The Canadian Securities Administrators (CSA) recently published a consultation paper “seeking stakeholder input on potential ways to modernize securities legislation for public companies,” open for a 120-day comment period.

Here’s how it sets out one item relevant to the subject matter of this blog. A reminder that in Canada, “venture issuers” generally refers to smaller public companies:

• We have received feedback from some market participants that for some smaller venture issuers, the costs of compliance with respect to providing financial statements in accordance with certain aspects of IFRS Accounting Standards may have become disproportionate to the benefits received by investors. Some reasons cited for this include:
  • Complex judgements and estimates: Issuers are commonly required to make significant judgments or estimates when applying certain aspects of IFRS Accounting Standards, including in areas such as fair value measurements or the bifurcation of financial instruments. These complex accounting areas often require internal expertise or the use of external advisors and the related disclosures that are required can be challenging for smaller issuers to prepare. These same areas can also lead to higher external audit costs.
  • Frequency and scope of change: Venture issuers with limited resources may find it challenging to monitor, interpret and implement frequent changes to accounting standards, including consequential changes to accounting policies and disclosure.
• We have also received feedback that investors of some venture issuers may use financial statements differently, and that investment decisions in some of these venture issuers may place less emphasis on certain aspects of financial statement reporting. Consequently, some investors question whether the current financial statement reporting requirements are appropriately tailored for some venture issuers.

This leads them to set out the following “potential approach”:

• We are seeking input on whether the CSA should consider permitting a subset of venture issuers to elect to prepare their financial statements using an alternative approach to financial statement reporting, for example based on a modified application of certain aspects of IFRS Accounting Standards, that appropriately balances burden reduction and investor protection.

They set out various questions, including:

• Should the CSA reconsider the current reporting requirements in financial statements for a subset of venture issuers?
  • If yes, what outcomes or improvements would you like to see?
  • If not, why do you think the current requirements remain appropriate or necessary for all issuers regardless of size?
• What characteristics (e.g., stage of development, operating complexity, industry, revenue level, or financing frequency) should determine which venture issuers might be eligible for an alternative or proportionate financial statement reporting approach?
• What specific IFRS Accounting Standards requirements or disclosures present the greatest challenges for venture issuers in terms of cost or complexity? For example, are there particular standards or types of disclosures that require significant judgments, external valuations or specialised advisors?…

As written, and noting that the CSA seems basically committed to retaining IFRS for the issuers in question (rather than allowing them to use an alternative body of standards), the discussion seems problematic at best. The implication of the passage on complex judgments and estimates seems to be that certain issuers might be exempted from having to make those judgments and estimates in various areas, and the reference to financial instruments denotes an area in which any such exemption could be fairly tightly defined (although it’s hard to see why investors in a smaller issuer would be better served by having any volatile and risky investments on its books carried on a cost basis, say). Beyond that, the use of judgments and estimates is necessarily so pervasive (in recognizing and measuring impairment, accounting for business combinations, in analyzing multi-faceted revenue and other contracts, etc. etc.) that any broad-based easing of their use would render the statements pervasively unreliable.

It’s similarly hard to see how the second item, on the challenge of keeping up with changes in accounting standards, could be coherently translated into meaningful concessions, unless the proposal might be to freeze IFRS at a point in time and exempt certain issuers from anything that changes thereafter. Perhaps the notion is that small issuers should be allowed more time to implement complex standards, but the implementation periods imposed by the IASB are typically hardly ungenerous.

For both of the areas cited above, and potential others such as alleviating disclosure requirements in various respects, many of the more complex aspects of IFRS often don’t apply to smaller issuers by the very fact of their smallness, and if they do apply, then they may be particularly significant in the limited context of the entity. Overall, the idea of the CSA wielding its scalpel to the body of IFRS in the name of “modernization” evokes the image of a Dr. Victor Frankenstein pursuing his misguided notion of scientific advancement, albeit that the outcome would be more likely to provoke eye-rolling than terror…

The opinions expressed are solely those of the author.