Edelkoort Smethurst Schein CPA’s LLP – October 2009 Newsletter

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Newsletter Content
• IFRS – Latest Buzz
• IFRS – Private Companies
• IFRS – Revaluation Model for PP&E
• IFRS –  Fair Value issues
• Bill 198 / SOX – 10 Steps to Efficiency

IFRS – Latest Buzz

G-20 calls for single set of accounting standards by June 2011
The Group of 20 nations called on international accounting bodies “to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard-setting process and complete their convergence project by June 2011.” The G-20 also said the International Accounting Standards Board’s institutional framework should further enhance the involvement of stakeholders…read more https://www.journalofaccountancy.com/Web/20092188.htm

Schapiro says shift to IFRS is still on SEC’s agenda
In the USA, the transition to International Financial Reporting Standards has not been in the spotlight lately as the global financial crisis and related issues have dominated the headlines. However, Securities and Exchange Commission Chairman Mary Schapiro said recently that the shift is still on the agency’s agenda. Schapiro said she expects the SEC to address this fall its “expectations” for possible IFRS adoption…read more

New Accounting Standards for Private Enterprises in Canada Finalized
TORONTO, September 30, 2009 – The Accounting Standards Board (AcSB) approved the final accounting standards for private enterprises in Canada. The new standards will be issued by the end of the year and will be available for 2009 reporting for entities that choose to adopt them early. The private enterprise standards give Canadian businesses the ability to choose to adopt new “made in Canada” standards or International Financial Reporting Standards (IFRSs). Private enterprises must decide which of the sets of standards to adopt for years beginning on or after January 1, 2011…read more

IFRS vs Canadian GAAP – PP&E and Revaluation Model
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.

There may be a misperception that International Financial Reporting Standards (IFRS) is just about Fair Value (FV). There are indeed options under IFRS that may allow you to use FV – these options might provide opportunities to reflect more current values in financial statements, but also come with costs of undertaking valuations and tracking changes in value. Careful accounting policy choices are required.

First, please understand that there is a difference in IFRS between the Fair Value Model and Revaluation Model. The Revaluation model pertains to Property Plant & Equipment (PP&E) under IAS 16, whereas the Fair Value Model pertains to Investment Property under IAS 40.

IFRS – PP&E Revaluation Method – under Canadian GAAP, you do not re-measure PP&E at Fair Value. PP&E is only measured at FV if it is lower than the original cost of the asset, as a result of an impairment loss, which causes the FV to fall below cost.

Under IFRS, there is a choice to be made in accounting policy either at cost and depreciating (Cost Model), or accounting at fair value using the Revaluation Model and depreciating. This choice is available on a class by class basis.

Example – suppose that a company has Land and Building that is used for a corporate head office and it is easier to re-measure at FV. This can be done, but IFRS rules require that all buildings used in the same manner in the entities operations must be also be accounted for at FV.

In the Revaluation model, any increase in FV does not go through the Income Statement. Instead, it is recognized directly in Balance Sheet Equity – Revaluation Surplus. Only if there is a decrease in FV, over and above any previous increases, does it go through the Income Statement as an expense item. Therefore, any revaluations that go below the original cost (what was originally paid) must go to the Income Statement. Any revaluations that increase FV are recognized directly in Equity (Statement of Changes in Equity). Revaluations that decrease FV but remain above original cost are also recognized in Equity.

The basic premise is that revaluations do not affect the Income Statement, but rather are recognized in Equity, unless the revaluation decreases an asset value below its original cost – in this situation it would affect the Income Statement as an expense item.

Impact to amortization (depreciation) – any revaluation that increases the asset value, also increases the amount of amortization that must be recognized in the Income Statement. Conversely, any revaluation that decreases an asset also decreases the amount of amortization that is required.

As can be seen, choosing the Revaluation model for PP&E will result in fairly complex accounting adjustments on an ongoing basis, and may result in higher volatility in reported net income. In Europe, about 97% of companies elected to use the Cost model when they transitioned to IFRS, as compared to 3% who elected to use the Revaluation model. The decision to use the Revaluation model depends on whether management believes it will be providing investors with more relevant information, and whether the fair values can be accurately appraised on an ongoing basis.

Fair Value Issues
The concept of fair value already exists within Canadian GAAP. For instance, CICA Handbook sections 3855 and 3861– Financial Instruments were introduced in Canada during 2007. A major component of these standards addressed the fair valuation of assets and liabilities, with the result being that they are substantially converged with IFRS – IAS 39. Fair value will continue to be very prominent as Canada transitions to IFRS.

