Audit Plan for the year ending December 31, 2010 · 2011. 1. 26. · The Toronto Zoo Audit plan for the year ending December 31, 2010 PricewaterhouseCoopers LLP 1 1.Executive summary

The Toronto Zoo

Audit Plan for the year endingDecember 31, 2010

“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, thePricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.

PricewaterhouseCoopers LLPChartered Accountants

North American Centre5700 Yonge Street, Suite 1900North York, ON

Canada M2M 4K7Telephone +1 416 218 1500Facsimile +1 416 218 1499January 18, 2011

Members of the Board of Managementof the Toronto Zoo

Dear Members of the Board of Management

We are pleased to present our audit plan for the audit of the financial statements of Toronto Zoo (the “Zoo”or the “organization”) for the year ending December 31, 2010.

This document summarizes our audit plan including our view on audit risks, the nature, extent and timing ofour audit work as well as our proposed fees and the terms of our engagement.

We value your feedback and we hope that this document will facilitate two-way communication with yourBoard of Management on the risks identified and our audit approach. We welcome any suggestions andobservations you may have arising from your review of the plan at your upcoming meeting on February 3,2011.

Yours very truly,

Sara OatesAssociate Partner – Not-for-Profit ServicesAudit and Assurance Group

cc: John Tracogna, Chief Executive OfficerRobin Hale, Chief Operating OfficerPaul Whittam, Manager of Financial Services

The Toronto Zoo Audit plan for the year ending December 31, 2010

The matters raised in this and other reports that will flow from the audit are only those that have come to our attention arisingfrom or relevant to our audit that we believe need to be brought to your attention. They are not a comprehensive record of all thematters arising and, in particular, we cannot be held responsible for reporting all risks in your business or all internal controlweaknesses. This report has been prepared solely for your use and should not be quoted in whole or in part without our priorwritten consent. No responsibility to any third party is accepted, as the report has not been prepared for, and is not intended for,any other purpose.

PricewaterhouseCoopers LLP

Index Page

1. Executive summary .........................................................................................................................1

2. Your team ........................................................................................................................................3

3. Scope of our services ......................................................................................................................3

4. When will we do the audit?..............................................................................................................4

5. How will we do the audit? ................................................................................................................5

6. Our fees.........................................................................................................................................10

7. What’s new for the current year?...................................................................................................10

Appendices

Appendix A: Engagement letter

Appendix B: Draft auditor’s report under Canadian Auditing Standards

Appendix C: Changes in financial reporting requirements for Canada’s Not-for-Profit organizations

Appendix D: Financial reporting release


PricewaterhouseCoopers LLP 1

1. Executive summary

We have prepared the attached document to provide you with the opportunity to review, comment on and

approve our audit plan for the 2010 audit of the financial statements.

This audit plan includes the required communications between an auditor and the Board of Management

(the “Board”) as required by Canadian Auditing Standards.

Below, we highlight key areas for discussion, including new matters or changes from the prior year’s audit

plan to facilitate your review. We would be pleased to answer any questions you might have at our upcoming

meeting.

Discussion item SummaryFor furtherreference

a. Client service team Sara Oates is your engagement leader andPam Papadopoulos is your engagementmanager. Both Sara and Pam are membersof the PwC Not-for-Profit audit team.

Page 3

b. Service deliverables The scope of our services includes an auditon the financial statements of the Zoo, andthe expression of an opinion on the Zoo’sfinancial statements

Page 3

c. Timing Our audit will be performed as follows:

- Interim visit: December 6th – for 1 week

- Year-end visit: Week of March 7th

and week of March 21st

Page 4

d. Audit approach Our audit approach will consist of a mixtureof key controls reliance and substantivedetail testing

Consistent with Canadian AuditingStandards, we will also implement a level ofunpredictability into our procedures eachyear.

Page 5

e. Risk analysis The areas of significant focus are as follows,and consistent with our review of the prioryear auditor’s working papers:

o Employee future benefits

o Capital assets

o Deferred revenue

o Payroll

o Management estimates

o Related party transactions

Page 5-7



Discussion item SummaryFor furtherreference

f. Materiality We have calculated materiality (based onthe current forecasted results) and havedetermined a preliminary materiality of$660,000.

Unadjusted and adjusted items over $33,000will be reported to the Board on completionof our audit.

Page 8

g. Fraud risk We are required to discuss fraud riskannually with the Board.

In planning our audit, we have consideredthe risk of fraud, management’s processesfor mitigating the risk, and the Board’soversight processes.

Page 9

h. 2010 audit fees Our proposed audit fee for 2010 is $17,430. Page 10

i. Canadian Auditing Standards Canada is adopting International Standardson Auditing (referred to as CanadianAuditing Standards) effective December 14,2010. We have included a summary of someof the key differences later in this report.

Our audit plan and approach have beenupdated, as required, to ensure compliancewith these new requirements.

Canadian Auditing Standards also require usto report to the Board any internal controlweaknesses that we believe are significantdeficiencies (internal control weaknessesthat we feel should be brought to yourattention). Any significant deficiencies weidentify will be discussed with managementand reported to you at year-end.

Page 11



2. Your team

Your client service team comprises the following individuals:

Name Role Phonenumber

Email address

Sara Oates Engagement leader 416.228.1104 [email protected]

PamPapadopoulos

Engagement manager 416.218.1528 [email protected]

3. Scope of our services

a. Our audit objectives

As the organization’s auditor, our primary responsibility is to form and express an opinion on theorganization’s financial statements for the year ending December 31, 2010. The financial statements areprepared by management with the oversight of those charged with governance (the Board). An audit of thefinancial statements does not relieve management or the Board of its responsibilities.

We conduct our audit in accordance with Canadian Auditing Standards, which are the same as InternationalStandards on Auditing. Those standards require that we comply with ethical requirements and plan andperform the audit to obtain reasonable assurance whether the financial statements are free from materialmisstatement.

In addition, we are committed to being a trusted advisor to management and to the Board. Where

appropriate, we will discuss sector standards, provide management our views and insights and also advise

management of other services we feel could be helpful – at all times staying within the realms of our

independence rules.

b. Engagement terms

Our engagement letter (included in Appendix A), which was agreed to by the City of Toronto, sets out theterms and conditions for our engagement as the independent auditor of the organization for the year endingDecember 31, 2010. In addition, our engagement letter outlines our responsibilities as the auditor and theresponsibilities of management.



c. Our service deliverables

Our audit and audit related service deliverables with respect to 2010 are:

Audit and audit related services Timing/status

Audit opinion Financial statement audit for the TorontoZoo

March/April 2011

Controlrecommendations

Report significant weaknesses in controland our recommendations to the Board ofManagement

April 2011

Other services Final report on the results of the audit tothe Board of Management

April 2011

4. When will we do the audit?

Working with management, we have developed the following project timeline, which is consistent with theorganization’s regulatory and filing requirements.

Audit planning

Audit plan provided to the Board of Management February 3, 2011

Audit

Interim audit visit

Year-end audit

Clearance meeting with management and PwC

Toronto Zoo Management Committee meeting1

Year-end Board of Management meeting

December 6th to 10th, 2010

Weeks of March 7th, and March 21st, 2011

April 2011

May 2011

June 2011

1At the year-end Management Committee meeting we will provide our draft audit opinion, key findings (particularly, regarding

significant estimates, transactions, accounting policies and disclosures), any significant deficiencies identified in internal controls

and also provide a confirmation of our independence.



5. How will we do the audit?

a. Our audit approach

Our audit procedures are tailored based on the organization’s significant accounts as well as ourassessment or risk, including the risk of fraud. In the current year, our planned work will include testing ofkey controls in the following areas:

Purchases, payables and disbursements Payroll Business performance reviews

All other areas will be subject to tests of detail and substantive analytical testing.

b. Risk analysis

Significant risks are those risks of material misstatement that, in our judgment, require special auditconsideration. We have identified the following significant audit risks and other risks, including business riskswith a potential audit impact, as part of our planning process.

