Accounting Standards Oversight Council
Report on Public Meeting
February 12-13, 2009

Accounting Standards Oversight Council considers the response to the economic environment

At its meeting in Toronto on February 12-13, 2009, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:

Current Economic Crisis
Key Strategic Issues in Overseeing the Canadian Standard-Setting Function in the Future and the Infrastructure to Support the AcSB
The AcSB’s Communications Activities
Update on the PSAB/Deputy Ministers Joint Working Group (JWG)
Issues Related to the Adoption of IFRSs for Government Organizations
Recent Activities in Standard Setting

Current Economic Crisis

The causes of the crisis and the prognoses for the short- and long-term
AcSOC received a presentation from Professor Laurence Booth,¹  University of Toronto, on the current economic crisis. He was accompanied by Professor Gordon Richardson,² University of Toronto. Professor Booth summed up the causes of the crisis, its current state, and his prognoses for the short- and long-term. He stated that the US and Canadian stock market collapses were largely due to problems in the US (and United Kingdom) banking systems, including problem loans and mortgages, and the resulting credit market crunch. The housing price bubble in the US (which was much less severe in Canada) stemmed from US government housing policy, enormous liquidity in the financial system and lax financial management of the mortgage market by the banks. Also, unlike banks in Canada, which are well regulated, US banks were poorly regulated.

Professor Booth stated that the US and European banks were trying to rebuild their capital bases and were tightening credit standards, while consumers were simultaneously cutting back on their spending for fear of job losses. He said that such consumer and business thrift in the current circumstances can be disastrous for the world’s economies. The US financial system is still not functioning properly, but, in Canada, Professor Booth believes the credit crisis appears to be passing. He expected the record US fiscal and monetary stimuli to produce results in that country by the third quarter of 2009.

Doug Hyndman, AcSOC Chair, expressed members’ thanks for an enlightening and sobering presentation.

Accounting consequences of the current economic environment
Paul Cherry, Chair, Accounting Standards Board, commented on actions taken by the AcSB and others as a result of the current economic crisis. He said, inter alia, that:

• AcSB staff have issued a fourth Commentary on the accounting implications of the restructuring of Canadian non-bank asset-backed commercial paper.
• In October 2008, in response to similar amendments made by the International Accounting Standards Board (IASB) to conform International Financial Reporting Standards (IFRSs) more closely to US GAAP, the AcSB issued amendments to its corresponding standards to allow reclassification of financial assets in certain narrow circumstances. Mr. Cherry said that the FASB, and probably also the IASB, would be discussing whether they should have formal processes through which changes in standards could be fast tracked. However, the boards do not want to give the impression to stakeholders that standard setters would often fast track changes through the due process system.

AcSB’s strategy to transition to IFRSs for Canadian publicly accountable enterprises for fiscal years beginning on or after January 1, 2011
Mr. Cherry confirmed that the AcSB still intends to make the changeover effective for fiscal years beginning on or after January 1, 2011. AcSOC supported this intention.

Mr. Cherry noted that the AcSB’s decision to cease harmonizing with US GAAP has resulted in Canadian accounting standards, to a certain extent, drifting into “no-man’s land” because Canadian standards are not yet fully aligned with IFRSs. The AcSB is very conscious of this state of affairs, which it views as tolerable only because of the imminent changeover to IFRSs in 2011.

Key Strategic Issues in Overseeing the Canadian Standard-Setting Function in the Future, and the Infrastructure to Support the AcSB

Key strategic issues
Members discussed a paper that articulated three key issues to be considered in determining the extent of any needed changes to the governance over, and structures of, the standards-setting function in Canada. Members agreed that the overarching issues were:

• Canada should maintain a strong standard-setting capability to serve the following constituencies:

  —	Publicly accountable enterprises;
  —	Non-publicly accountable enterprises;
  —	Not-for-profit organizations; and
  —	Public sector entities.

• AcSOC has a responsibility to ensure the independence of the standard-setting function and that the AcSB’s and PSAB’s activities are true to their mission and serve the public interest.
• AcSOC acknowledges that the current funding arrangements for the standard-setting function in Canada have served the public interest well, but considers that additional sources of funding should now be sought to ensure the adequacy and sustainability of funding, while ensuring that there is no appearance of a lack of independence.

