Accounting Standards Oversight Council
Report on Public Meeting
June 11-12, 2009

Accounting Standards Oversight Council considers the response to the economic environment

At its meeting in Calgary on June 11-12, 2009, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:

Current Economic Environment
AcSB’s and PSAB’s Performance
Presentation on the PSAB/Deputy Ministers Joint Working Group (JWG)
Issues Related to the Adoption of IFRSs in the Public Sector
Entity Level Financial Statements in the Public Sector
Canadian Public Accountability Board
Recent Activities in Standard Setting

Current Economic Environment

Members were updated on the activities of the IASB, FASB and AcSB relative to the current economic environment.

IASB activities
Members noted that governments and regulators around the globe are making heavy and sometimes inconsistent demands on standard setters, calling for quick responses, adequate due process and simple answers to complex situations. Many interested parties are seeking a “level playing field” in financial reporting without recognizing that it is not fully achievable without the adoption of a single common set of standards by all enterprises. Some are also looking to financial reporting standards to address problems that the standards did not cause and are not designed to resolve. Partly in response to events related to the current economic environment and demands from stakeholders, the IASB is developing proposals to replace its current standard for recognition and measurement of financial instruments on a fast-track basis. An exposure draft on classification and measurement is expected in July 2009, with the objective of completing a new standard in time for voluntary adoption for the 2009 calendar year. Exposure drafts on impairment and hedge accounting are also expected before the end of the year. The overall objective of the new proposals is to reduce complexity in accounting for financial instruments.

FASB activities
In April 2009, in the face of pressure from the US Congress, the banking sector and others, but also resulting from work commenced previously, the FASB finalized two Staff Positions (FSPs), one providing additional guidance on fair value measurements in inactive markets and the other changing the impairment model for some financial instruments. The IASB and the AcSB each found the FSP on fair value measurement fully compatible with their standards on that topic but found the FSP on impairment to be in conflict with some aspects of their respective standards on impairment.

AcSB’s decisions on impairment of debt securities
The AcSB’s response to the current financial crisis has been governed by its strategic decision to adopt IFRSs and its related policies of limiting change to current Canadian GAAP during the transition period and restricting any necessary changes to steps towards IFRSs. After consulting with stakeholders, the IASB decided not to converge with the position in the FASB FSP on other-than temporary impairment, a concept that does not exist in IFRSs. The AcSB reviewed the FSP proposals to gain a clear understanding of their nature, purpose, possible effects in practice and consistency with current Canadian GAAP and IFRSs. The AcSB noted that Canadian GAAP had become a relative outlier internationally on the treatment of impairment losses on investments in available-for-sale and held-to-maturity debt instruments. In light of the IASB’s decision, Canada’s position on impairment and the AcSB’s overall IFRS transition strategy, the AcSB is proposing to introduce certain elements of IAS 39, Financial Instruments: Recognition and Measurement, into the Canadian standard on financial instrument recognition and measurement on a fast-track basis. This would involve adopting the IAS 39 definitions of the four measurement categories of financial assets and then applying existing Canadian guidance on the incurred credit loss approach to available-for-sale and held-to-maturity assets as well as loans and receivables.

Members commended the AcSB for its prompt actions and responses to matters related to the financial crisis.

AcSB’s and PSAB’s Performance

AcSOC’s responsibilities include evaluating the performance of the Boards that it oversees. AcSOC’s Performance Review Committee reported on the results of its extensive review of performance reports from the AcSB and PSAB for the year ended March 31, 2009. In particular, the Committee commended the AcSB for its work on implementing its strategy for publicly accountable enterprises and for developing a proposed approach for financial reporting by private enterprises. The Committee noted that the AcSB had not kept to its original timeline for addressing the needs of the not-for-profit sector but was making progress. The Committee commended PSAB for its management of the technical and other issues raised by senior governments through the Joint Working Group (see below) and stated that governments’ concerns will require ongoing attention.