These risks were identified based on discussions with management, our knowledge of the business andcurrent developments in your sector and the economy.

They are the key risks from our perspective. We request your input on the following significant risks andwhether there are any other areas of concern that the Board has identified.



Risk area(including key judgments andestimates)

Management’s response Our audit approach

Employee future benefits

Employee future benefitdeterminations are complexcalculations prepared by specialistswhich involve actuarialassumptions.

The City has utilized the expertservices of Buck Consulting tocalculate the value of the employeefuture benefit payable amount,which includes an estimate of sickleave liability. Benefit payments aremade through ADP andmanagement relies on theircontrols.

We will test and rely on thecontrols of management andADP.

We will obtain the actuarialvaluation report prepared byMercer for the 2010 year, andperform certain proceduresaround assumptions and dataused by the actuary inaccordance with Canadianauditing standards. These testsdo not include reperformance ofthe calculations.

Capital assets

The major capital assets of the Zooare owned by the City of Toronto.Management will make purchasesof furniture and equipment asnecessary to run their operations.

Management reviews accounts atyear end to individually identifyitems capital in nature, and ensuresthat these amounts have beenappropriately capitalized at year-end.

We will review significantexpense accounts such asrepairs and maintenance, aswell as the contracted serviceaccounts, to ensure thatamounts that should have beencapitalized were appropriatelyaccounted for.

Deferred revenue

Certain revenues relate to futureperformance (gift certificates), andwhere not yet earned, are deferredas at the year-end.

Management develops an estimatebased on the best informationavailable to them on gift certificatesales and use by patrons.

We will review management’sestimate of deferred revenuerelated to gift certificate sales,for reasonableness, and ensurethat there is sufficient auditevidence supporting theseestimates.

Payroll

Salaries and benefits comprise asignificant portion of the Zoo’sexpenditures. It is important thatcontrol procedures in this area areeffective and function properly on acontinuous basis.

There are various controls in placeto ensure the accuracy of thepayroll, including hires,terminations, and changes tosalaries and benefit amounts.

We will validate keymanagement controls aroundthe payroll cycle.

We will also performsubstantive analyticalprocedures on salary andbenefits expenditures incurredin the current year.



Risk area(including key judgments andestimates)

Management’s response Our audit approach

Management estimates

There are a number of items inwhich accounting estimates arerequired (i.e. pay equity, vacationaccruals, allowance for doubtfulaccounts, inventory obsolescence).

Management reviews its estimateson a regular basis and applies aconsistent methodology to estimatethe amounts, unless there hasbeen a change in circumstances.

For all material estimates, wewill review management’smethodology in arriving at theseestimates, to ensure that it isreasonable and has beenconsistently applied year overyear.

Treatment of related partytransactionsA large amount of activity occursbetween the Zoo and the City. Thisincludes transactions such asreceipt of operating funding, loanpayments and the Zoo StabilizationReserve Fund charges.

Management separately tracks andmonitors amounts received fromthe City of Toronto to ensure thatthey are spent in accordance withfunding arrangements.

We will confirm all year-endbalances with the City ofToronto to ensure they havebeen accurately and completelyreflected in the accounts of theZoo.



c. Materiality

Misstatements, including omissions, are considered to be material if they (individually or in aggregate with

other misstatements) could reasonably be expected to influence the economic decisions of users, taken on

the basis of the financial statements.

Judgments about materiality are made in light of surrounding circumstances and are affected by the size or

nature of a misstatement, or a combination of both. A common measure for setting materiality at a not-for-

profit entity is to use ½% to 2 % of revenues or expenditures.

We have set our preliminary materiality for the audit as follows:

Basis Amount

Overall materiality1: 1 ½% of expenditures $660,000

Unadjusted and adjusted items in

excess of this amount will be reported

to the Board.

5% of overall materiality $33,000

1Our materiality calculation is based on the audited financial statements of the prior year; should there be a significant change,

we will communicate changes to the Board at year-end.



d. Discussion on fraud risk

Canadian Auditing Standards require us to discuss fraud risk annually with the Board of Management. Weunderstand that part of your governance role is also to consider the fraud risks facing the organization andthe responses to those risks.

Required discussion: Fraudrelated processes

Through our planning process (and prior years’ audits), wehave developed an understanding of your oversight processesincluding:

o Code of conducto Board of Management charterso Discussion at Board of Management meetings and our

attendance at those meetingso Business performance reviewso Review of related party transactionso Consideration of tone at the top

Are there any new processes or changes to the above that weshould be aware of?

Required discussion: Fraud We are not aware of any fraud at the current time. We would like toask whether you are aware of instances of actual, suspected oralleged fraud affecting the organization.

An auditor’s responsibilities for detecting fraud

We are responsible for planning and performing the audit to obtain reasonable assurance that the financialstatements are free of material misstatements, whether caused by error or fraud.

The likelihood of not detecting a material misstatement resulting from fraud is higher than the likelihood ofnot detecting a material misstatement resulting from error, because fraud may involve collusion as well assophisticated and carefully organized schemes designed to conceal it.

During our audit, we will perform the following procedures in order to fulfill our responsibilities:

inquiries of management, the finance committee and others related to any knowledge of fraud orsuspected fraud;

perform disaggregated analytical procedures, primarily over revenue and consider unusual orunexpected relationships identified in planning the audit;

incorporate an element of unpredictability in the selection of the nature, timing and extent of our auditprocedures;

perform additional required procedures to address the risk of management’s override of controls,including:

o examine journal entries and other adjustments for evidence of the possibility of materialmisstatement due to fraud;

o review accounting estimates for biases that could result in material misstatement due to fraud,(including a retrospective review of significant prior years’ estimates); and

o evaluate the business rationale of significant unusual transactions.



6. Our fees

Our estimated fees are based on the expected time required to complete the audit. Our fees exclude taxesand out-of-pocket costs, as outlined in the engagement letter provided to the City of Toronto.

We estimate our fees for 2010 will be $17,430 for the audit of the financial statements of the Toronto Zoo.

Should we incur additional costs due to changes in the level of effort or scope changes, we will advisemanagement.

7. What’s new for the current year?

a. Canadian Auditing Standards

Canada is adopting International Standards on Auditing (ISA) as Canadian Auditing Standards for the auditsof financial statements and other historical financial information. Canadian Auditing Standards will come intoeffect for fiscal periods ending on or after December 14, 2010.

Key changes include:

There are approximately one third more requirements that apply to single organization audits and anumber of new requirements that apply to group audits. About half of the new requirements result fromclarification of the existing guidance and half relate to new requirements designed to improve auditquality (although many are conditional on the prevailing facts and circumstances).

Additional procedures will be required in the areas of auditing estimates and related party transactionsand where auditor’s experts are used.

The structure and wording of this report will change. In addition, under current standards, it is very rarethat an auditor’s report contains an emphasis of matter or other matter paragraph. Under CanadianAuditing Standards, these additional paragraphs are required when there is a material uncertaintyrelated to a going concern, another significant uncertainty or an unusual item, if there is a restatement ofthe prior period, or when there is a restriction on use of the financial statements. We have included anexample of an auditor’s report under Canadian Auditing Standards in Appendix B.

There is increased emphasis on appropriate and timely communications with management and thosecharged with governance to help you understand and respond to our audit findings. There are newrequirements, in particular, to communicate significant deficiencies in internal control (not just materialweaknesses) and evaluate the adequacy of two-way communications. Our audit report templates havebeen revised to address these matters.

We have assessed the impact of these changes on our audit of the Toronto Zoo and they are reflected in ouraudit plan and estimated fees for the current year.



b. Changes to accounting standards for not-for-profit organizations (NPOs)

In December 2010, the Canadian Accounting Standards Board issued new accounting standards for not-for-profit organizations (NPOs) and changes for government not-for-profit organizations (GNPOs). Under theprevious approach, both GNPOs and non-government NPOs were directed to follow the Canadian Instituteof Chartered Accountants’ (CICA) Handbook, which includes standards developed to deal with the uniquecircumstances of many NPOs — the 4400 series. The new accounting framework will now be dependent onyour organization’s classification as either an NPO or GNPO.

