Examen de la mise en œuvre - Financial Reporting and Assurance

Transcription

Formulaire de réponse
Pour être pris en considération, les commentaires
doivent être reçus au plus tard le
9 février 2015.
Examen de la mise en œuvre :
Chapitre 3856, Instruments financiers
Appel à informations
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Organisation :
Lapointe Petrone, CPA SENCRL
Personne-ressource :
Kathleen Berchet, CPA auditrice, CGA
Fonction :
Directrice en certification
Courriel :
kberchet@lgdp.qc.ca
Téléphone : 450-678-2665 #228
Les commentaires ont d’autant plus de valeur qu’ils fournissent des exemples précis de
difficultés d’application et décrivent clairement les effets sur l’information financière. S’il
y a lieu, le renvoi à un paragraphe ou à un groupe de paragraphes précis du chapitre
correspondant du Manuel permettra également de rehausser l’utilité des commentaires
exprimés. Les commentaires reçus par le CNC, à l’exception de ceux dont l’auteur aura
expressément demandé la confidentialité, pourront être consultés sur le site Web peu
après la date limite de réception des commentaires.
Question 1 : Évaluation initiale
La détermination des justes valeurs initiales des actifs financiers et des passifs
financiers pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, pour quel type
de transactions la détermination de la juste valeur s’avère-t-elle difficile? Dans quelle
mesure s’agit-il de transactions courantes et quels sont les facteurs qui rendent difficile
la détermination de la juste valeur?
difficulté dans la détermination si un taux d'intérêt est un taux du marché, s'il tient
compte adéquatement du risque associé au client, etc.
ex: taux d'un prêt sur véhicules (taux à 0% ou taux réduit); taux d'emprunt cautionné par
la SCHL, SHQ, etc.
Le fait de réévaluer un prêt initial à un montant autre afin de tenir compte d'un taux du
marché différent du taux réel ne fait que compliquer le traitement comptable et n'aide en
rien l'utilisateur des EF. Le propriétaire exploitant veut voir le montant réel de sa dette et
non une dette selon une JV calculée avec un taux qui n'est pas la réalité du contrat.
Question 2 : Évaluation ultérieure
a) Êtes-vous d’accord que les titres de capitaux propres cotés sur un marché actif
devraient être évalués à la juste valeur, tandis que les titres de capitaux propres qui
ne sont pas cotés sur un marché actif devraient être évalués au coût et les titres
d’emprunt, au coût amorti, à moins que l’entité ne choisisse de les évaluer à la juste
valeur? Dans la négative, pourquoi?
oui
b) Des difficultés d’ordre pratique se posent-elles lorsqu’il s’agit de déterminer si un
titre de capitaux propres doit être évalué à la juste valeur (c’est-à-dire lorsqu’il est
considéré comme coté sur un marché actif, par opposition à un marché peu actif)?
Dans l’affirmative, veuillez décrire ces difficultés.
non, pas pour nos clients qui ont leurs placements à la bourse active
Question 3 : Application de la juste valeur
Dans quelle mesure est-il courant, pour les entreprises à capital fermé, d’évaluer leurs
instruments financiers, autres que les titres de capitaux propres cotés sur un marché
actif, à la juste valeur? Y a-t-il suffisamment d’indications sur la détermination de la
juste valeur? Dans la négative, que faudrait-il donner en matière d’indications
supplémentaires?
pour les fonds mutuels.
Difficulté par contre de savoir si le fonds mutuel doit être à la JV ou au coût la quasitotalité du temps, les placements autres que boursiers sont au coût
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Question 4 : Opérations conclues avec des apparentés
Outre pour ce qui est de l’évaluation initiale, la question de savoir s’il faut appliquer le
chapitre 3840 ou le chapitre 3856 pour la comptabilisation d’actifs financiers ou de
passifs financiers pose-t-elle des difficultés? Dans l’affirmative, veuillez décrire ces
difficultés.
non
Question 5 : Dépréciation
a) L’application des indications sur la dépréciation contenues dans le chapitre 3856
pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, veuillez décrire ces
difficultés.
Les estimations relatives aux flux de trésorerie futurs attendus des actifs financiers
dépréciés reposent sur l’exercice, par la direction, du meilleur jugement possible,
fondé sur des hypothèses raisonnables et justifiables, et tiennent compte des divers
scénarios possibles.
Cette définition est vaste et selon les scénarios, cela peut donner lieu à des
montants substantiellement différents
b) Si vous êtes utilisateur d’états financiers, estimez-vous que les informations
relatives à la dépréciation sont utiles et opportunes? Pourrait-on rendre ces
informations plus utiles?
oui
Question 6 : Présentation — passif et capitaux propres
a) L’application des indications sur le classement d’un instrument dans le passif ou les
capitaux propres pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, dans
quelle mesure ces difficultés sont-elles courantes et quelles sont-elles? Veuillez
donner des exemples.
il y a de rares cas où le classement pose problème.
Difficulté rencontrée lors d'obligations convertibles. On doit classer les
composantes (difficulté à les distinguer et les évaluer) selon la substance du contrat
au moment initial, mais la substance peut changer dans le temps selon les
conditions du contrat.
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instrument comporte à la fois une composante passif et une composante capitaux
propres? Dans l’affirmative, dans quelle mesure ces difficultés sont-elles courantes
et quelles sont-elles? Veuillez donner des exemples.
oui: difficulté à évaluer les composantes
difficulté lorsque la conversion dépend de certains critères souvent extérieurs à la
société (sur lesquels elle n'a pas le contrôle).
c) Lorsqu’on détermine qu’un instrument est un instrument composé, la
comptabilisation de cet instrument pose-t-elle des difficultés d’ordre pratique? Dans
l’affirmative, dans quelle mesure ces difficultés sont-elles courantes et quelles sontelles? Veuillez donner des exemples.
comment on fait pour mettre un montant sur des options ou des bons de
souscription
Question 7 : Cessions de créances
a) Des difficultés d’ordre pratique se posent-elles dans l’application de l’Annexe B pour
le traitement comptable des cessions de créances? Dans l’affirmative, veuillez
décrire ces difficultés.
jamais eu ce cas
b) Existe-t-il des pratiques divergentes quant au moment de la décomptabilisation des
créances? Dans l’affirmative, veuillez décrire les différentes pratiques.
jamais eu ce cas
c) Dans quelle mesure est-il courant pour les entreprises à capital fermé canadiennes
de réaliser des opérations de titrisation ou d’affacturage?
Question 8 : Décomptabilisation des passifs
a) Des difficultés d’ordre pratique se posent-elles au moment de déterminer si un
passif est éteint ou s’il est plutôt modifié? Dans l’affirmative, veuillez donner des
exemples de ces difficultés.
oui, critères pas assez bien définis. Que veut dire modification substantielle? Laisse
trop de place au jugement.
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b) La comptabilisation d’une modification ou d’une extinction de passif financier poset-elle des difficultés? Dans l’affirmative, veuillez décrire ces difficultés.
oui, car on doit faire une évaluation à la JV du nouveau passif, le cas échéant. Si on
continue l'ancienne dette, on a pas de problème.
Question 9 : Comptabilité de couverture
a) L’application des dispositions relatives à la comptabilité de couverture contenues
dans le chapitre 3856 pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative,
veuillez fournir des exemples détaillés de ces difficultés.
jamais utilisé
b) Devrait-il être permis d’appliquer la comptabilité de couverture à d’autres catégories
de relations et d’éléments de couverture? Dans l’affirmative, à quelles catégories de
relations et d’éléments de couverture l’application de la comptabilité de couverture
devrait-elle être permise?
jamais utilisé donc je ne vois pas l'intérêt
c) Dans quelle mesure est-il courant, pour les entreprises à capital fermé, de conclure
des opérations comportant des relations de couverture ou des éléments de
couverture? En quoi l’élargissement du champ d’application de la comptabilité de
couverture permettrait-il d’améliorer l’utilité de l’information financière?
jamais utilisé donc je ne vois pas l'intérêt
Question 10 : Informations à fournir
a) Les préparateurs et les utilisateurs estiment-ils que la quantité d’informations à
fournir selon la norme est appropriée?
malheureusement, la section sur les risques aux EF est rarement lue par les
utilisateurs. Ces notes sont souvent remplies pour satisfaire aux normes mais
n'apportent rien de plus aux utilisateurs (surtout pour les petites entreprises dont le
propriétaire est exploitant)
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b) La conformité aux obligations d’information du chapitre 3856 pose-t-elle des
difficultés d’ordre pratique? S’il y a lieu, veuillez donner des exemples de ces
difficultés ainsi que des exemples d’informations à fournir qui, selon vous, ne sont
pas utiles.
voir a)
c) Les préparateurs et les utilisateurs estiment-ils que les dispositions concernant les
informations à fournir sur les risques et incertitudes des paragraphes 3856.53 et .54
contribuent à fournir des informations
je garderais risque de concentration de crédit, et risque de change.
Question 11 : Autres questions
Y a-t-il d’autres points problématiques pour les parties prenantes, dont il n’a pas été
question ci-dessus? Dans l’affirmative, veuillez fournir des précisions, y compris des
exemples dans la mesure où cela est pertinent.
non
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6
Response Questionnaire
To be considered, comments must be received by
February 9, 2015
Post-Implementation Review:
Section 3856, Financial Instruments
Request for Information
The AcSB welcomes comments on all aspects of the Request for Information.
This form is not intended to constrain your response. Each text box will
accommodate your full comments.
You are able to save and forward this form to others in your organization for review prior
to submission.
Organization:
Lapointe Petrone, CPA SENCRL
Contact Name:
Kathleen Berchet, CPA auditor, CGA
Position:
Assurance manager
Email:
kberchet@lgdp.qc.ca
Phone:
450-678-2665 #228
Comments are most helpful if they provide specific examples of application challenges
and/or a clear description of the impact on financial reporting. When applicable,
reference to a specific paragraph or group of paragraphs in the related Handbook
Section will also enhance the usefulness of comments provided. All comments received
by the AcSB will be available on the website shortly after the comment deadline, unless
confidentiality is requested. The request for confidentiality must be stated explicitly
within the response.
Question 1: Initial measurement
Are there challenges in practice in determining the initial fair values of financial assets
and liabilities? If so, for what types of transactions is determining fair value difficult?
How common are these transactions and what factors make it difficult to determine fair
value?
There is a challenge in determining whether an interest rate is a market rate, whether
client risk is adequately taken into account, etc.
For example, car loans (at 0% or a reduced rate), or borrowing rates guaranteed by the
CMHC or SHQ (Quebec’s housing corporation), etc.
Remeasurement of an original loan at another amount to take into account a market
rate that differs from the actual rate only complicates the accounting treatment and does
not help FS users. Owner-managers want to see the actual amount of their debt and not
one based on a FV calculated using a rate that is not reflected in a contract.
Question 2: Subsequent measurement
a) Do you agree that equity securities quoted in an active market should be measured
at fair value, while equity securities not quoted in an active market are measured at
cost and debt securities are measured at amortized cost, unless the entity elects to
measure them at fair value? If not, why not?
Yes.
b) Are there challenges in practice in determining when an equity security is required
to be measured at fair value (i.e., when it is considered to be quoted in an active
market vs. a thinly traded market)? If so, please describe these challenges.
No, not for our clients whose investments are in an active market.
Question 3: Application of fair value
How common is it that private enterprises measure financial instruments, other than
equity securities quoted in an active market, at fair value? Is there sufficient guidance
on how to determine fair value? If not, what additional guidance should be provided?
Additional guidance for mutual funds.
Most of the time, it is difficult to determine whether a mutual fund should be measured
at FV or at cost. Investments other than securities are measured at cost.
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Question 4: Related party transactions
Are there challenges in determining whether to apply Section 3840 or Section 3856 to
aspects of accounting for financial assets or liabilities besides initial measurement? If
so, please describe these challenges.
No.
Question 5: Impairment
a) Are there challenges in practice in applying the impairment guidance in Section
3856? If so, please describe these challenges.
Estimates of the expected future cash flows from impaired financial assets reflect
management’s best judgment, based on reasonable and supportable assumptions
and take into account the range of possible outcomes.
This definition is broad and, depending on the outcomes, can give rise to amounts
that differ substantially.
b) If you are a user of financial statements, do you find the impairment information
useful and timely? Are there ways in which the information could be made more
useful?
Yes.
Question 6: Presentation – Liabilities and equity
a) Are there challenges in practice in applying the guidance to determine whether an
instrument should be classified as a liability or equity? If so, how common is this
and what are the challenges? Please provide examples.
Classification rarely poses a challenge. One challenge is convertible bonds. The
components (which are difficult to separate and measure) should be classified
based on the substance of the contract at inception, but the substance can change
over time depending on the contract terms.
b) Are there challenges in practice in determining whether an instrument contains both
a liability and an equity element? If so, how common is this and what are the
challenges? Please provide examples.
Yes, measuring the components poses a challenge when the conversion depends
on certain criteria often outside a company’s control.
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c) When an instrument is determined to be a compound instrument, are there
challenges in practice in accounting for such instruments? If so, how common is this
How is an amount attributed to options or warrants?
Question 7: Transfer of receivables
a) Are there challenges in practice in applying Appendix B to determine how to
account for transfers of receivables? If so, please describe these challenges.
We have never encountered this situation.
b) Is there divergence in practice on when receivables are derecognized? If so,
please describe the alternatives used.
We have never encountered this situation.
c) How common are securitization and factoring transactions for private enterprises in
Canada?
Question 8: Derecognition of Liabilities
a) Are there challenges in practice in determining when a liability should be accounted
for as an extinguishment versus a modification? If so, please provide examples of
these challenges.
Yes, the criteria are not sufficiently defined. What does “substantially modified’’
mean? This leaves too much room for judgement.
b) Are there challenges in accounting for a modification or extinguishment of financial
liabilities? If so, please describe these challenges.
Yes, because the new liability must be measured at FV, where applicable. If the
original debt is continued, there is no challenge.
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Question 9: Hedge accounting
a) Are there challenges in practice in applying the hedge accounting requirements in
Section 3856? If so, please provide detailed examples of these challenges.
Never been used.
b) Should hedge accounting be permitted for other types of hedging relationships and
hedging items? If so, for what types of hedging relationships and hedging items
should hedge accounting be permitted?
Never been used therefore I do not see the benefit.
c) How common are transactions that involve these hedging relationships or hedging
items for private enterprises? How would increasing the scope of hedge accounting
improve the usefulness of financial reporting?
Never been used therefore I do not see the benefit.
Question 10: Disclosures
a) Do preparers and users think that the standard requires an appropriate level of
disclosure?
