Fixing the holes – the CSA’s review program report

The Canadian Securities Administrators have issued their latest report on the activities of their continuous disclosure review programs, Staff Notice 51-341, covering the fiscal year ended March 31, 2014, and based on 991 reviews of one kind or another.

As so often, the CSA report doesn’t choose to open the window too wide: it states that “76% of our review outcomes required issuers to take action to improve their disclosure or resulted in the issuer being referred to enforcement, ceased traded or placed on the default list,” but doesn’t provide much detail on what underlies that seemingly impressive statistic. In particular, in the area of financial statements, it only goes into detail on a meagre three areas where deficiencies arose, and it would be puzzling if these were the three most common or troubling recurring issues (for two of them, it would be surprising if they were within the top twenty, or even the top fifty).

The first issue relates to IFRS 12 Disclosure of Interests in Other Entities, and is described as follows: “For the majority of issuers, the adoption of (IFRS 12 in conjunction with IFRS 10 and IFRS 11) did not have a material impact on comprehensive income and the statement of financial position. For those issuers where adoption of the standards led to significant changes, such as from joint control to control, we observed many examples of insufficient disclosure in the financial statements to explain the basis for the change. In these instances, it was not apparent what factor(s) when considered in the context of the new standards led to the changes, such as the underlying structure, the agreements in place and/or the relevant activities. In many of these circumstances, we noted that the issuer only disclosed what the change was and how it was accounted for, but did not explain the significant judgments and assumptions made in arriving at management’s conclusion.” I imagine most readers will have trouble imagining how many cases there could possibly have been where the change in circumstances wasn’t largely obvious. The CSA provides an illustrative example is of an entity that didn’t consolidate an 85%-owned investee under IAS 27 because of protective rights granted to the minority, while now concluding under IFRS 10 that it has the power to direct the “relevant activities,” but such scenarios surely arise rather more often in textbooks than in practice. Regardless, the small number of affected entities should encounter little difficulty in polishing their disclosures as requested.

The second issue arises from the determination under IAS 18 Revenue of whether an issuer is acting as a principal or as an agent (I wrote here about a previous CSA commentary on this issue): “Examples have been noted whereby an issuer recognized revenue as either principal or agent but their disclosure documents (e.g. financial statements, MD&A, AIF) contradicted or did not support the accounting treatment.” No doubt this issue will be with us as long as accounting itself, although it takes on a bit of a different complexion under forthcoming IFRS 15 (I’ll deal with that in the future); anyway, similarly, it would seem strange if this were one of the primary ongoing sources of material problems at the present time.

The third issue, also the subject of previous commentary by the CSA (here for instance) relates to IAS 36 Impairment: “In accordance with paragraph 130 of IAS 36, an issuer must disclose information about the events and circumstances that led to the recognition or reversal of an impairment loss, and the amount of impairment loss recognized or reversed during the period. An issuer must disclose whether the recoverable amount of the asset (cash-generating unit) is its fair value less costs of disposal or its value in use. For level 2 and level 3 fair value measurements, if the recoverable amount is fair value less costs of disposal, an issuer must disclose the valuation technique used to measure fair value less costs of disposal. If recoverable amount is value in use, an issuer must disclose the discount rate(s) used in the current estimate and previous estimate (if any) of value in use. Some issuers did not disclose all the information required by paragraph 130 of IAS 36.” We can likely all agree that compliance with IAS 36 often constitutes one of the key issues for any given set of financial statements, although the disclosure requirements (which can become rather ludicrously excessive if applied without a sense of proportion) surely wouldn’t constitute as lucrative an area for regulatory investigation as the underlying recognition and measurement.

And that’s it for financial statement issues, although those involved in financial reporting will likely read the report’s commentary on MD&A as well (which also confines itself to three long-established matters). It would be unwise to take the report as an invitation to complacency: obviously, on any given day, on the desk of any given reviewer, it’s impossible to predict what might prompt further digging. Perhaps the CSA is diverting us with baubles while it cunningly prepares to launch major attacks in other areas. Or perhaps, basically, underneath it all, they can’t find that many big problems with IFRS compliance in Canada. It would be nice to know, but I don’t think they’re going to tell us…

The opinions expressed are solely those of the author

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