- The years of previous efforts and outputs have had the desired effects in 2010-2011.
- PSAB’s long-term outcomes relating to improving financial statements and increasing awareness and support have, in large measure, been achieved.
- The six major objectives of PSAB outlined in its 2010-2011 Work Plan were completed. In particular:
- PSAB approved final Handbook Sections on government transfers, financial instruments and foreign currency translation.
- Government not-for-profit organizations have been brought into the CICA Public Sector (PSA) Handbook.
- Good progress is being made on the conceptual framework project, with the Deputy Ministers of Finance supporting the project and the membership of a task force.
- The work of IPSASB was monitored and assistance was provided to the Canadian members of that Board.
- PSAB’s communications efforts have increased awareness of, and support for, its work.
The Performance Review Committee Chair said that PSAB’s report clearly depicted its challenges and outputs during the 2010-2011 year, and that PSAB had performed very well. The Council endorsed this conclusion and thanked existing and past PSAB members and staff for their efforts to improve public sector financial reporting in Canada.
Recent developments
Tim Beauchamp provided an update on some of PSAB’s more significant activities, the status of its technical agenda, as well as other matters of interest.
- In particular, he commented on the following items:
- In March 2011, PSAB approved three inter-related standards dealing with financial instruments, foreign currency translation and financial statement presentation. The transitional provisions afforded in the standards were a key issue, given the different needs of government organizations and governments.
- Projects in progress include concepts underlying financial performance, completeness of GAAP for government organizations, reviewing the terminology in the PSA Handbook, related party transactions, and appropriations (amounts provided to a government organization to assist in the funding of its operations).
- PSAB continues to prepare briefing notes on related agenda items for meetings of the International Public Sector Accounting Standards Board and to review exposure drafts issued by that Board.
- In addition to its communications activities across the country, PSAB continues to engage in outreach activities with Deputy Ministers of Finance across Canada.
Mr. Beauchamp reminded the Council that with the impending removal of the pre-changeover standards in Part V of the CICA Handbook – Accounting, and after due consideration of the alternatives (i.e., to use the accounting standards for private enterprises in Part II of that Handbook or the PSA Handbook), PSAB remains of the view that all government business enterprises (including rate-regulated enterprises) should follow IFRSs.
Financial Reporting by the Government of Canada
Clyde MacLellan, Assistant Auditor General, Office of the Auditor General of Canada (OAG), provided an overview of the Government of Canada’s financial reporting framework that was adopted in 2003. He said that PSAB’s reporting model and full accrual accounting had been adopted for this purpose, and this results in transactions being recognized when they occur rather than when the cash, or equivalent, is received or paid. In addition, budget information is now provided on the same basis as financial reporting (i.e., on an accrual basis).
- The new framework ensures that all the government’s resources, obligations and costs are reported. This has the advantage of:
- increasing the government’s accountability for these items;
- improving the government’s decision-making ability; and
- improving the indicators of the government’s financial performance.
The government’s financial statements now recognize: non-financial assets, such as tangible assets, inventories and prepaid expenses; tax revenues on an accrual basis; all employee and veterans’ benefits liabilities; all environmental clean-up liabilities; and all liabilities related to aboriginal claims. In addition, the government now provides a financial statement discussion and analysis, similar to management’s discussion and analysis provided by private sector reporting issuers.
- As a result, the Government of Canada is now considered by the OAG to be a world leader in the area of financial reporting by governments. However, Mr. MacLellan said a number of challenges remained to be dealt with under the new reporting framework, such as:
- assessing various unique government-type transactions, such as transfers to the provinces and constructive obligations; and
- having financial managers incorporate the new reporting framework into their daily decision making and analysis activities.
Members posed questions to Mr. MacLellan and the Chair thanked him for an effective overview of the federal government’s reporting framework.
Standard on Quarterly Financial Reports for Crown Corporations
Suzie Gignac, Executive Director, Government Accounting Policy and Reporting Group, Office of the Comptroller General, Government of Canada, provided an overview of the legislative requirements for quarterly financial reporting for Crown corporations.
- As a result of amendments to the Financial Administration Act, departments and Crown corporations will be required to prepare quarterly financial reports for the first three quarters of each fiscal year starting April 1, 2011. The objective is to ensure that quarterly financial reports are timely and consistent in supporting the effective oversight of public funds. These reports include:
- the financial statements for quarter and year-to-date, including comparatives; and
- a narrative discussion of the financial results, risks, and significant changes to operations, personnel and programs.
The Treasury Board has issued two standards to be used by departments and Crown corporations in preparing their reports.