Unfortunately, users rarely read the section on risks in the FS. These notes are
often extensive to satisfy the standards but do not add value for users (especially
for owner-managers of small businesses).
b) Are there any challenges in practice complying with the disclosure requirements in
Section 3856? If applicable, please provide examples of challenges and examples
of disclosures you think do not result in useful information.
See a)
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c) Do preparers and users think that the disclosures on risks and uncertainties in
paragraphs 3856.53-.54 provide useful financial information? If not, how could this
guidance be improved to increase the usefulness of financial reporting taking into
account the cost of applying such guidance?
I think disclosures on credit concentration risk and foreign currency risk should be
maintained.
Question 11: Other matters
Do stakeholders have additional concerns on topics not covered by the above
questions? If so, please provide details of these concerns, including examples if
relevant.
No.
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February 9, 2015
to submission.
Organization:
Spacek & Norrad CPA's
Contact Name:
Nick Norrad
Position:
Partner
Email:
nickn@snaccounting.com
Phone:
506-457-2275
by the AcSB will be available on the website shortly after the comment deadline,
unless confidentiality is requested. The request for confidentiality must be stated
explicitly within the response.
value?
In practice my most significant challenge in determining initial fair value has
been for below-market interest rate loans. In Atlantic Canada, the federal
government has recently begun providing zero-rate loans to pre-revenue start
up companies through its ACOA program. The loans are repayable based on
a set % of revenue, once revenue is generated, or immediately in the event of
an asset sale by the company. As future cash flows (namely the revenues) are
very much uncertain, discounting those cash flows to come up with an initial
fair value is difficult. I cannot find guidance in the CPA Handbook where, if the
fair value is not reasonably determinable, we can revert to the face value of the
instrument. As such we are looking to require the clients to estimate their
future sales, or timing of an asset sale, to determine the point(s) at which the
loan will be repaid. Due to the high degree of uncertainty of these estimates, I
am concerned that sales will occur much quicker than anticipated, or an asset
sale occurs that perhaps was never contemplated and suddenly the debt must
be settled at an amount, possibly materially, higher than what is on the books.
I wish that, where fair value is not reasonably determinable, we could fall back
on the simple face value of the instrument. As for the commonality of these
transactions - in the past, they were quite uncommon, but even in our rather
small practice we have at least three to deal with in the upcoming year.
Another challenge is determining the fair value interest rate. In practice we are
not credit specialists and therefore do not know what an appropriate market
interest rate for debt with similar terms would be. Especially in my above-noted
example of a pre-revenue start up company. The reality in their situation is that
they simply would not receive an unsecured loan from any sort of arm's-length
institution such as a bank. So how do I determine what an appropriate
discount rate would be?
I agree
2
Not in my experience
In my experience, the only financial instruments recorded at fair value on my
clients' financial statements have been equity securities quoted in an active
market, and below-market interest rate loans.
The current guidance is fine if the inputs to your fair value calculation are
reliable. As I noted above regarding the zero-rate ACOA loans, when the
inputs are contingent on uncertain future events, the whole calculation
becomes a guess.
useful?
I am a preparer of financial statements, but if I were a user I believe I would
find impairment information useful, and timely so long as the financial
statements were prepared in a reasonable amount of time after year-end (i.e.
90-day bank reporting).
3
I have not had any significant challenges with this
We have only one current client with convertible debentures. 3856.22 provides
clear guidance.
In our rather small practice, such instruments are very uncommon.
I have no experience with these transactions
Canada?
In our practice in Fredericton, NB, such transactions are very much uncommon
these challenges.
I have not had any challenges in this area
4
In our practice in Fredericton, NB, such transactions are very much uncommon
disclosure?
In general, yes
A66 - liquidity risk - Where do we draw the line between disclosure here and
the requirement to add a going concern note?
Generally, yes. Although much of this disclosure seems to be common sense items that a knowledgeable financial statement user (especially for a private
company) would already know, and probably have a great deal more
knowledge of than what is actually disclosed.
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relevant.
Not to my knowledge
screen.
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February 9, 2015
to submission.
Organization:
David Baker, CPA, CA
Contact Name:
David Baker, CPA, CA
Position:
Proprietor
Email:
dbakerca@hotmail.com
Phone:
(226) 647-4979
by the AcSB will be available on the website shortly after the comment deadline,
unless confidentiality is requested. The request for confidentiality must be stated
explicitly within the response.
value?
I have found two aspects of paragraph 3856.07 which caused particular
difficulty:
1. Initial recording of all financial instruments at fair value:
The requirement to initially record zero-interest and low-interest term loans at
fair value has been particularly troublesome. Many private enterprise and notfor-profit users do not find the imputed interest expense meaningful and are
mislead by the discounted amount owing shown on the balance sheet. The
disclosure in the financial statement notes necessary to reconcile the legal
liability with the discounted balance presented in the balance sheet causes
further confusion. Two particular problems have been frequently noted: (a)
There is too much room for subjectivity in determining a fair value interest rate
(resulting in possible inconsistent treatment of similar transactions), and (b)
When there is no asset being purchased with low-interest financing, an
imaginary "gain" is recorded upon initial recording which is offset in subsequent
periods by imaginary "interest expense" (which is especially misleading for a
not-for-profit organization).
While a requirement to discount low-interest loans may be reasonable for
certain publicly-accountable enterprises (e.g. those that issue "zero coupon
bonds"), this requirement for private enterprises and not-for profit organizations
to discount low-interest term loans is unnecessarily complex and costly.
2. Allocation of financing fees to liability balances:
Unamortized financing fees are required to be capitalized as an offset to term
financial liabilities rather than be shown as prepaid assets. Again, this causes
confusion amongst users as well as unnecessary financial statement note
reconciliations. I feel that such fees meet the definition of an asset (shown in
paragraph 1000.25) as much as many other prepaid expenses and should be
presented as assets.
2
My only concern with this topic is that, for some private enterprises, financial
statements are not prepared until almost six months after the year-end, when
tax returns are due. As a result, in a volatile stock market, the fair values
shown for actively-traded equity securities may be significantly different from
their values on the date that the financial statements are completed. This may
require a subsequent events note which renders the fair value used to
determine the asset value and income in the financial statements less
meaningful.
No such problems noted.
The election available in paragraph 3856.13 is, in my experience, virtually
never seen in private enterprises. Occasionally I have seen it used by not-forprofit organizations. My only suggestion to clarify this election would be more
guidance as to what is meant by "the asset or liability" in subparagraph
3856.13(a). If, for example, an entity had previously accounted for a bond
investment at amortized cost, then purchased a separate and new bond
investment, is the new investment eligible for the fair value election? Could the
election be used when a new investment category of bond (e.g. government
versus corporate) is purchased? This vagueness should be clarified.
No such problems noted.
3
The symptoms of impairment shown in paragraph 3856.A15 are too broad. In
particular part (g) of that paragraph that describes national economic
conditions is too vague to be meaningful. Examples of situations under which
an impairment assessment is required should be limited to those which have a
direct relationship to expected decreases in future cash flows from that specific
financial instrument.
useful?
I have never seen an impairment adjustment in a real life situation other than
for accounts receivable.
My only exposure to a concern over such presentation relates to redeemable
preferred shares issued in a tax planning arrangement. I think that the current
method of accounting for such shares as equity is satisfactory and disagree
with the proposals in the current Exposure Draft(upon which I will be
commenting separately).
Not a commonly seen situation.
Not a commonly seen situation.
Never seen in my experience.
4
N/A
Canada?
Never seen in my experience.
these challenges.
Not a significant issue in my experience.
No challenges noted.
This topic is rarely seen in my experience in private enterprises and not-forprofit organizations.
No additional hedging relationships should be permitted as they would merely
result in more complex rules covering very obscure situations.
No changes should be made as these situations are too obscure (in my
experience) to warrant additional complexity to the Handbook standards.
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disclosure?
Two comments:
First, I feel that the disclosure requirements of paragraph 3856.38 relating to
financial assets is too limited. For example, a statement preparer has no
specific guidance as to whether the interest rates and maturity dates of bond
and GIC investments should be disclosed. That preparer can only try to meet
the general usefulness requirements of 3856.37. Such vagueness could result
in inconsistent disclosure amongst preparers.
Second, I feel that the requirement under 3856.46(a) to disclose "whether"
there have been any covenant defaults or breaches results in unnecessary
boilerplate disclosure. Had the standard been written to require disclosure only
"if" such defaults or breaches had occurred, any such disclosure would be
much more striking and meaningful.
No specific problems noted.
The disclosure required under paragraph 3856.53 has resulted in many
preparers merely copying and pasting boilerplate notes regarding financial
instrument risks into all financial statements. In my experience, such
disclosures are not useful to readers as they merely describe obvious business
conditions. The requirement for such disclosures could add unnecessary cost
to financial statement preparation, if such notes were not merely copied and
pasted. Also, any requirements resulting in meaningless financial statement
notes help to obscure important disclosures in an ocean of trivialities. These
general risk disclosure requirements should be deleted.
However, I do believe that the risk concentration disclosure requirements of
paragraph 3856.54 can be useful when those disclosures are limited to specific
and unusual situations.
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relevant.
screen.
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February 9, 2015
to submission.
Organization:
Nexia Canada representing 6 firms
Contact Name:
Stephen Schecter
Position:
Partner
Email:
schecter@nexiafriedman.ca
Phone:
514-731-7901
by the AcSB will be available on the website shortly after the comment deadline, unless
confidentiality is requested. The request for confidentiality must be stated explicitly
within the response.
value?
Occasionally there are. When financial instruments (receivable or payable) are issued
at non-market interest rates, 3856.07 suggests that the financial instrument be
measured at fair value. This requires a determination of market interest rate to be used
for discounting of the financial instrument’s expected cash flows.
These transactions are reasonably common. The market interest rate to be used is
often difficult to determine for private companies.
We agree.
We have not experienced any challenges in practice although guidance on what is or is
not an active market would be welcome.
Fairly frequently private enterprises enter into loans (receivable or payable) with arm’s
length parties at non-market interest rates (eg. government loans or where sellers of
capital assets provide financing). The guidance to determine fair value seems to be
sufficient. The challenge is the determination of the rate to be used, especially in a
situation where an entity has not recently incurred any other arm’s length debt.
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guidance on the determination of an appropriate discount rate to be used in various
situations would be helpful.
We have not encountered any difficulties in determining whether to apply Section 3840
or Section 3856. However, the guidance under Section 3840 should be explicit for
subsequent measurement as it is for initial measurement.
We have not encountered any.
useful?
Not applicable.
We have not experienced any challenges in this area.
3
If the situation outlined in 3856.21 occurs then 3856.22(a) permits the entity to measure
the equity component as zero or measure the more easily measurable component and
allocate the residual to the other component. We have not seen a situation where a
method other than these two options were carried out and feel that the likelihood of a
company selecting a more complex option are low.
We have not seen a high occurrence of these transactions. As a result, we cannot
comment on any challenges that may exist.
We do not find these transactions to be common for private enterprises.
Canada?
We do not find these transactions to be common for private enterprises.
these challenges.
4
We have not experienced any challenges.
We have no suggestions in this area.
Transactions that involve hedging relationships or hedging items for private enterprises
do occur – usually currency forward contracts - but they are not common. We find that
most entities undertaking such hedges do not choose to apply hedge accounting.
disclosure?
Yes.
We have not encountered any challenges.
Paragraph .53 states that an entity shall disclose the exposures to risk, how they arise
and any change in risk exposures from the previous period. These requirements are
general in nature and as a result, have led to disclosure that is more boilerplate in
nature as opposed to useful. The guidance could be improved by providing certain
minimum disclosures such as:
5
Currency risk – the amount by currency and nature of financial instruments
denominated in foreign currencies
Interest rate risk – the amount and nature of financial instruments subject to interest rate
risk
Other price risk – the amount and nature of financial instruments subject to market
relevant.
We have no other concerns or topics.
screen.
6
Tel: 416 865 0111
Fax: 416 367 3912
Toll-free: 888 505 7993
www.bdo.ca
BDO Canada LLP
36 Toronto Street
Suite 600
Toronto Ontario M5C 2C5
Rebecca Vilmann, CPA, CA
Director, Accounting Standards
Accounting Standards Board
277 Wellington Street West
Toronto, Ontario M5V 3H2
February 6, 2015
Re: Post-Implementation Review: Section 3856, Financial Instruments
Dear Ms. Vilmann,
We have read the above-mentioned Post-Implementation Review that was issued in October 2014
and are pleased to have the opportunity to provide responses to your specific questions as
outlined below. In addition, we wanted to note that we feel the Post Implementation Review
process is a welcome addition to the Board’s due process.
1. Initial Measurement: Are there challenges in practice in determining the initial fair
values of financial assets and liabilities? If so, for what types of transactions is
determining fair value difficult? How common are these transactions and what factors
make it difficult to determine fair value?
Most financial instruments arise as a result of a cash transaction with non-related parties,
which is the best evidence of fair value. In these types of transactions there are no
issues in determining fair value. However, there are a number of types of transactions
where determining fair value can be difficult. We have noted the following types of
transactions:
•
Related party transactions that are not in the scope of Section 3840. These types
of transactions are fairly common (i.e. transactions with management).
•
Transactions with family members who are not considered related parties as
defined by Section 3840. For example it is common for parents to provide
financing at non-market rates of interest to a company controlled by their adult
children. In most cases parents and adult children would not be considered
related.
•
Given Section 3856 also applies to Not-for-Profit organizations (NPOs). There are
a number of NPOs that receive or grant loans at non-market rates.
•
Transactions that do not involve cash, such as financing the purchase of plant,
property and equipment with loans. This is a very common situation in the
construction industry. These types of transactions cause issues as it can be
difficult to determine whether these loans are offered at market rates. This is
especially true in our current low interest rate environment.
An additional example of when determining fair value initially can be difficult is provided
in our response to question 8(b) below.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
Determining fair value in the first three situations above can be difficult since the
transaction is occurring between related parties, family members or in a NPO
environment and it is often not easy to obtain evidence of fair value since these same
types of transactions do not always occur where such relationships do not exist.
In the fourth situation above, we are also aware that there can be an identification and
application issue here as often preparers of the financial statements fail to identify that
there could be a difference between the rate the loan has been offered at and the
market rate. This lack of awareness can result in the loan not being measured and
recorded at its actual fair value initially.