For accountants, there is a dual challenge – understanding accounting standards, and understanding fair value methodologies. Quite often, the fair value measurements are complex and require specialized expertise. Fair value calculations can have a materially significant impact on financial results, so knowing when to seek assistance, and the best person(s) to provide expertise, is extremely important.

How best to get educated in this complex and important area? I discussed this recently with Mr. Robert Hirsch, LLB President of Acumen Information Services, which provides information to assist organizations in meeting their reporting and regulatory needs.

Rob commented as follows…” understanding the critical terms, procedures and applications of fair value is a complex and time-consuming exercise that will have impact on all elements of your financial statements. Furthermore, the road to IFRS will require ongoing valuation and impairment testing of assets and liabilities with no easily determinable value”.

Rob goes on to say that… “in many cases, you will need to turn to external valuation experts to assist you which, for most organizations, will be a new development with its own set of challenges such as ensuring completion of work to coincide with close procedures and regulatory filings, alignment of internal controls and procedures and understanding the differing theories and approaches of each valuation firm”.

Obtaining sufficient knowledge in this area will be part of the ongoing training required by accountants.  Rob and the Acumen team have arranged for several of Canada’s subject matter experts to appear at a conference in Toronto on December 1st and 2nd, 2009 to discuss these issues. You can obtain more information about Acumen’s conference by visiting https://www.acumeninformation.com/index.html

10 Steps to Bill 198 / SOX Efficiency
The Institute of Internal Auditor Magazine has an excellent article written by Norman Marks, CPA, and VP Governance at Business Objects (an SAP company). It contains practical information about what questions companies should be asking, and reviews that they should be doing to ensure that their Bill 198 / SOX processes are as efficient and effective as possible. Some highlights and excerpts are as follows:

1. Has operating management taken ownership of its processes and documentation, rather than leaving that job to the Bill 198 / SOX or finance team?
2. Does operating management update all processes and control documentation promptly throughout the year, not just when testing starts? Is there an effective change management process in place?
3. Is operating management committed to assessing and remediating all control deficiencies promptly?
4. Has a top-down, risk-based approach been used to identify financial reporting risks and related key controls? Is management confident that all identified key controls are truly “key”?
• Key Controls – defined as a control that, if it fails, means there is at least a reasonable likelihood that a material error in the financial statements would not be prevented or detected on a timely basis. In other words, a key control is one that is required to provide reasonable assurance that material errors will be prevented or timely detected.
• Entity-Level Controls – management should consider adding direct entity-level controls such as account fluctuation or trend analysis at corporate, divisional, or regional levels that would provide sufficient assurance that a material error would be detected. Installing a higher-level control may enable management to eliminate from scope a number of activity-level controls.
• Fraud controls – many companies needlessly test controls related to fraud schemes or thefts that would never result in a material error in the financial statements.
• Redundant controls – companies should ensure that redundant controls are not included in testing. An example would be having strong automated and manual controls in place over a particular process, and then testing both. This often occurs because IT General controls and Business Process controls are designed and tested separately, and the inherent lack of coordination.
• IT General controls – the Institute of Internal Auditors has published the Guide to the Assessment of IT Risk (GAIT) to assist with the scoping of IT general controls. If management is not using GAIT to define the scope of IT general controls, the scope is not likely to be efficient. 80% percent of those surveyed using GAIT indicated a reduction in key controls of 10%, and some as high as 20%.
• Monitoring controls – efficiencies may be realized by implementing monitoring controls that ensure other controls are operating effectively. Management can use a checklist during the period-close to confirm that all major account reconciliations have been completed, rather than testing all account reconciliations to check for timely completion.
5. Are Bill 198 / SOX managers at a high enough level in the organization to perform their responsibilities effectively?
6. Is the use of internal resources optimized, including the use of internal auditors to perform testing or to validate testing performed by management staff?
7. Has overall staffing been optimized, reducing reliance on more expensive external consultants and testers?
8. Has external auditor’s reliance on management testing been optimized effectively? This is a big one, and includes assessing if management has done the following:
• Taken appropriate steps to ensure competency and objectivity of Bill 198 / SOX testing.
• Understands the external auditor’s assessment of the risks related to the controls where the external auditor is not relying on management testing.
• Negotiated with the external auditor to maximize reliance.
9. Does the external auditor follow a top-down, risk-based approach?
10. Is the Bill 198 / SOX program itself assessed for effectiveness on a continual basis, to ensure it is improved as the organization learns from experience and benefit from changes in regulations or their interpretation?

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 IFRS details with their accounting professionals. Edelkoort Smethurst Schein CPA’s LLP disclaims any responsibility whatsoever in regards to interpretation and use of any of this information.