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Accounting Standards Oversight Council discusses public and private sector accounting issues. At its meeting in Toronto on February 24-25, 2011, the Accounting Standards Oversight Council (AcSOC) received presentations on, and discussed, the following: International Accounting Matters
Strategy Reviews by the IFRS Foundation Trustees and the IFRS Foundation Monitoring Board
The Role of Board Directors in Not-for-Profit Organizations’ Expense Allocation
Accounting for Not-for-Profit Organizations
Update on the Accounting Standards Board’s Activities and Planning
Communications — Outreach Activities of the Accounting Standards Oversight Council
Recent Audit Developments Relevant to Financial Reporting
Update on the Public Sector Accounting Board’s Activities and Planning
International Public Sector Accounting Standards Board International Accounting Matters Paul Cherry, Chair of the IFRS Advisory Council, updated members on developments at the International Accounting Standards Board (IASB) and the IFRS Foundation. In particular, he commented on the current IASB work plan, which has been cut back to focus on four projects that the IASB believes are essential to addressing the accounting implications of the global financial crisis, the expectations of the G20 group of nations, and the pending decision of the US Securities and Exchange Commission regarding whether to adopt International Financial Reporting Standards (IFRSs) for US domestic issuers. These projects deal with financial instruments, revenue recognition, leases and insurance contracts. The IASB Chairman, Sir David Tweedie, reported to the IFRS Foundation Trustees in Tokyo in early February 2011 that he remains confident the deadline of June 30, 2011 will be met, with no sacrifice in the quality of the standards. - Mr. Cherry also discussed:
- the IASB’s public consultation on the post-2011 technical agenda, which is likely to be issued in July 2011;
- the search for a new Chairman for the IFRS Foundation, which is proceeding apace;
- the strategy reviews being undertaken by the IFRS Foundation Trustees and the IFRS Foundation Monitoring Board (see below);
- initiatives identified by the Trustees to address the lack of the necessary infrastructure to support the interpretation and application of IFRSs; and
- the Trustees’ adoption of new procedures whereby the Trustees’ Due Process Oversight Committee will evaluate and certify the IASB’s adherence to due process before an IASB project is completed.
Members discussed Mr. Cherry’s remarks and the possible implications of these developments for Canada. Strategy Reviews by the IFRS Foundation Trustees and the IFRS Foundation Monitoring Board - Peter Martin, Director, Accounting Standards, provided an overview of:
- the IFRS Foundation Trustees’ strategy review consultation paper and the joint response of the Accounting Standards Oversight Council (AcSOC) and the Accounting Standards Board (AcSB) to the Trustees’ paper; and
- the IFRS Foundation Monitoring Board’s consultative report on the IFRS Foundation’s governance.
- The Trustees decided, in 2010, that it was timely to undertake a broad review of various strategic issues on the tenth anniversary of the establishment of the IFRS Foundation and the IASB. After some initial discussion, the Trustees decided to seek public input on four key issues through a consultation paper. The paper was issued on November 5, 2010 for comment by February 24, 2011. The issues on which the Trustees sought input were:
- the mission of the IFRS Foundation;
- its governance structure;
- its processes; and
- its financing.
- The AcSOC/AcSB response letter included the following key points:
- The IFRS Foundation’s mandate should be to serve the public interest by developing a single set of high-quality, globally accepted financial reporting standards for use by capital market participants and based upon clearly articulated principles.
- The IASB needs to be clear about the effects any proposed new or revised standard is expected to have on financial reporting.
- The IFRS Foundation and the IASB should maintain the fact and appearance of independence in setting standards.
- The IASB’s due process is fundamentally sound in principle but needs to be observed more thoroughly in practice, including the adoption of some necessary improvements to certain processes.
- The Trustees need to be more thorough in their oversight of the IASB’s activities.
- More attention needs to be paid to interpretive issues to ensure consistent practice in applying IFRSs.
- The Trustees need to continue to pursue a better basis of financing for the IASB.