In addition, users of the financial statements seem to understand the concept of
measuring and presenting a financial asset at fair value, but struggle more when it comes
to measuring and presenting financial liabilities at fair value. When a user, such as a
lender, sees a loan presented on the balance sheet or disclosed in the notes at a number
that is other than what the entity actually owes to the user (i.e. since the loan is being
measured initially at fair value because the rate given for the loan was not a market rate)
this often causes confusion and requires explanation. We believe the Board
acknowledged the fact that users would prefer loans recorded at face amount when
providing the option to measure the equity component of compound instruments at $0
(see paragraph .87 in the Basis of Conclusion for ASPE).
Although we believe recording financial liabilities at fair value on initial recognition
provides useful information, given the challenges identified above, we are concerned
that the cost/benefit criterion is not being met. We suggest the Board consider allowing
an option to measure financial liabilities at face amount similar to the option provided
for compound instruments.
2. Subsequent Measurement:
a. Do you agree that equity securities quoted in an active market should be
measured at fair value, while equity securities not quoted in an active market
are measured at cost and debt securities are measured at amortized cost, unless
the entity elects to measure them at fair value? If not, why not?
Yes, we agree.
b. Are there challenges in practice in determining when an equity security is
required to be measured at fair value (i.e., when it is considered to be quoted in
an active market vs. a thinly traded market)? If so, please describe these
challenges.
Yes, there are challenges in practice in determining whether an equity security is
required to be measured at fair value, these include:
•
What is meant by the term “equity instrument”? Does this mean the
legal definition or the accounting definition? For example, would
exchange traded puttable units be considered an equity instrument?
•
Are units in open ended mutual funds considered to be quoted in an
active market? Daily pricing exists for these units; however, they are not
actually traded on a market, instead the transactions are with the fund.
•
Many equity instruments listed on the TSX-V are thinly traded; however,
regular trading of these instruments does occur. Therefore these
instruments are actively traded. We believe actively traded is not the
same as thinly traded, however, we are aware that some may be
concluding that thinly traded securities are not actively traded leading to
diversity in practice. We believe clarification of what “active market”
means needs to be provided in the standard as this can be a significant
issue in Canada.
3. Application of fair value: How common is it that private enterprises measure financial
instruments, other than equity securities quoted in an active market, at fair value? Is
there sufficient guidance on how to determine fair value? If not, what additional
guidance should be provided?
We see many entities electing to measure debt securities at fair value, especially if they
have a portfolio of both equity and debt securities which are managed on a fair value
basis. In this case, fair value is readily available for the debt securities. It is not
common to see entities elect to measure instruments at fair value when fair value is not
readily available. As a result, we do not believe that additional guidance on determining
fair value is needed.
4. Related Party Transactions: Are there challenges in determining whether to apply
Section 3840 or Section 3856 to aspects of accounting for financial assets or liabilities
besides initial measurement? If so, please describe these challenges.
Yes, there are challenges in determining whether to apply Section 3840 or Section 3856
to aspects of accounting for financial assets or liabilities besides initial measurement.
Individuals find navigating between the standards difficult, as to deal with these
transactions you need to go back and forth between the two standards. As a result of the
confusion, individuals may end up applying the incorrect standard. We believe the
requirements would be much easier to follow and apply correctly if they were all located
in one standard.
We also find the guidance in Section 3840 difficult to apply to newly issued financial
instruments. For example, what is the carrying amount of a new loan and what is the
exchange amount when an asset is purchased through the issuance of new debt?
An additional example of difficulties in determining whether to apply the guidance in
Section 3840 or Section 3856 is provided in our response to question 8(a) below.
5. Impairment:
a. Are there challenges in practice in applying the impairment guidance in Section
We are not aware of issues in applying the impairment guidance in Section 3856.
b. If you are a user of financial statements, do you find the impairment
information useful and timely? Are there ways in which the information could be
made more useful?
We are not aware of any required improvements.
6. Presentation of Liabilities and Equity:
a. Are there challenges in practice in applying the guidance to determine whether
an instrument should be classified as a liability or equity? If so, how common is
this and what are the challenges? Please provide examples.
Much of this guidance is unchanged from Pre-changeover GAAP and as a result we
believe very few application issues exist.
b. Are there challenges in practice in determining whether an instrument contains
both a liability and an equity element? If so, how common is this and what are
the challenges? Please provide examples.
See our answer to question 6(a) above.
c. When an instrument is determined to be a compound instrument, are there
challenges in practice in accounting for such instruments? If so, how common is
We do not believe there are challenges in practice in accounting for compound
instruments due to the fact that the option to value the equity component of
compound instruments at $0 has resolved much of the complexity in accounting
for compound instruments.
7. Transfer of Receivables:
a. Are there challenges in practice in applying Appendix B to determine how to
We believe that much of Appendix B related to securitization and qualifying
special-purpose entity’s could be eliminated from Section 3856 as most entities
that previously used this guidance were publically accountable and are now
applying IFRS. As a result, when a private enterprise looks at Appendix B for
guidance now, it is difficult to apply since the entity has to look through a
significant amount of non-applicable complex guidance. We believe the guidance
in Appendix B should be simplified to make it relevant and useful for private
enterprises.
b. Is there divergence in practice on when receivables are derecognized? If so,
As mentioned above Appendix B is overly complex, as a result, we believe many
preparers do not realize that it applies to the less complicated transactions they
are entering into. As a result, we believe in many cases these transactions are
not accounted for correctly.
c. How common are securitization and factoring transactions for private
enterprises in Canada.
Securitizations are very rare in our private company client base. Although not
common, less complex transactions, such as factoring transactions do occur in our
client base.
8. Derecognition of Liabilities:
a. Are there challenges in practice in determining when a liability should be
accounted for as an extinguishment versus a modification? If so, please provide
examples of these challenges.
Yes, there are challenges in practice in determining when a liability should be
accounted for as an extinguishment versus a modification. The main challenge
lies in determining what is and is not included in the 10% test. The current
guidance included in Section 3856 is not straightforward and as a result we see
issues where individuals are not including the correct items in this test. As a
result, this can lead to the wrong conclusion and treatment of the liability. We
believe additional guidance is needed on what is and is not to be included in the
10% test.
In addition, in a situation where the financial liability is between related parties
and the transaction falls under Section 3840, it may be unclear to an entity using
the standards whether the guidance in Section 3856 on determining whether a
liability should be accounted for as an extinguishment versus a modification, is
required to be applied. This is another example of a situation where there are
challenges and confusion in determining the interaction between Section 3840
and Section 3856.
b. Are there challenges in accounting for a modification or extinguishment of
financial liabilities? If so, please describe these challenges.
Yes, there are challenges in accounting for a modification or extinguishment of
financial liabilities. If there is an extinguishment then an entity needs to fair
value the new debt. This is a non-cash transaction and once again in this
situation determining initial fair value can be difficult. We also believe this is an
issue that individuals miss identifying and as a result they do not realize the new
debt needs to be measured at fair value. Therefore, we believe that this needs
to be clarified in the standard or that the accounting for this type of transaction
needs to be simplified.
In addition, we have also noted a practical challenge in accounting for an
extinguishment of liabilities in a situation where Entity A has never paid an
invoice that is now quite old and Entity B who issued the invoice has never
followed up on the invoice requesting payment. In this situation, it appears that
Entity A will in all likelihood never be required to pay the invoice. However,
under the standard Entity A cannot remove the liability from its balance sheet,
since it has not paid the invoice and it has not been legally released by either
process of law or the creditor. It would be helpful if the Handbook included
guidance for this type of situation such that when it is virtually certain Entity A
would not be required to pay the invoice it could derecognize the liability.
9. Hedge Accounting:
a. Are there challenges in practice in applying the hedge accounting requirements
in Section 3856? If so, please provide detailed examples of these challenges.
On adoption of ASPE we believed a significant number of private enterprises that
had not previously been using hedge accounting would begin to adopt it due to
the simplifications in the standards. We have not seen an increase in the use of
hedge accounting. In fact, we actually saw a decrease as our private enterprise
agriculture clients could no longer apply hedge accounting when using futures.
We also believe the restrictions put on hedge accounting are not consistent with
the risk management strategies employed by our private enterprise clients. Since
we have not seen an increase in the use of hedge accounting, we do not believe
any benefit has been achieved by the simplifications.
b. Should hedge accounting be permitted for other types of hedging relationships
and hedging items? If so, for what types of hedging relationships and hedging
items should hedge accounting be permitted?
We believe hedge accounting should be permitted for futures contracts as they
are too common to be excluded from the allowable hedging items.
We also believe an option to treat own use contracts as financial instruments as is
currently allowed under IFRS 9 should be permitted. We feel an “own use
option” would allow entities to achieve the benefits of hedge accounting without
having to use hedge accounting.
c. How common are transactions that involve these hedging relationships or
hedging items for private enterprises? How would increasing the scope of hedge
accounting improve the usefulness of financial reporting?
See our response to questions 9(a) and (b).
10. Disclosures:
a. Do preparers and users think that the standard requires an appropriate level of
disclosure?
We believe that on the whole the standard requires and appropriate level of
disclosure. However, we do not believe the current disclosure of risks and
uncertainties is useful.
b. Are there any challenges in practice complying with the disclosure requirements
in Section 3856? If applicable, please provide examples of challenges and
examples of disclosures you think do not result in useful information.
We believe the current disclosure on risks and uncertainties is time consuming to
prepare and is not useful to financial statement users.
c. Do preparers and users think that the disclosures on risks and uncertainties in
paragraphs 3856.53-.54 provide useful financial information? If not, how could
this guidance be improved to increase the usefulness of financial reporting
taking into account the cost of applying such guidance?
Based on our experience preparers and users of private enterprise financial
statements do not find that the disclosures on risks and uncertainties helpful as
typically this disclosure is boilerplate and as a result provides little to no useful
information.
We believe information on risks and uncertainties would be better represented by
requiring the following:
•
Currency risk would be adequately disclosed by disclosure of balances of
financial instruments denominated in a foreign currency.
•
Interest rate risk would be adequately addressed by disclosing which
instruments are subject to variable rates and instruments that mature in the
current year
•
Liquidity risk is adequately addressed by properly classifying instruments as
current vs. long –term and disclosure of principal payments required in long
term debt.
•
Price risk could be addressed by disclosing information on investments and
derivatives held.
•
Credit risk should be limited to receivables and debt securities and addressed
by disclosures related to economic dependence and disclosures required for
impairments.
In many cases these disclosures are already included in the financial statements.
Requiring these types of disclosures and clarifying that these disclosures address
the risk and uncertainty objectives would eliminate the current boilerplate
disclosures that are being included in financial statements.
11. Other Matters: Do stakeholders have additional concerns on topics not covered by the
above questions? If so, please provide details of these concerns, including examples if
relevant.
We have no other matters to note.
Thank you for your consideration of the above-noted responses. If you have any further
questions, please contact me at 416-369-6937.
Yours sincerely,
Armand Capisciolto, CPA, CA
CPA (Michigan)
National Accounting Standards Partner
BDO Canada LLP
Grant Thornton LLP
12th Floor
50 Bay Street
Toronto, ON
M5J 2Z8
T +1 416 366 4240
F +1 416 360 4944
www.GrantThornton.ca
February 9, 2015
Rebecca Villmann, CPA, CA, CPA (Illlinois)
Raymond Chabot Grant Thornton LLP
Suite 2000
National Bank Tower
600 De La Gauchetière Street West
Montréal, Québec
H3B 4L8
T + 514 878 2691
F + 514 878 2127
www.rcgt.com
Via: ed.accounting@cpacanada.ca
Dear Ms. Villmann:
Re: Request for Information – Post-Implementation Review: Section 3856, Financial
Instruments
Grant Thornton LLP and Raymond Chabot Grant Thornton LLP (we) would like to thank you for the
opportunity to provide comments on the Accounting Standards Board (AcSB) Request for
Information Post-Implementation Review: Section 3856, Financial Instruments.
According to the AcSB’s comments in the Overview to the Request for Information, the objective of
this project is to assess, notably, whether Section 3856 provides useful information to users of financial
statement and whether there are challenges in applying the standard. Overall, we believe that Section
3856 provides useful information to users of private enterprise financial statements, and we also
believe there are some challenges in the application of certain areas of the standard, especially
pertaining to initial measurement at fair value, related party transactions and the transfer of receivables.
We also include suggestions on how to improve the disclosure requirements related to risks and
uncertainties. Please refer to Appendix A for our responses to the specific questions in the Request
for Information.
If you wish to discuss our comments or concerns, please contact Rinna Sak (Rinna.Sak@ca.gt.com,
416-607-2712) and/or Gilles Henley (henley.gilles@rcgt.com, 514-393-4809).
Yours sincerely,
Rinna Sak, CPA, CA
Grant Thornton LLP
Gilles Henley, CPA, CA
Raymond Chabot Grant Thornton LLP
Appendix A – Responses to Request for Information questions
Are there challenges in practice in determining the initial fair values of financial assets and
liabilities? If so, for what types of transactions is determining fair value difficult? How
common are these transactions and what factors make it difficult to determine fair value?
Yes, there are challenges in practice in determining the initial fair value of financial assets and liabilities.
The two main challenges are determining the:
 appropriate market interest rate for loans with off-market rates of interest; and
 timing and amounts of expected future cash flows for financial assets or liabilities with
repayment terms based on future operating cash flows.
Some examples of these types of transactions include:
 Automobile dealers offering financing at zero or low interest rates;
 Loans from provincial or federal agencies (e.g., Local development centres in Québec that
offer loans to entities at low interest rates to promote the economic development or Finance
PEI, which offers loans to agricultural producers).
 The loans are repayable so they do not fall under the scope of Section 3800 Government
Assistance. In many cases, entities receive loans that they would not have otherwise
received from regular financial institutions, which can make the determination of an
appropriate discount rate even harder. As a result, some entities have accepted
qualifications in their audit reports due to the added cost in determining the appropriate
discount rates to determine initial fair value.
 In the case of agricultural loans from Finance PEI, the government of PEI issues loans to
numerous farmers at the same rate, which adds to the challenge of determining whether
the government rate is the market rate (i.e., since it is the same rate offered to all farmers
who receive the loans) or if entities must estimate a “market rate” through other means.
 Loans from family members and friends (i.e., angel investors) who do not meet the definition
of a related party in Section 3840 Related Party Transactions. These loans are often non-interest
bearing;
 Low interest or no interest loans to an employee or member of management; and
 Contingent consideration to be received by a seller in a business combination
All of these examples are common in practice for both private enterprises and not-for-profit
organizations. In fact, not-for-profit organizations that provide below market rate loans to individuals
and other entities struggle with the costs associated with estimating market rates of interest and
expected cash flows, and the tracking of two sets of books for loan balances.