These requirements will be effective for years beginning on or after January 31, 2012 although earlyadoption is permitted. It is anticipated that, as an entity reporting to the City and consolidated in the City'sresults, the Zoo will be required to adopt either Public Sector Accounting Standards (PSAS) in their entiretyor PSAS plus the new section applicable to GNPOs (section 4200 of the Public Sector Handbook)

Some of the more significant differences between the standards currently used by the Zoo and PSASinclude:

Accounting

Pension plans – Neither the corridor approach nor full recognition of actuarial gains and losses are allowed– all actuarial gains and losses are amortized over the average remaining service life of the employeegroup. There are other changes in the calculation methodology including the discount rate and arequirement to recognize plan amendments immediately.

Other employee future benefits – Leave benefits, such as sick pay, are accrued under the PSA Handbookregardless of vesting provisions.

Intangibles – Other than software, intangibles are not recognized as assets. Goodwill is rarely capitalized,but rather expensed in the period of acquisition.

Financial Instruments - There are currently no standards dealing with financial instruments, although draftstandards are currently under review. If adopted in their current form, there would be several changes,including the requirement to recognize unrealised gains and losses associated with derivatives and thetranslation of foreign denominated balances in a statement of remeasurement gains and losses.

Presentation and disclosure

- If an organization elects to adopt the PSA Handbook excluding Sections PS 4200 to 4270, there arenumerous differences in presentation with respect to the primary statements. For example, statement offinancial position classifications will now include financial and non-financial assets. The statement ofoperations will include budget information, and a statement of changes in net debt will be required. However,if an NPO elects to adopt the PSA Handbook including the PS 4200 series of standards, financial statementpresentation will be largely unchanged.

Please see our separate publication (Appendix C) for further discussion of the changes in accountingstandards.



Appendix A: Engagement letter



Appendix B: Draft auditor’s report under CanadianAuditing Standards

Independent Auditor’s Report (DRAFT)

To the Members of the Board of Management of the Toronto Zoo.

We have audited the accompanying financial statements of the Toronto Zoo, which comprise the balance sheet asat December 31, 2010 and the statements of operations, net assets and cash flows for the year then ended, and asummary of significant accounting policies and other explanatory information.

Management’s responsibility for the financial statementsManagement is responsible for the preparation and fair presentation of these financial statements in accordancewith Canadian generally accepted accounting principles and for such internal control as management determinesis necessary to enable the preparation of financial statements that are free from material misstatement, whetherdue to fraud or error.

Auditor’s responsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted ouraudit in accordance with Canadian generally accepted auditing standards. Those standards require that wecomply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in thefinancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of therisks of material misstatement of the financial statements, whether due to fraud or error. In making those riskassessments, the auditor considers internal control relevant to the organization’s preparation and fair presentationof the financial statements in order to design audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the organization’s internal control. An audit alsoincludes evaluating the appropriateness of accounting policies used and the reasonableness of accountingestimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.

OpinionIn our opinion, the financial statements present fairly, in all material respects, the financial position of the TorontoZoo as at December 31, 2010 and its results of operations and cash flows for the year then ended in accordancewith Canadian generally accepted accounting principles.

[Emphasis of matter or other matter]2

Chartered Accountants3

[Date]Address4

2An emphasis of matter paragraph or other matter paragraph is included where required. Refer to CAS 706 for details. Examples are provided

below:

Emphasis of matter: Significant uncertainty or unusual item in the financial statements, such as going concern uncertainty Early application of an accounting standard that has a pervasive effect on the financial statements Restatement of financial statements Financial statements prepared in accordance with specified basis of accounting

Other matters: Restriction on distribution or use of auditor’s report Reissuance of financial statements Prior periods financial statements audited by a predecessor auditor or not audited3

For Ontario only, add Licensed Public Accountants4 Include if not on letterhead



Appendix C: Changes in financial reportingrequirements for Canada’s Not-for-Profit organizations

Keeping you informed Changes in financial reporting requirements for Canada’s not-for-profit organizations

www.pwc.com/ca

2 Keeping you informed

In December 2010, the Canadian Accounting Standards Board issued new accounting standards for not-for-profit organizations (NPOs) and changes for government not-for-profit organizations (GNPOs).

Changes in financial reporting requirements for Canada’s not-for-profit organizations

Under the previous approach, both GNPOs and non-government NPOs were directed to follow the Canadian Institute of Chartered Accountants’ (CICA) Handbook, which includes standards developed to deal with the unique circumstances of many NPOs — the 4400 series. The new accounting framework will now be dependent on your organization’s classification as either an NPO or GNPO.

To determine which standards to follow under the new framework, it’s

important to understand whether or not your organization is controlled by a government body. The Public Sector Accounting (PSA) Handbook section 1300 provides guidance on the interpretation and application of the concept of government control. In some instances it may not be readily apparent whether government control exists, especially when an organization receives government funding indirectly or from a number of government bodies. As a result, NPOs should have a careful understanding of their particular facts and circumstances.

Once you’ve determined whether your organization is a government or non-government NPO, you will be required to adopt the appropriate standards for fiscal years beginning on or after January 1, 2012. The standards may have a significant impact on the financial reporting for your organization. We encourage both NPOs and GNPOs to consider the potential impact of the new standard and the appropriate time frame for adoption, as early adoption is permitted.

Changes in financial reporting requirements for Canada’s not-for-profit organizations 3

Potential impacts of adopting Part III of the CICA Handbook – Accounting Standards for Not-For-Profit Organizations

It is expected that the majority of non-government NPOs in Canada will adopt Part III of the CICA Handbook. While for many organizations, this will not result in any significant accounting or disclosure changes, for others the implications may be more significant. The potential accounting and disclosure differences for NPOs that elect to adopt Part III of the Handbook include:

Accounting

• Intangible assets – A new intangible assets section reaffirms the applicability of section 3064 Goodwill and intangible assets, unless provided otherwise in the new section. Organizations are directed to consider the service potential of an intangible asset when assessing the existence of an impairment.

• Financial instruments.

– The disappearance of the “available for sale” option means that organizations will no longer have the option to recognize unrealized gains and losses in the statement of changes in net assets/fund balances. Going forward, all changes in the fair value of the financial instruments will be recognized in the statement of operations.

– All financial instruments can be carried at fair value if the option is selected on initial recognition. If not, the default treatment for quoted debt securities will be cost or amortized cost. For quoted equity securities, it will continue to be fair value. This creates a different default accounting treatment for investments depending on their nature.

Definition Existing Canadian Generally Accepted Accounting Principles (GAAP)

New Canadian Generally Accepted Accounting Principles

Non-government not-for-profit organizations Organizations that are not controlled by the government and that are organized and operated exclusively for social, educational, professional, religious, charitable or any other NPO purposes. Its members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization.

Former CICA Handbook, including CICA 4400 Series (standards that apply only to NPOs)

Choice between:

a. Part I of the CICA Hand-book – International Financial Reporting Standards (IFRS)

b. Part III of the CICA Handbook – Accounting Standards for Not-For-Profit Organizations (based largely upon Part II of the CICA Handbook – Accounting Standards for Private Entities, plus CICA 4400 Series)

Government not-for-profit organizations Organizations controlled by the government that have counterparts outside the public sector and that are organized and operated exclusively for social, educational, professional, religious, charitable or any other NPO purposes. Its members, contributors and other resource providers do not, in such capacity, receive any financial return directly from the organization. Under the current definition, schools, hospitals, colleges and universities typically fall under this category.

Former CICA Handbook, including CICA 4400 Series

Choice between:

a. PSA Handbook

b. PSA Handbook supple-mented by CICA 4400 series for NPOs which have been incorporated into the PSA Handbook as PS4200

Understanding the new framework

The following table summarizes the key distinction in the new framework:


• Government remittances – Government remittances payable that are outstanding at the balance sheet date are required to be disclosed and include federal and provincial sales tax, payroll taxes, health taxes and workers’ safety insurance premiums among other items.