- The Monitoring Board published its own strategic consultation report on February 7, 2011 for comment by April 8, 2011. Among the key topics covered are:
- the structure and processes of the Monitoring Board – size, membership, voting rules and transparency;
- separating the roles of the IASB Chair and the CEO of the IFRS Foundation and the staffs of the IASB and the IFRS Foundation;
- giving the Monitoring Board the right to place issues on the IASB’s agenda; and
- enhancing the Monitoring Board’s role in the selection of the IASB’s Chair and the criteria for selecting other IASB members.
The Chair commented that AcSOC’s Strategy Committee would be meeting to discuss a response to the IFRS Foundation Monitoring Board. The Role of Board Directors in Not-for-Profit Organizations’ Expense Allocation Qiu Chen, a PhD candidate in accounting at Queen’s University, presented her research findings on this topic. She said that board directors have a responsibility to ensure that financial statements are free from material misstatements. Section 4470, Disclosure of Allocated Expenses by Not-for-Profit Organizations, in Part III of the CICA Handbook – Accounting permits not-for-profit organizations (NFPOs) to choose the transparency level of their expense reporting. Such choice of the transparency level, coupled with the different types of evaluation metrics donors adopt to decide on their donations, may affect the director oversight of management expense allocation. - Ms. Chen concluded the following from her research findings:
- The transparency of an NFPO’s expense disclosure increases the directors’ monitoring of management’s expense allocations by reducing the directors’ tendency to endorse an allocation of fundraising expenses to boost the ratio of an NFPO’s charitable spending to total spending.
- Compared to the donor’s adoption of an expense-focused evaluation process, the donor’s adoption of a balanced evaluation process reduces directors’ monitoring of management’s expense allocations. However, such a negative effect is diminished when NFPOs have a relatively good service performance.
- She said that the implications of her findings are as follows:
- The Accounting Standards Board should make more transparent expense reporting a mandatory, rather than a voluntary, disclosure.
- Regulators should be cautioned of the negative effect of reducing directors’ oversight of management’s potential expense misallocations, especially for NFPOs with relatively poor levels of service performance.
Members discussed Ms. Chen’s presentation and posed a number of questions. The Chair thanked her for an excellent presentation. Accounting for Not-for-Profit Organizations Peter Martin and Tim Beauchamp, Director, Public Sector Accounting, updated members on the publication in December 2010 by the AcSB and PSAB of new standards for not-for-profit organizations in the private and public sectors, including details of the Boards’ communications programs and implementation support. The presenters also commented on the joint task force that is charged with recommending improvements to the new sets of standards. The joint task force includes members with backgrounds as users, preparers and auditors of financial statements of not-for-profit organizations in both the public and private sectors. Further information regarding not-for-profit organizations is available on the boards’ websites, www.acsbcanada.org. and www.psab-ccsp.ca. Update on the Accounting Standards Board’s Activities and Planning - Recent developments
Peter Martin commented on recent AcSB activities, including the following: - The AcSB has continued to issue “wraparound” exposure drafts of all IASB proposals and carry out its now well-established routines for responding to the IASB and encouraging Canadian stakeholders to comment.
- The AcSB has been dealing with two circumstances in which Canadian entities would face undue hardship in making the changeover to IFRSs on January 1, 2011 — investment companies (together with segregated accounts of life insurance enterprises) and entities with rate-regulated activities. Mr. Martin said that, as previously advised, the AcSB had approved an optional one-year deferral of the mandatory date for first-time adoption of IFRSs by investment companies holding a controlling interest in an investee, and entities with rate-regulated activities. However, due to a delay in the publication of the IASB’s proposals dealing with investment companies’ controlling interests in investees, the AcSB has recently extended the mandatory date of first-time adoption of IFRSs by investment companies until January 1, 2013.