Infrastructure to support the AcSB
Members received and discussed a paper setting out a possible future structure for the private-sector accounting standard-setting function in Canada. Members expressed their qualified support for a structure (similar to the current model) that would provide for a single board, reporting to AcSOC, with sole responsibility for maintaining GAAP for publicly accountable enterprises, private enterprises and not-for-profit organizations. (GAAP for public sector entities would remain under PSAB.) Under this structure, the AcSB would seek advice from three standing advisory committees, one for each category of reporting entity. Each advisory committee would be chaired by a board member and its membership would comprise an additional board member plus a range of individuals knowledgeable about accounting by enterprises within the particular committee’s mandate. These advisory committees would have authority to recommend proposals to the board and to develop proposals as requested by the board. However, the board would retain authority for final decisions. The direct links between the board and the advisory committees would ensure co-ordination of all activities. Members expressed a concern that the proposed structure might be too elaborate. They also suggested that any new model be reassessed about three years following implementation, in the light of experience gained, both in Canada and elsewhere.

Members endorsed the AcSB’s plan to set up a broadly constituted discussion group to provide a Canadian forum for the identification of issues that might require standard setting or interpretive solutions by the AcSB or by the IASB. Such a group would also provide an organized forum to discuss practical problems, and possible solutions, arising in Canada. It should be emphasized that such a group would not provide interpretations.

The AcSB’s Communications Activities

Peter Martin, Director, Accounting Standards, updated members on the AcSB’s communications activities. Members suggested, inter alia, that:

• key financial reporting blogs should be monitored regularly and serious instances of misinformation should be countered;
• the AcSB should strive to make its communications concise and easily understood;
• the AcSB should co-operate with others in an effort to restore public confidence in financial reporting generally;
• staff should prepare a concise communication as to why 2011 is still appropriate for the changeover to IFRSs for Canadian publicly accountable enterprises;
• the AcSB should make optimal use of electronic communications and reduce reliance on hard copy communications; and
• the AcSB’s website should be revamped to make it more user friendly.

Update on the PSAB/Deputy Ministers Joint Working Group (JWG)

Tim Beauchamp, Director, Public Sector Accounting, updated members on the activities of the JWG, which comprises selected PSAB members and Deputy Ministers of Finance from senior Canadian governments. The JWG was formed to accomplish two objectives: to improve the relationship and communications between PSAB and this major stakeholder group, and to explore concerns of governments about the effect of PSAB’s conceptual framework on how they report and explain their fiscal policy frameworks.

Mr. Beauchamp commented on the recommendations contained in papers that JWG sub-groups had developed and previously presented to PSAB on:

• the conceptual framework;
• PSAB’s governance and standard-setting process; and
• proposed changes in accounting standards in the following specific areas:

  —	government transfers – recipients;
  —	financial instruments;
  —	government business organizations; and
  —	line-by-line consolidation of broader public sector organizations.

Mr. Beauchamp stated that the above recommendations were presented as viable, but non-binding, options for PSAB to consider, that all recommendations regarding standards are subject to PSAB’s normal due process, and that governance issues are subject to consideration and approval by AcSOC, where appropriate. He said that a key benefit of the JWG process is that the Deputy Ministers have become better informed about PSAB and its processes, and communications with these key stakeholders have improved. In addition, PSAB has become more aware of the issues facing governments. Mr. Beauchamp commented that an important consideration is that there is not always unanimity between senior governments on various issues, which compounds the difficulty in arriving at a solution acceptable to all parties.

Issues Related to the Adoption of IFRSs for Government Organizations

The Public Sector Accounting (PSA) Handbook currently directs government business enterprises (GBEs) and government business-type organizations (GBTOs) to prepare their financial statements in accordance with GAAP for publicly accountable enterprises. Effective January 1, 2011, under the AcSB’s strategic plan, GAAP for publicly accountable enterprises will be IFRSs.

PSAB previously considered whether GBEs and GBTOs should use IFRSs or another basis of accounting. PSAB concluded that the only suitable alternative is to use IFRSs, since private enterprise GAAP is under development, and not-for-profit organizations GAAP is inappropriate for these organizations. Also, the PSA Handbook is designed for governments, not for enterprises.

Subsequently, the Canadian Council of Comptrollers General and the JWG raised concerns about the potential application of IFRSs to GBEs and GBTOs. Among other things, they note that most GBEs and GBTOs do not meet the definition of “publicly accountable enterprises” as defined by the AcSB.

PSAB has agreed to consider the issue again. AcSOC members expressed concern that GBEs and GBTOs might delay planning for the transition to IFRSs while PSAB reviews the issue. Members suggested that PSAB issue a communication targeted to these organizations that they should not change their plans to adopt IFRSs in anticipation of any changes PSAB may make. To solicit input from stakeholders, PSAB will be issuing an Invitation to Comment (ITC) addressing the issue of using IFRSs in the public sector. AcSOC members advised PSAB to react quickly once it received comments on the ITC.