• Measurement uncertainty – A description of the circumstances giving rise to the uncertainty and relevant information about the anticipated resolution of the uncertainty is required. Previously only the nature of material uncertainties was required to be disclosed.

• Presentation of investments – Investments are classified as current only when reasonably prompt liquidation is possible.

• Non-classifiedbalancesheet– The balance sheet is segregated into current or non -current categories unless the entity operates in an industry where doing so is not appropriate.

• Capital disclosures – The requirement to disclose the organization’s policy and capital restrictions has been eliminated.

• Inventory – No significant changes other than a reduction in disclosures – for example, there is no longer the requirement to have specific disclosures around impairments or reversals.

– Transaction costs –Transaction costs incurred to acquire or issue financial instruments measured at amortized cost will be required to be netted against the carrying value rather than being expensed.

• Definedbenefitplans – For organizations with a defined benefit plan, there will be an option to select between the “immediate recognition approach”, where actuarial gains or losses would be recognized immediately in the statement of operations each period, or the “deferral and amortization approach”.

• Capital assets – On transition to these standards, the organization may measure any individual capital asset at fair value and then use that fair value as its deemed cost at that date.


• Primary Generally Accepted Accounting Principles – Various items have been eliminated from the primary principles including Emerging Issues Committee (EIC) abstracts, background information, basis of conclusion documents, illustrative material and implementation guides.

• Cashflowstatements – All organizations must prepare and present a cash flow statement. There is no longer the option to omit the cash flow statement if the required cash flow information is readily apparent from other financial statements or note disclosures.


Potential impacts of adopting Part I of the CICA Handbook – International Financial Reporting Standards

The option to adopt International Financial Reporting Standards (IFRS) is available to all non-government NPOs but will likely initially only be considered by those organizations that:

• Are part of a global organization whose affiliates have chosen to use IFRS;

• Participate in an industry with for-profit companies who report under IFRS; or

• Have international funders or other users of the financial statements who require the use of IFRS.

IFRS was originally developed for use in the for-profit world and does not contain specific guidance for NPOs. In addition, there is currently no intention to modify IFRS for NPOs; these organizations will be subject to the same standards and requirements as publicly accountable entities. Some of the most significant accounting and reporting implications of adopting IFRS include:

Accounting

• Revenue recognition – Under IFRS, there are no specific standards to address the unique nature of contribution revenue for NPOs. This specifically impacts the recognition of contributions restricted for specific purposes or time periods as well as endowment contributions that currently have specific recognition criteria under Canadian Generally Accepted Accounting Principles. Under IFRS, revenue is recognized under a general revenue recognition standard that may result in timing differences for recognition of contributions.

• Property and equipment – IFRS permits an entity to revalue property and equipment to fair value on the date of transition to the new accounting framework. If a NPO has investment property, it may also be carried at fair value and revalued annually to determine any fair value adjustments. Annual assessments for impairment of property and equipment must be made and impairment losses recovering in future periods can be reversed and recorded in the financial records.

• Consolidation – Current Canadian accounting standards provide NPOs with various alternatives to report controlled and related entities. Under IFRS, no similar standard exists, so accounting for controlled and related entities would follow general consolidation standards. This would result in the consolidation of all controlled entities and equity accounting for all entities in which a NPO has significant influence. Cost accounting would be used for those investments that a NPO does not control or have significant influence.


• Financial Instruments – There are currently no standards dealing with financial instruments, although draft standards are currently under review. If adopted in their current form, there would be several changes, including the requirement to recognize unrealized gains and losses associated with derivatives and the translation of foreign denominated balances in a statement of remeasurement gains and losses.


• If an organization elects to adopt the PSA Handbook excluding sections 4200 to 4270, there will be numerous differences in presentation with respect to the primary statements. For example, statement of financial position classifications will now include financial and non-financial assets. The statement of operations will include budget information, and a statement of changes in net debt will be required. However, if an GNPO elects to adopt the PSA Handbook including the 4200 series of standards, financial statement presentation will be largely unchanged.

Organizations converting to the PSA Handbook will need to identify the differences in the standards that impact them and quantify these differences. In addition, the PSA Handbook contains specific exemptions and exceptions applicable to the first time adoption of PSA Standards by government organizations.

• Employeefuturebenefits – While the standards around employee future benefits are similar to current Canadian GAAP, there are some differences that could result in how employee future benefits are recognized under IFRS. These primarily relate to the immediate recognition of past service costs and the planned elimination of the ability to smooth the recognition of actuarial gains and losses over time periods.

• Capital leases – Under current IFRS standards, accounting for leases is similar to Canadian GAAP. However, the specific tests to determine if a lease is capital in nature are slightly different, which may result in a different conclusion under IFRS. Organizations should also be aware that there is a current IFRS exposure draft on leases that could significantly change how leases are accounted for, including the potential recognition of all leases, operating and capital, on the balance sheet.


• Generalfinancialstatementpresentation and fund accounting – IFRS does not have an equivalent standard to Handbook Series 4400. As a result, the concept of fund accounting and the presentation of separate funds in the financial statements does not exist under IFRS. Related statements, such as the statement of changes in net assets, are replaced with IFRS statements, and would include a statement of comprehensive income.

• Financial statement notes – Under IFRS, note disclosure is generally more extensive, with detailed note requirements for specific accounts and balances. For example, disclosure of the compensation of key management personnel is required under IFRS in the notes to the financial statements. As well, because many NPOs have previously taken advantage of the exemptions available under Canadian GAAP to limit disclosures around financial instruments, additional disclosures will likely be required in this area.

Potential impacts of adopting the PSA Handbook

The status quo will no longer be an option for GNPOs as the PSA Handbook guidance differs from the CICA Handbook. Some of the more significant differences include:

Accounting

• Pension plans – Neither the corridor approach nor full recognition of actuarial gains and losses are allowed – all actuarial gains and losses are amortized over the average remaining service life of the employee group. There are other changes in the calculation methodology including the discount rate and a requirement to recognize plan amendments immediately.

• Otheremployeefuturebenefits – Leave benefits, such as sick pay, are accrued under the PSA Handbook regardless of vesting provisions.

• Intangibles – Other than software, intangibles are not recognized as assets. Goodwill is rarely capitalized, but rather expensed in the period of acquisition.


BritishColumbia Ken Legg 604 806 7579 [email protected]

Alberta Julie Thomson 403 509 7551 [email protected]

Saskatchewan Dean Staff 306 668 5954 [email protected]

Manitoba Kim Nykoluk 204 926 2437 [email protected]

Toronto Sara Oates 416 228 1104 [email protected]

Ottawa Adam Harvey 613 755 8711 [email protected]

Montreal Norman Jones 514 205 5058

Atlantic Stephanie Maritz 902 491 7427 [email protected]

Contact us

Next stepsOrganizations are required to transition to the appropriate standards by the fiscal year beginning on or after January 1, 2012, although early adoption is permitted. Now is the time to consider the options available and start to think about the appropriate implementation date of the new standards for your organization. Our team understands the new framework and is ready to help you through the process.

© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. 0858-01 0111



Appendix D: Financial reporting release

Financial Reporting Release

Keeping your head above water…Recent issues in financial reporting

August 2010

In this Issue

2 Deferring IFRS Transition for Investment Companies and Rate-Regulated Enterprises3 Global GAAP Convergence4 A Single Statement of Comprehensive Income5 Revenue Recognition6 Fair Value Measurement7 Financial Instruments8 Amortized Cost of Financial Instruments9 Leases10 Pensions11 Insurance Contracts12 Pension Plans13 CSA Disclosure Reviews14 Appendix – The IASB Work Plan

We’ve got to be straight with you. Preparing this edition of the Financial Reporting Release has been a bit of a chore. Nosooner did we think we’d finished, when, bam, some big new accounting development was announced, causing morerevision. It got so bad that we were afraid to turn on our computers, answer the phone, or read the newspaper for fear ofhearing something new. “No más” was our cry (or, as we say in English, “uncle”).

