Communications About IFRS Changeover

Peter Chant, FCA, Deloitte & Touche LLP

MD&A Disclosure of Pre-2011 IFRS Conversion Issues:

Anticipating the IFRS Restatement Process

Peter D. Chant FCA

Agenda

• Some background – what are we trying to communicate and what are the challenges?

• Recommendations of the CICA’s Corporate Performance Reporting Board – including example disclosures

• Some practical examples

Questions will be solicited at the end of each section and at the end of the formal presentation

Challenges

• Users’ perspective– Distinguishing between changes in expected or reported performance as

the result of changes in the underlying business, and as the result of changing reporting bases;

– Being aware of any one-time effects of adopting IFRS on the business or financial reports

• Preparers’ perspective– Understanding the scope of the conversion process, and the appropriate

timelines– Understanding the strategic and tactical issues in conversion, and the

incentives and disincentives for communicating

• Regulators’ perspective– Ensuring communication of material changes and risks

Users’ Concerns about IFRS changeover plans

• Users’ perspective: – IFRS 1 protocol re: changeover to IFRS in 2011 only requires restatement of

previously published 2010 income statement numbers, concurrent with first time adoption (in 2011) • 2010 IFRS numbers will (generally) not be published simultaneously with

2010 Canadian GAAP numbers • Reconciliation between Canadian GAAP 2010 numbers and IFRS 2010

numbers only published at beginning of 2011, along with restated 2010, and new 2011 numbers

• How will 2011 IFRS based forecasts get prepared in 2010 or earlier? – Analysts will have to develop pre-2011 expectations of 2011 IFRS numbers

either:• On their own• Using incomplete financial statement disclosures of preparers or• By early disclosure of 2010 IFRS compliant results (and 2011 IFRS guidance)

Preparers’ Concerns about IFRS changeover plans

• Preparers’ perspective:– Real deadlines may be earlier that 1/1/2011: 2011 guidance to investors may

motivate earlier deadline (or defer guidance?)– Internal processes may also motivate earlier deadline :

• IFRS compliant numbers needed by compensation committees to set benchmarks for payments of bonuses, etc.

• Compliance with covenants should be established at other than last moment – need to obtain agreements with lenders on GAAP

– Attributes of IFRS 1 may provide a disincentive to early publication of IFRS compliant financial statements:

• IFRS 1 option to deem fair value of selected items of PP&E as cost may motivate strategic behaviour: which assets to fair value?

• Adoption of new IFRS standards in 2011 (revenue, financial statement presentation, joint ventures) may also provide disincentive for early adoption

• Actual financial situation as at end of 2010 e.g. status of debt covenants may influence entity’s choices for opening balances of 2010 IFRS statements i.e. impairments, reversals, and surpluses

• Reluctance to approach lenders until credit situation is stabilized

Regulators’ concerns about IFRS changeover plans

• CSA Staff Notice 52-320 identifies disclosure of pre-2011 IFRS changeover plans in MD&A as element of discussion of changes in issuer’s accounting policies:– Initially qualitative assessment of process– Closer to changeover date, more detailed information expected on effects of

changeover– Disclosure would consider:

• Accounting policies – including choices, implementation decisions (if made)• IT and systems implications• Internal control issues• Disclosure controls • Accounting expertise • Impact on business policies and practices

– Similar requirements for investment funds

Guidance from the CICA’s CPRB

• CICA’s Canadian Performance Reporting Board develops guidance on MD&A disclosures and related elements of financial reporting beyond the financial statements

• In September 2008 published guidance on Pre-2011 Communications about IFRS conversion

• Guidance focuses on:– Scope of conversion plans– Challenges of incomplete information and communicating project

in process in Canadian legal and regulatory environment– Sample disclosure of process

CPRB: Pre-2011 Communications about IFRS Conversion

Outline of CPRB recommendations

• Changeover plan should be broad-based, assess resources needed and progress against plan

• Changeover affects should focus on:– material accounting standards changes, – selection of accounting policies,– development of competencies– business policy assessments, – timing and testing of system design changes

