Report on Public Meeting
June 3-4, 2010

Accounting Standards Oversight Council discusses the performance of PSAB, the AcSB and their future plans.

At its meeting in Halifax on June 3-4, 2010, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following:

AcSB Appointment
Performance of the Public Sector Accounting Board and the Accounting Standards Board in 2009-2010
Update on the Public Sector Accounting Board’s Activities and Planning
Update on the Accounting Standards Board’s Activities and Planning
Meetings with Ministers and Deputy Ministers of Finance
Financial Reporting Strategies for Not-for-Profit Organizations
A Non-accountant’s Views of Accounting Standards
Fair Value Accounting During the Financial Crisis
The Profession of Standard Setting
Terms of Reference – AcSOC, AcSB and PSAB
Other Recent Activities in Standard Setting

AcSB Appointment

AcSOC is pleased to announce that Gord Fowler, FCA has been appointed Chair of the Accounting Standards Board (AcSB), effective November 1, 2010 for a three-year term. He will succeed the present Chair, Tricia O’Malley, FCA, to whom the Council expresses its appreciation for her leadership as the AcSB completes the strategies in its five-year plan ending on March 31, 2011.

Performance of the Public Sector Accounting Board and the Accounting Standards Board in 2009-2010

Public Sector Accounting Board (PSAB)
John Wiersema, PSAB Chair, said that PSAB was satisfied with its performance during the operating year ending March 31, 2010, given the difficulties it faced in addressing particular standards and other issues.

Denis Desautels, Chair of the Council’s Performance Review Committee, said that the Committee had concluded that PSAB had performed satisfactorily during the 2009-2010 operating year in the face of heavy current and ongoing challenges. The Committee had also concluded that PSAB’s Annual Plan for the year ended March 31, 2011 provided a suitable basis for AcSOC to assess PSAB’s performance for that year.

Accounting Standards Board (AcSB)
Tricia O’Malley said that the AcSB was satisfied that it had achieved its deliverables in terms of its 2009-2010 Annual Plan and the requirements of its 2006-2011 Strategic Plan.

Denis Desautels said that the Performance Review Committee was satisfied that the AcSB had met its performance obligations during the 2009-2010 operating year and that the Board had performed well during the period under review. The Committee had also concluded that the AcSB’s Annual Plan for the year ended March 31, 2011 provided a suitable basis for AcSOC to assess the AcSB’s performance for that year.

Update on the Public Sector Accounting Board’s Activities and Planning

Recent developments
Tim Beauchamp, Director, Public Sector Accounting, provided an update on some of the more significant activities of PSAB, the status of its technical agenda, as well as other matters of interest. He said that PSAB had approved the final standard, Section PS 3260, Liability for Contaminated Sites, amendments to the Introduction of Public Sector Accounting Standards and the withdrawal of Section PS 3800, Government Assistance — Application of CICA Handbook – Accounting Section 3800, to reflect PSAB’s new “no International Financial Reporting Standards (IFRSs) override” policy.

He also commented on PSAB’s projects on government transfers, and financial instruments and amendments to foreign currency translation. He said:

• PSAB believes that it has found an acceptable solution for government transfers that conforms to PSAB’s conceptual framework.
• PSAB is not convinced that a disclosure standard would be the solution for the financial instruments project, though it did not rule out this option, and is working on a recognition standard.

PSAB’s 2010-2013 Strategic Plan
Commenting on specific aspects of the Plan that was discussed at the Council’s last meeting in February 2010, Mr. Beauchamp said that the major concern raised by governments regarding PSAB’s work concerns its conceptual framework, and governments are calling for a review of that framework as it drives standards-level issues. Having previously decided that it should work with the International Public Sector Accounting Standards Board to assess the conceptual framework, PSAB has now concluded that it should begin its own project on this topic, while at the same time seeking input from other stakeholders. PSAB will continue to actively influence and leverage off the international Board’s project.

Update on the Accounting Standards Board’s Activities and Planning

Recent developments
Gord Fowler, AcSB Vice-Chair, updated members on matters of interest. He discussed a number of issues that are of particular importance to stakeholders, such as the proposals of the International Accounting Standards Board (IASB) on:

• exempting investment companies from consolidation requirements;
• rate-regulated activities; and
• life insurance contracts.

Further information regarding these issues is available on the AcSB’s website, www.acsbcanada.org.

Mr. Fowler also commented on Canada’s readiness for the 2011 changeover to IFRSs and its new standards for private enterprises. Publicly accountable enterprises are generally on track for a successful changeover to IFRSs, although there is some concern about the state of readiness of smaller public companies. Many private enterprises are planning to adopt the new private enterprise standards early.