Most, if not all, of the developments relate to International Financial Reporting Standards (IFRS) and Canada’simpending transition to them. Things have been relatively quiet on other fronts. Private companies, for instance, aremore or less content with their lot as they prepare to adopt their own “made in Canada” GAAP in 2011. Canada’sAccounting Standards Board (AcSB) still is sorting out its new accounting framework for NPOs with finalization expectedsometime soon and transition in 2012. The finishing touches on public sector accounting are proceeding apace. Nope,it’s pretty much IFRS developments that are the source of all this angst.

Why all the activity? Simple. At the same time Canada’s moving to IFRS, IFRS is being overhauled as part of a jointproject by the International and US Financial Accounting Standards Boards (the Boards) to reform and converge theirstandards in the wake of the financial crisis. By 2011 no less. Proposals for changes now are being pumped out at arapid pace as a consequence. Some are more surprising than others. Did you know, for instance, there’s arecommendation on the table to get rid of the income statement? No, really. And a proposed new standard for decidingwhen to recognize revenue in the financial statements and how to measure it? Not to mention ideas for standardizing fairvalue measurements and disclosures. Also, the Financial Accounting Standards Board (FASB) has a plan for newstandards on financial instruments. We only wish it was the same as the IASB’s. The International Accounting StandardsBoard (IASB) has been working on its own too, most notably proposing significant changes on pensions and insurancecontracts.

The pace of change has caused some concern about whether the quality of standards is being impaired for the sake ofspeed. The Boards have slowed down in response, but only a bit. You still can expect IFRS to look very different at theend of 2011 than it was at the beginning. How will this affect your transition to IFRS? We have some thoughts.

While the IASB’s proposals create uncertainty about what life will be like under IFRS after Canada transitions, someCanadian companies are facing significant uncertainty about the how IFRS applies at transition. So much so that theAcSB has recommended deferring the mandatory date for IFRS transition beyond 2011 … but only for investmentcompanies and rate-regulated enterprises. Be still your beating hearts.

And there you have it. We think. Read fast.

Deferring IFRS Transition for InvestmentCompanies and Rate-Regulated Enterprises

I love deadlines. I love the whooshing sound they make as they fly by.− Douglas Adams

We stand before you abashed. How many times havewe looked you straight in the eye and told you that thedie is cast, that there’s no way on God’s green earth theAcSB’s going to defer the date for mandatory transitionto IFRS? So what happens six months or so before themagic date? Proposals to push it back are on the table,though only for investment companies and rate-regulated enterprises. The AcSB proposes that thetransition date be deferred until 2012 for the former and2013 for the latter.

The reason? Uncertainty whether specialized practicesin these industries under existing Canadian GAAP canbe carried forward to IFRS.

In the case of investment companies, the uncertaintyrelates to accounting for controlled investments. UnderCanadian GAAP, investment companies must accountfor these investments at fair value; under IFRS, they’rerequired to be consolidated. Earlier this year, however,the IASB decided to adopt the Canadian GAAPapproach. The trouble is that the IASB’s decision istentative. Even if it becomes final, it’s unlikely that IFRScan be changed fast enough to allow Canadianinvestment companies to make a smooth transition toIFRS in 2011. A doomsday scenario exists where aCanadian investment company would have to start offIFRS reporting that year by consolidating its controlledinvestments, only to revert back to fair value accountinga short while later.

For rate-regulated enterprises, the issue is so-calledrate-regulated accounting – setting up an asset or aliability where a regulator allows the enterprise to recovera loss from its customers (or refund a gain). While thisaccounting is standard practice in Canada, it’scontroversial under IFRS. At Canada’s request, the IASBadded a project to consider issuing a standard to resolvethe uncertainty over its application. Hopes were high fora favourable resolution in time for Canada’s 2011transition but they took a tumble late in July. The IASBconcluded that more research and consultation isnecessary. It now seems highly unlikely this question willbe sorted out any time soon.

Observation. We think it’s in the best interests offinancial statement users to defer the mandatorytransition date for investment companies and rate-regulated enterprises. This should allow the IASB thetime necessary to resolve the uncertainty about what isand what isn’t IFRS, and give Canadian entities in thesesectors the opportunity to respond appropriately. What’sthat you say? Any chance the AcSB will extend thedeferral to other Canadian companies? Don’t hold yourbreath. These are special circumstances.

PricewaterhouseCoopers LLP / 2

Global GAAP Convergence

‘Cause the dreams ain’t broken down here now, they’re just walking with a limp.− Small Change (Got Rained on with his Own .38), Tom Waits

As devout readers of Financial Reporting Releasealready know, the IASB and FASB have established anambitious joint program to improve and converge IFRSand US GAAP in certain significant areas by mid-2011.This involves reconsidering a wide-ranging set ofstandards, including financial instruments, fair valuemeasurement, consolidation, leases, revenuerecognition, financial statement presentation,derecognition, and classification of financial instrumentsbetween liabilities and equity (see Appendix for theIASB’s timing for individual projects).

In recent months, constituents in the US and elsewherehave objected that the Boards’ timetable doesn’t allowenough time for financial statement preparers to providetheir views on the proposed new standards. In June, theBoards responded by further prioritizing the projects,committing not to release more than four major exposuredrafts in any quarter, and deferring a number of projectsby six months. Basically, though, it’s still full steamahead.

The good news is that you won’t have to adopt the newstandards when they’re issued – the IASB has promisedthat, in general, the standards won’t become mandatoryuntil 2013 or 2014 at the earliest. As a result, you canexpect existing IFRS to provide a relatively stableplatform for financial reporting for the next few years. Abreather, so to speak, before the next round ofaccounting changes come your way. The IASB has alsocommitted to do what it can to ease the burden of

implementation. Look for a consultative document inSeptember. One idea is adopting all the standards at thesame time, in one big bang.

Observation. So far, anyway, the AcSB appearscomfortable with the management of the pace of IFRSchange, that it won’t compromise Canadian companies’ability to transition to IFRS, will allow input on proposednew standards, and will implement them when they’refinalized. Nevertheless, it’s a challenge.

Why the Rush?

Pressure from the G20 for common global standardsby 2011 that will rectify financial reporting problemsexperienced during the financial crisis.

Desire by the IASB to enhance IFRS before the USdecides whether to adopt IFRS for domestic financialreporting by the end of 2011.

Impending retirement of a number of IASB members,including the Chairman.

Potential for countries adopting IFRS in 2011 to avoida double switch in accounting standards (generally notpossible in Canada since IFRS reporting begins withthe first interim, not annual, 2011 financial statements).


A Single Statement of Comprehensive Income

I, too, have a conspiracy theory. I believe that Einstein was killed by the mafia because he knew toomuch. − Steve Shaffer

Sitting down? The IASB and FASB have issued a jointexposure draft proposing to eliminate the incomestatement from financial reporting. That’s right, theincome statement. Instead, you’d have something calleda “Statement of Profit or Loss and Other ComprehensiveIncome” (OCI). This statement will report the revenue,expenses, gains and losses included in net income andOCI on a single page. Net income and OCI would besubtotals (net of income taxes) that are summed toarrive at a final total called comprehensive income (you’dstill calculate EPS using net income).

Under existing Canadian GAAP, you can provide astatement of profit or loss and OCI if you want to buthardly anyone does. Under IFRS, you must provide one,but can present a traditional income statement as well,which almost everyone does. Guess which one comesfirst? Always.

What is OCI?

Everybody knows what net income is, but some mightneed a refresher on OCI. These are gains and lossesGAAP makes you recognize but allows (or requires) youto exclude from net income. In the past, standard-settershave used OCI as a means of addressing concern aboutthe earnings volatility produced by contentiousaccounting standards. Like fair value accounting, youask? Got it the first time. Because OCI gains and lossesso often are controversial, they’re received less thanenthusiastically. For many, OCI is like the seedy uncle inthe shiny black suit you sit with the kids when he comesto holiday dinner, in the desperate hope no one willnotice the odd belch or two.

