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IFRS Implications for the Public Sector

Andrew Newman, Audit Partner, Public Sector

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Agenda

Canada’s Plan to Adopt IFRSCanada’s Plan to Adopt IFRS

IFRS-Canadian GAAP Similarities and DifferencesIFRS-Canadian GAAP Similarities and Differences

Key Success FactorsKey Success Factors

Q & AQ & A

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Canada’s Plan to Adopt IFRS

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Canada’s plan to adopt IFRS – who and when?

Canadian GAAP will cease for publicly accountable enterprisesCanadian GAAP will cease for publicly accountable enterprises

Change-over date to IFRS now confirmed as fiscal years Change-over date to IFRS now confirmed as fiscal years beginning on or after January 1, 2011beginning on or after January 1, 2011

Currently “publicly accountable enterprises” defined to be Currently “publicly accountable enterprises” defined to be entities that:entities that:

Issued any class of instruments in a public market; andIssued any class of instruments in a public market; and

Hold assets in a fudiciary capacity for a broad group of outsiders.Hold assets in a fudiciary capacity for a broad group of outsiders.

Publicly accountable enterprises include Government Business Publicly accountable enterprises include Government Business Enterprises and Government Business Type OrganizationsEnterprises and Government Business Type Organizations

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Private Enterprises

AcSB has announced intention to develop unique set of AcSB has announced intention to develop unique set of standards for private enterprisesstandards for private enterprises

Two key premises:Two key premises:

The majority of the recognition and measurement standards in the The majority of the recognition and measurement standards in the existing Handbook are relevant to Canada’s private business and existing Handbook are relevant to Canada’s private business and will be retained with few, if any, modifications will be retained with few, if any, modifications

Financial statement disclosure requirements will be considerably Financial statement disclosure requirements will be considerably fewer than in the existing Handbook. fewer than in the existing Handbook.

Moving quickly—anticipated to be completed by end of 2008.Moving quickly—anticipated to be completed by end of 2008.

Proposed approach and working drafts of some sections Proposed approach and working drafts of some sections published on August 28published on August 28thth..

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Not-for-Profit Organizations

AcSB has not mandated adoption of IFRS by NPOsAcSB has not mandated adoption of IFRS by NPOs

AcSB actively discussing the future direction of accounting AcSB actively discussing the future direction of accounting standards for NPOsstandards for NPOs

Possible options include:Possible options include:

Providing a set of over-arching standards (liks S4400) that address Providing a set of over-arching standards (liks S4400) that address unique aspects of NPOsunique aspects of NPOs

Allowing NPO’s to select between IFRS and private business Allowing NPO’s to select between IFRS and private business GAAP, under the umbrellas of the over-arching NPO standardsGAAP, under the umbrellas of the over-arching NPO standards

Allowing, or requiring, the “SUCH” sector (schools, universities, Allowing, or requiring, the “SUCH” sector (schools, universities, colleges, hospitals) to adopt PSAB standardscolleges, hospitals) to adopt PSAB standards

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Governments

PSAB has not signalled that governments or PSAB has not signalled that governments or government NPOs will be required to adopt IFRSgovernment NPOs will be required to adopt IFRS

International Public Sector Accounting Standards International Public Sector Accounting Standards Board:Board:

Currently no plan to implement international Public Currently no plan to implement international Public Sector standards in CanadaSector standards in Canada

IPSASB relocated to TorontoIPSASB relocated to Toronto

Canada has two members on IPSASB (Rick Neville & Canada has two members on IPSASB (Rick Neville & Sheila Fraser)Sheila Fraser)

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IFRS - Canadian GAAP Similarities and Differences

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Timeline for adoption of IFRS

IFRSgo-live

Dec 31/08 Jan 1/10 Jan 1/11Jan 1/08

Calendar year periods beginning

Changeover date announced

IFRSComparative

figures

IFRS Opening Balance Sheet

Update convergence planand standards whichmay have material

effect in greater detail

Disclosureof plan for convergenceand anticipated effects

Last reportingunder

Canadian GAAP

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IFRS versus Canadian GAAP – Similarities