In paragraph 60 of the Basis for Conclusions to Accounting Standards for Private Enterprises (ASPE)
from June 2010, the AcSB concluded that initial measurement at fair value, which is consistent with
the treatment by publicly accountable enterprises, was the appropriate choice; however, we believe this
choice may have been offset by the cost to private enterprises and not-for-profit organizations in
arriving at fair values in the common scenarios we describe above.
2
(a) Do you agree that equity securities quoted in an active market should be measured at
fair value, while equity securities not quoted in an active market are measured at cost
and debt securities are measured at amortized cost, unless the entity elects to measure
them at fair value? If not, why not?
Yes, we agree that equity securities quoted in an active market should be measured at fair value, while
equity securities not quoted in an active market are measured at cost and debt securities are measured
at amortized cost, unless the entity elects to measure them at fair value. In practice, there has been
some confusion as to what is meant by equity with regards to real estate investment trusts (REITs) as
they are redeemable at the option of the holder, additional guidance would be useful to assist in this
determination.
(b) Are there challenges in practice in determining when an equity security is required to be
measured at fair value (i.e., when it is considered to be quoted in an active market vs. a
thinly traded market)? If so, please describe these challenges.
Generally, we believe that there are few challenges in practice in determining when an equity security is
required to be measured at fair value; however, in some situations, professional judgment must be
applied. For example, with mutual/pooled funds, it can be challenging to determine if the prices are
readily and regularly available due to a lack of guidance within the standard (e.g., when the prices are
available on a weekly or daily basis as compared to a monthly or quarterly basis). As a result, we
propose that the AcSB add guidance as to when prices for an equity security would be considered
“readily and regularly available” as it would be useful to assist in comparability between private
enterprise financial statements.
How common is it that private enterprises measure financial instruments, other than equity
securities quoted in an active market, at fair value? Is there sufficient guidance on how to
determine fair value? If not, what additional guidance should be provided?
Generally, the only time private enterprises measure financial instruments, other than equity securities
quoted in an active market, at fair value is when they have an investment portfolio that includes other
items like bonds. This scenario is not common for private enterprises other than investment
companies or holding companies because most private enterprises tend to reinvest excess cash back
into their businesses or distribute excess cash to shareholders. For private investment or holding
companies, the whole investment portfolio is generally measured at fair value. The use of the fair
value election is used more by not-for-profit organizations who have investment portfolios. For
instruments in mutual and pooled funds that would not be considered quoted in an active market,
generally, entities elect to measure these instruments at fair value due to the difficulties in applying the
guidance in ASPE with regards to distributions received when these types of investment are measured
at cost.
We understand that the AcSB was considering a project to review the guidance in IFRS 13 Fair Value
Measurement to assess if any of the concepts would be useful to private enterprise stakeholders. While
we believe that more guidance on how to determine fair value would be helpful in Part II of the CPA
Canada Handbook, in general, we do not believe that ASPE requires additional guidance to the extent
of IFRS 13. Nevertheless, it would be useful to provide a consistent definition of fair value
throughout ASPE.
3
aspects of accounting for financial assets or liabilities besides initial measurement? If so,
please describe these challenges.
Yes, we believe there are some challenges and confusion in determining whether to apply Section 3840
or Section 3856 as follows:
 There is a lack of guidance regarding the initial measurement of financial instruments
originated or issued in related party transactions in Section 3840. Paragraph 3856.08 refers to
Section 3840 for the initial measurement of a financial instrument originated or issued in a
related party transaction; however, Section 3840 does not provide any specific guidance.
There are three illustrative examples in Section 3840 that provide some guidance, but they are
not a primary source of generally accepted accounting principles (GAAP). In practice, the one
area that demonstrates the most inconsistency in treatment is the accounting for a new
financial instrument originating or issued as part of a related party transaction as the current
definition of carrying amount is difficult to apply in this case.
 The flow chart in the appendix to Section 3840 stops after initial measurement which has led
to questions from practitioners and preparers about where to look for guidance on the
subsequent measurement of these financial instruments.
(a) Are there challenges in practice in applying the impairment guidance in Section 3856? If
Overall, we believe the method is working well and we do not believe there have been any
substantial challenges in practice in applying the impairment guidance in Section 3856.
(b) If you are a user of financial statements, do you find the impairment information useful
and timely? Are there ways in which the information could be made more useful?
This question is not applicable as we are not a user of financial statements.
Question 6: Presentation of liabilities and equity
(a) Are there challenges in practice in applying the guidance to determine whether an
instrument should be classified as a liability or equity? If so, how common is this and
what are the challenges? Please provide examples.
The need to assess whether an instrument is a liability, equity, or has elements of both is not
common, but it does arise and we believe the guidance is fairly straight forward; nevertheless, this
area is one that can often be missed by preparers who may not realize there are clauses in
agreements that may affect the presentation of the instrument (e.g., redemption clauses and change
of control clauses).
(b) Are there challenges in practice in determining whether an instrument contains both a
liability and an equity element? If so, how common is this and what are the challenges?
Please provide examples.
Please see the response to question 6(a).
4
(c) When an instrument is determined to be a compound instrument, are there challenges
in practice in accounting for such instruments? If so, how common is this and what are
No, we do not believe there are significant challenges in practice. In many cases, entities use the
choice in paragraph 3856.22 to measure the equity component at zero.
(a) Are there challenges in practice in applying Appendix B to determine how to account for
transfers of receivables? If so, please describe these challenges.
We believe that the guidance in Appendix B is too complex for the types of transactions to
transfer receivables entered into by many private enterprises. The guidance in Appendix B was
carried over unchanged from pre-changeover GAAP, which contemplates the complexities
encountered by publicly accountable enterprises and is based on complex US GAAP rules. The
AcSB stated in its Basis for Conclusions to ASPE from June 2010 that it planned to consider
international projects at a later date in relation to the transfers of receivables. With the publication
of the IASB’s final standard, IFRS 9 Financial Instruments, we advise the AcSB to consider the IFRS
model because it is based on the transfer of “risks and rewards” related to the receivables, and the
risk and rewards model is one with which private enterprises are quite familiar.
The current model of determining whether a sale has occurred is based on the concept of whether
there has been a transfer of control over the receivables to other parties; this concept is less
understood than a “transfer of risks and rewards” model. Accountants and preparers that are used
to a risks and rewards model, often quickly conclude that a transfer is a secured borrowings rather
than a sale simply because the company continues to be exposed to future credit losses. Under the
transfer of control model this, in and of itself, often does not lead to secured borrowing treatment.
In addition, the analysis under the current guidance can be costly for entities given the detail in the
standard; in particular, the first requirement in paragraph 3856.B5 (isolation beyond the reach of
the transferor and its creditors) generally requires the use of legal advisers which may involve a
legal opinion to assess this item.
As a result, we strongly urge the AcSB to review the IFRS 9 model and adopt a more principlesbased model that is simpler to understand and less costly to apply for private enterprises.
(b) Is there divergence in practice on when receivables are derecognized? If so, please
describe the alternatives used.
We aren’t aware of any divergence in practice.
(c) How common are securitization and factoring transactions for private enterprises in
Canada
Securitization transactions are rare, factoring transactions occur more frequently than
securitization transactions.
5
Question 8: Derecognition of liabilities
(a) Are there challenges in practice in determining when a liability should be accounted for
as an extinguishment versus a modification? If so, please provide examples of these
challenges.
The biggest challenge encountered in practice is a general lack of awareness that a change in an
agreement may result in extinguishment accounting treatment. This issue may not be one that can
be resolved by a revision to the standards; however, the majority of the guidance related to this
concept is somewhat buried within Appendix A to Section 3856, so we suggest that placing more
of it within the main body of the standard may assist in drawing entities’ attention to the concepts.
In addition, moving up the derecognition section within the standard and adding titles that direct
preparers and practitioners to the concept more clearly may also be useful.
(b) Are there challenges in accounting for a modification or extinguishment of financial
One of the challenges in accounting for a modification or extinguishment of financial liabilities
relates to whether an entity should include or exclude the effects of a conversion option or the
issuance of warrants in the 10 percent cash flow test. In addition, there are challenges with respect
to how to account for the effect of a conversion option and the issuance of a warrant once the
entity has concluded on whether there is a modification or an extinguishment of a financial
liability. While this issue is not widespread in practice, there is no guidance in the standard.
(a) Are there challenges in practice in applying the hedge accounting requirements in
Yes, we believe there are challenges in applying the hedge accounting requirements in Section
3856; however, we strongly believe that having a simplified model is very useful to private
enterprises. In practice, we find that private enterprises can be reluctant to adopt hedge
accounting, not because they do not want to, but because they find the language quite confusing.
For example:
 the use of the terms “hedged item” and “hedging item”, which are virtually identical terms
except for the three letters, makes it quite difficult to follow the guidance provided.
 the guidance in paragraph 3856.33 pertaining to when the hedged item matures before or
after the hedging item has been difficult to apply in practice even though some annual
improvements were made to that paragraph over the last few years. In situations where
the settlement dates match exactly, the accounting is generally fairly straightforward;
however, in situations where this is not the case, the language and wording in the standard
can be quite difficult to follow. Accordingly, we believe additional application guidance
would be helpful in this area to cover more than the simple examples provided in the
Guide to ASPE (Chapter 45).
(b) Should hedge accounting be permitted for other types of hedging relationships and
hedging items? If so, for what types of hedging relationships and hedging items should
hedge accounting be permitted?
In order to keep the model fairly simplified, we understand that a limited number of situations,
which the AcSB considered were the most common hedge relationships, were captured in the
standard. If the AcSB wishes to add additional types of hedging relationships to the list, we would
not object; however, we believe the model should remain as simple as possible. Two areas where
we have encountered private enterprises that wanted to access hedge accounting but have not
been able to do so given the current model are: agriculture enterprises that may use commodity
futures to hedge against price fluctuations in anticipated purchases and sales of commodities and
private enterprises that use a forward starting interest rate swaps to hedge against interest rate
fluctuations in an anticipated issuance of a debt.
6
(c) How common are transactions that involve these hedging relationships or hedging
In practice, the vast majority of hedges for which hedge accounting is used in our client base are (i)
hedges of an interest-bearing asset or liability hedged with an interest rate swap and (ii) hedges of
an anticipated transaction denominated in a foreign currency hedged with a forward contract. The
two additional areas we mentioned in question 9(b) above are not common. In our view,
increasing the scope of hedge accounting would improve the usefulness of financial reporting for
those entities that hedge using relationships that do not currently fall into the current model, but
as we said in our answer to question 9(b), we believe it is more important to maintain a model that
is as simple as possible and that captures as many situations as possible, which we believe the
current model does.
(a) Do preparers and users think that the standard requires an appropriate level of
disclosure?
Overall, we believe the standard requires an appropriate level of disclosure.
(b) Are there any challenges in practice complying with the disclosure requirements in
Section 3856? If applicable, please provide examples of challenges and examples of
disclosures you think do not result in useful information.
In the Basis for Conclusions to ASPE from June 2010, the AcSB states that the most frequent
financial statement users in the private enterprise sector are creditors and that they often have the
ability to request (and generally receive) additional information from the enterprise when needed.
The requirement to disclose whether any financial liabilities were in default or in breach of any
term or covenant during the period that would permit a lender to demand accelerated repayment is
a disclosure that many entities believe provides little added benefit since their lenders (the main
user of private enterprise financial statements) would already have been aware of the default as a
result of mandatory reporting during the period. In addition, this disclosure requires added audit
or review costs and in practice.
(c) Do preparers and users think that the disclosures on risks and uncertainties in
Generally, preparers and users do not find the disclosures on risks and uncertainties useful as the
information is mostly boilerplate; however, to make the disclosures more useful additional costs
would have to been incurred. Nevertheless, we believe that the disclosure of exposures to certain
type of risks, if significant, provides useful information when it cannot be easily derived from
reading the financial statements. Below, please find our suggestions on how to improve the
guidance by focusing on specific areas:
Credit risk
Evidence that an entity is exposed to credit risk is evident from the balance sheet, thus we do not
believe it is necessary to disclose exposure to this risk, except for concentrations of this risk.
Currency risk
Useful disclosure of currency risk could be provided through the disclosure of the significant
balances denominated in foreign currencies at the reporting date and the foreign exchange rates
used to translate those amounts at the end of the reporting period. This disclosure would convey
any concentrations of risk.
7
Interest rate risk
Most entities already provide information concerning the interest rates on their interest-bearing
financial instruments; as a result, the exposure to interest rate risk is generally already apparent
from the financial statements. Therefore, we do not believe it is necessary to disclose exposure to
this risk.
Other price risk
The majority of other price risk disclosures relate to the exposure to market fluctuations on
investments in equities quoted in an active market; if an entity has already disclosed their
investment in these types of financial instruments, there is no need for this disclosure. Also, this
risk is not well understood by preparers as the term “other price risk” is not clear. If the AcSB
retains this disclosure, some examples of areas in which the AcSB would expect disclosures related
to this risk would be useful.
Concentrations of risk
Concentrations of risk are useful to users when they are not readily apparent (e.g., concentrations
of credit risk in accounts receivable from a specific geographical jurisdiction).
Do stakeholders have additional concerns on topics not covered by the above questions? If
so, please provide details of these concerns, including examples if relevant.
Although it doesn’t arise often, we believe it would be helpful if contingent consideration that arises as
part of a net asset purchase (that does not fall under the scope of Section 1582 Business Combinations) is
specifically listed as being in the scope of Section 3856. We would also suggest that it be addressed in
Section 3061 Property, Plant and Equipment and Section 3064 Goodwill and Intangible Assets. At the same
time, explicit guidance on how to account for this consideration from the side of the seller should also
be added to Section 3280 Contingencies and Section 3400 Revenue. Currently, there is guidance for
contingent consideration in acquisitions that fall within the scope of Section 1582, but there is no
guidance for net asset acquisitions which has resulted in some confusion as to whether the
consideration in these types of transactions falls within the scope of Section 3856.
8
Deloitte LLP
2 Queen Street East
Suite 1200
Toronto ON M5C 3G7
Canada
Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca
February 9, 2015
by email: ed.accounting@cpacanada.ca
Ms. Rebecca Villmann
Toronto, ON M5V 3H2
Dear Ms. Villmann:
Re: Invitation to Comment on Post-Implementation Review: Section 3856, Financial Instruments.
We appreciate the opportunity to respond to the Accounting Standards Board (“AcSB”) PostImplementation Review: Section 3856, Financial Instruments issued in October, 2014.
Please find attached our comments to the specific questions raised in the Post-Implementation Review
(“PIR”). If you require any further information, please contact Diana De Acetis at 416-601-6203 or Brian
Devereux at 604-640-4994.