On the basis of the Boards’ reports and the Performance Review Committee’s review, AcSOC concluded that both Boards had adequately discharged their responsibilities to the public in an independent, professional and transparent manner in fiscal 2008-2009.

AcSOC’s review of the work plans developed by the Boards for the year ending March 31, 2010 indicated that these plans are consistent with the Boards’ strategies and will provide the Performance Review Committee with a suitable base to review the performance of both Boards for that period.

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

The JWG comprises selected PSAB members and Deputy Ministers of Finance from senior Canadian governments and 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.

The following members of senior governments presented to AcSOC on governments’ concerns and the recommendations of the JWG:

• Bernard Turgeon, Associate Deputy Minister of Finance, Quebec;
• Bruce Bennett, Assistant Deputy Minister and Controller, Ontario;
• Bruce Gray, Senior Assistant Deputy Minister of Finance, Manitoba;
• Doug Lynkowski, Controller General, Alberta; and
• Cheryl Wenezenki-Yolland, Associate Deputy Minister of Finance, and Comptroller General, British Columbia.

Colin Anderson, Deputy Minister of Finance, Ontario, had previously advised that senior governments in Canada were concerned with PSAB’s strategic direction in standard setting, as well as the adequacy of the oversight processes over PSAB to ensure that public sector financial reporting serves the public interest.

In the current AcSOC meeting, the presenters reiterated that governments are sovereign and different from private sector businesses. They stated that PSAB standards significantly impact measures of financial performance in government budgets, fiscal updates and annual financial reports, and that in measuring governments’ financial performance, the public focus is primarily on a government’s surplus or deficit and its debt accumulation.

The presenters commented specifically on the recommendations contained in the following papers that JWG subgroups had developed and presented to PSAB:

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

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

The presenters indicated that governments wished to continue the present dialogue and foster a long-term relationship with AcSOC and PSAB.

The PSAB Chair stated that the papers prepared by the JWG subgroups were accepted by the JWG and passed on to PSAB for its consideration. PSAB has indicated that the papers present viable options for its consideration. However, it was stressed that any standards-related issues are subject to PSAB’s due process.

Following the JWG’s work, the presenters stated that governments’ expectations were that:

• PSAB and AcSOC provide a detailed response, including future actions in response to the specific JWG papers and recommendations;
• government JWG and subgroup members contribute their knowledge and experience to any task forces or working groups addressing the issues covered in the JWG Report; and
• governments, PSAB and AcSOC establish improved mechanisms for on-going dialogue.

The Chair stated that AcSOC and PSAB would endeavour to address governments’ concerns, while not compromising PSAB’s independence. The presenters stated that government JWG members will keep Ministers of Finance updated on progress toward resolution of the issues addressed by the JWG.

The Chair thanked the presenters for their informative presentation and said that AcSOC is always keen to receive input directly from its stakeholders.

Issues Related to the Adoption of IFRSs in the Public Sector

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. Other government organizations (OGOs) are able to self-select between the PSA Handbook and the CICA Handbook – Accounting (private sector GAAP). Effective January 1, 2011, under the AcSB’s strategic plan, GAAP for publicly accountable enterprises will be IFRSs.

In response to concerns raised by a number of stakeholders concerning the breadth of application of IFRSs in the public sector, PSAB issued an Invitation to Comment (ITC) entitled “Financial Reporting by Government Organizations,” in February 2009 seeking views of respondents regarding the breadth of application of IFRSs to government organizations.

