IFRS Implications for the Public Sector

Andrew Newman, Audit Partner, Public Sector 1

Agenda Canada’s Plan to Adopt IFRS IFRS-Canadian GAAP Similarities and Differences Key Success Factors Q & A 2

Canada’s Plan to Adopt IFRS

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Canada’s plan to adopt IFRS – who and when?

Canadian GAAP will cease for publicly accountable enterprises Change-over date to IFRS now confirmed as fiscal years beginning on or after January 1, 2011 Currently “publicly accountable enterprises” defined to be entities that:

Issued any class of instruments in a public market; and Hold assets in a fudiciary capacity for a broad group of outsiders.

Publicly accountable enterprises include Government Business Enterprises and Government Business Type Organizations 4

Private Enterprises AcSB has announced intention to develop unique set of standards for private enterprises Two key premises:

The majority of the recognition and measurement standards in the existing Handbook are relevant to Canada’s private business and will be retained with few, if any, modifications Financial statement disclosure requirements will be considerably fewer than in the existing Handbook.

Moving quickly —anticipated to be completed by end of 2008.

Proposed approach and working drafts of some sections published on August 28 th .

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Not-for-Profit Organizations AcSB has not mandated adoption of IFRS by NPOs AcSB actively discussing the future direction of accounting standards for NPOs Possible options include:

Providing a set of over-arching standards (liks S4400) that address unique aspects of NPOs Allowing NPO’s to select between IFRS and private business GAAP, under the umbrellas of the over-arching NPO standards Allowing, or requiring, the “SUCH” sector (schools, universities, colleges, hospitals) to adopt PSAB standards

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Governments PSAB has not signalled that governments or government NPOs will be required to adopt IFRS International Public Sector Accounting Standards Board:

Currently no plan to implement international Public Sector standards in Canada IPSASB relocated to Toronto Canada has two members on IPSASB (Rick Neville & Sheila Fraser)

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IFRS - Canadian GAAP Similarities and Differences

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Timeline for adoption of IFRS

Changeover date announced

Jan 1/08

Disclosure of plan for convergence and anticipated effects

Dec 31/08

Update convergence plan and standards which may have material effect in greater detail

Jan 1/10 Jan 1/11 Calendar year periods beginning

IFRS Opening Balance Sheet IFRS Comparative figures IFRS go-live Last reporting under Canadian GAAP

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IFRS versus Canadian GAAP – Similarities Comprehensive set of principles-based standards Similar to Canadian GAAP in structure and form Similar basic concepts and recognition / measurement principles Similar structure and content of financial statements Many standards in IFRS provide similar approach as Canadian GAAP 10

IFRS versus Canadian GAAP – Differences Fewer bright lines and rules Some standards in IFRS differ

considerably

Canadian GAAP –

e.g. impairments, provisions

from More accounting policy choices and less interpretative guidance

Applying IFRS requires more professional judgement and results in greater volume of disclosures Many differences in application/interpretation

BE CAREFUL – The devil is in the detail! 11

IFRS versus Canadian GAAP:

Areas with more significant differences

Impairment of assets



Provisions (incl. asset retirement obligations) Financial instruments & hedging Leases Property, plant and equipment Employee benefits Securitizations



Stock-based compensation Accounting for tax uncertainties Consolidations, SPEs, investments, JVs Rate-regulated operations



Industry-specific issues – insurance, extractive industries



Fundamentally different from Canadian GAAP

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Impairment of Assets (IAS 36)

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Impairment – Summary of approach IFRS has one general impairment standard

IFRS – “1-step process” Canadian GAAP – “2-step process”

Recoverable amount is higher of

fair value less cost to sell value in use (discounted CF)

Discounting required in

Evaluation stage

For an asset in use, undiscounted future cash flows from use establish recoverability and fair value used for the impairment calculation Discounting occurs only in the valuation stage

Impairments more likely under IFRS!!