Comprehensive set of principles-based standardsComprehensive set of principles-based standards

Similar to Canadian GAAP in structure and formSimilar to Canadian GAAP in structure and form

Similar basic concepts and recognition / measurement principlesSimilar basic concepts and recognition / measurement principles

Similar structure and content of financial statementsSimilar structure and content of financial statements

Many standards in IFRS provide similar approach as Canadian GAAPMany standards in IFRS provide similar approach as Canadian GAAP

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IFRS versus Canadian GAAP – Differences

Fewer bright lines and rulesFewer bright lines and rules

Some standards in IFRS differ Some standards in IFRS differ considerablyconsiderably from Canadian GAAP – from Canadian GAAP – e.g. impairments, e.g. impairments, provisionsprovisions

More accounting policy choices and less interpretative guidanceMore accounting policy choices and less interpretative guidance

Applying IFRS requires more professional judgement and results in greater volume of Applying IFRS requires more professional judgement and results in greater volume of disclosuresdisclosures

Many differences in application/interpretationMany differences in application/interpretation

BE CAREFULBE CAREFUL – – The devil is in the detail! The devil is in the detail!

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IFRS versus Canadian GAAP:Areas with more significant differences

Impairment of assetsImpairment of assets Provisions Provisions (incl. asset(incl. asset retirement obligations)retirement obligations)

Financial instruments & Financial instruments & hedginghedging

LeasesLeases

Property, plant and Property, plant and equipmentequipment

Employee benefitsEmployee benefits

Securitizations Securitizations Stock-based compensationStock-based compensation

Accounting for tax Accounting for tax uncertaintiesuncertainties

Consolidations, SPEs, Consolidations, SPEs, investments, JVsinvestments, JVs

Rate-regulated operations Rate-regulated operations Industry-specific issues – Industry-specific issues – insurance, extractive industriesinsurance, extractive industries

Fundamentally different from Canadian GAAPFundamentally different from Canadian GAAP

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Impairment of Assets(IAS 36)

Impairment – Summary of approach

Recoverable amount is higher Recoverable amount is higher ofof

fair value less cost to sellfair value less cost to sell

value in use (discounted value in use (discounted CF)CF)

For an asset in use,undiscounted future cash flowsfrom use establish recoverability

and fair value used for the impairment calculation

Discounting occurs only inthe valuation stage

IFRS has one general impairment standardCanadian GAAP – “2-step process”

IFRS – “1-step process”

Impairments more likely under IFRS!!

Discounting required inDiscounting required in Evaluation stageEvaluation stage

Impairment – Long-lived assets and finite-life intangible assets

Timing of impairment tests same as Canadian GAAPTiming of impairment tests same as Canadian GAAP

Estimate recoverable amount forEstimate recoverable amount for

individual asset or, if not possibleindividual asset or, if not possible

the asset’s cash-generating unitthe asset’s cash-generating unit

Apply CGU concept when asset does not generate cash Apply CGU concept when asset does not generate cash inflows which are independent from other assets inflows which are independent from other assets

similar to “asset group” but could have differencessimilar to “asset group” but could have differences

Presume future cash flows beyond initial 5 years not Presume future cash flows beyond initial 5 years not reliablereliable

extrapolation based on steady or declining rate of growthextrapolation based on steady or declining rate of growth

Reverse impairment charges if circumstances changeReverse impairment charges if circumstances change

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Property, Plant & Equipment and Investment Property

(IAS 16, IAS 40)

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PP&E – Recognition and measurement

Components approach – Components approach – more rigorously applied more rigorously applied and broader than under Canadian and broader than under Canadian

allocate cost to significant parts of the asset (including non-allocate cost to significant parts of the asset (including non-physical components such as major overhaul/inspection)physical components such as major overhaul/inspection)

