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IFRS Implications for the Public Sector
Andrew Newman, Audit Partner, Public Sector
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Agenda
Canada’s Plan to Adopt IFRSCanada’s Plan to Adopt IFRS
IFRS-Canadian GAAP Similarities and DifferencesIFRS-Canadian GAAP Similarities and Differences
Key Success FactorsKey Success Factors
Q & AQ & A
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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 enterprisesCanadian GAAP will cease for publicly accountable enterprises
Change-over date to IFRS now confirmed as fiscal years Change-over date to IFRS now confirmed as fiscal years beginning on or after January 1, 2011beginning on or after January 1, 2011
Currently “publicly accountable enterprises” defined to be Currently “publicly accountable enterprises” defined to be entities that:entities that:
Issued any class of instruments in a public market; andIssued any class of instruments in a public market; and
Hold assets in a fudiciary capacity for a broad group of outsiders.Hold assets in a fudiciary capacity for a broad group of outsiders.
Publicly accountable enterprises include Government Business Publicly accountable enterprises include Government Business Enterprises and Government Business Type OrganizationsEnterprises and Government Business Type Organizations
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Private Enterprises
AcSB has announced intention to develop unique set of AcSB has announced intention to develop unique set of standards for private enterprisesstandards for private enterprises
Two key premises:Two key premises:
The majority of the recognition and measurement standards in the The majority of the recognition and measurement standards in the existing Handbook are relevant to Canada’s private business and existing Handbook are relevant to Canada’s private business and will be retained with few, if any, modifications will be retained with few, if any, modifications
Financial statement disclosure requirements will be considerably Financial statement disclosure requirements will be considerably fewer than in the existing Handbook. fewer than in the existing Handbook.
Moving quickly—anticipated to be completed by end of 2008.Moving quickly—anticipated to be completed by end of 2008.
Proposed approach and working drafts of some sections Proposed approach and working drafts of some sections published on August 28published on August 28thth..
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Not-for-Profit Organizations
AcSB has not mandated adoption of IFRS by NPOsAcSB has not mandated adoption of IFRS by NPOs
AcSB actively discussing the future direction of accounting AcSB actively discussing the future direction of accounting standards for NPOsstandards for NPOs
Possible options include:Possible options include:
Providing a set of over-arching standards (liks S4400) that address Providing a set of over-arching standards (liks S4400) that address unique aspects of NPOsunique aspects of NPOs
Allowing NPO’s to select between IFRS and private business Allowing NPO’s to select between IFRS and private business GAAP, under the umbrellas of the over-arching NPO standardsGAAP, under the umbrellas of the over-arching NPO standards
Allowing, or requiring, the “SUCH” sector (schools, universities, Allowing, or requiring, the “SUCH” sector (schools, universities, colleges, hospitals) to adopt PSAB standardscolleges, hospitals) to adopt PSAB standards
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Governments
PSAB has not signalled that governments or PSAB has not signalled that governments or government NPOs will be required to adopt IFRSgovernment NPOs will be required to adopt IFRS
International Public Sector Accounting Standards International Public Sector Accounting Standards Board:Board:
Currently no plan to implement international Public Currently no plan to implement international Public Sector standards in CanadaSector standards in Canada
IPSASB relocated to TorontoIPSASB relocated to Toronto
Canada has two members on IPSASB (Rick Neville & Canada has two members on IPSASB (Rick Neville & Sheila Fraser)Sheila Fraser)
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IFRS - Canadian GAAP Similarities and Differences
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Timeline for adoption of IFRS
IFRSgo-live
Dec 31/08 Jan 1/10 Jan 1/11Jan 1/08
Calendar year periods beginning
Changeover date announced
IFRSComparative
figures
IFRS Opening Balance Sheet
Update convergence planand standards whichmay have material
effect in greater detail
Disclosureof plan for convergenceand anticipated effects
Last reportingunder
Canadian GAAP
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IFRS versus Canadian GAAP – Similarities
Comprehensive set of principles-based standardsComprehensive set of principles-based standards
Similar to Canadian GAAP in structure and formSimilar to Canadian GAAP in structure and form
Similar basic concepts and recognition / measurement principlesSimilar basic concepts and recognition / measurement principles
Similar structure and content of financial statementsSimilar structure and content of financial statements
Many standards in IFRS provide similar approach as Canadian GAAPMany standards in IFRS provide similar approach as Canadian GAAP
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IFRS versus Canadian GAAP – Differences
Fewer bright lines and rulesFewer bright lines and rules
Some standards in IFRS differ Some standards in IFRS differ considerablyconsiderably from Canadian GAAP – from Canadian GAAP – e.g. impairments, e.g. impairments, provisionsprovisions
More accounting policy choices and less interpretative guidanceMore accounting policy choices and less interpretative guidance
Applying IFRS requires more professional judgement and results in greater volume of Applying IFRS requires more professional judgement and results in greater volume of disclosuresdisclosures
Many differences in application/interpretationMany differences in application/interpretation
BE CAREFULBE CAREFUL – – The devil is in the detail! The devil is in the detail!