Recent Activities in Standard Setting

PSAB activities
Nola Buhr, Chair of PSAB, provided an update on PSAB’s recent activities and technical agenda items. She also commented, inter alia, on:

• PSAB’s international activities and stated that PSAB was encouraging public comment, via a link on its website, on a Consultation Paper, “Conceptual Framework, Phase I” (objectives, scope, qualitative characteristics and the reporting entity), released by the International Public Sector Accounting Standards Board;
• recent communications activities to important stakeholders; and
• a survey sent to stakeholders requesting them to rank the relative importance of potential PSAB projects.

AcSB activities
Paul Cherry and Peter Martin updated members on matters of interest, including the following:

• The AcSB continues to make good progress in implementing its strategy for adopting IFRSs for publicly accountable enterprises.
• An issue has recently arisen concerning the basis for preparing interim financial statements in the initial year of IFRS adoption. The AcSB decided early in the development of its strategic plans that financial statements prepared on a GAAP basis for any interim periods within the 2011 fiscal year should be prepared in accordance with IFRSs. Questions have been raised about the possibility of permitting or requiring publicly accountable enterprises to report their published quarterly financial statements during 2011 on the basis of pre-changeover Canadian GAAP and switch to IFRSs in preparing their annual financial statements for 2011. Members strongly suggested that it would be unsatisfactory for financial statements to be prepared on a non-IFRS basis for any interim periods within the changeover year. They also suggested it would be desirable to provide non-authoritative guidance on the disclosure requirements, and general approach to presentation, for the interim financial statements for the changeover year.
• The IASB has issued an Exposure Draft on consolidated financial statements. The AcSB subsequently issued an Exposure Draft proposing to incorporate the new IASB proposals into Canadian GAAP as part of the IFRSs to be adopted by publicly accountable enterprises on the changeover to IFRSs. Final standards from the IASB and AcSB are expected in the second half of 2009.
• The AcSB continues to make progress in developing a new set of standards for private enterprises and expects to be able to approve an exposure draft of the entire new set of standards by the end of March. Portions of the material have been issued informally for comment already and the substance of the changes from current GAAP requirements have been publicized widely. The target is to issue the standards in final form in late 2009, to permit their application for fiscal years ending December 31, 2009. Publication of the exposure draft will be accompanied by a further round of communication activities and staff support of professional development programs and implementation aids to facilitate the adoption of the standards. The AcSB will review the implementation of the proposed new standards in Canada, and also monitor the IASB’s progress in developing standards for private enterprises, over the next few years.

Financial Reporting by Not-for-Profit Organizations – Invitation to Comment
Peter Martin and Tim Beauchamp highlighted matters discussed in an Invitation to Comment, “Financial Reporting by Not-for-Profit Organizations,” that was issued jointly by the AcSB and PSAB in December 2008 (with a comment period ending on June 30, 2009) to invite feedback on the future of financial reporting by not-for-profit organizations. A number of members suggested that there was a need to issue guidance for this sector as soon as possible.

IASB activities
Tricia O’Malley provided an update on IASB-related activities that will affect the activities of the AcSB, including details of the current IASB technical agenda and its activities in response to the current economic environment. She commented that work has accelerated on the rate-regulated activities project and that an exposure draft is expected to be issued in the second half of this year. Also, an exposure draft is expected shortly on the project covering the derecognition of financial assets and liabilities. The aim of this project is to improve the existing derecognition requirements in IAS 39, Financial Instruments: Recognition and Measurement, which have been perceived to be difficult to understand and apply in practice.

She also stated that the International Accounting Standards Committee Foundation (IASCF) had completed the first phase of its Constitution Review and had now commenced the second phase of its review, requesting comments by March 31, 2009. She asked AcSOC members to consider matters that should be included in a letter of comment to the IASCF on its review. Members agreed that staff should prepare a draft letter that would be circulated to them for comment. The final letter would be signed by the AcSOC and AcSB Chairs.

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¹   CIT Chair in Structured Finance and Professor of Finance, Rotman School of Management.
²   KPMG Professor of Accounting, Rotman School of Management.

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The AcSB and the PSAB are each accountable to AcSOC, an independent body established in September 2000 by the Canadian Institute of Chartered Accountants to oversee their activities. Reporting to the public and consisting of up to 25 prominent business and government leaders, AcSOC brings a broad perspective to complex issues facing standard setters in both the private and public sectors. AcSOC supports the AcSB and the PSAB in setting accounting standards in Canada and in contributing to the development of internationally accepted accounting standards. AcSOC's responsibilities include appointing AcSB and PSAB members, providing input on strategic priorities, and evaluating the boards’ performance. AcSOC members, many of whom represent particular constituencies, include regulators, investors and other users, preparers and auditors of financial reports.