Borrowing costs directly attributable to Borrowing costs directly attributable to construction of “qualifying” assets – construction of “qualifying” assets – must be must be capitalized capitalized

Subsequent measurement options are cost or Subsequent measurement options are cost or revaluation model; apply to all items in a category revaluation model; apply to all items in a category of PP&Eof PP&E

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Investment property – Two options

Fair value modelFair value modelInitially measure at costInitially measure at cost

Adjust carrying value to Adjust carrying value to fair valuefair value

Do not deduct disposal Do not deduct disposal costs in arriving at FVcosts in arriving at FV

Recognize changes in Recognize changes in FV in P&L, not equityFV in P&L, not equity

No depreciation or No depreciation or impairment lossesimpairment losses

Cost modelCost modelInitially measure at costInitially measure at cost

DepreciateDepreciate

Impairment lossesImpairment losses

Determine and disclose Determine and disclose fair valuefair value

Apply accounting policy choice to all investment properties

Property held for rental or capital appreciationProperty held for rental or capital appreciation

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Pension and Post Employment Benefits

(IAS 19)

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Defined benefit pension plans and OPEBs – Actuarial gains and losses

Can choose to recognize:

immediately in equity (with no amounts ever recognized in P&L); or

using corridor method; or

another systematic approach to recognize faster

Required to apply accounting policy choice consistently to all plans

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Defined benefit pension plans and OPEBs – Past service costs

Accelerated recognition of past service costs relative to Canadian GAAP

Recognize past year service cost on straight-line basis over average remaining vesting period

To the extent that benefits are already vested at time of amendment, recognize past service costs immediately

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Provisions(IAS 37)

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Scope of IAS 37 – Provisions

Applies to all enterprises in accounting for provisions, Applies to all enterprises in accounting for provisions, contingent liabilities and contingent assets, exceptcontingent liabilities and contingent assets, except

those covered by another IFRSthose covered by another IFRS (e.g. financial instruments, (e.g. financial instruments, insurance contracts, employee benefit obligations)insurance contracts, employee benefit obligations)

Provisions – liabilities of uncertain timing or amount

IAS 37(IFRIC I, 5, 6)

EIC-60, 134, 135, 159

HB 3110

HB 1000

HB 3290

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Provisions – Recognition and measurement

Recognize if probable a liability has been incurredRecognize if probable a liability has been incurred

Recognize on basis of legal OR constructive obligationRecognize on basis of legal OR constructive obligation

Probable = “More likely than not” rather than “likely”Probable = “More likely than not” rather than “likely”

Measure at “best estimate” – Measure at “best estimate” – may be one ofmay be one of

most likely outcomemost likely outcome – single best estimate – single best estimate

expected valueexpected value – probability weighted expected value – probability weighted expected value

midpointmidpoint – where a range of probable estimates – where a range of probable estimates

Discounting required when effect is materialDiscounting required when effect is material

More items to be recognized…measurement may differ

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Measurement

IFRSIFRS Canadian GAAP

Provisions under Provisions under IAS 37IAS 37

Best Best estimateestimate

Best estimateBest estimateamount required to settle at balance amount required to settle at balance sheet date sheet date oror transfer to a third party transfer to a third party

Loss Loss contingenciescontingencies

Best Best estimateestimate

Reasonable estimateReasonable estimate

of ultimate lossof ultimate loss (or low end of range if (or low end of range if no estimate more likely than any other)no estimate more likely than any other)

Asset retirement Asset retirement obligations and obligations and restructuring restructuring liabilitiesliabilities

Best Best estimateestimate

Fair value Fair value (amount liability could be settled for in (amount liability could be settled for in a current transaction by willing parties)a current transaction by willing parties)

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Other Potential Differences

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Related Parties

No special rules – RPTs accounted for in accordance with No special rules – RPTs accounted for in accordance with requirements of relevant IFRSsrequirements of relevant IFRSsShould take into account substance over formShould take into account substance over form