AcSB’s 2011-2014 Strategic Plan
Ms. O’Malley stated that AcSOC had previously concurred with the AcSB’s intention to begin developing a new strategic plan for the period 2011-2014 with the objective of having it discussed and agreed to by AcSOC early in 2011. One of the AcSB’s objectives in outreach activities will be to provide comfort to its stakeholders that it has no intention of departing from the strategic directions implemented over the past few years. The AcSB has now developed a draft plan that it intends to publish by July 2010 for public comment. AcSOC members agreed with the general tenor of the plan.

Meetings with Ministers and Deputy Ministers of Finance

Mr. Wiersema updated members on developments arising from a letter from the Minister of Finance and Deputy Premier of the Province of British Columbia that raised concerns by governments across Canada with PSAB’s accounting standards. He said that he, the AcSOC Chair, the Chair of the Board of Directors of the Canadian Institute of Chartered Accountants and senior PSAB staff had either met, or will be meeting, with senior officials from provincial governments. Meetings have been productive and PSAB continues to work through the issues raised by governments, including their concerns with PSAB’s conceptual framework and the effects of accounting standards on governments’ public policy decisions. Some governments recognize the benefit of accounting standards in decision making and recognize PSAB’s efforts as being helpful. Both PSAB and governments are keen to carry on their two-way dialogue.

Financial Reporting Strategies for Not-for-Profit Organizations

Peter Martin, Director, Accounting Standards, and Tim Beauchamp, Director, Public Sector Accounting said that the AcSB and PSAB have each been developing new strategies for setting standards in the not-for-profit sector. These proposed strategies were discussed with AcSOC at its last meeting in February 2010, and are detailed in Exposure Drafts issued by each Board that are open for comment until July 15, 2010.

The Boards expect to review the comments on their Exposure Drafts in September 2010 and adopt the proposed changes into their respective Handbooks before the end of 2010. The Boards have each agreed to the creation of a joint task force that will develop recommendations for replacing the current “4400 series” of standards in both Handbooks. The objective is to place the same standards in both Handbooks. The task force will have members from both the public and private sectors and will be established as soon as possible after the new strategic directions have been finalized.

A Non-accountant’s Views of Accounting Standards

Graham Steele, Minister of Finance, Province of Nova Scotia, spoke on the importance of accounting standards. He said that accounting standards matter because the strength of Canada’ democracy and the quality of public-policy decisions depend on an ongoing, vigorous, well-informed debate on public policy. An important condition for such a debate is that there be general agreement on the underlying financial numbers.

Minister Steele commented that there are numerous audiences for government financial statements and for the accounting standards that underlie them, and that is part of the challenge for standard setters. Audiences for financial statements are diverse and include the general public, government decision makers, the news media (who rely on quotable “experts” such as Auditors General, and academic and professional commentators, to help them understand governments’ financial statements) and investors in government bonds.

The Minister said that it is essential that government financial statements and their underlying accounting standards reflect the substance of a transaction or financial position. The accounting treatment should never drive a transaction – but it does happen – and this is a sign that the underlying standard is not reflecting the substance of the relevant transaction. He commented on the undesirability of including “phantom” volatility in government financial statements. He said that while there are good examples of PSAB’s standards capturing the substance of transactions very well, this did not always apply to the standard on government transfers, which should always capture the real substance of federal/provincial agreements.

Members discussed Minister Steele’s presentation and posed a number of questions. The Chair thanked the Minister for an interesting and timely presentation.

Fair Value Accounting During the Financial Crisis

AcSOC member, Professor Dan Thornton of Queen’s University, provided members with the results of some research he had undertaken jointly with Professor Michel Magnan of Concordia University that is relevant to the fair value accounting debate. The study examined data for 320 US banks over the four quarters of 2008 and the first quarter of 2009.

Professor Thornton reviewed evidence on how fair value accounting measured up during the financial crisis and the implications for future accounting standards. He said that as a market gets more disorderly, two things happen – liquidity decreases and information risk increases. As liquidity decreases, quoted asset prices drop, and these prices increasingly do not convey information regarding the assets’ fundamental values. The evidence indicated that asset prices were increasingly discounted relative to their reported fair values as the crisis worsened, but that discounts were reduced as it abated. Professor Thornton stated that the evidence indicated that the market attached little or no credibility to the audits of fair valued assets at any level in the fair value hierarchy during the depths of the crisis.

