The new Alberta Advantage – a stimulating disclosure report!

The Alberta Securities Commission has recently issued its 25th Annual Corporate Finance Disclosure Report

The report contains observations on MD&A, prospectuses and other matters, but I’ll just focus here on what it has to say about financial statements. It highlights four IFRS-related areas in particular, and digs into some of these in somewhat greater detail than many publications of this type, therefore providing some pretty good food for thought. For example, on the topic of impairment, it recounts a case in which an issuer indicated that no impairment indicators existed for its exploration assets at the end of the reporting period, even though regulatory approval for the development of one of its material properties was significantly delayed. In response to the ASC’s inquiry, the issuer “clarified that, at the end of the reporting period, the development licence approval was in the final stages and the final approval was actually obtained approximately three months after the reporting period ended. As such, the RI did not consider this factor to be an impairment indicator on its own.” The ASC didn’t take issue with that conclusion, but it required improvements in future disclosures, specifically to require updates on the timing for regulatory approval on the issuer’s significant project.

Writing here recently about the IASB’s proposed practice statement Application of Materiality to Financial Statements, I noted that the IASB at one point seems to suggest “an obligation for preparers to identify all the risks and conditions that market participants might conceivably think are applicable to the company, and then to explicitly assure them that these risks and conditions aren’t actually applicable, which might seem like an onerous task by any measure.” This comes to mind on considering the disclosure improvement required by the ASC in the above example, which it acknowledges isn’t required by the specific requirements of IAS 36. Put another way, if there isn’t actually a significant problem with the amounts and disclosures in an issuer’s financial statements, what’s the obligation to make that fact super-explicit to hypothetical readers who might conceivably have thought that there is? The ASC’s example is useful in provoking thought on that question, but can’t of course point toward any kind of comprehensive framework for resolving it.

On the topic of credit risk, disclosure omissions identified by the ASC for various issuers include an aged analysis of financial assets that were past due but not impaired; an analysis of financial assets that were individually determined to be impaired as at the end of the reporting period, including the factors the entity considered in determining that they were impaired; and disclosure of significant receivables past due that were concentrated in one or few customers. Summarizing its interactions with one issuer that had failed to disclose adequate information in this area, the report observes:

  • “The (issuer) advised staff that given the economic environment in addition to its “tightened-up” collection process, it had increased its allowance for doubtful accounts by $1 million for the six month period ended June 30, 2015. We noted however that the subsequent filing of the June 30, 2015 interim financial report did not provide any indication that an additional $1 million was added to the allowance for doubtful accounts, as required by paragraph 16 of IFRS 7. In addition, the (issuer) did not disclose the reason for this policy and process change as required by paragraph 33 of IFRS 7. We advised the (issuer) that we would require these disclosures in their next filing.”

In addition to perhaps allowing some mild amusement over the issuer’s seeming recklessness in not disclosing something it had already told the regulator about, this raises an interesting question about to what extent “tightening up” collection procedures constitutes a change in objectives, policies and processes for managing risk, as set out in the cited IFRS 7.33. If working a bit harder to collect what’s already contractually yours is a disclosable change in these matters, then should you also disclose (say) changes in the personnel assigned to the area, or changes in the size of the font with which the collection terms are displayed on your invoices, or just about anything…?

The report also addresses the IAS 1 disclosure requirement, for issuers that present their expenses classified by function, to disclose additional information in the notes on the nature of the expenses, specifically including depreciation and amortization expense and employee benefits expense. The ASC’s reviews indicated that some issuers aren’t providing these disclosures at all, and others include in their breakdown a significant amount labelled as “other”, “which makes it impossible for readers to determine the nature of the other expenses.” The ASC provides an example of an issuer with $485 million of total expenses for which it asserts that items including $30 million in salaries, benefits and labour costs, $26 million in transportation costs; and $34 million in maintenance costs and other “should have been disclosed separately.” In truth, I find that a difficult assertion to fully support within the limited parameters of what IAS 1.104 and 105 actually say. But it’s certainly a useful reference point for issuers.

The final financial statement topic in the report is that of functional currency, which I’ve been meaning to return to in this space for a while. But not today…

The opinions expressed are solely those of the author

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