– Consider transactions with shareholder, particularly non-Consider transactions with shareholder, particularly non-reciprocal amounts received in the form of cash or non-reciprocal amounts received in the form of cash or non-monetary assets monetary assets If any possibility of having to repay, then recognize If any possibility of having to repay, then recognize

liabilityliability If no requirement to repay under any circumstance, If no requirement to repay under any circumstance,

then normally will be an equity contribution and not then normally will be an equity contribution and not incomeincome

– potential issue for GBE/GBTOs—applicability of PS3800potential issue for GBE/GBTOs—applicability of PS3800

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Other Potential Differences

Revenue recognitionRevenue recognition

Don’t blindly assume that your revenue recognition Don’t blindly assume that your revenue recognition policies are consistent with IFRSpolicies are consistent with IFRS

Accounting for InvestmentsAccounting for Investments

No VIE standard; consolidate controlled SPEsNo VIE standard; consolidate controlled SPEs

No exemption from consolidation of subsidiaries; No exemption from consolidation of subsidiaries; no AcG-18 equivalent standardno AcG-18 equivalent standard

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Implementation Key Success Factors

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Two Sources

1)1) IFRS Implementation Experience from Europe and IFRS Implementation Experience from Europe and AustraliaAustralia

2)2) The Canadian Experience with Significant Accounting The Canadian Experience with Significant Accounting Changes in the Public SectorChanges in the Public Sector

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Experiences from Europe and Australia

Companies found that theyCompanies found that they Underestimated the effort needed to convertUnderestimated the effort needed to convert Lacked early support from senior managementLacked early support from senior management Waited too long to get startedWaited too long to get started

Suffered from poor project managementSuffered from poor project management

Failed to fully embed IFRS into their primary systemsFailed to fully embed IFRS into their primary systems

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More experiences from Europe and Australia

Companies found that theyCompanies found that they

Invested heavily in training finance & accounting staffInvested heavily in training finance & accounting staff

Required systems upgrades / adjustments Required systems upgrades / adjustments (IT and management reporting systems)(IT and management reporting systems)

Needed to renegotiate contracts Needed to renegotiate contracts (e.g. bank and compensation agreements)(e.g. bank and compensation agreements)

Spent considerable timeSpent considerable time communicating with communicating with stakeholdersstakeholders

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Key Success Factors

1)1) Support from highest levels of managementSupport from highest levels of management Corporate Priority Corporate Priority

2)2) A robust & flexible project planA robust & flexible project plan Accounting & Financial ReportingAccounting & Financial Reporting SystemsSystems People/TrainingPeople/Training Operations/Business/ExternalOperations/Business/External

3)3) A multi-functional implementation team A multi-functional implementation team 4)4) An energetic and dedicated team leader committed to An energetic and dedicated team leader committed to

successful completionsuccessful completion5)5) Prioritization of tasks (Complexity, Time & Resource Prioritization of tasks (Complexity, Time & Resource

Requirements, Risk, Momentum)Requirements, Risk, Momentum)

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Key Success Factors

6)6) Resources (financial, human, technical)Resources (financial, human, technical)

7)7) Engaging non-financial managers and staff Engaging non-financial managers and staff

8)8) Communications / Managing ExpectationsCommunications / Managing Expectations

9)9) Engaging external stakeholders consistently (Audit Engaging external stakeholders consistently (Audit Committee, Board, TBS, OAG)Committee, Board, TBS, OAG)

10)10)Seek value-added benefits:Seek value-added benefits:enhance skill / knowledge of financial and non-financial staffenhance skill / knowledge of financial and non-financial staff

streamline and standardize processes streamline and standardize processes

enhance your control environmentenhance your control environment

improve knowledge of organizationimprove knowledge of organization

cross-functional interactioncross-functional interaction

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Questions?

Andrew C. NewmanAndrew C. Newman

PartnerPartner

andrewnewman@kpmg.caandrewnewman@kpmg.ca

613-212-2877613-212-2877