- Members were updated on the AcSB’s response to the IASB’s proposals on insurance contracts, with which the Canadian life insurance industry has considerable concerns. The most significant issue of concern is the proposed discount rate for future contractual cash flows. In its comment letter, the AcSB shared the conclusion of the Canadian life insurers that the IASB’s proposed discount rate was inappropriate but did not endorse the industry’s view of the better alternative. Instead, the AcSB developed its own recommendation to the IASB, proposing an approach that would have insurers discount their contract liabilities at the prevailing market rate on high-quality corporate bonds.
- The AcSB continues to monitor Canada’s readiness for the 2011 changeover to IFRSs to identify issues that require its attention, even though many entities have already made the changeover. Some concerns remain about the smaller public companies, some of which are widely believed not to have done as much work as they should to prepare for the changeover.
Draft 2010-2011 Performance Report
The Performance Review Committee met in February 2011 to discuss the AcSB’s (and PSAB’s) draft performance report for the year ended March 31, 2011. The draft reflected the AcSB’s performance to date and a final report will be prepared for the Committee’s review in May 2011. The Performance Review Committee’s preliminary conclusion was that the AcSB had performed very well in attending to the financial reporting needs of all sectors of the economy for which it is responsible. Draft 2011-2014 Strategic Plan
The meeting was advised that the Performance Review Committee had discussed the final draft of the AcSB’s 2011-2014 Strategic Plan, which retains the strategies adopted in its 2006-2011 Strategic Plan. The Plan calls for a period of relative calm to permit the newly adopted strategic directions to “bed down” in practice. Committee members were comfortable with the content of the Strategic Plan, which the AcSB is now ready to approve. Draft 2011-2012 Annual Plan
Performance Review Committee members were of the view that the draft document appeared to provide a basis for the Committee to assess AcSB’s performance for the year ended March 31, 2012. Communications — Outreach Activities of the Accounting Standards Oversight Council Lisa Pretty, Communications Manager, Standards, updated members on AcSOC’s recent communications activities and reported on proposed communications outreach activities. She said that the AcSOC website (www.acsoc.ca) was being redesigned to provide visitors with a more complete picture of AcSOC, focusing on the role it plays in financial reporting in Canada, to increase the transparency of AcSOC’s activities and its role in serving the public interest. She stated that AcSOC branded materials were being developed and plans were underway to increase media relations activities to increase stakeholders’ awareness of AcSOC. Members suggested, and discussed, ideas to improve AcSOC’s outreach activities. Recent Audit Developments Relevant to Financial Reporting Bruce Winter, Chair, Auditing and Assurance Standards Board (AASB), commented on recent audit developments relevant to financial reporting. The auditor’s report on the first financial statements under a new financial reporting framework
Mr. Winter discussed matters related to the circumstances when the auditor is reporting on the first set of financial statements of an entity that has changed over to a new financial reporting framework, in particular when the auditor has been engaged to report only on the most recent year. For example, unless engaged to do so, the auditor will not report on comparative information required by the new Canadian accounting standards for private enterprises. He commented that in this situation, the auditor’s report would explain why the comparative information is unaudited, and he commented that stakeholders need more guidance explaining why reporting on all financial periods is in the public interest. Communications with law firms under new accounting and auditing standards
Mr. Winter commented on the Joint Policy Statement that governs communications with law firms in relation to claims and possible claims against their clients for the preparation and audit of financial statements. From an accounting perspective, he said that the existing Joint Policy Statement is based on the terminology and the accounting requirements in Section 3290, Contingencies (now in Parts II and V of the CICA Handbook – Accounting). However, this Section will not necessarily be the accounting standard that entities will follow in the future. For entities that adopt IFRSs, the accounting standard will be IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which is quite different from Section 3290. IAS 37 is currently undergoing revision by the IASB. From an auditing perspective, under new Canadian Auditing Standards, audit reports will typically be signed at a later date than under prior generally accepted auditing standards. The issue is to provide sufficient turnaround time for law firms to review their records regarding claims against their clients. Prior to undertaking a full revision of the Joint Policy Statement, the AASB issued Assurance and Related Services Guideline AuG-46, Communications with Law Firms under New Accounting and Auditing Standards, which provides a practical approach to meeting the new requirements. Revisions to auditing standards dealing with securities matters
Mr. Winter said that public interest considerations and changes in other relevant Canadian and international standards had prompted plans to revise the auditing standards dealing with securities matters. He said that background research, including extensive consultation with the user community and counsel, was in progress. Members posed questions to Mr. Winter and the Chair thanked him for a particularly interesting and apt presentation. Update on the Public Sector Accounting Board’s Activities and Planning Appreciation
The Chair noted that John Wiersema’s term as PSAB Chair was due to end on March 31, 2011 and that the current AcSOC meeting would be his last as a non-voting member. On behalf of AcSOC members, the Chair thanked Mr. Wiersema for his sterling contribution to PSAB’s accomplishments, particularly PSAB’s improved relations with its stakeholders and the increased acceptance of its standards by various levels of government in Canada. Recent developments
Tim Beauchamp 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. - In particular, he commented on a number of PSAB’s technical agenda items as follows:
- Despite many vicissitudes, PSAB had finally approved its government transfers standard. The basic principle in the standard is that transfers received (or receivable) by a government in Canada are accounted for as revenue, unless a liability can be shown to exist.