- The Crown corporation’s chief executive officer or chief financial officer must:
- ensure that the report is prepared in accordance with the standard;
- establish internal controls to enable preparation of quarterly financial statements that are not materially misstated and present fairly the financial results;
- ensure that information in the narrative is consistent with the financial statements; and
- sign a Statement of Management Responsibility to acknowledge that the above requirements are included in each quarterly report.
- Ms. Gignac said that:
- the standard aims to enhance transparency and oversight on the use of public funds;
- financial reporting is based on GAAP results, with disclosures tailored to the Crown corporation environment;
- certain Crown corporations have indicated that they are embracing the reports as a means of communication; and
- the first reports are due to be released in August 2011.
Members discussed Ms. Gignac’s presentation and posed a number of questions. The Chair thanked her for an excellent presentation.
International Accounting Matters
- Paul Cherry, Chair of the IFRS Advisory Council, updated members on matters related to IFRSs. He said that the frenetic pace of activities at the IASB appeared to be abating. His comments included the following:
- The IASB issued four new IFRSs on May 12, 2011, all with an effective date of January 1, 2013:
- IFRS 10 Consolidated Financial Statements (replacing the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation — Special Purpose Entities);
- IFRS 11 Joint Arrangements (replacing IAS 31 Interests in Joint Ventures);
- IFRS 12 Disclosure of Interests in Other Entities (a new, comprehensive standard on disclosure requirements for all forms of interests in other entities including subsidiaries, joint arrangements, associates and unconsolidated structured entities); and
- IFRS 13 Fair Value Measurement (replacing existing guidance in various standards on how to determine fair value and adding new disclosure requirements).
- The IASB’s standard for small and medium-sized entities (SME) has become widely used around the world. The IFRS Foundation has formed a SME Implementation Group to support the international adoption of this IFRS and to monitor its implementation.
- The IASB and US Financial Accounting Standards Board continue to work on financial instruments, leases, revenue recognition and insurance contracts. Both boards will take the necessary time to ensure that all these standards are of high quality. The revenue recognition proposals will be re-exposed. The IASB has not yet decided whether to issue re-exposure drafts on the other three projects.The US Securities and Exchange Commission is on track to make an announcement in 2011 regarding the possible use of IFRSs in the US.
- The IFRS Foundation Trustees will finalize proposals regarding their strategy once the results of the IFRS Foundation Monitoring Board’s review are published.
- It is likely that the IASB will provide more extensive guidance to ensure consistent application of its IFRSs.
- It is crucial that the IASB’s independence be maintained.
- To ensure that the IASB follows sound due process, in future, the IFRS Foundation Trustees’ Due Process Oversight Committee will sign off on the proper application of due process in developing each new IFRS.
- The IASB’s consultation process on its future agenda will begin in July 2011.
Members discussed Mr. Cherry’s remarks and the possible implications of these developments for Canada.
Report-back on AcSOC Member Peter Jewett’s Attendance at an AcSB Meeting
Peter Jewett commented on his attendance at an AcSB meeting on March 22, 2011. He said he was impressed by the scope of the issues discussed at that meeting and the AcSB members’ preparedness. To enhance AcSOC members’ understanding of the AcSB and its activities, he urged Council members to make an effort to attend an AcSB (and PSAB) meeting. He also commented on the desirability of AcSB members attending the occasional AcSOC meeting. To permit AcSB members to express views that their employers, clients or business associates might not agree with, Mr. Jewett indicated that he was not in favour of opening AcSB meetings to public observation.
Significant Global Developments Affecting Corporate Reporting and Regulation
- Bob Muter provided an overview of important global financial reporting developments affecting Canada. He commented on:
- expectations arising from the global credit crisis for better corporate reporting on business models, risks, management judgments and financial health;
- an expectation of better reporting from auditors and audit committees; and
- concerns from prudential regulators about financial stability, systemic risk and investor protection.
- Mr. Muter discussed various initiatives undertaken by major jurisdictions around the world. These included the following:
- Measures stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act to promote the financial stability of the US by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and to achieve other purposes.
- Proposals from the International Integrated Reporting Committee in the UK, which is a powerful international cross section of leaders from the corporate, investment, accounting, securities, regulatory, academic and standard-setting sectors, as well as civil society. This Committee promotes the integrated reporting of financial and non-financial data demonstrating the linkage between an organization’s strategy, governance and financial performance and the social, environmental and economic content within which it operates.