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IFRS versus Canadian GAAP:Areas with more significant differences
Impairment of assetsImpairment of assets Provisions Provisions (incl. asset(incl. asset retirement obligations)retirement obligations)
Financial instruments & Financial instruments & hedginghedging
LeasesLeases
Property, plant and Property, plant and equipmentequipment
Employee benefitsEmployee benefits
Securitizations Securitizations Stock-based compensationStock-based compensation
Accounting for tax Accounting for tax uncertaintiesuncertainties
Consolidations, SPEs, Consolidations, SPEs, investments, JVsinvestments, JVs
Rate-regulated operations Rate-regulated operations Industry-specific issues – Industry-specific issues – insurance, extractive industriesinsurance, extractive industries
Fundamentally different from Canadian GAAPFundamentally different from Canadian GAAP
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Impairment of Assets(IAS 36)
Impairment – Summary of approach
Recoverable amount is higher Recoverable amount is higher ofof
fair value less cost to sellfair value less cost to sell
value in use (discounted value in use (discounted CF)CF)
For an asset in use,undiscounted future cash flowsfrom use establish recoverability
and fair value used for the impairment calculation
Discounting occurs only inthe valuation stage
IFRS has one general impairment standardCanadian GAAP – “2-step process”
IFRS – “1-step process”
Impairments more likely under IFRS!!
Discounting required inDiscounting required in Evaluation stageEvaluation stage
Impairment – Long-lived assets and finite-life intangible assets
Timing of impairment tests same as Canadian GAAPTiming of impairment tests same as Canadian GAAP
Estimate recoverable amount forEstimate recoverable amount for
individual asset or, if not possibleindividual asset or, if not possible
the asset’s cash-generating unitthe asset’s cash-generating unit
Apply CGU concept when asset does not generate cash Apply CGU concept when asset does not generate cash inflows which are independent from other assets inflows which are independent from other assets
similar to “asset group” but could have differencessimilar to “asset group” but could have differences
Presume future cash flows beyond initial 5 years not Presume future cash flows beyond initial 5 years not reliablereliable
extrapolation based on steady or declining rate of growthextrapolation based on steady or declining rate of growth
Reverse impairment charges if circumstances changeReverse impairment charges if circumstances change
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Property, Plant & Equipment and Investment Property
(IAS 16, IAS 40)
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PP&E – Recognition and measurement
Components approach – Components approach – more rigorously applied more rigorously applied and broader than under Canadian and broader than under Canadian
allocate cost to significant parts of the asset (including non-allocate cost to significant parts of the asset (including non-physical components such as major overhaul/inspection)physical components such as major overhaul/inspection)
Borrowing costs directly attributable to Borrowing costs directly attributable to construction of “qualifying” assets – construction of “qualifying” assets – must be must be capitalized capitalized
Subsequent measurement options are cost or Subsequent measurement options are cost or revaluation model; apply to all items in a category revaluation model; apply to all items in a category of PP&Eof PP&E
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Investment property – Two options
Fair value modelFair value modelInitially measure at costInitially measure at cost
Adjust carrying value to Adjust carrying value to fair valuefair value
Do not deduct disposal Do not deduct disposal costs in arriving at FVcosts in arriving at FV
Recognize changes in Recognize changes in FV in P&L, not equityFV in P&L, not equity
No depreciation or No depreciation or impairment lossesimpairment losses
Cost modelCost modelInitially measure at costInitially measure at cost
DepreciateDepreciate
Impairment lossesImpairment losses
Determine and disclose Determine and disclose fair valuefair value
Apply accounting policy choice to all investment properties
Property held for rental or capital appreciationProperty held for rental or capital appreciation
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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
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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, Applies to all enterprises in accounting for provisions, contingent liabilities and contingent assets, exceptcontingent liabilities and contingent assets, except
those covered by another IFRSthose covered by another IFRS (e.g. financial instruments, (e.g. financial instruments, insurance contracts, employee benefit obligations)insurance contracts, employee benefit obligations)
Provisions – liabilities of uncertain timing or amount
IAS 37(IFRIC I, 5, 6)
EIC-60, 134, 135, 159
HB 3110
HB 1000
HB 3290
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Provisions – Recognition and measurement
Recognize if probable a liability has been incurredRecognize if probable a liability has been incurred
Recognize on basis of legal OR constructive obligationRecognize on basis of legal OR constructive obligation
Probable = “More likely than not” rather than “likely”Probable = “More likely than not” rather than “likely”
Measure at “best estimate” – Measure at “best estimate” – may be one ofmay be one of
most likely outcomemost likely outcome – single best estimate – single best estimate
expected valueexpected value – probability weighted expected value – probability weighted expected value
midpointmidpoint – where a range of probable estimates – where a range of probable estimates
Discounting required when effect is materialDiscounting required when effect is material
More items to be recognized…measurement may differ
