Accounting Standards for

Private Enterprises

Accounting Standards for Private Enterprises

Brian Drayton Greg Edwards

Partner Principal

Meyers Norris Penny Accounting Standards Board

Presented by

Background

Focus on general purpose financial statements

Different user needs

Lenders vs. equity investors

Ability to request more information

Preparers/auditors often have less accounting resources

Different cost/benefit

3

Private Enterprises – What We Heard

Preparers

Most of current Handbook is fine

Concerns: specific issues and disclosure overload

Limit to how much change can be handled

Change urgently needed

Users

Like current Handbook – incl. disclosures

Recognize preparer issues

Would prefer more GAAP statements

4

Private Enterprises – What We Did

Extensive ongoing consultation

Advisory Committee

Started with existing Handbook

Focused changes on key issues

Eliminated EIC Abstracts

Some material included in standards

Eliminated unnecessary material

5

Exposure Draft

Comment letter deadline July 31, 09

180 responses

Overall the response to the ED was extremely

positive

AcSB met August 25 and Sept 22-23, 09

Standards issued mid December 2009

6

Disclosures

Focus on needs of users in PE market

Most frequent user – creditors

Sufficient information so users can

determine whether they need more -

expectation they can get more on request

Re-examined all disclosures

Significant reduction in disclosure

requirements

7

Disclosures

Two new disclosures included in Exposure Draft in response to user requests

Compensation of key management (as a group)

Amounts payable for government remittances plus any amounts in arrears

Final standards do not include management compensation or government remittances in arrears

Amounts payable for government remittances at year end still required

8

Disclosures

Disclosure Supplement provides all

disclosures in one place

Disclosures are minimum disclosures

Section 1400 fair presentation requirements

may lead to additional disclosures

Not required to disclose information that is

not material

9

Key Problem Areas

Financial Instruments

Employee future benefits

Intangible assets

Goodwill impairment

Stock-based compensation

Asset retirement obligations

Income taxes

Investments

Callable debt

Leases 10

Financial Instruments

Single standard (3856) addresses all financial instruments

Measure at amortized cost, except fair value for Equity securities quoted in an active market Free standing derivatives (that are not a hedge)

Fair value option

No OCI All gains and losses through net income

11

Financial Instruments

One impairment model - write down to higher of PV of expected cash flows from holding the asset

Net amount from selling the asset

Net proceeds from collateral

Preferred shares in tax planning arrangements classified as equity

Convertible debt – conversion option can be measured at zero

Transaction costs expensed if measure at FV

Simplified (but restricted) hedge accounting

12

Employee Future Benefits

Issue: DB accounting is complex, costly

New accounting policy choice

Use funding valuation as basis for

measurement

Immediate recognition - no smoothing

Can still use existing Section 3461

accounting

Must apply same policy to all plans

13

Internally-generated Intangible Assets

Issue: capitalizing development costs

Accounting policy choice

Expense all costs of internally-generated

intangibles; or

Capitalize in accordance with existing

Section 3064

Same policy for all intangibles

14

Impairment of Goodwill and Indefinite Life Intangibles

Issue: Is impairment test required each year?

Retain events and circumstances approach

Issue: Complexity of Goodwill impairment

Simplify test

Goodwill impairment is amount by which BV of

reporting unit > FV

Eliminates need to fair value individual assets

and liabilities

15

Stock-based Compensation

Issue: Seen as complex, not useful

Retain – compensation is an expense

Eliminate minimum value method

Simplification – estimate volatility using

industry index (calculated value method)

Default to broad index if cannot identify

suitable industry index

16

Asset Retirement Obligations

Issue: Fair value of ARO can be complex

to calculate

Simplification – measure at management’s

best estimate

Eliminates complexities of fair value

IAS 37 approach

17

Income Taxes

Issue: Future income taxes are complex,

users often ignore

Retain choice of future taxes or taxes

payable

Disclosures accompanying the taxes payable

method retained

Example provided

18

Subsidiaries, Affiliates, Joint Ventures

Issue: Consolidation, equity accounting are complex, users often want non-consolidated statements

Existing differential treatments in Sections 1590, 3051 and 3055 retained

Choice of methods -- consolidation, cost or equity

AcG-15 retained, pending new global consolidation standard, but can be avoided through non-consolidation policy choice

19

Considered but No Change

Callable loan classification

Users see high value

Display example provided

Leases

Users see high value in capital lease

accounting

20

EIC Abstracts

Not retained in current form

Too rules oriented

Material from 29 Abstracts embedded in proposed standards, primarily:

Financial instruments

Income taxes

Leases

Related parties

Revenues

21

Timing

Effective for fiscal periods beginning on or after January 1, 2011

Early adoption permitted (starting in 2009)

Calendar year-end adoption in 2011

2011 Financial Statements include 2010 comparatives

Prepare opening balance sheet at January 1, 2010

22

Transition Issues

First-time adoption, Section 1500

General approach is retrospective

Optional exemptions (to retrospective application)

Mandatory exceptions (to retrospective

application)

Disclosure

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Transition Issues

First-time adoption

Optional exemptions (to retrospective application)

business combinations

fair value

employee future benefits

cumulative translation differences

financial instruments

share-based payment transactions

asset retirement obligations

related party transactions

24

Transition Issues

First-time adoption

Mandatory exceptions (to retrospective application)

derecognition (of financial assets & liabilities)

hedge accounting

estimates

non-controlling interests

25

Transition Issues

First-time adoption

Disclosure Requirements

changes to retained earnings resulting from

transition

net income reconciliation for comparative year

explanation of material adjustments to cash flow

statement

26

Why would a private company adopt IFRSs?

PE standards is simpler and requires less change

Consider IFRSs if

Possible IPO in next few years

Parent company uses IFRSs

Large number of subsidiaries use IFRSs

Users want your company to report on same basis as public companies

Other reasons?

27

Transition Issues

What now?

Decide: Private Enterprise standards or IFRS

Identify significant changes to your accounting

policies

Consider first-time adoption alternatives

Consider timing

Consider resources to affect the change

28

Impact of new standards on other areas

Contracts: eg., debt covenants

HR: bonus and other incentive schemes

Taxation: effect of GAAP on taxable

income

IT and other data systems

Internal controls

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Keeping up-to-date

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Questions? Comments?

greg.edwards@cica.ca

Questions and Answers