• Focusing on Key Performance Indicators (“KPIs”) may relieve pressure to provide complete financial statements while matters unresolved

• Separate communications should be published when all decisions are finalized, including impact on all KPI’s

• Also need to communicate effects of conversion on material agreements, activities in progress, ICFR and DC&P and a caveat…

Pre-2011 Communications about IFRS Conversion

Pre-2011 Communications about IFRS Conversion

Pre-2011 Communications about IFRS Conversion

BMO Financial Group 191st Annual Report 2008

Transition to International Financial Reporting Standards

Canadian public companies will be required to prepare their financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board, for financial years beginning on or after January 1, 2011. Effective November 1, 2011, we will adopt IFRS as the basis for preparing our consolidated financial statements. We will issue our financial results for the quarter ended January 31, 2012 prepared on an IFRS basis. We will also provide comparative data on an IFRS basis, including an opening balance sheet as at November 1, 2010.

In order to meet the requirement to transition to IFRS, we have established an enterprise-wide project and formed an executive steering committee. We are following a transition plan comprised of three phases: IFRS diagnostic assessment, implementation and education, and completion of all integration systems and process changes. We are on track, having completed the diagnostic phase of our project, and we have entered the early stages of the implementation and education phase of our plan. Due to anticipated changes in International Accounting Standards prior to our transition to IFRS, we are not in a position to determine the impact on our financial results.

Bombardier Q3 2008 MD&A

International Financial Reporting Standards

In February 2008, the AcSB confirmed that Canadian GAAP for publicly accountable enterprises will be converged with IFRS effective in calendar year 2011, with early adoption allowed starting in calendar year 2009. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on recognition, measurement and disclosures. In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date. The International Accounting Standard Board (IASB) will also continue to issue new accounting standards during the conversion period, and as a result, the final impact of IFRS on the Corporation’s consolidated financial statements will only be measured once all the IFRS applicable at the conversion date are known.

For the Corporation, the changeover to IFRS will be required for interim and annual financial statements beginning on February 1, 2011. As a result, the Corporation has developed a plan to convert its Consolidated Financial Statements to IFRS. The Corporation has also set up IFRS dedicated teams at all levels of the organization. The Corporation has provided training to key employees and is monitoring the impact of the transition on its business practices, systems and internal controls over financial reporting.

A detailed analysis of the difference between IFRS and the Corporation’s accounting policies as well as an assessment of the impact of various alternatives are in progress. Changes in accounting policies are likely and may materially impact the Corporation’s Consolidated Financial Statements.

Telus Corporation – 2008 Q3 MD&A

There are several phases that the Company will have to complete on the path to changing over to IFRS-IASB

Implementation phase

Description and status

Initial impact assessment and scoping

This phase includes the identification of significant differences between existing Canadian GAAP and IFRS-IASB, as relevant to the Company’s specific instance.

Based on the current state of IFRS-IASB, this phase identified a modest number of topics possibly impacting either the Company’s financial results and/or the Company’s effort necessary to change over to IFRS-IASB. The IASB has activities currently underway which may, or will, change IFRS-IASB and such change may, or will, impact the Company. The Company will assess any such change as a component of its key elements phase.

Key elements This phase includes identification, evaluation and selection of accounting policies necessary for the Company to change over to IFRS-IASB. As well, this phase includes other operational elements such as information technology, internal control over financial reporting and training.Currently underway are the identification, evaluation and selection of accounting policies necessary for the Company to changeover to IFRS-IASB; consideration of impacts on operational elements such as information technology and internal control over financial reporting, are integral to this process. Targeted training activities which leveraged both internal and external resources, occurred during the current reporting period. Although its impact assessment activities are underway and progressing according to plan, continued progress is necessary before the Company can prudently increase the specificity of the disclosure of pre-and post-IFRS-IASB changeover accounting policy differences.

Embedding This phase will integrate the solutions into the Company’s underlying financial system and processes that are necessary for the company to change over to IFRS-IASB.