Impairment – Long-lived assets and

finite-life intangible assets

Timing of impairment tests same as Canadian GAAP Estimate recoverable amount for

individual asset or, if not possible the asset’s cash-generating unit

Apply CGU concept when asset does not generate cash inflows which are independent from other assets

similar to “asset group” but could have differences

Presume future cash flows beyond initial 5 years not reliable

extrapolation based on steady or declining rate of growth

Reverse impairment charges if circumstances change

Property, Plant & Equipment and Investment Property (IAS 16, IAS 40)

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PP&E – Recognition and measurement Components approach – more rigorously applied

and broader than under Canadian

allocate cost to significant parts of the asset (including non physical components such as major overhaul/inspection)

Borrowing costs directly attributable to construction of “qualifying” assets – must be

capitalized

Subsequent measurement options are cost or revaluation model; apply to all items in a category of PP&E 17

Investment property – Two options Property held for rental or capital appreciation Fair value model

Initially measure at cost Adjust carrying value to fair value Do not deduct disposal costs in arriving at FV Recognize changes in FV in P&L, not equity No depreciation or impairment losses

Cost model

Initially measure at cost Depreciate Impairment losses Determine and disclose fair value

Apply accounting policy choice to all investment properties

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Pension and Post Employment Benefits (IAS 19)

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Defined benefit pension plans and OPEBs –

Actuarial gains and losses

Can choose to recognize:

immediately in equity (with no amounts ever recognized in P&L); or

using corridor method; or another systematic approach to recognize faster

Required to apply accounting policy choice consistently to all plans 20

Defined benefit pension plans and OPEBs – Past service costs Accelerated recognition of past service costs relative to Canadian GAAP Recognize past year service cost on straight-line basis over average remaining vesting period To the extent that benefits are already vested at time of amendment, recognize past service costs

immediately

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Provisions (IAS 37)

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Scope of IAS 37 – Provisions Applies to all enterprises in accounting for provisions, contingent liabilities and contingent assets, except

those covered by another IFRS (e.g. financial instruments, insurance contracts, employee benefit obligations)

HB 1000 EIC-60, 134, 135, 159 IAS 37

(IFRIC I, 5, 6)

HB 3290 HB 3110

Provisions – liabilities of uncertain timing or amount

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Provisions – Recognition and measurement Recognize if probable a liability has been incurred Recognize on basis of legal OR constructive obligation Probable = “More likely than not” rather than “likely” Measure at “best estimate” – may be one of

most likely outcome

– single best estimate

expected value

– probability weighted expected value

midpoint

– where a range of probable estimates

Discounting required when effect is material

More items to be recognized…measurement may differ

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Measurement Provisions under IAS 37 Loss contingencies Asset retirement obligations and restructuring liabilities IFRS Best estimate Canadian GAAP Best estimate

amount required to settle at balance sheet date

or

transfer to a third party

Best estimate Reasonable estimate

of ultimate loss (or low end of range if no estimate more likely than any other)

Best estimate Fair value

(amount liability could be settled for in a current transaction by willing parties)

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Other Potential Differences

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Related Parties

No special rules – RPTs accounted for in accordance with requirements of relevant IFRSs Should take into account substance over form – Consider transactions with shareholder, particularly non reciprocal amounts received in the form of cash or non monetary assets –  If any possibility of having to repay, then recognize liability  If no requirement to repay under any circumstance, then normally will be an equity contribution and not income potential issue for GBE/GBTOs —applicability of PS3800

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Other Potential Differences Revenue recognition

Don’t blindly assume that your revenue recognition policies are consistent with IFRS

Accounting for Investments

No VIE standard; consolidate controlled SPEs No exemption from consolidation of subsidiaries; no AcG-18 equivalent standard

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Implementation Key Success Factors

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Two Sources 1) IFRS Implementation Experience from Europe and Australia 2) The Canadian Experience with Significant Accounting Changes in the Public Sector 30

Experiences from Europe and Australia Companies found that they

 Underestimated the effort needed to convert  Lacked early support from senior management  Waited too long to get started  Suffered from poor project management  Failed to fully embed IFRS into their primary systems

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More experiences from Europe and Australia Companies found that they

 Invested heavily in training finance & accounting staff  Required systems upgrades / adjustments (IT and management reporting systems)  Needed to renegotiate contracts (e.g. bank and compensation agreements)  Spent considerable time

communicating with stakeholders

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Key Success Factors 1) Support from highest levels of management

 Corporate Priority

2) A robust & flexible project plan

    Accounting & Financial Reporting Systems People/Training Operations/Business/External

3) A multi-functional implementation team 4) An energetic and dedicated team leader committed to successful completion 5) Prioritization of tasks (Complexity, Time & Resource Requirements, Risk, Momentum) 33

Key Success Factors 6) Resources (financial, human, technical) 7) Engaging non-financial managers and staff 8) Communications / Managing Expectations 9) Engaging external stakeholders consistently (Audit Committee, Board, TBS, OAG) 10)Seek value-added benefits:

enhance skill / knowledge of financial and non-financial staff streamline and standardize processes enhance your control environment improve knowledge of organization cross-functional interaction

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Questions?

Andrew C. Newman Partner [email protected]

613-212-2877 35