- The specific proposals include:
- disclosures to address unexpected business failures, such as details of a company’s business model, the risks associated with the model, how these risks are managed, and the key management judgments and estimates underlying the financial statements;
- better reporting on the viability of a business, such as management’s assumptions underlying the going concern conclusion;
- addressing financial stability issues, such as the status of financial stability objectives versus transparency in corporate reporting, and the question of disclosure to regulators before disclosure to the capital markets;
- a proposal for public reports from audit committees, accompanied by assurance on these reports from the auditors; and
- dealing with audit issues, such as expanding the audit report, protocols for auditor dialogue with prudential regulators, the concentration of audit services in the “big four” firms, the provision of non-audit services by auditors and the mandatory tendering or rotation of audits.
Members discussed Mr. Muter’s presentation and agreed that the issues raised were significant and warranted further discussion at future meetings.
Report-back from AcSOC Members who Represent Designated Organizations
John Nagy, Laura Talbot and Dan Thornton, representing Certified General Accountants Association of Canada (CGA-Canada), Certified Management Accountants of Canada (CMA Canada) and the Canadian Academic Accounting Association (CAAA), respectively, updated the meeting on some of the activities of their respective Associations. Mr. Nagy commented on the research activities undertaken by CGA-Canada and its IASB outreach program. In particular, he pointed to a recent paper provided to Council members titled, “The Effects of IFRS on Financial Ratios: Early Evidence in Canada.” Mr. Nagy also indicated that CGA-Canada would be renewing research in this area as more information becomes available.
Ms. Talbot said that standard setting is important to CMA Canada members, many of whom are preparers, analysts and senior management using financial information for decision-making purposes. Her Association has an IFRS Commentary Group, focused on the management accountants’ point of view, that provides feedback on the IASB’s discussion papers and proposed standards. Current IFRSs are included in the accreditation program and professional development courses, such as an online IFRS Certificate Program. CMA Canada is also involved with the Prince of Wales Accounting for Sustainability Project, which is determining the best approach to developing an integrated reporting model to portray an organization’s financial, environmental and social performance.
Professor Thornton detailed the CAAA’s current contributions to financial reporting, which included supplying members of the AcSB’s Academic Advisory Council, nominating a representative to sit on AcSOC, maintaining an elaborate website and issuing annual newsletters. In addition, CAAA members are actively involved in producing textbooks incorporating IFRSs and research activities. CAAA members have received many awards in the fields of education and research, and two prestigious international journals are now edited in Canada.
IFRS Foundation Strategy Review
Rebecca Villmann, a Principal on the staff of the AcSB, said that the IFRS Foundation Trustees’ initial strategy review consultation paper, which was discussed at the February 24-25, 2011 AcSOC meeting, laid out a series of issues with some background information on four main topics — the Foundation’s mission, governance, process and financing — and asked for stakeholders’ reactions. In April 2011, the Trustees issued a second report setting out a series of principles and recommendations based on the input received in response to their first report. The Trustees are seeking responses to their second report by July 25, 2011.
Ms. Villmann said that AcSOC’s Strategy Committee and the AcSB are very supportive of the positions proposed in the Trustees’ report. AcSOC members also expressed support for the proposals and agreed to send a relatively short supportive letter (jointly with the AcSB) to the Trustees with only a few recommendations for changes on second order points.
Transition of Publicly Accountable Enterprises to IFRSs
Rebecca Villmann said that the AcSB and its stakeholders in the Canadian publicly accountable enterprise sector have been working for five years towards the adoption of IFRSs. Interim reports for the quarter ended March 31, 2011 reflect the first large-scale live reporting on an IFRS basis in Canada. The complete picture will only become apparent from the first year-end reporting, following an audit of all information, which will be in the early part of 2012 for enterprises with calendar year ends. To date, the changeover appears to have gone smoothly in the capital markets, although the Canadian Securities Administrators report a number of disclosure shortcoming in regulatory filings.
The AcSB’s 2011-2014 Strategic Plan calls for a review of the effects of the strategies it first adopted in 2006 to determine the degree of success achieved relative to long-term objectives. The AcSB plans to carry out this review over the next two to three years, in part by monitoring reports by securities regulators, financial analysts, professional bodies, accounting firms, industry associations and others.
International Public Sector Accounting Standards Board
- Tim Beauchamp updated members on some of the significant activities of the International Public Sector Accounting Standards Board (IPSASB), the status of its technical agenda and other matters of interest. In particular, he mentioned some of the topics that were discussed at the last IPSASB meeting in March 2011:
- presentation and measurement aspects of the conceptual framework project;
- whether the terminology for performance reporting should be standardized, including a discussion on qualitative characteristics and the elements for service performance reporting;
- service concession arrangements, including the matter of revenue recognition when accounting for an asset created under one of these arrangements;
- narrative reporting (financial statement disclosure and analysis); and
- entity combinations.
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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. The AcSOC members, many of whom represent particular constituencies, include regulators, investors and other users, preparers and auditors of financial reports.