Yours truly,
Julie Corden
National Professional Practice Director
Private Companies, Public Sector and Not-for-Profit Organizations
Deloitte LLP
Post-Implementation Review: Section 3856, Financial Instruments
February 9, 2015
Page 2
1. Are there challenges in practice in determining the initial fair values of financial assets and
liabilities? If so, for what types of transactions is determining fair value difficult? How
common are these transactions and what factors make it difficult to determine fair value?
Yes, there can be challenges with determining the initial fair value of financial instruments.
Private entities may receive loans on terms that are favourable relative to market (e.g. below
market interest or interest free loans). These loans may be received from: [1] non-arm’s length
parties such as friends, neighbours, or relatives who do not meet the technical definition of a
“related party” under Section 3840 or [2] arm’s length parties, such as certain government
agencies which provide such loans as an incentive to undertake or continue certain activities.
In both cases, the requirements are the same – these loans are required to be measured at fair
value in accordance with Section 3856.07. Section 3856. A8 states that fair value “can be
estimated as the present value of all future cash receipts discounted using the prevailing market
rates of interest for a similar instrument (similar as to currency, term, type of interest rate, or
other factors) with a similar credit rating.” For entities which do not have third-party, arm’s
length financing obtaining a prevailing market rate of interest for a similar instrument with a
similar credit rating may be difficult and costly to determine. This situation is common among
private companies, including those in the development stage. In addition, similar complexities
exist for entities with debt with a demand feature or debt with no stated repayment terms, for
which Section 3856 requires discounting from the first date payment could be demanded. (see
Section 3856.A12 and A13) For companies in these situations, many will seek assistance from
their accounting advisors and/or valuation specialists to access such information.
2. (a) Do you agree that equity securities quoted in an active market should be measured at
fair value, while equity securities not quoted in an active market are measured at cost and
debt securities are measured at amortized cost, unless the entity elects to measure them at
fair value? If not, why not?
Yes
2. (b) Are there challenges in practice in determining when an equity security is required to be
measured at fair value (i.e., when it is considered to be quoted in an active market vs. a
thinly traded market)? If so, please describe these challenges.
Yes. A challenge exists for not-for-profit entities which invest in pooled funds. The pooled funds
may hold investments in money market securities, bonds or equity securities which are publicly
traded. The pooled funds are not listed on a stock exchange but the funds publish their net asset
values (“NAV”) per unit on a daily, weekly or monthly basis. In some cases, the units are
redeemable on a daily basis at the published NAV, and in other cases, the requests for unit
redemptions are accumulated and the redemptions are made on a weekly or monthly basis. A
question arises as to whether the units in the pooled funds are considered to be similar to equity
instruments that are traded in an active market and, therefore, are required to be measured at fair
value in accordance with Section 3856.12(a).
The Basis for Conclusions to Part II states that: “The AcSB noted that judgment is necessary in
some cases to determine whether a particular security is an equity instrument that is traded in an
February 9, 2015
Page 3
active market. For example, the AcSB observed that investments that are conduits for traded
securities, such as pooled or mutual fund units, might meet the criteria for fair value
measurement if the investments are liquid and prices for the units reflect the net asset value of the
underlying pool. The ability to elect fair value measurement for any financial instrument at
initial recognition makes it easier to measure investments with similar characteristics in the same
manner when some are actively traded and others are not.” (paragraph 73)
It is not clear whether evaluating the “liquidity” of the underlying investments held by a pooled
fund would necessarily be indicative of whether the pooled fund units are considered to be
“actively traded”. This would seem to focus the analysis on the nature of the investments held in
the pooled fund rather than on how readily an investor in the pooled fund could redeem its units
relative to how readily a shareholder could sell its shares in an active market. Consideration may
be given to providing guidance that focuses on:
• whether the units in a pooled fund are redeemable on a daily basis (without restriction)
• whether the redemptions are required to be made at the published daily NAV and
• the extent of discretion available to the fund to refuse or defer redemption requests.
This approach would appear to more closely align with the guidance in paragraph 3856.A9 for
evaluating whether an equity instrument is traded in an “active market”. When an entity elects to
apply the fair value option, it need not determine whether an “active market” exists, but it would
need to be satisfied that the NAV represents fair value, and accordingly, the first two conditions
above may be relevant to such analysis.
3. How common is it that private enterprises measure financial instruments, other than equity
In our experience, it is not common for private enterprises to avail themselves of the option to
record financial instruments other than equity securities quoted in an active market at fair value.
4. Are there challenges in determining whether to apply Section 3840 or Section 3856 to
aspects of accounting for financial assets or liabilities besides initial measurement? If so,
Yes. Several challenges exist with respect to the accounting for financial instruments in related
party transactions. These include:
1) How to account for a newly issued financial instrument in a related party transaction
In some circumstances a financial instrument may be originated as part of the related party
transaction. For example, a parent could transfer land to its wholly-owned subsidiary in exchange
for a newly issued loan. Assume the transaction is accounted for at its carrying amount in
accordance with Section 3840.08. Section 3840 defines “carrying amount” as “the amount of an
item transferred, or cost of services provided, as recorded in the accounts of the transferor, after
adjustment, if any, for amortization or impairment of value”. Therefore, it is clear that the
February 9, 2015
Page 4
carrying amount of the land that is recorded by the subsidiary is the carrying amount recorded by
the parent (transferor), however, the carrying amount of the newly issued loan is less clear.
The carrying amount of the loan may depend on the terms of the loan. For example, if the loan
has no specified terms of repayment or the loan is repayable on demand, it would appear to be
appropriate for it to be recorded at its face amount (as is suggested by Example 11 of Section
3840). If the terms of the loan are such that it bears a below market rate of interest and has a
fixed repayment date, it is unclear whether the loan would be initially recognized at its face
amount or the present value of such payments computed using the below market rate of interest.
These are the types of considerations that exist when determining the initial accounting for a
newly issued loan.
If the consideration transferred is not a loan but rather redeemable preferred shares issued in a tax
planning arrangement that fall within the scope of paragraph 3856.23, a potential “mismatch”
exists between the accounting applied by the issuer and the holder. The issuer would record the
redeemable preferred shares at their par, stated or assigned value in accordance with paragraph
3856.23, which often is a nominal amount. However, a question arises as to whether the holder
would record the investment in the redeemable preferred shares at the amount due on demand, on
the basis that it has the right to demand and receive such payment anytime at its option, or at an
alternative amount. As a result, the application of paragraph 3856.23 could result in a substantial
difference between the amounts payable and receivable recorded by the counterparties to the
same transaction.
Given the lack of explicit guidance in Section 3840 and the frequency with which related party
transactions occur in private companies, it would be helpful to provide guidance on how an entity
should determine the “carrying amount” of a newly issued financial instrument in Section 3840.
2) How to subsequently account for a financial instrument in a related party transaction
In some cases, an entity may transfer an existing financial instrument in a related party
transaction. For example, a parent may transfer a loan receivable due from a third party, which is
carried at amortized cost, to its wholly-owned subsidiary for no consideration. The transaction
qualifies for measurement at carrying value in accordance with Section 3840.08. Therefore, the
parent would de-recognize the loan receivable and record an offsetting entry to equity; the
subsidiary would record the loan receivable at its carrying amount recorded by the parent with an
offsetting entry in equity.
Questions arise as to how the loan receivable recorded by the subsidiary would be accounted for
subsequent to initial recognition. For instance, would the subsidiary be required to accrete the
loan receivable up to its face amount on maturity in accordance with paragraph 3856.11; would
such accretion be recognized in the income statement in accordance with paragraph 3856.15. In
addition, would the loan receivable be required to be assessed for impairment in accordance with
the requirements of Section 3856.
The questions arise because Section 3856 indicates under the sub-heading “Initial measurement”
that “when a financial asset is originated or acquired or a financial liability is issued or assumed
in a related party transaction, an entity shall measure it in accordance with Related Party
Transactions, Section 3840.” Because Section 3840 does not contain guidance on the subsequent
February 9, 2015
Page 5
measurement of related party transactions, the question arises for financial instruments issued in a
related party transaction whether an entity would follow the guidance in Section 3856.
In Part V, paragraph 3855.60 provided helpful guidance in this regard indicating that “When the
financial asset or financial liability transferred in a related party transaction is classified as a heldto-maturity investment, a loan or receivable, or a financial liability other than one held for trading,
the amount determined in accordance with Section 3840 provides the basis for subsequent
measurement at amortized cost.” This guidance provided direction in stating that even though the
financial instrument was not initially measured at fair value in accordance with Section 3856 that
does not preclude Section 3856 from being applied subsequently to such instrument. Section
3855.61 contains similar guidance when a financial instrument is originated in a related party
transaction – stating that “When the financial asset or financial liability that originated in a related
party transaction is classified as a held-to-maturity investment, a loan or receivable, or a financial
liability other than one held for trading, the amount determined in accordance with Section 3840
provides the basis for subsequent measurement at amortized cost”.
Consideration should be given to providing guidance that would clarify whether the subsequent
measurement of financial instruments in a related party transaction would follow the guidance in
Section 3856 (as was suggested in Part V, Section 3855). This would apply to financial
instruments originated in a related party transaction as well as those pre-existing financial
instruments that are transferred in a related party transaction.
3) How to account for the subsequent impairment and forgiveness of a related party loan
A question arises as to how to account for the subsequent impairment and forgiveness of a loan in
a related party transaction. Consider, for example, the situation where a parent has transferred a
building to its wholly owned subsidiary in exchange for an intercompany loan of $5 million. The
transaction is a related party transaction which is accounted for at carrying amount in accordance
with Section 3840.29. Therefore, the parent would de-recognize the building and recognize the
loan receivable, with any differential recognized in equity.
Several years after the transfer, the parent determines that the subsidiary is unable to pay the full
$5 million owing. Due to the subsidiary’s financial condition, the parent determines that only $4
million is collectible, but for tax planning or other strategic reasons, the parent decides to settle
the outstanding balance for $2 million.
Therefore, it appears there are two events occurring: 1) the subsequent impairment of the loan
receivable and 2) a related party transaction to forgive or settle a portion of the remaining balance
due from the subsidiary. On the basis that the loan receivable would be accounted for in
accordance with Section 3856 subsequent to its initial recognition, the parent would recognize an
impairment loss of $1 million in income. On the basis that the settlement or forgiveness of $2
million of the loan is a related party transaction, it would appear that it would be recognized in
equity (by analogy to the guidance in paragraph 3840.29 for the initial accounting for related
party transactions). However, given the lack of explicit guidance in Section 3840 for the
subsequent accounting for financial instruments issued or acquired in related party transactions it
is unclear whether transactions involving impairment and settlement are being separately
distinguished or whether such transactions are being accounted for together through income or
through equity.
February 9, 2015
Page 6
It may be helpful to provide guidance that would clarify the application of Section 3856 and 3840
when accounting for the subsequent impairment in a loan due from a related party and its
forgiveness (settlement).
5. (a) Are there challenges in practice in applying the impairment guidance in Section 3856? If
No substantive challenges were noted.
5
(b) If you are a user of financial statements, do you find the impairment information useful
and timely? Are there ways in which the information could be made more useful?
N/A (not a user)
6
instrument should be classified as a liability or equity? If so, how common is this and what
are the challenges? Please provide examples.
A challenge may exist in determining when it is appropriate to classify redeemable preferred
shares as liabilities versus when it is appropriate to apply the exception in paragraph 3856.23.
The challenge arises because the nature of the transactions intended to be captured by the
exception in paragraph 3856.23 appears narrower than the types of transactions which could be
effected through the sections of the Income Tax Act cited in the paragraph.
6
liability and an equity element? If so, how common is this and what are the challenges?
Please provide examples.
No substantive challenges were noted. Any challenges identified appear to be mitigated by an
entity’s decision to elect as a policy choice to measure the equity component of compound
financial instruments at zero as permitted by paragraph 3856.22.
6
(c) When an instrument is determined to be a compound instrument, are there challenges in
practice in accounting for such instruments? If so, how common is this and what are the
No substantive challenges were noted.
7
One of the challenges in practice relates to determining whether the transferred receivables have
been “isolated” from the transferor – put presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership in accordance with paragraph 3856.B5. While
the criteria for isolation in S. 3856, Appendix B are unchanged from those in Part V, AcG-12,
Transfers of Receivables, the judgments involved and the nature of evidence considered when
evaluating whether such condition was met in AcG-12 was aided by the existence of Assurance
February 9, 2015
Page 7
Guideline AuG-28, that has since been withdrawn from the CPA Canada Handbook. Assurance
Guideline AuG-28, Using a legal opinion as audit evidence concerning a transfer of financial
assets, provided guidance as to when the use of a legal specialist may be necessary to obtain
competent evidential matter to support management’s assertion that the isolation criteria have
been met in certain situations, and, where a legal opinion is obtained, provided guidance as to the
types of language in such legal opinion that would support management’s assertion that the
transferred receivables have been put presumptively beyond the reach of the transferor and its
creditors as well as examples of language that would not support such assertion. Consideration
may be given to reviewing whether such guidance should be incorporated into Section 3856 of
the Handbook in order to assist in the application of the requirements in Section 3856, Appendix
B.
7
(b) is there divergence in practice on when receivables are derecognized? If so, please
We have not been made aware of divergence in practice.
7
Canada
In our experience, securitization transactions by private entities are uncommon. Some private
entities enter into factoring transactions (e.g. selling accounts receivable for a discount) but they
are not considered common.
8
(a) Are there challenges in practice in determining when a liability should be accounted for
as an extinguishment versus a modification? If so, please provide examples of these
challenges.
Yes, a challenge identified is whether equity issued to a lender should be considered in the 10%
test per S.3856.A52 for purposes of assessing whether the transaction results in an extinguishment
or a modification.
For example, an entity may issue warrants to a lender as consideration for the lender’s concession
to extend the maturity of a debt obligation or otherwise modify its terms. A question arises as to
whether the fair value of such warrants should be included in the 10% test and, if so, how. We
understand that different views may exist as to how the warrants might be considered in the 10%
test – for example, some may include the fair value of the warrants in the 10% test, whereas
others may only include the fair value of the warrants if an initial test performed which does not
consider such warrants indicates a change of less than 10% (as a change greater than 10% would
be indicative that an extinguishment of the debt has occurred).