In Professor Thornton’s view, there is no evidence of accounting precipitating the crisis or being “procyclical” because the market’s assessment of the accounting values reflected the deterioration occurring in the financial system. The declines in fair values on banks’ financial statements followed, and did not lead, the asset price declines. He was of the opinion that the fair value standards were flawed in directing firms to rely on isolated price quotes when the market was in distress – a time when thoughtful use of models, based on banks’ evaluations of expected future cash flows, would have been far more informative than reporting the effect of isolated quotes in a distressed market. He speculated that flawed accounting standards had “set up” the auditors to fail in providing credibility to reported values.

Members discussed and commented on Professor Thornton’s presentation. The Chair thanked Professor Thornton for his thought-provoking presentation.

The Profession of Standard setting

Peter Martin and Tricia O’Malley informed AcSOC about the practice of developing financial reporting standards, with particular emphasis on the role and functions of a national standard setter working to support IFRSs. Mr. Martin outlined a proposal made to a meeting of the National Standard Setters, a self-formed group of major national accounting standard setters from around the world, that the following should be the essential characteristics of a high-quality standard setter:

Mr. Martin said that standard setters have commonly considered the possible effects of proposed standards before promulgating them. He reported that the National Standard Setters discussed four proposed principles for the conduct of effects studies by standard setters:

Ms. O’Malley emphasized the importance of keeping standards focused on the objective of financial reporting, which is the provision of decision-useful information to investors and creditors, and avoiding attempts to achieve various other public policy objectives.

Mr. Martin concluded by discussing the AcSB’s activities in the new IFRS environment. These comprise:

He said that most of the above activities are now part of the normal routine of the work of the AcSB.

Members discussed Mr. Martin’s presentation and posed a number of questions.

Terms of Reference — AcSOC, AcSB and PSAB

AcSOC considered and approved revised terms of reference of each of AcSOC, the AcSB and PSAB. These documents will be posted on the relevant websites in due course.

Other Recent Activities in Standard Setting

International Public Sector Accounting Standards Board (IPSASB)
Tim Beauchamp updated members on some of the significant activities of the IPSASB, the status of its technical agenda and other matters of interest. In particular, he mentioned the IPSASB project on entity combinations, which is exploring the pooling of interest method and on which PSAB provided a significant amount of research, and a project to develop a conceptual framework for general purpose financial reports of public sector entities. IPSASB is establishing a Standard Setters’ Advisory Panel for the conceptual framework project to advise it on the project and to draw its attention to areas of concern in developing the framework.

IASB/US Financial Accounting Standards Board (FASB) extension of their convergence timeline to permit increased stakeholder participation
Tricia O’Malley stated that the IASB and FASB had just announced their intention to extend their convergence timeline beyond June 2011, allowing for greater public participation and ultimately higher quality accounting standards.

The IASB, the FASB and the G20 had originally agreed on the June 2011 deadline, with the goal of driving towards a single set of high-quality accounting standards. The convergence program is focused on major areas of accounting such as revenue recognition, leases, financial instruments and financial statement presentation. Stakeholders have informed the Boards that the original timetable would not permit them to provide the comprehensive and thoughtful comments on the Boards’ proposals that are essential in the development of standards. The modified plan is intended to put the focus on creating high-quality standards. Mary Schapiro, Chair of the US Securities and Exchange Commission (SEC), has stated that she sees no reason that the adjusted timeline would affect the SEC’s work plan for determining whether to incorporate IFRSs into the financial reporting system for US issuers.

AcSOC recommended that the AcSB should issue a media release expressing the AcSB’s support for the joint IASB/FASB announcement.

IASB activities
Paul Cherry, Chair of the IFRS Advisory Council (IAC), and AcSOC member Karyn Brooks, Senior Vice-President & Controller of Bell Canada Enterprises, provided an update on the IASB structure, and discussed some major issues that will eventually affect the activities of the AcSB, including the current IASB/FASB work plan and the IASB’s strategic direction post-2011.

The IAC believes that the IASB/FASB work plan is very aggressive; however, as discussed elsewhere in this report, some relief is in the offing for stakeholders. Preparers sorely need a period of calm following the June 2011 IASB/FASB convergence deadline. By that time, a robust set of IFRS standards will exist to support financial reporting. The IAC believes that, post-June 2011, the focus should be on ascertaining that IFRSs are working as intended and that a path forward should be set in a sensible way.

The IAC believes it is essential to safeguard the independence of the IASB in the face of huge political pressure in the European Union. The IASB’s parent body, the International Accounting Standards Committee Foundation, is working hard to achieve broad-based and secure funding.

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The AcSB and 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 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