- PSAB approved a revised project proposal on concepts underlying financial performance (conceptual framework).
- An Exposure Draft containing amendments to Section PS 1200, Financial Statement Presentation, was approved by PSAB in September 2010. The Exposure Draft proposes a new statement of remeasurement gains and losses. The proposed approach, together with the proposed new standard on financial instruments and related amendments to the foreign currency translation standard, reflects the circumstances of the Canadian public sector.
Mr. Beauchamp concluded by stating that that PSAB had engaged in a number of significant outreach activities, including the completion of a series of meetings with Deputy Ministers of Finance across Canada. Draft 2010-2011 Performance Report
Tim Beauchamp detailed the highlights of PSAB’s performance during the year ended March 31, 2011. Bob Muter stated that AcSOC’s Performance Review Committee discussed PSAB’s draft performance report for the operating year. He said that the draft reflected PSAB’s performance to date and a final report will be prepared for the Committee’s review in May 2011. The Performance Review Committee’s preliminary conclusion is that PSAB had a very good year. Serious threats were confronted and there were significant accomplishments, such as improving relations with Canada’s Deputy Ministers of Finance, the issue of a new Handbook Section on government transfers, and the likely issue of a new Section on financial instruments. Draft 2010-2013 Strategic Plan
Mr. Beauchamp noted that the Strategic Plan had been approved by PSAB and passed by AcSOC, and a summary of the plan was developed and posted on PSAB’s website as an Invitation to Comment in August 2010 with a comment deadline of October 15, 2010. He said that no substantive comments had been received following the Plan’s publication. Draft 2011-2012 Annual Plan
Mr. Muter stated that Performance Review Committee members were of the view that the draft plan document appeared to provide a basis for the Committee to assess PSAB’s performance for the year ended March 31, 2012. International Public Sector Accounting Standards Board (IPSASB) - Tim Beauchamp updated members on some of the significant activities of IPSASB, the status of its technical agenda and other matters of interest. In particular, he mentioned the following:
- IPSASB’s highest priority over the next three years is a Conceptual Framework project, the objective of which is to develop a public sector conceptual framework that is applicable to the preparation and presentation of general purpose financial reports of public sector entities.
- IPSASB is working on a Service Concession Arrangements project, the objective of which is to develop financial reporting guidance on these arrangements for the public sector grantor entity.
- IPSASB has undertaken an Entity Combinations project, the objective of which is to prescribe the accounting treatment for such combinations undertaken by public sector entities.
- IPSASB has issued an Exposure Draft regarding proposed annual improvements. PSAB is considering undertaking a similar project.
- The objective of IPSASB’s Narrative Reporting project is to provide guidance for narrative reporting in a public sector financial reporting context.
* * * * * 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. The AcSOC members, many of whom represent particular constituencies, include regulators, investors and other users, preparers and auditors of financial reports. |