Why now the move to get rid of the income statement?One reason is that upcoming IFRS and FASB standardsare stuffing more and more items into OCI, includingsome gains and losses that have always beenrecognized in net income under Canadian GAAP (we’lltalk more about these later). It’s getting hard to tell thedifference between the two. Another reason is ongoingpressure from those who think OCI has gotten a bad rap,that it can be just as important in assessing performanceas net income, and deserves the same prominence inthe financial statements. Under this view, the incomestatement has just got to go – two stars can’t be said tohave the same billing if only of them has their name up inlights.

Observation. Conspiracy theorists interpret the Boards’proposal to reduce net income to subtotal status as theopening gambit in a deep, dark plot whose end game isthe elimination of net income as a GAAP measure ofperformance. That might be a bit of an overreaction – thelatest proposals from IASB staff to revamp financialstatement format, for instance, would reshape it into astyle that’s consistent with the presentation in the cashflow statement, but would retain the net income subtotal.Still, there’s no doubt that standard-setters want to raiseOCI’s profile.


Revenue Recognition

To lose one parent, Mr. Worthing, may be regarded as a misfortune; to lose both seems likecarelessness. − The Importance of Being Earnest, Oscar Wilde

No one can accuse anyone of being careless when itcomes to revenue recognition. This project, now a jointone between the IASB and FASB, has been studied inone form or another for decades. The objective? Toestablish basic criteria for recognizing revenue that canbe used by almost any industry. Not like the cornucopiaof specialized practices that have developed, piecemeal,under existing GAAP.

In June, the Boards issued an exposure draft of thewould-be common global standard. Those in the knowwill immediately recognize that the exposure draft losestwo of the major concepts that have driven revenuerecognition practices in the past. The first of these is thatyou “earn” revenue. The second is that you can’t reportrevenue without having reasonable assurance you’ll getpaid. While we expect no one will shed a tear over thefirst concept (too vague to be meaningful), some willmourn the second. It’s been abandoned on the groundsthat uncertainty should not affect whether you recognizesomething in the financial statements, only how youmeasure it (the greater the uncertainty, the lesser thevalue). Do you hear echoes of fair value accounting inthis approach? You should.

Not all the old principles are gone. The exposure draftcarries forward the traditional idea that delivery is acritical factor in determining when to recognize revenue.There are, of course, some major modifications.

Observation. It’s impossible to provide any generalcomments about the effect the proposals might have.Some may find little or no change. For others, the impactcould be dramatic. It would pay to consider theproposals, earnestly.

Some of the Key Proposals

Recognizing revenue when an entity satisfies aperformance obligation to transfer a good or service.

When necessary, splitting a contract into distinctperformance obligations and allocating the totalcontract price to each obligation using standaloneselling prices.

Measuring revenue at the contract price adjusted forthe risk you won’t get paid. Also for any discounts,rebates, refunds, credits, incentives, performancebonuses and other variable consideration, byprobability-weighting outcomes determined based onyour experience.

Recognizing revenue for goods sold with a right ofreturn only if you can estimate returns for goodsexpected to be returned, based on experience, and setup a liability for refunds by probability-weightingoutcomes.

Recording a loss if a performance obligation becomesonerous.


Fair Value Measurement

Rosencrantz: Shouldn’t we being doing something … constructive?Guildenstern: What did you have in mind? A short, blunt human pyramid?− Rosencrantz and Guildenstern Are Dead, Tom Stoppard

Bet you’re thinking the Boards’ joint project on fair valuemeasurement applies only to financial instruments. Notso. Their objective’s nothing less than to construct acommon global standard that will apply anytime an entityhas to measure an item at fair value, be it a financialinstrument, property, plant and equipment, intangibleasset, or goodwill. The hope is to construct somethingthat’ll endure … like the pyramids.

The IASB views this project as confirming and clarifyingexisting IFRS guidance. And IFRS and existingCanadian GAAP on this topic are similar, you canexpect the broad principles for fair value measurementyou’re using now to flow through to the new standard.Don’t get too comfortable, though. Major differences stillmight pop up. As with anything, it’s all in the details.

The project is nearly done. In July, the IASB released acomprehensive summary of its almost final conclusions.By “almost final” we mean the Boards have consideredthe responses to the exposure draft published last yearand are in the process of putting the finishing touches tothe standard.

Observation. The Boards are in substantial agreementon the project. Unanimity, it seems, is a whole lot easierto achieve when you’re talking about how to estimatethe fair value of something, not whether it should bemeasured at fair value. To fair value, or not to fair value,that is … what we talk about on the next page.

Core Measurement Principles You CanExpect to See in the Final Standard

Estimating fair value as the hypothetical price at whichan asset can be sold or a liability transferred in anentity’s principal market in a transaction between twomarket participants (neither of whom are you).

Using a three-level hierarchy that maximizes the use ofmarket-observable inputs such as market prices andinterest rates and minimizes the use of unobservableinputs. Take the correlation of unobservable factorsinto account in making estimates

Ignoring blockage factors in estimates.

Incorporating an issuer’s credit and other non-performance risks in estimating the fair value of aliability.

Disclosing a fair value uncertainty analysis if you’vegot to make an assumption about a valuation inputthat’s unobservable, and the effect of using one ormore reasonably possible alternatives is significant.


Financial Instruments

It always looks darkest just before it gets totally black.− Charlie Brown, Peanuts, Charles Schultz

There are few constants in life. One, apparently, is thecontroversy over the use of fair value in financialinstrument accounting. The hubbub continues as theIASB and FASB wrestle over their joint project tosimplify, improve and converge their respectivestandards by mid-2011. Here’s a recap of what hashappened so far. Late in 2009, the IASB issued newrules on financial assets; they also have separateprojects on hedging and financial liabilities on the go.On this side of the Atlantic, the FASB issued a set ofproposals in May 2010 that address all aspects offinancial instrument accounting. Once the Boards finishtheir own deliberations, they’ll compare notes and try toproduce a single unified standard. That’s the idea, atleast.

The Boards are far apart right now – really far. Some ofthat disagreement stems, apparently, from views aboutthe sophistication of US markets. Says the FASB,“What may be considered an improvement injurisdictions with less developed financial reportingsystems applying IFRS may not be considered animprovement in the United States”. Hmm …

Don’t be misled into thinking that the debate is onlyabout fair value. The Boards also can’t agree on how tocalculate amortized cost. We’ve got more about this onthe next page.

Don’t look now, but the prospect of a single globalaccounting standard for financial instruments is lookinga little bleak. Still, it always gets darkest before …

Observation. Achieving a converged global solutionwill require compromise and goodwill, not only fromstandard-setters but also from regulators and otherpolicy makers.

Comparing Financial Instrument Models

Issue FASB IASB

Assets and liabilitiesthat always have tobe measured at fairvalue

DerivativesEquity investmentsLoans receivableDebt securitiesInstruments withembedded derivativesnot closely related

DerivativesEquity investments

Assets and liabilitiesthat might qualify formeasurement atamortized costinstead of fair value1

Trade receivables andpayablesLong-term debt

Trade receivablesand payablesLoans receivableDebt securitiesLong-term debt

Option to measure atfair value if qualifyingfor amortized cost?

Yes Only if reduces oreliminates anaccounting mismatch

Account separatelyfor derivativesembedded in financialinstruments?

No No, except forliabilities whereembedded derivativesnot closely related

Instrumentsmeasured at fairvalue whose changesin fair value can berecognized in OCIinstead of net income

Trade receivables andpayablesLoans receivable2

Debt securities2

Long-term debt

Equity investments3

Long-term debt(change due to owncredit risk)4

1Depends on business purpose and characteristics of the instrumentand, for the FASB model, an entity’s election to use this accounting.The FASB and IASB qualification criteria are not the same.2An entity can display the amortized cost of a qualifying asset on thebalance sheet (in addition to its fair value) and report interest incomeand impairments in net income with other changes in OCI.3One time option to include. No recycling to net income on disposal –dividends in net income.4In May, the IASB proposed that for liabilities measured at fair value(other than derivatives and other instruments held for trading),changes in fair value due to the entities’ own credit risk should be inOCI with no recycling.