A related question is when an entity has chosen as its accounting policy to measure the equity
component of a financial instrument at zero as permitted by paragraph 3856.22, which extends to
warrants detachable from a financial liability, would the entity be required to measure the fair
value of the warrants issued for purposes of the 10% test. If the answer to such question is “yes”,
would the availability of such information on the fair value of the warrants, negate the entity’s
ability to continue to apply the exemption in paragraph 3856.22 (as it now has an estimate of the
fair value of the warrants). The question arises because some view paragraph 3856.22 as an
February 9, 2015
Page 8
accommodation to allow an entity not to have to measure the fair value of an equity component of
a financial instrument, not an opportunity to not record the fair value of an equity component
once one has already been determined (as may be the case in a modification).
It is noteworthy that neither US GAAP nor IFRS appear to contain explicit guidance as to how
the issuance of equity instruments such as warrants would be treated for purposes of the “10%
test”.
8
Challenges which exist flow from determining whether an entity’s election to account for the
equity component of a newly issued financial instrument at zero, would impact the accounting for
such instrument if the transaction was determined to be a modification or an extinguishment.
9
(a) Are there challenges in practice in applying the hedge accounting requirements in
No substantive challenges have been noted.
9
hedging items? If so, for what types of hedging relationships and hedging items should
hedge accounting be permitted?
We would encourage the AcSB to revisit whether the use of futures contracts may, in certain
circumstances, qualify for hedge accounting. We understand that certain entities in the
agricultural sector use futures contracts in order to economically hedge adverse changes in
commodity prices, however futures contracts, unlike forward contracts, are ineligible to be used
as hedging items. As indicated in the Basis for Conclusions June 2010, “the AcSB confirmed that
special accounting for futures contracts and options used as hedging items would not be
permitted. Futures contracts rarely match the critical terms of a contract perfectly due to their
standardized quantities and settlement dates. An enterprises that hedges with futures contracts
must account for those contracts at fair value …” (paragraph 107)
At the time Section 3856 was developed, it is our understanding that it was designed to allow
hedge accounting for a limited number of hedging instruments provided there was strict
adherence to a number of qualifying conditions. Since the issuance of Section 3856, some of the
conditions necessary to achieve hedge accounting have been made more flexible, such as an
increase in the maximum number of days between a hedged transaction and the maturity of a
hedging forward contract from 14 to 30 days. While this amendment provided for an increased,
though tolerable level of ineffectiveness, for forward contracts, the AcSB did not revisit its
position on futures contracts for which a lack of critical terms match was cited as one of the
reasons for their inadmissibility. Given that the AcSB has a project underway to develop
accounting standards for Agriculture, we encourage them to take this opportunity to revisit
whether the use of futures contracts would be eligible as hedging instruments to achieve hedge
accounting, and, if so, the conditions under which this would be permissible.
February 9, 2015
Page 9
9
(c) How common are transactions that involve these hedging relationships or hedging items
for private enterprises? How would increasing the scope of hedge accounting improve the
usefulness of financial reporting?
As indicated in the response to question 9(b) above, these transactions are common among certain
entities operating in the agricultural sector (e.g. hog producers). It is possible that in some
specific circumstances, the use of futures contracts may assist in achieving a better degree of
matching between the recognition of the gains and loss on the futures contracts with the gains and
losses incurred on the underlying anticipated transactions they are designed to hedge.
10 (a) Do preparers and users think that the standard requires an appropriate level of
disclosure?
N/A (neither a preparer nor user)
10 (b) Are there any challenges in practice complying with the disclosure requirements in
Section 3856? If applicable, please provide examples of challenges and examples of
disclosures you think do not result in useful information.
No
10 (c) Do preparers and users think that the disclosures on risks and uncertainties in
guidance be improved to increase the usefulness of financial reporting taking into account
the cost of applying such guidance?
N/A (neither a user nor preparer). We would however observe that the disclosures made
concerning risks and uncertainties for financial instruments can at times be voluminous and/or
generic. Some form of instructive guidance or illustrative examples would be helpful in
demonstrating how disclosures for risks and uncertainties can be tailored to focus on those risks
and uncertainties that are most significant and specific to a company’s operations.
Given that investments are often the most significant asset for not-for-profit organizations, some
guidance may be helpful which would integrate the NFPO’s investment policies, and their
compliance with such policies, together with the risk and uncertainties disclosures in a
meaningful way.
11 Do stakeholders have additional concerns on topics not covered by the above questions? If
No
ABCD
KPMG LLP
Bay Adelaide Centre
Suite 4600
333 Bay Street
Toronto ON
M5H 2S5
Telephone (416) 777-8500
Fax (416) 777-8818
www.kpmg.ca
March 6, 2015 *
Ms. Rebecca Villmann, CPA, CA,
CPA (Illinois)
Toronto, ON M5V 3H2
via e-mail to ed.accounting@cpacanada.ca
Dear Ms. Villmann:
Re:
October 2014
We appreciate this opportunity to respond to the request for information in conjunction with the postimplementation review of Section 3856, Financial Instruments; Accounting Standards for Private
Enterprises.
Our specific comments in response to the questions posed in the request are provided below:
1. Are there challenges in practice in determining the initial fair values of financial assets and
liabilities? If so, for what types of transactions is determining fair value difficult? How common
are these transactions and what factors make it difficult to determine fair value?
Based on our experience, the challenges in initial recognition at fair value relate mainly to establishing
an appropriate discount rate. The challenge is amplified when there is an extended repayment schedule.
Preparers often fail to apply discounting when measuring these types of transactions, and many of
them rely on their public accountant to assist in selecting an appropriate discount rate. The challenge is
not only on the preparer’s side, but it is on the public accountant as well.
Transactions that we encounter regularly that are challenging to initially measure at fair value are
primarily transactions with low or zero (i.e. non-market) stated interest rates, such as with suppliers,
closely related entities that are not considered related parties (per the definition in the CPA Canada
Handbook – Accounting), government agencies, and vendors in a business combination. These
transactions are common in the private enterprises business community. It is not clear that the benefit
of initial measurement at fair value warrants the cost of determining a fair value that is often very
subjective and of little value to the users of the financial statements.
We therefore believe that from a cost benefit perspective, the initial measurement at fair value may not
warrant the requisite resources and efforts. In addition, appropriate disclosure, such as the disclosures
* previously filed on
February 9 & 10, 2015
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
KPMG Canada provides services to
KPMG LLP.
ABCD
March 6, 2015
Page 2
for related party transactions, would likely be sufficient to meet the need of the users of the financial
statements to understand the economics of the transactions. Our suggestion is to consider deleting the
requirement for fair value measurement where fair value is not reliably measurable.
2. a) Do you agree that equity securities quoted in an active market should be measured at fair
value, while equity securities not quoted in an active market are measured at cost and debt
securities are measured at amortized cost, unless the entity elects to measure them at fair value?
If not, why not?
We agree that equity securities quoted in an active market should be measured at fair value because it
is readily and easily available. We also agree that equity securities not quoted in an active market
should be measured at cost and debt securities measured at amortized cost. If entities, such as
investment holding companies, want to account for all of the components of their investment portfolio
at fair value, they can use the fair value option, taking into consideration our comments in response to
question 2b.
2. b) Are there challenges in practice in determining when an equity security is required to be
measured at fair value (i.e., when it is considered to be quoted in an active market vs. a thinly
traded market)? If so, please describe these challenges.
In today’s world, the complexity of financial instruments keeps increasing, and it is not always clear
what constitutes an “equity” instrument, when applying the guidance in Section 3856.
Instruments which are not easy to categorize include REIT units, exchange traded funds, mutual funds,
etc.
We therefore believe that a definition of “equity securities” should be added to Section 3856.
3. How common is it that private enterprises measure financial instruments, other than equity
In our experience, it is not common for private businesses to use the fair value option for financial
instruments other than equity securities quoted in an active market. However, investment holding
companies and not for profit organizations often make the fair value election, where the entity wants to
have the same basis of measurement for all its investments. We do not believe additional guidance,
such as IFRS 13, is necessary.
4. Are there challenges in determining whether to apply Section 3840 or Section 3856 to aspects of
accounting for financial assets or liabilities besides initial measurement? If so, please describe
these challenges.
Section 3840 provides measurement guidance for the initial recognition of a financial asset or a
financial liability resulting from a related party transaction. However, both Sections 3840 and 3856
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stop with the guidance on initial measurement. We understand that there is diversity of practice in
accounting subsequent to initial measurement because the Handbook is silent on this matter.
We believe that subsequent measurement for financial instruments originating in a related party
transaction should be done at amortized cost and that a reference in Section 3840 to Section 3856 be
added to that effect, and vice-versa.
We also are concerned about the lack of guidance on accounting for a convertible debt between related
parties, which is scoped out of the initial recognition requirements in Section 3856. Would the entity
have to bifurcate the conversion feature and ascribe a value to it because the option of ascribing a zero
value to the conversion feature is only available under Section 3856? It would seem inappropriate to
require more rigorous accounting for a related party transaction than is required for an arm’s length
transaction. We often see this type of instrument issued to venture capitalists who are already
shareholders and therefore considered related parties.
5. a) Are there challenges in practice in applying the impairment guidance in Section 3856? If so,
We are not aware of any significant challenges in practice in applying the impairment guidance in
Section 3856.
5. b) If you are a user of financial statements, do you find the impairment information useful and
timely? Are there ways in which the information could be made more useful?
We are not the users of financial statements.
6. a) Are there challenges in practice in applying the guidance to determine whether an instrument
should be classified as a liability or equity? If so, how common is this and what are the
There are clearly challenges in classifying today’s complex financial instruments, especially in the
private entity world where conventional debt and equity capital is not always available.
We see debt instruments (legal form), which are convertible into a variable number of common shares.
The debt is never repayable in cash and the only feature that leads to liability classification is that the
debt will be settled by issuing a variable number of common shares. Many private businesses struggle
that such an instrument is a liability. This could be equally difficult for the instrument holder and
issuer.
6. b) Are there challenges in practice in determining whether an instrument contains both a
liability and an equity element? If so, how common is this and what are the challenges? Please
provide examples.
There are many very complex financial instruments in the private business environment; we believe
that the key is to clearly articulate the transaction, and use professional judgment. Attempting to
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Page 4
provide more guidance or rules on how to account for such instruments would not likely be costeffective.
Also refer to our comment on convertible debts between related parties in question 4 above.
6. c) When an instrument is determined to be a compound instrument, are there challenges in
challenges. Please provide examples.
We believe that there are no specific challenges, apart from what has already been addressed in our
previous comments.
7. a) Are there challenges in practice in applying Appendix B to determine how to account for
transfer of receivables? If so, please describe these challenges.
We see very few of these transactions by entities applying ASPE. We do observe that the controlbased approach in Appendix B is based on the US GAAP standard, and requires a legal confirmation,
which can be costly for private entities. The IFRS model based on risks and rewards appears to be
simpler in its application. We suggest that this be looked into by the AcSB but we do not see it as a
priority.
7. b) Is there divergence in practice on when receivables are derecognized? If so, please describe
the alternative used.
We are not aware of divergence in practice.
7. c) How common are securitization and factoring transactions for private enterprises in Canada?
Based on our experience, factoring is sometimes used, but securitization is not common in the private
entity space.
8. a) Are there challenges in practice in determining when a liability should be accounted for as an
extinguishment versus a modification? If so, please provide examples of these challenges.
There are challenges and we believe that there is diversity in application in practice, due to the lack of
sufficiently specific guidance.
The exiting guidance originated when the matching principle was still relevant. We question whether
the distinction between a modification and an extinguishment is still providing useful information and
value to the users of the financial statements.
We suggest that the numerical guidelines be deleted, which would fit more with the principle-based
spirit of the ASPE framework. The determination of whether there has been an extinguishment or a
modification would be based on whether the entity’s risk profile as a borrower has changed
substantively, based on professional judgment. Alternatively, the information needs of users may be
adequately met by expensing all costs related to the old debt, and capitalizing the cost of issuance of
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the “new” debt, without the need for an assessment of whether there was a modification or
extinguishment.
Our assessment would also be applicable to renegotiations of the terms and conditions of lines of
credit.
8. b) Are there challenges in accounting for a modification or extinguishment of financial
We have encountered challenges related to convertible debt, and also when the conversion features are
modified. For example, it is not clear when applying the 10% test if the equity feature should be taken
into consideration. Some of these considerations were addressed in old EIC-88 and EIC-71, but were
not carried forward into Part II.
In addition, it is not clear how an entity should account for legal fees incurred, whereas old EIC-88 in
Handbook – XFI was much more directive on this point.
9. a) Are there challenges in practice in applying the hedge accounting requirements in Section
3856? If so, please provide detailed examples of these challenges.
We believe that hedge accounting under ASPE is very straight forward. The biggest challenge for an
entity is the limited number and nature of hedging relationships for which private enterprises can apply
hedge accounting. There are many hedging relationships which are fully effective which cannot be
accounted for as hedges under Section 3856.
9. b) Should hedge accounting be permitted for other types of hedging relationships and hedging
items? If so, for what types of hedging relationships and hedged items should hedge accounting
be permitted?
There are financial instruments, other than forward contracts, available in the financial markets that are
increasingly being used by private enterprises to establish economic hedges. We would recommend
that the principle-based approach to hedge accounting of IFRS 9, Financial Instruments (2013), which
more closely aligns hedge accounting with risk management, be considered by the AcSB for
incorporation into Section 3856. Based on IFRS 9, and what we are observing in practice, additional
hedging relationships that should be accommodated under ASPE include:
-
Interest rate swaps where the hedged item is either highly probable forecast interest payments or
highly probable forecast interest receipts.
-
The risk component of non-financial items as hedged items.
-
Anticipated transactions denominated in a foreign currency hedged with an option contract to
mitigate the effect of changes in future foreign currency exchange rates.
9. c) How common are transactions that involve these hedging relationships or hedging items for
private enterprises? How would increasing the scope of hedge accounting improve the usefulness
of financial reporting?
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March 6, 2015
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We believe that such transactions are sufficiently common to warrant increasing the scope of hedge
accounting to better reflect the economics of other types of hedging relationships.
10. a) Do preparers and users think that the standard requires an appropriate level of disclosure?
We believe that in general, Section 3856 requires an appropriate level of disclosure, with the following
comments:
The disclosure requirements in 1520.03 state that income from investments measured using the cost
method, and income from investments measured at fair value, should be presented separately on the
face of the income statement. We do not believe that this level of segregation on the face of the income
statement provides useful additional information to the users. Based on our experience, we believe that
this level of differentiation is not meeting the cost benefit test. This requirement should be moved to
paragraph 1520.04, where it could be presented in a note.
10. b) Are there any challenges in practice complying with the disclosure requirements in Section
3856? If applicable, please provide examples of challenges and examples of disclosures you think
do not result in useful information.
We believe that the risks and uncertainties disclosures do not provide useful information to the readers
as entities are generally using boiler plate note disclosures.