After considering the responses to the ITC, PSAB plans to issue an exposure draft proposing the following:

• GBEs would adhere to standards for publicly accountable enterprises in the private sector as determined by the AcSB (that is: IFRSs) following the same transitional provisions (currently for fiscal periods beginning on or after January 1, 2011).
• The GBTOs classification in the PSA Handbook would be eliminated. Government organizations that are currently classified as GBTOs would be recategorized as OGOs.
• OGOs would generally base their financial reporting on the PSA Handbook. However, in certain cases, IFRSs might be a more appropriate basis of accounting. OGOs would make an assessment of their objectives and circumstances to determine the most appropriate basis of accounting. The proposals would provide indicators that would be considered in the determination of whether IFRSs is the most appropriate basis of accounting. OGOs that follow IFRSs would follow the same transitional time frame as GBEs. OGOs that adopt the PSA Handbook would elect to do so for fiscal periods beginning on or after January 1, 2011.

The PSAB Chair indicated that PSAB expects to issue final amendments to the PSA Handbook in October 2009.

Entity Level Financial Statements in the Public Sector

A PSAB task force has reached tentative decisions regarding issues specific to organizations in the public sector that prepare general purpose financial statements (usually organizations such as departments and ministries of a government).

The task force has agreed that while current practices may have been modeled on GAAP, they may diverge from GAAP because they are constructed to take into account changes in laws or the needs of special interest groups. The task force also agreed that preparers of entity level financial statements would have to decide whether their statements are general purpose financial statements based on GAAP or special purpose reports. If the former, then the PSA Handbook would apply.

The task force has drafted a Statement of Principles (SOP) adopting the perspective that the SOP would propose a standard that deals with the application, interpretive and incremental aspects of the issues, rather than creating a whole separate body of standards to apply to entity level financial statements (i.e., it would build on existing standards and provide guidance where no guidance currently exists).

PSAB’s target date for a final standard is March 2010.

The Chair stated that this project is a positive development and encouraged PSAB to proceed.

Canadian Public Accountability Board

The Canadian Public Accountability Board (CPAB) performs inspections of public accounting firms performing audits on the financial statements of reporting issuers in Canada.

Brian Hunt, FCA, Chief Executive Officer of CPAB, updated members on CPAB’s:

• relations, and activities in conjunction, with other audit regulators;
• strategic focus;
• sixth public report;
• focus for 2009; and
• response to the global economic downturn.

Mr. Hunt stated that CPAB is one of the world’s top audit regulators and is working in co-operation with its counterparts in a number of other countries. It continually improves its processes, is currently focusing on the key issues in improving audit quality, and is augmenting its human resources to cope with the introduction of IFRSs. Although CPAB is still finding instances of GAAS and GAAP deficiencies, it is generally seeing improvements in its most recent inspections.

During 2009, CPAB is focusing on audit firms’ responses to the global economic downturn, improving its medium- and small-firm inspection methodology, and refining its basis for assessing audit quality.

The Chair thanked Mr. Hunt and asked him to keep AcSOC informed of CPAB’s activities.

Recent Activities in Standard Setting

PSAB activities
John Wiersema, Chair of PSAB, provided an update on PSAB’s recent activities and technical agenda items. He commented specifically on aspects of PSAB’ projects on government transfers and financial instruments:

• For recipients of government transfers, PSAB’s recently-issued Re-exposure Draft proposes different approaches for operating transfers, capital transfers and transfers of tangible capital assets. For an operating transfer, the principle indicates that the recipient would recognize the transfer in revenue when it has been authorized and the recipient has met any eligibility criteria set by the transferor, unless the transfer creates a liability for the recipient. The recipient principle notes that operating transfers are revenue unless a liability exists. For a monetary capital transfer or a transfer of a tangible capital asset, the principle indicates that the recipient would recognize the transfer as an asset and a deferred capital contribution when the transfer has been authorized and recipients have met any eligibility criteria set by the transferor.
• A proposed, separate exposure draft would exclude hedge accounting from the proposals and recommend that remeasurement gains and losses resulting from derivatives and portfolio investments that are equities traded in an active market be recognized and presented separately and below the difference between revenue and expense in the statement of operations. PSAB recognizes that this approach does not provide a measure of effectiveness in the relationship between the hedged and the hedging item.