Abbey National PLC

Transition to IFRS

Restatement of 2004 Financial Information from UK GAAP to IFRS

Abbey National PLC -Annual Report 2004

From 1 January 2005, the Group has been using IFRS as its primary financial reporting framework. Although the move to IFRS can significantly change the timing of earnings recognition in financial results and the level of reported earnings, it is important to note that there is no IFRS impact on business fundamentals and cash flows.

The most significant item impacting on the Group’s ordinary shareholders’ equity is the recognition of the Group’s net pensions deficit on balance sheet. Leasing and the write off of certain intangible assets also have an impact.

The most significant item impacting the Group’s total assets is the gross up of the Group’s mortgage securitization entities assets and liabilities, which were previously accounted for under UK GAAP using the linked presentation approach.

Abbey National PLC

2005 report: Hedging/Fair Value

• “As Abbey’s business model is now primarily structured to maximise use of the fair value option under IFRS, the group decided to cease claiming any hedge accounting for US GAAP purposes, and de-designated all its hedges under U.S. GAAP from 1 January 2005 in order to reduce the administrative burden on the group. In addition, the effects of applying hedge accounting under IFRS have been reversed.”

Alternative Perspectives on Pre-conversion Disclosure

Rio Tinto 2005 International financial reporting standards Salient points for year ended 31 December 2004 The change to reporting under IFRS does not affect the cash flow generation of Rio Tinto businesses and hence will not affect any commercial decisions.• 2004 IFRS reported cash flow from operations, which includes dividends from equity accounted joint ventures and associates, is $4.5 billion pre-tax.• Net debt of $3.8 billion is practically unchanged under IFRS.• IFRS Net Earnings were $405 million higher than UK GAAP Net Earnings (which included the amortization of goodwill).• To enhance understanding of the performance of Rio Tinto businesses an alternative earnings measure, Underlying Earnings, will be presented in addition to Net Earnings.• IFRS Underlying Earnings for 2004 were $2,272 million which compares with $2,221 million for UK GAAP Adjusted Earnings (which included the amortization of goodwill).• Shareholders’ equity at 31 December 2004 is $707 million (six per cent) lower than UK GAAP.The amounts presented in this release do not reflect IAS 39 “Financial Instruments: Recognition and Measurement” which will be adopted with effect from 1 January 2005.

Alternative Perspectives on Pre-conversion Disclosure

BHP Billiton 2005 MD&A:Impact of Adopting International Financial Reporting Standards  

For reporting periods beginning on or after 1 January 2005, BHP must comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. BHP structure results in two entities with their own statutory reporting obligations, one in the UK and the other in Australia. While the UK and Australia are transitioning to IFRS-based financial reporting regimes in the same timeframe, the structure creates unique IFRS implementation issues, including:

   (i)in the UK, listed groups are required to comply with IFRS as endorsed by the European Commission (EC); there is a risk that IFRS as endorsed by the EC at 30 June 2006 may not be consistent with IFRS applicable in Australia;  

  (ii)the Australian Accounting Standards Board has approved IFRS-based standards, some of which mandate particular policies that are optional (and not applied uniformly by other entities) in the UK; and  

  (iii)continued development and interpretation of IFRS prior to 30 June 2006 that could affect the ultimate difference between current reporting frameworks and IFRS applicable in each jurisdiction.  Accordingly, significant uncertainty remains as to the ultimate impact of IFRS on BHP’s financial statements.

Concluding observations

• IFRS changeover is unlikely to be a simple matter:– to execute: many moving parts, some strategic considerations– to communicate: early disclosure may be incomplete and subject to change, late

disclosure may be less relevant• Disclosure in financial statements required by IFRS 1 appears likely to be quite late in

the “normal” disclosure calendar for user purposes• Uncertainty in the economic environment as well as negotiations with lenders may

motivate delay in making significant decisions• Same pressures motivate investors’ need for data earlier to assess risks• Focusing on KPIs may make the communications task more manageable, relevant to

investors and users with incomplete information• Challenge is to provide meaningful information to users without compromising

process: an interesting communications challenge!