In addition, we believe that the disclosure of covenant breaches that occurred “during the period” is a
challenge for both preparers and assurance providers. We believe that users’ primary focus and
concern is covenant breaches as at the balance sheet date. In the private entity world, the primary users
of the financial statements are the entity and its lenders, both of whom are presumed to already be
aware of covenant breaches that occurred during the year. Requiring assurance providers to obtain
evidence as to whether covenant breaches occurred during the period requires additional work and
does not meet the cost vs. benefit criterion. We believe that the requirements in Part V were sufficient,
i.e. that disclosures of covenant breaches be required for breaches that exist as at the balance sheet
date.
Further, to ensure consistency, we recommend that paragraph 3856.52 (d) be amended to include
disclosure of transaction costs (“...separately identifying amortization of premiums, discounts,
financing fees, and transaction costs;…”). In addition, we suggest that the guidance in paragraphs
3856.A3 and .A4 be amended to also address transaction costs.
10. c) Do preparers and users think that the disclosures on risks and uncertainties in paragraphs
3856.53-.54 provide useful information? If not, how could this guidance be improved to increase
the usefulness of financial reporting taking into account the cost of applying such guidance?
As indicated in our response to question 10b, we do not believe that the disclosures on risks and
uncertainties required by paragraphs 3856.53-.54 provide useful information, because of the way the
preparers are applying the guidance. We believe that much of the information can be derived by the
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users from other disclosures requirements, and that only certain additional disclosures may be
required, as follows:
-
Adding a requirement to disclose when a non-current financial asset is denominated in a foreign
currency.
-
Adding a disclosure requirement for when a short-term loan or operating line of credit is
denominated in a foreign currency.
-
Restricting the disclosure of concentration of credit risks to only trade accounts receivables.
11. Do stakeholders have additional concerns on topics not covered by the above questions? If so,
please provide details of these concerns, including examples if relevant.
In developing Part II and Section 3856, there was a clear understanding that there would be no
requirement to identify, and separately account for embedded derivatives. However, we do find that
with the current wording in Section 3856, it is difficult to support this statement. We therefore suggest
that paragraph 3856.03 be amended to clearly articulate that embedded derivatives are not in the scope
of Section 3856, except as otherwise provided for in the Section.
*****
Thank you for this opportunity to provide our comments. We would be pleased to provide further
clarification of our views as you may require. Please contact Lucie Lavoie at 514 840 2515 if you wish to
discuss further.
Yours truly,
KPMG LLP
Chartered Accountants
Montréal, le 9 février 2015
Rebecca Villmann, CPA, CA,
CPA (Illinois)
Directrice, Normes comptables
Conseil des normes comptables
277, rue Wellington Ouest Toronto (Ontario) M5V 3H2
Madame,
Vous trouverez ci-joint les commentaires conjoints des Groupes de travail techniques NCECF –
Comptabilité financière – Partie II et OSBL – Comptabilité financière – Partie III, ainsi que du
Groupe de travail sectoriel – Coopératives de l’Ordre des comptables professionnels agréés du
Québec concernant l’appel à informations « Examen de la mise en œuvre : Chapitre 3856,
Instruments financiers ».
Nous vous serions reconnaissants de nous faire parvenir une copie de la traduction anglaise de
nos commentaires.
Veuillez prendre note que ni l’Ordre des comptables professionnels agréés du Québec, ni
quelque personne que ce soit ayant participé à la préparation des commentaires ne peuvent être
tenus responsables relativement à leur utilisation et ils ne sont tenus à aucune garantie de
quelque nature que ce soit découlant de ces commentaires, comme décrit dans le déni de
responsabilité joint à la présente.
Veuillez agréer, Madame Villmann, mes salutations distinguées.
Annie Smargiassi CPA auditrice, CA
Représentante des Groupes de travail techniques NCECF – Comptabilité financière – Partie II et
OSBL – Comptabilité financière – Partie III ainsi que du Groupe de travail sectoriel sur les
Coopératives
p. j.
Déni de responsabilité et commentaires
DÉNI DE RESPONSABILITÉ
Les documents préparés par les Groupes de travail techniques et sectoriels de l’Ordre des
comptables professionnels agréés du Québec (Ordre) ci-après appelés les « commentaires »,
sont fournis selon les conditions décrites dans la présente, pour faire connaître leur opinion sur
des énoncés de principes, des documents de consultation, des exposés-sondages préliminaires
ainsi que des exposés-sondages publiés par le Conseil des normes comptables, le Conseil des
normes d’audit et de certification, le Conseil sur la comptabilité dans le secteur public, le Conseil
sur la gestion des risques et la gouvernance et d’autres organismes.
Les commentaires fournis par ces groupes de travail ne doivent pas être utilisés comme
substitut à des missions confiées à des professionnels spécialisés. Il est important de noter que
les lois, les normes et les règles sur lesquelles sont émis les commentaires peuvent changer en
tout temps et que, dans certains cas, les commentaires écrits peuvent être sujets à controverse.
Ni l’Ordre, ni quelque personne que ce soit ayant participé à la préparation des commentaires ne
peut être tenu responsable relativement à l’utilisation de ces commentaires et il n’est tenu à
aucune garantie de quelque nature que ce soit découlant de ces commentaires. Les
commentaires donnés ne lient pas, par ailleurs, les membres des Groupes de travail techniques
et sectoriels l’Ordre ou, de façon plus particulière, le Bureau du syndic de l’Ordre.
La personne qui se réfère ou utilise ces commentaires assume l’entière responsabilité de sa
démarche ainsi que tous les risques liés à l’utilisation de ceux-ci. Elle consent à exonérer l’Ordre
à l’égard de toute demande en dommages-intérêts qui pourrait être intentée par suite de toute
décision qu’elle aurait pu prendre en fonction de ces commentaires. Elle reconnaît également
avoir accepté de ne pas faire état de ces commentaires reçus via les Groupes de travail dans
les avis exprimés ou les positions prises.
COMMENTAIRES DES GROUPES DE TRAVAIL TECHNIQUES NCECF – COMPTABILITÉ FINANCIÈRE – PARTIE II ET OSBL –
COMPTABILITÉ FINANCIÈRE – PARTIE III AINSI QUE DU GROUPE DE TRAVAIL SECTORIEL – COOPÉRATIVES DE L’ORDRE DES CPA DU
QUÉBEC RELATIFS À L’EXPOSÉ-SONDAGE « ACTIONS PRIVILÉGIÉES RACHETABLES ÉMISES À TITRE DE MESURE DE
PLANIFICATION FISCALE ».
2
MANDAT DES GROUPES DE TRAVAIL
Les Groupes de travail techniques NCECF – Comptabilité financière – Partie II et OSBL –
Comptabilité financière – Partie III ainsi que le Groupe de travail sectoriel – Coopératives de l'Ordre
des comptables professionnels agréés du Québec ont comme mandat notamment de recueillir et de
canaliser le point de vue des praticiens exerçant en cabinet et de membres œuvrant dans les affaires,
dans les services gouvernementaux, dans l'industrie et dans l'enseignement ainsi que le point de vue
d’autres personnes concernées œuvrant dans des domaines d’expertise connexes.
Pour chaque exposé-sondage ou autre document étudié, les membres des Groupes de travail
mettent leurs analyses en commun. Les commentaires ci-dessous reflètent les points de vue
exprimés et, sauf indication contraire, ces commentaires ont fait l'objet d'un consensus parmi les
membres des Groupes de travail ayant participé à cette analyse.
Les commentaires formulés par les Groupes de travail ne font l'objet d'aucune sanction de l'Ordre. Ils
n'engagent pas la responsabilité de celui-ci.
COMMENTAIRES DES GROUPES DE TRAVAIL TECHNIQUES NCECF – COMPTABILITÉ FINANCIÈRE – PARTIE II ET OSBL – COMPTABILITÉ
FINANCIÈRE – PARTIE III AINSI QUE DU GROUPE DE TRAVAIL SECTORIEL – COOPÉRATIVES DE L’ORDRE DES CPA DU QUÉBEC RELATIFS À
L’EXPOSÉ-SONDAGE « ACTIONS PRIVILÉGIÉES RACHETABLES ÉMISES À TITRE DE MESURE DE PLANIFICATION FISCALE ».
3
COMMENTAIRES GÉNÉRAUX
Les membres ont indiqué que les normes comptables pour les entreprises à capital fermé devraient
être élaborées de façon à répondre aux besoins des petites, mais également des plus grandes entités
à capital fermé. Certains membres présents à la rencontre provenaient de grandes entités à capital
fermé et, de façon générale, ils croient que la simplification des normes ne doit pas se faire au
détriment de ces plus grandes entités. Ils ont donné l’exemple de la comptabilité de couverture qui a
été simplifiée à un point tel qu’elle ne reflète plus les besoins de certaines plus grandes entités. Des
membres qui n’étaient pas présents à la consultation avaient également signifié ces propos lors
d’échanges antérieurs. Des commentaires plus précis à ce sujet sont présentés plus loin dans le
texte.
Il est important selon les membres que les NCECF ne soient pas perçues par les préparateurs et
utilisateurs d’états financiers comme des normes de moins grande qualité.
Selon plusieurs membres, on ne devrait pas trop simplifier les normes sans bien en encadrer les
modalités d’application. Ils mentionnent que des guides d’application sont nécessaires, puisqu’ils
aident à l’exercice du jugement professionnel et assurent une meilleure comparabilité dans
l’application des normes. Les guides d’applications présentent plus d’avantages que d’inconvénients
pour les préparateurs et utilisateurs d’états financiers, d’autant plus que de nombreux abrégés du
CPN n’ont pas été intégrés dans la partie II.
Certains membres sont d’avis que l’accès payant à des guides d’application de CPA Canada est un
frein pour certains préparateurs et certificateurs d’états financiers (ÉF), notamment les plus petites
entités, et qu’on devrait fournir un minimum de matériel gratuitement pour favoriser une application
adéquate et uniforme des normes. Des membres ont également indiqué que les guides d’application
sont publiés trop tardivement pour les aider à appliquer les normes en temps opportun.
Des membres ne sont pas à l’aise avec la présentation, en annexe d’une norme, de directives très
précises qui vont au-delà des exigences de la partie principale de la norme, et ce même si l’annexe
fait partie intégrante de la norme. Ils ont donné l’exemple du paragraphe 3856.A52. Des membres ont
aussi mentionné qu’il manque d’exemples dans les NCECF et que les exemples aident à la
discussion, aux échanges et à l’analyse d’une situation donnée. Des membres ont indiqué qu’un
guide d’application, par exemple le Guide de CPA Canada pour les entreprises à capital fermé, ne
peut remplacer une norme complète et compréhensible.
4
Selon certains membres, les exigences et le langage employé dans la norme sont complexes et l’on
devrait viser une simplification du langage. Des membres ont également soulevé, lors de rencontres
antérieures, qu’ils doivent souvent se référer aux textes rédigés en anglais pour comprendre certains
passages des textes en français.
Plusieurs membres mentionnent qu’on devrait plus se préoccuper des besoins des utilisateurs des ÉF
autres que les banquiers. Ils indiquent que dans bien des cas, les seuls utilisateurs sont les
actionnaires et les autorités fiscales; et que par conséquent, la présomption que l’utilisateur principal
est le banquier ne tient pas compte de la réalité de plusieurs entreprises. D’autres membres
mentionnent qu’on ne devrait pas baser le référentiel sur la prémisse que l’entité à capital fermé est
de petite taille et ne présente que des opérations peu complexes, car cela ne leur semble pas refléter
la réalité d’un grand nombre d’entités qui appliquent les NCECF.
QUESTIONS DU CNC
Question 1 : Évaluation initiale
La détermination des justes valeurs initiales des actifs financiers et des passifs financiers
pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, pour quel type de transactions
la détermination de la juste valeur s’avère-t-elle difficile? Dans quelle mesure s’agit-il de
transactions courantes et quels sont les facteurs qui rendent difficile la détermination de la
juste valeur?
Selon les membres, les difficultés d’application sont assez fréquentes pour la PME au sujet des
exigences du paragraphe 3856.07 qui exige la comptabilisation initiale des instruments financiers à
leur juste valeur.
Ils ont identifié que les difficultés d’application se retrouvent surtout au niveau de la détermination du
taux d’intérêt (d’actualisation) pour évaluer initialement, à la juste valeur, les prêts à taux réduits ou
les prêts sans intérêt.
Ils ont donné comme exemples de situations problématiques, le financement des soldes de prix
d’achat découlant d’acquisitions d’entreprises qui sont souvent à des taux fortement réduits, les
soldes de prix de vente sans intérêt accordées par certains fournisseurs pour l’achat d’équipement,
les prêts non garantis provenant de gouvernements ou d’entités gouvernementales et les prêts
d’entités à capital de risque. Ces situations sont fréquentes et les conditions afférentes à ces passifs
financiers sont très différentes des conditions accordées dans le cadre des prêts usuels des
institutions financières; la détermination du taux d’intérêt pose des enjeux d’ordre pratique et est
5
difficile à justifier pour la direction et à certifier pour les certificateurs. Comme ces instruments sont
différents des « instruments semblables (quant à l'unité monétaire, à la durée, au type de taux intérêt
ou à d'autres facteurs) ayant une notation semblable » et n’ont souvent pas d’équivalent sur le
marché de par leur nature, les membres ont vécu plusieurs difficultés d’application pratique à cet
égard et les paragraphes A8 à A11 du chapitre 3856 n’ont été d’aucune utilité pour leur permettre de
poser un jugement éclairé. Par exemple, dans certaines situations, le prêt sans intérêt finance la
totalité d’une transaction alors qu’aucun titre sur le marché ne finance plus qu’un certain pourcentage
d’une acquisition. De plus, plusieurs membres déplorent que le chapitre 45 du Guide de CPA Canada
pour les entités à capital fermé ne traite pas de ces situations plus complexes et s’en tient aux
situations les plus simples.
Des membres ont indiqué que l’exigence d’évaluer initialement les instruments financiers à la juste
valeur est parfois complexe à appliquer et a un impact important seulement dans le cas de
transactions relativement rares, et ils suggèrent d’éliminer complètement cette exigence. D’autres
membres proposent de la simplifier, par exemple en permettant d’établir la juste valeur des passifs
financiers en les actualisant au taux d’intérêt sans risque ou en offrant le choix d’évaluer initialement
les instruments financiers à la juste valeur ou au montant de la contrepartie. Les positions sont
partagées à ce sujet.