Amortized Cost of Financial Instruments

There are three kinds of people: those who can count and those who can’t.− Bumper sticker

Under GAAP, amortized cost is the traditionalaccounting method for measuring loans. The model isreasonably straightforward. You “amortize” anydifference between the cost of a loan and its principalamount to income over the term of the loan, andrecognize impairment when bad things happen thataffect its collectability. This model has been around, oh,forever.

The IASB and FASB are proposing changes to themodel as the result of worries expressed during thefinancial crisis that the model permits reportingexcessive interest income, and delays recognition ofloan losses. Each proposal is different, though.Compared to the FASB’s, the IASB’s model reducesthe rate at which interest income is recognized,changes the timing of recognition of loan impairmentsand increases the volatility of net income. Some say ithas quasi-fair value features embedded in it so thatyou’re roughly in the same position as having torecognize in net income any change in the fair value ofa loan due to changes in its credit risk. Up or down.Fair value features in a cost model? Never … Well …

Observation. In evaluating the different approaches,you’ve got to keep the whole picture in mind. Accordingto the FASB’s proposals, you always measure a loan atfair value but can report interest income andimpairments on qualifying loans in net income using theamortized cost method. Other fair value changes go toOCI. Financial statement users thus would have morethan one way of assessing the effect on the entity’sperformance. Under the IASB’s model, by contrast,amortized cost is a substitute, not a supplement, for afair value measurement. Which is the better model? Itall depends on how you count.

Comparing the Amortized Cost Models

Issue FASB IASB

Measurement ofamortized cost,assuming noimpairment

Present value ofcash flowsdiscounted ateffective rate in theloan

1

Present value ofexpected cash flowsdiscounted at loan’seffective rate lesscredit spread

2

Rate at which toaccrue interestincome

Effective rate in theloan

1Effective rate lesscredit spread

2

Trigger for initialrecognition of aloan loss

Management nolonger hasreasonableassurance ofcollection based onpast events andpresentcircumstances

3

It is anticipated thatthat future cashflows will declinedue to non-performance risk

Increase in carryingamount solely dueto improvement inthe loan’s creditrisk?

No Yes

1A different rate may apply when an entity acquires a loan at a

discount due to credit risk.2Effectively results in interest being accreted at the risk-free

rate at the inception of the loan.3Individual loans must also be considered on a pooled basis.

For pooled loans this can result in a “day one” loss.


Leases

My reality cheque bounced.− Saying on a T-shirt

Under existing GAAP, everywhere, the focus of theaccounting standards has been on whether the leasetransfers the risks and rewards of ownership to thelessee. If so, the lessee accounts for the transaction asthe purchase of the leased asset financed by a long-term loan provided by the lessor. Otherwise, thetransaction is an operating lease and left off the balancesheet. Because leases often are structured to fall shortof meeting the threshold tests that would requirepurchase accounting, many have criticized existingGAAP for leases on the grounds that it doesn’t fairlypresent their view of the financial reality.

In August, the IASB and FASB proposed radicalchanges to lease accounting. The proposals shift thefocus away from the leased asset and onto the leaseitself. The proposition is that the lessee shouldrecognize its right to use the leased property as aseparate intangible asset and a liability for the futurelease payments it has to make to the lessor. Always.The lessor applies mirror image accounting (unless thelessor transfers all significant risks or benefits, in whichcase, the lessor records the transaction as the sale ofthe leased asset).

There would be no grandfathering of existing off-balancesheet leases – everything would come on the balancesheet on transition.

Observation. Those using operating leases shouldcarefully consider the financial statement impact of thechanges. Not only would the balance sheet change,rental expense would be replaced by amortization of theintangible asset and interest expense on the borrowing.Debt covenants, EBITDA and other similar metricswould be affected.

Some of the Other Major Proposals

Increasing lease payments for “expected” contingentrentals (probability weighted possible outcomes).Under CGAAP, these are expensed as thecontingency resolves.

Calculating lease payments taking into account theextension or termination option if its exercise is morelikely than not. Under CGAAP, only the effects of“bargain” options are included.

Excluding purchase options from lease paymentcalculations. Under CGAAP, bargain purchase optionsresult in capital lease treatment.

Discounting lease payments at the lessee’sincremental borrowing rate or rate charged by thelessor, if known. Under CGAAP, the discount rate isthe lower of the two.

Adjusting the carrying value of leased property and therelated liability if facts and circumstances indicate asignificant change in payments. Under CGAAP, thereare no similar adjustments.

CGAAP = existing Canadian GAAP before crossover to IFRS


Pensions

In mathematics you don’t understand things. You just get used to them.− John Von Neumann

Like financial instruments, the financial crisis shone aspotlight on the accounting by employers for theirdefined pension and other similar plans (we discussaccounting by pension plans later). As a result, the IASBundertook a project to address some of the moreegregious issues. A major objective of the project was toimprove comparability in IFRS reporting by narrowingthe existing range of alternatives. Practice is all over themap.

An exposure draft came out in April. Compared toexisting Canadian GAAP, the suggested changes areseismic. For example, it no longer would be possible todelay recognition of actuarial gains and losses – theywould be recognized in the statements in full as theyoccurred. On the other hand, they wouldn’t go throughnet income anymore. Want to guess where they’d go? Ahint – it’s not net income.

Other proposals would restrict the rate of return on planassets you can accrue in calculating pension expense.Still others would shift the basis of reporting thecomponents of pension expense in the incomestatement. Oops. Did we say income statement? Wemeant the statement of profit or loss and othercomprehensive income, of course. Wash our mouths outwith soap.

Observation. It has always been a basic tenet ofCanadian GAAP that changes in estimates should berecognized on the same line as the original estimate.For pensions, this has been reflected in the requirement

to recognize actuarial gains and losses as an adjustmentof pension expense. For a Canadian audience, therequirement to put these gains and losses in OCI isrevolutionary. Remember, though, there’s a new bottomline that the IASB wants you to get used to, one thatincludes OCI.


Disaggregating and accounting separately for thecomponents of pension expense (current service cost,interest, and actuarial gains and losses). ExistingGAAP focuses on the net cost.

Accruing interest on the net pension balance at theprevailing rate for high quality bonds. Under existingGAAP, an entity uses this rate to accrue interest on thegross pension liability. It accrues a return on planassets at the rate expected for those assets.

Recognizing actuarial gains and losses in OCI with norecycling to net income in future periods. Underexisting GAAP, these gains and losses, whenrecognized, go through net income.

Expensing the cost of past service awards whengranted. Existing GAAP expenses these over theremaining service lives of employees.

Enhancing disclosures.



Insurance Contracts

It is very evident I have hit a sore spot.− Sir John A. Macdonald, debating in Parliament on a railway scandal

Rarely has an exposure draft provoked such an outcry.Even before the ink was dry, Canadian life insurancecompanies were beating the drums about new IASBproposals on accounting for insurance contracts.

Why the uproar? The IASB proposals could significantlyincrease the value of liabilities, reduce equity, andheighten the volatility of net income. The principalreason for this is the proposal on how to measure thecontracts. Under existing Canadian GAAP, life insurancecontracts are valued using an actuarial technique linkedto the expected return on the assets backing them. TheIASB wants to sever this link and apply a lower interestrate instead. It’s an immutable law of arithmetic that thelower the interest rate used in valuing a liability, thehigher the value. You just can’t get around it.

The proposals also address a number of other importantmatters, including short-term contracts, reinsurance,unbundling contracts between investment and servicecontracts, presentation and disclosure. It’s a biggie.