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Measurement
IFRSIFRS Canadian GAAP
Provisions under Provisions under IAS 37IAS 37
Best Best estimateestimate
Best estimateBest estimateamount required to settle at balance amount required to settle at balance sheet date sheet date oror transfer to a third party transfer to a third party
Loss Loss contingenciescontingencies
Best Best estimateestimate
Reasonable estimateReasonable estimate
of ultimate lossof ultimate loss (or low end of range if (or low end of range if no estimate more likely than any other)no estimate more likely than any other)
Asset retirement Asset retirement obligations and obligations and restructuring restructuring liabilitiesliabilities
Best Best estimateestimate
Fair value Fair value (amount liability could be settled for in (amount liability could be settled for in a current transaction by willing parties)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 No special rules – RPTs accounted for in accordance with requirements of relevant IFRSsrequirements of relevant IFRSsShould take into account substance over formShould take into account substance over form
– Consider transactions with shareholder, particularly non-Consider transactions with shareholder, particularly non-reciprocal amounts received in the form of cash or non-reciprocal amounts received in the form of cash or non-monetary assets monetary assets If any possibility of having to repay, then recognize If any possibility of having to repay, then recognize
liabilityliability If no requirement to repay under any circumstance, If no requirement to repay under any circumstance,
then normally will be an equity contribution and not then normally will be an equity contribution and not incomeincome
– potential issue for GBE/GBTOs—applicability of PS3800potential issue for GBE/GBTOs—applicability of PS3800
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Other Potential Differences
Revenue recognitionRevenue recognition
Don’t blindly assume that your revenue recognition Don’t blindly assume that your revenue recognition policies are consistent with IFRSpolicies are consistent with IFRS
Accounting for InvestmentsAccounting for Investments
No VIE standard; consolidate controlled SPEsNo VIE standard; consolidate controlled SPEs
No exemption from consolidation of subsidiaries; No exemption from consolidation of subsidiaries; no AcG-18 equivalent standardno AcG-18 equivalent standard
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Implementation Key Success Factors
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Two Sources
1)1) IFRS Implementation Experience from Europe and IFRS Implementation Experience from Europe and AustraliaAustralia
2)2) The Canadian Experience with Significant Accounting The Canadian Experience with Significant Accounting Changes in the Public SectorChanges in the Public Sector
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Experiences from Europe and Australia
Companies found that theyCompanies found that they Underestimated the effort needed to convertUnderestimated the effort needed to convert Lacked early support from senior managementLacked early support from senior management Waited too long to get startedWaited too long to get started
Suffered from poor project managementSuffered from poor project management
Failed to fully embed IFRS into their primary systemsFailed to fully embed IFRS into their primary systems
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More experiences from Europe and Australia
Companies found that theyCompanies found that they
Invested heavily in training finance & accounting staffInvested heavily in training finance & accounting staff
Required systems upgrades / adjustments Required systems upgrades / adjustments (IT and management reporting systems)(IT and management reporting systems)
Needed to renegotiate contracts Needed to renegotiate contracts (e.g. bank and compensation agreements)(e.g. bank and compensation agreements)
Spent considerable timeSpent considerable time communicating with communicating with stakeholdersstakeholders
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Key Success Factors
1)1) Support from highest levels of managementSupport from highest levels of management Corporate Priority Corporate Priority
2)2) A robust & flexible project planA robust & flexible project plan Accounting & Financial ReportingAccounting & Financial Reporting SystemsSystems People/TrainingPeople/Training Operations/Business/ExternalOperations/Business/External
3)3) A multi-functional implementation team A multi-functional implementation team 4)4) An energetic and dedicated team leader committed to An energetic and dedicated team leader committed to
successful completionsuccessful completion5)5) Prioritization of tasks (Complexity, Time & Resource Prioritization of tasks (Complexity, Time & Resource
Requirements, Risk, Momentum)Requirements, Risk, Momentum)
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Key Success Factors
6)6) Resources (financial, human, technical)Resources (financial, human, technical)
7)7) Engaging non-financial managers and staff Engaging non-financial managers and staff
8)8) Communications / Managing ExpectationsCommunications / Managing Expectations
9)9) Engaging external stakeholders consistently (Audit Engaging external stakeholders consistently (Audit Committee, Board, TBS, OAG)Committee, Board, TBS, OAG)
10)10)Seek value-added benefits:Seek value-added benefits:enhance skill / knowledge of financial and non-financial staffenhance skill / knowledge of financial and non-financial staff
streamline and standardize processes streamline and standardize processes
enhance your control environmentenhance your control environment
improve knowledge of organizationimprove knowledge of organization
cross-functional interactioncross-functional interaction
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Questions?
Andrew C. NewmanAndrew C. Newman
PartnerPartner
[email protected]@kpmg.ca
613-212-2877613-212-2877