each cycle it is important to understand how the financial reporting may have changed, even though the actual business process itself may not be much different. A cross-functional review may highlight issues.

In addition to the above, IT application controls take on heightened importance, particularly if Excel spreadsheets have been used to calculate data and serve as an information repository. Is access to the spreadsheets secure? Are formulas locked?

This information is based on my personal observations, opinions and IFRS training programs, and has been augmented with information publicly available from various accounting firms’ web-sites. Please remember to contact your accounting professional(s) for further guidance. I would be pleased to discuss how Edelkoort Smethurst Schein CPA’s LLP can support your company’s certification process during 2011.

CEO CFO Certification templates – updated for IFRS
There are some changes to CEO CFO Certifications as a result of the transition to IFRS. On December 10, 2010, both the Ontario Securities Commission (OSC), and Canadian Securities Administrators (CSA) provided updates for revised terminology and templates. The details pertaining to NI 52-109 and other instruments impacted by IFRS can be obtained from the OSC web-site at the links below. The changes relate primarily to the replacement of Canadian GAAP terminology for IFRS terminology in the templates. For instance, Form 52-109F1 Certification of annual filings – full certificate is amended by replacing “results of operations” with “financial performance”. Readers should ensure they have a full understanding of the changes, and make the necessary revisions prior to the initial interim reporting period for 2011.

Click here for the Terminology link (Refer to Page 102)

Click here for the Certification Templates (Refer to Page 12)
 

The Canadian Securities Administrators Staff Notice 52-327 – Certification Compliance Update
On October 15, 2010 the Canadian Securities Administrators (CSA) Staff issued Notice 52-327, Certification Compliance Update, which summarizes issuer compliance with the requirements of National Instrument (NI) 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings. The results show moderate improvement in the level of compliance by issuers since a similar review was conducted last year.

CSA staff conducted the review of 2009 annual MD&A and annual certificates of a sample of 195 reporting issuers, composed of 145 non-venture issuers and 50 venture issuers. The sample included 45 issuers that were identified as non-compliant in last year’s CSA review of 2008 annual MD&A and annual certificates. Out of the total reporting issuers reviewed:
• 45 per cent appeared to comply or substantively comply with the provisions and no action was required, compared to 38 per cent in last year’s review;
• 33 per cent were required to make prospective changes in future filings, compared to 32 per cent in last year’s review; and
• 22 per cent were required to refile their annual MD&A and/or certificates, compared to 30 per cent in last year’s review.

For further information, please click here for the CSA web-site link.

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.

Sincerely,

Edelkoort Smethurst Schein CPA’s LLP MBA, CMC, CGA
Edelkoort Smethurst Schein CPA’s LLP
Cell: 905-630-1607
Fax: 888-501-1156
Email: gpjschein@sympatico.ca
Web: gfsconsulting.ca
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.
 

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2016-10-14T13:26:47+00:00

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