Observation. Valuing insurance contracts by referenceto the assets backing them makes perfect businesssense. The trouble is that it‘s just not consistent with thebasic model that accountants use these days to valueliabilities. That model focuses only on the characteristicsand the risks of the loan itself. How you intend to settle itjust doesn’t matter. In a very real sense, the controversyover valuing life insurance contracts is the latest

manifestation of one that’s existed since the beginning ofaccounting time – the extent to which standards shouldtake business strategies and the entity’s objectives intoaccount.

Proposals for Valuing InsuranceContracts

Measuring a contract at the present value of expectedfuture cash flows, plus any profit anticipated on dayone.

Determining expected future cash flows using differentcash flow scenarios, adjusted for the probability of theiroccurrence.

Discounting expected cash flows at the risk-freeinterest rate prevailing at the balance sheet date.

Adjusting the value for the risk that ultimate cash flowswill be different than you expect.

Not adjusting measurements for the risk that theinsurance company will fail to perform under thecontract.


Pension Plans

All my life, I always wanted to be somebody. Now I see that I should have been more specific.− Jane Wagner

You may recall that pension plans are the only type ofCanadian publicly accountable enterprise that can’tadopt IFRS. The AcSB excused them on the groundsthat existing IFRS is just too old and tired to serve as anappropriate basis of financial reporting. That’s not tosuggest that pension plans will be able to stick with whatthey’re doing now. Starting in 2011, they’ll have to applya scrubbed up, more specific version of existingCanadian GAAP.

The revised Canadian standard was released in April.Perhaps the most significant change requires pensionplans to recognize their obligation to provide benefits toplan participants as a liability on the face of the balancesheet. Used to be, you could disclose this informationonly in the notes. While it’s hard to argue that a pensionplan should be allowed to keep its liabilities off balancesheet, issues do arise when they come on. The biggestis that plan assets and liabilities typically are measuredusing different methods, so that all or a portion of aplan’s pension surplus or deficiency might relate only tomeasurement differences. In the past, some plansrecognized a separate asset or a liability to eliminate thiseffect but the AcSB put the kibosh on this in the newstandard. No smoothing over differences allowed.

Observation. The AcSB now requires liabilityrecognition for pension liabilities but was careful not toadd more fuel to the fire by introducing newmeasurement requirements similar to those we’ve justseen for insurance companies. For pension plans,anyway, the resolution of this controversy will wait foranother day.


Measuring all investments at fair value, includingsubsidiaries that would otherwise be consolidated andinvestments in master trusts. Under CGAAP,consolidation on a highly summarized basis iscommon.

Recognizing the plan’s obligation to provide benefitson the balance sheet. Under CGAAP, an entity mayrecognize or note disclose this liability.

Expensing transaction costs as period costs.

Applying either IFRS or Private Company GAAP whenthe standard doesn’t address an issue.

Making the financial instrument and capital disclosuresrequired for other publicly accountable enterprises(sensitivity analysis of market risks isn’t required, ifmembers direct their own investment activities).



CSA Disclosure Reviews

You can observe a lot by watching.− Yogi Berra

Canadian Securities Administrators (CSA) financialstatement reviews are sort of like getting income taxnotices – even though you know what they’re likely tocontain, you still mutter a little prayer before openingthem.

We’ve got two CSA reviews to tell you about. The firstsummarizes the results of the CSA’s continuousdisclosure reviews for the 12 months ended March 31,2010. The second deals with its IFRS transition reviews.

Continuous disclosure reviews, we suspect, can almostwrite themselves. The question is not what the faults willbe, rather their pervasiveness. The table on the righthighlights major deficiencies uncovered for 2009 filings.Significantly, the report also highlights the specificissues on which the CSA will focus in 2011 – IFRStransition disclosure, material contracts, corporategovernance, and a follow-up review of certification.

With respect to IFRS transition reporting, the CSAidentified a need for improvement in discussions ofchangeover plans, milestones and anticipated timelines,and the effects of accounting differences and accountingpolicy changes, including linking transition differences tothe affected balance sheet or income statement items.

Observation. The CSA has told you, right up front,what they’ll be concentrating on in next year’s reviews.Why not make the time now to review the quality of yourreporting in those areas and save yourself a “Dear CFO”letter next year?

Common Deficiencies in 2009 Filings

Financial instruments – inappropriate assumptionsused in measurement and incomplete disclosures,including credit and liquidity risk, aging analysis ofreceivables, and market risk sensitivity analysis.

Revenue recognition – deficient disclosure of policies.

Goodwill – incomplete disclosure of methods used inimpairment testing.

Capital disclosures – absent or incomplete disclosureabout what the entity manages as capital, includingquantitative data, and whether or not objectives formanaging have been met.

MDA – failure to provide meaningful disclosure aboutoperations, liquidity, risks and uncertainties, relatedparty transactions and critical accounting estimates.


Appendix – The IASB’s Work Plan

We present herewith a summary of the IASB’s work plan – all on-the-go projects and the estimated period in which afinal standard will be issued (save and except for minor fixes of existing standards). We expect the plan will be ofgreatest interest to those with a more technical bent but we encourage everyone to take a quick look. Convergenceprojects with the FASB are indicated with a red dot ●.

ProjectExpectedIssue Date Project

ExpectedIssue Date

Consolidation Financial Statement Presentation ●

Policies ● 2010. Q4 Discontinued operations ● 2011,H2+

SPE disclosures 2010, Q4 Other comprehensive income ● 2010, Q4

Investment companies ● 2011, Q2 Presentation and cash flow standards ● 2011,H2+

Derecognition Disclosures 2010,Q3 Financial Instruments with EquityCharacteristics ●

2011,H2+

Emissions Trading Schemes ● NYD* Insurance Contracts 2011,Q2

Extractive Activities NYD* Income Taxes 2011

Fair Value ● Joint Ventures 2010,Q3

Measurement guidance ● 2011,Q1 Leases ● 2011,Q2

Uncertainty analysis disclosure ● 2011,Q1 Liabilities 2011

Financial Instruments ● Post Employment Benefits

Financial liabilities ● 2011,Q2 Defined benefit plans 2011,Q1

Impairment ● 2011,Q2 Termination benefits 2010,Q3

Hedge accounting ● 2011,Q2 Rate-Regulated Activities **

Asset and liability offsetting ● 2001,Q2 Revenue Recognition ● 2011,Q2

NYD* = not yet determined**See earlier discussion


For more information …

This newsletter has been prepared for the clients and friends of PricewaterhouseCoopers by National Accounting andAssurance. For further information on any of the matters discussed, please feel free to contact any member of NAA, or yourPricewaterhouseCoopers engagement leader. This newsletter is available from the PricewaterhouseCoopers LLPCanadian web site, which is located at www.pwc.com/ca.

The partners and managers in National Accounting and Assurance are:

Carolyn Anthony 416 815 5266

Brooke Ayer 416 814 5793

Scott Bandura (Calgary) 403 509 6659

Martin Boucher (Montréal) 514 205 5415

Sean Cable 416 814 5831

Michel Charbonneau (Montréal) 514 205 5127

David Clément (Montréal) 514 205 5122

Jerome Donny 416 815 5069

Larissa Dyomina 416 869 2320

Will Foster (Vancouver) 604 806 7183

Sophie Gaudreault 416 815 5236

Doug Isaac (Vancouver) 604 806 7710

Vicki Kovacs 416 941 8363

Robert Marsh (Vancouver) 604 806 7765

Rosemary McGuire 416 869 2599

Claire Patra (Calgary) 403 509 7356

Jim Saloman 416 941 8249

Sherrie Shaw 416 365 8809

Mike Tambosso 416 941 8388

Michael Walke 416 815 5011

Gary Van Haren 416 814 5717

Chris Wood 416 365 8227

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Toronto Zoo Audit plan for the year ending December 31, 2010

www.pwc.com/ca© 2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, anOntario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other memberfirms of the network, each of which is a separate legal organization.

Documents

Audit Plan for the year ending December 31, 2010 · 2011. 1. 26. · The Toronto Zoo Audit plan for the year ending December 31, 2010 PricewaterhouseCoopers LLP 1 1.Executive summary