International Public Sector Accounting Standards Board (IPSASB)
Tim Beauchamp, Director, Public Sector Accounting, updated members on matters of interest, and the status of IPSASB’s technical agenda. In particular, he commented on IPSASB’s important project on long-term fiscal sustainability, which is designed to produce a framework for the reporting and disclosure of information related to the long-term fiscal sustainability of governmental programs. He also noted that 17 countries have fully adopted International Public Sector Accounting Standards (IPSASs), and 10, while not adopting IPSASs specifically, follow a full accrual basis of accounting.

Liability for remediation and mitigation of contaminated sites
Doug Lynkowski, Controller General, Alberta, and Chair of the PSAB task force developing accounting standards for reporting a liability for contaminated sites, highlighted the proposed principles contained in a Statement of Principles (SOP) on the topic that is currently out for public comment.

Mr. Lynkowski said that the SOP applies to discontinued operations and those unexpected, unplanned events that are not part of an asset retirement obligation. Further, it excludes those expenditures that result in the acquisition or betterment to a tangible capital asset. He stated that when contamination exceeds an authoritative environmental standard and the government is responsible or accepts responsibility for the remediation or mitigation costs, the liability would be measured using a discounted flow approach. Liability recognition is based on the same approach adopted in, ASSET RETIREMENT OBLIGATIONS, CICA HANDBOOK – ACCOUNTING Section 3110 (i.e., only obligations including an obligation created by the legal doctrine of promissory estoppel, establishes a clear duty or responsibility to another party that justifies recognition of a liability).

The Chair thanked Mr. Lynkowski for an interesting and topical presentation.

AcSB activities
Tricia O’Malley, AcSB Chair, and Peter Martin, Director, Accounting Standards, updated members on matters of interest, including the following:

• On March 12, 2009, the AcSB issued its second omnibus Exposure Draft, “Adopting IFRSs in Canada, II,” requesting public comment on:

  —	all of the changes to the standards in the IASB’s 2007 bound volume that are included in the 2008 bound volume;
  —	a revised definition of a “publicly accountable enterprise;” and
  —	a draft new Preface to the CICA Handbook – Accounting.
  Comments are currently being analyzed.

• In the face of concerns and questions expressed by some stakeholders, the AcSB continues to publicize its intention to make the changeover to IFRSs for Canadian publicly accountable enterprises effective for fiscal years beginning on or after January 1, 2011. The Canadian Securities Administrators and the Canadian Public Accountability Board will work with the AcSB to disseminate this information to smaller publicly accountable enterprises and accounting firms. AcSOC supports the AcSB’s intention.
• The AcSB has reached a major milestone in its strategy for developing a separate set of GAAP standards for private enterprises that will meet the financial reporting needs of that sector. The Exposure Draft, “Generally Accepted Accounting Principles for Private Enterprises,” was issued on April 29, 2009 with a July 31, 2009 comment deadline.
• In December 2008, the AcSB and PSAB issued a jointly developed Invitation to Comment on possible future directions in setting standards for not-for-profit organizations, as reported to AcSOC’s last meeting. The document is open for comment until June 30, 2009 and input is being encouraged through a program of communications with stakeholders in the not-for-profit sector. The period for responding to the Invitation to Comment was set with a view to providing stakeholders an opportunity to consider the proposals on private enterprise GAAP, as one of the identified possible directions for setting standards for not-for-profit organizations is based on those proposals. A program of roundtable consultations across Canada is underway currently, involving both the AcSB and PSAB representatives.

IASB activities
Tricia O’Malley provided an update on IASB-related activities that will affect the activities of the AcSB, including details of the lengthy current IASB technical agenda. Members were advised that, in one form or another, the AcSB responds to all documents, such as exposure drafts and discussion papers, published by the IASB. The AcSB convenes topic-specific roundtables and also has two standing advisory councils to obtain input to the IASB. The AcSB is also proceeding to create a forum for identifying and discussing practice issues in the application of IFRSs.

* * * * *

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.