Des membres ont également soulevé des questions au sujet de l’exclusion du champ d’application du
chapitre 3856 des contrats émis par l'acquéreur relativement à une contrepartie conditionnelle dans
un regroupement d'entreprises jusqu'à ce qu'on soit fixé quant à la réalisation ou non de la condition.
Ils ont indiqué que le fait de ne pas « désactualiser » une contrepartie conditionnelle à payer à long
terme avant d’être fixé quant à la réalisation de la condition peut amener l’entité à présenter un
montant de passif fortement surévalué entretemps
Toutefois, des membres ont également mentionné que l’évaluation initiale des actifs et passifs à la
juste valeur est justifiée et qu’elle permet d’éviter que des entités manipulent indûment leurs résultats.
Ils ont donné l’exemple des concessionnaires automobiles qui offrent des prêts sans intérêt; les
exigences actuelles exigent de comptabiliser séparément, sur la durée du financement, les produits
d’intérêts relatifs aux financements octroyés et ainsi d’éviter de surévaluer le chiffre des ventes.
Concernant l’évaluation initiale à la juste valeur, dans le cas d’un contrat conclu avec un client, les
membres croient qu’on devrait préciser dans les NCECF, comme c’est le cas dans les IFRS, qu’il
n’existe pas d’obligation d’évaluation initiale à la juste valeur si, au moment de la passation du
contrat, l’entité s’attend à ce que l’intervalle entre le moment où elle fournira un bien ou un service
promis au client et le moment où le client paiera ce bien ou ce service n’excède pas un an et ce
6
même si l’impact pourrait être important (voir la dernière version d’IFRS 9.5.1.3, IFRS 15.63 et
IFRS 15.BC236). Étant donné qu’il n’existe pas d’exception dans les NCECF à cet égard, il n’est pas
clair pour eux si l’on devrait se baser ou non sur les IFRS pour l’évaluation initiale. Les membres sont
d’avis que les NCECF ne devraient pas être plus contraignantes que les IFRS.
Question 2 : Évaluation ultérieure
a) Êtes-vous d’accord que les titres de capitaux propres cotés sur un marché actif devraient
être évalués à la juste valeur, tandis que les titres de capitaux propres qui ne sont pas cotés
sur un marché actif devraient être évalués au coût et les titres d’emprunt, au coût amorti, à
moins que l’entité ne choisisse de les évaluer à la juste valeur? Dans la négative, pourquoi?
Oui, les membres sont d’accord avec le fait que les titres de capitaux propres cotés sur un marché
actif devraient être évalués à la juste valeur; selon eux, il s’agit de la valeur la plus pertinente pour un
lecteur.
b) Des difficultés d’ordre pratique se posent-elles lorsqu’il s’agit de déterminer si un titre de
capitaux propres doit être évalué à la juste valeur (c’est-à-dire lorsqu’il est considéré comme
coté sur un marché actif, par opposition à un marché peu actif)? Dans l’affirmative, veuillez
décrire ces difficultés.
Oui, plusieurs membres vivent des difficultés d’application et ils sont d’avis que des directives
additionnelles seraient nécessaires pour les aider à identifier clairement les titres de capitaux propres
cotés sur un marché actif.
Selon eux, il est très difficile de déterminer si certains placements font partie des titres de capitaux
propres cotés sur un marché actif. Ils ont donné l’exemple des titres de fonds communs de placement
pour lesquels il n’est pas toujours clair de déterminer s’il s’agit de titres de capitaux propres ou non et
également de déterminer si le marché est actif ou s’il ne l’est pas en l’absence de modalités précises
d’application.
Les membres ont indiqué qu’en l’absence de directives claires dans les NCECF, ils se réfèrent
souvent aux IFRS. Ils ont donné l’exemple d’IFRS 13 qui donne beaucoup plus d’indications que le
chapitre 3856 de la partie II. Par ailleurs, bien que les membres soient d’avis que plus d’indications
sur la détermination de la juste valeur seraient utiles, ils croient que des indications aussi détaillées
que celles prévues dans l’IFRS 13 ne sont pas requises.
D’autres membres mentionnent que dans beaucoup de situations, il n’existe pas de problème
d’évaluation de la juste valeur.
7
Question 3 : Application de la juste valeur
Dans quelle mesure est-il courant, pour les entreprises à capital fermé, d’évaluer leurs
instruments financiers, autres que les titres de capitaux propres cotés sur un marché actif, à la
juste valeur? Y a-t-il suffisamment d’indications sur la détermination de la juste valeur? Dans
la négative, que faudrait-il donner en matière d’indications supplémentaires?
Les membres ont indiqué que cette situation n’est pas très fréquente, mais qu’elle dépend des types
d’entités et des placements qu’elles détiennent.
Des membres ont précisé que dans certaines situations, ils se réfèrent à des experts en évaluation
pour évaluer la juste valeur lorsque celle-ci est difficile à déterminer.
Plusieurs OSBL évaluent ultérieurement leurs placements à la juste valeur. Ces organismes semblent
préférer utiliser la juste valeur plutôt que le coût amorti qui nécessite de considérer l’amortissement
des primes et escomptes. La juste valeur, fournie par un courtier, est plus simple à utiliser.
Question 4 : Opérations conclues avec des apparentés
Outre pour ce qui est de l’évaluation initiale, la question de savoir s’il faut appliquer le
chapitre 3840 ou le chapitre 3856 pour la comptabilisation d’actifs financiers ou de passifs
financiers pose-t-elle des difficultés? Dans l’affirmative, veuillez décrire ces difficultés.
Les membres se sont questionnés sur les opérations avec certaines parties liées qui ne répondent
pas à la définition des apparentés prévue au chapitre 3840, par exemple les enfants non à charge.
Selon eux, ces liens sont souvent une indication que le montant de la contrepartie n’a pas été
convenu entre des parties compétentes agissant en toute liberté dans des conditions de pleine
concurrence, conformément à la définition de juste valeur. Ils indiquent qu’il s’agit souvent, en
substance, d’un apparenté.
Certains membres croient que les actifs financiers et les passifs financiers découlant de telles
opérations devraient aussi être exclus de l’exigence d’évaluation initiale à la juste valeur. Des
membres indiquent que plusieurs autres opérations ne sont pas toujours effectuées dans des
conditions de pleine concurrence, par exemple celles avec des amis proches.
Des membres indiquent que pour certains instruments financiers, par exemple les dettes convertibles
en actions émises en faveur d’apparentés notamment en faveur d’actionnaires, l’évaluation
subséquente pose problème, de même que la présentation. Selon le paragraphe 3856.08, l’émetteur
doit initialement évaluer le passif financier selon le chapitre 3840. Étant donné que le
paragraphe 3856.22 (qui permet notamment d’évaluer l’élément de capitaux propres à zéro) traite
aussi de l’évaluation initiale, on pourrait conclure qu’il ne peut être appliqué aux instruments financiers
8
composés découlant d’une opération entre apparentés. Par contre, le fait que le paragraphe 3856.22
fasse partie de la section « Présentation » (et non de la section « Évaluation ») du chapitre 3856
pourrait amener à conclure qu’il s’applique aux instruments financiers découlant d’une opération entre
apparentés. Une clarification à cet égard est souhaitable.
Les membres ont indiqué également que l’évaluation des instruments financiers découlant
d’opérations entre apparentés dans le cadre de la présentation des états financiers des OSBL selon
la partie III du Manuel de CPA Canada devrait être clarifiée. Étant donné que le paragraphe 3856.08
exige d’évaluer initialement les instruments financiers découlant d’une opération entre apparentés
selon le chapitre 3840, des membres auraient eu tendance à s’appuyer sur le chapitre 3840 de la
partie II concernant la mesure des opérations, car celle-ci n’est pas traitée dans le chapitre 4460 de la
partie III. Par contre, le chapitre 3840 indique clairement qu’il s’applique uniquement aux ÉF des
entreprises à but lucratif. En l’absence de précisions, les divergences d’application peuvent être
nombreuses.
Question 5 : Dépréciation
a) L’application des indications sur la dépréciation contenues dans le chapitre 3856 pose-t-elle
des difficultés d’ordre pratique? Dans l’affirmative, veuillez décrire ces difficultés.
Les membres ont indiqué ne pas avoir vécu de problème d’application concernant les indications sur
la dépréciation contenues dans le chapitre 3856.
b) Si vous êtes utilisateur d’états financiers, estimez-vous que les informations relatives à la
dépréciation sont utiles et opportunes? Pourrait-on rendre ces informations plus utiles?
Les membres sont d’avis que les informations sont utiles et opportunes et ils n’ont pas relevé de
difficulté d’application.
9
Question 6 : Présentation — passif et capitaux propres
a) L’application des indications sur le classement d’un instrument dans le passif ou les
capitaux propres pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, dans quelle
mesure ces difficultés sont-elles courantes et quelles sont-elles? Veuillez donner des
exemples.
instrument comporte à la fois une composante passif et une composante capitaux propres?
Dans l’affirmative, dans quelle mesure ces difficultés sont-elles courantes et quelles sontelles? Veuillez donner des exemples.
Les membres ont répondu aux questions 6a) et 6b) de façon combinée. Ils ont indiqué qu’ils utilisent
souvent l’option d’évaluation à zéro pour la composante capitaux propres, ce qui fait en sorte qu’ils
n’ont pas de problèmes d’application dans plusieurs situations.
Par contre, des membres ont indiqué avoir des difficultés à identifier quels sont les passifs qui
représentent des « passifs financiers indexés sur un indicateur de la performance financière de l'entité
ou sur la variation de la valeur de ses capitaux propres » et pour lesquels des indications d’évaluation
précises sont prévues au paragraphe .14 du chapitre 3856. Ils se sont questionnés notamment sur la
présence ou non d’un contrat, pour conclure s’il s’agit d’un instrument financier assujetti au
chapitre 3856. Selon eux, les exigences du paragraphe 3856.14 ne sont pas claires, notamment car
on n’y précise pas les types d’instruments visés par les exigences. Ils ont noté que la définition de ce
qu’est un contrat n’est pas claire et que les normes IFRS sont beaucoup plus précises à ces égards.
Voici des exemples qu’ils ont soulevés et pour lesquels des précisions pourraient être apportées :
-
les passifs financiers dont le montant payable est basé sur des critères de performance (par
exemple un multiple du résultat avant intérêt, impôt et dépréciation (BAIIDA))
-
les actions privilégiées rachetables au gré du détenteur à des valeurs basées sur la
performance de l’entité.
Ils ont également noté des différences dans la façon dont l’alinéa 3856.22 est rédigé dans les
versions anglaise et française. Selon eux, il pourrait en résulter des divergences dans la pratique.
Voici les extraits pertinents du Manuel de CPA Canada à ce sujet :
Version française (on pourrait conclure que seules deux méthodes sont acceptables) :
« .22
Les deux méthodes suivantes sont acceptables aux fins de l'évaluation
initiale des éléments distincts de passif et de capitaux propres d'un instrument visé par
le paragraphe 3856.21 :
10
a)
L'élément de capitaux propres est évalué à zéro. La totalité du produit de
l'émission est attribuée à l'élément de passif.
b)
La valeur de l'élément le plus facile à évaluer est déduite du produit total
de l'émission. La différence donne la valeur de l'élément restant. »
Version anglaise (il est implicite que d’autres méthodes que celles indiquées sont possibles) :
« .22
Acceptable methods for initial measurement of the separate liability and
equity elements of an instrument to which paragraph 3856.21 applies include the
following:
(a)
The equity component is measured as zero. The entire proceeds of the
issue are allocated to the liability component.
(b)
The less easily measurable component is allocated the residual amount
after deducting from the entire proceeds of the issue the amount separately
determined for the component that is more easily measurable. »
c) Lorsqu’on détermine qu’un instrument est un instrument composé, la comptabilisation de
cet instrument pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, dans quelle
mesure ces difficultés sont-elles courantes et quelles sont-elles? Veuillez donner des
exemples.
Les membres ont noté des problèmes particuliers d’application au sujet des instruments d’emprunt
convertibles et autres comportant des dérivés incorporés. Le CPN-164 apportait certaines précisions
utiles relativement à ces instruments.
Des membres ont également conclut que les indications incluses à l’alinéa 3856.14 c) qui exigent
d’ajuster le passif à chaque date de clôture au plus élevé de son coût après amortissement et d’un
montant représentant « la somme qui serait payable à la date de clôture si l'on calculait à cette date le
supplément résultant de l'indexation (la valeur de conversion ou la valeur intrinsèque) », devraient
être modifiées. En effet, selon eux, lorsque la valeur intrinsèque (ou la valeur de conversion) est plus
élevée que la juste valeur de l’instrument, les IFRS exigeraient une actualisation de celle-ci (montant
escompté) alors qu’aucune précision n’est incluse dans les NCECF à cet égard. Selon eux, la
simplification des NCECF les amène à comptabiliser un montant plus élevé à l’évaluation initiale que
le montant qui aurait été comptabilisé selon les IFRS, et ce montant ne serait pas révisé à chaque
date de clôture. Selon leur expérience, comme les exigences du paragraphe 3856.14 sont très
différentes des exigences présentées dans les IFRS, plusieurs préparateurs et certificateurs ont
tendance à les oublier ou ne pas les appliquer adéquatement.
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Question 7 : Cessions de créances
a) Des difficultés d’ordre pratique se posent-elles dans l’application de l’Annexe B pour le
traitement comptable des cessions de créances? Dans l’affirmative, veuillez décrire ces
difficultés.
Les membres ont noté des difficultés d’application au sujet de la condition présentée à l’alinéa B5 a)
de l’Annexe B du chapitre 3856, qui est extrait ci-dessous :
« Les actifs cédés ont été isolés par rapport au cédant — c'est-à-dire présumément
placés hors d'atteinte du cédant et de ses créanciers, même en cas de faillite ou de mise
sous séquestre. »
Comme cette condition s’appuie sur des aspects légaux, ils ont indiqué avoir besoin, dans certaines
circonstances, d’opinion juridique sur le sujet, ce qui peut être onéreux et complexe.
De plus, selon certains membres, le paragraphe B5 est basé sur un critère « d’abandon de contrôle »
sur les créances cédées, par opposition à la notion de « détention de risques et avantages » qui est
incluse dans le chapitre 3400 sur la comptabilisation des produits. Selon eux, les précisions
précédemment incluses dans le CPN-9, mais qui n’ont pas été reprises dans le chapitre 3856
devraient être révisées et reconsidérées. Pour plusieurs membres, l’application des critères de
conservation du contrôle effectif sur les créances cédées et les notions de risques et avantages sont
des notions difficiles à appliquer en pratique. Ils ont cité les questions suivantes qu’ils se sont
posées :
-
À quoi correspondent les risques et avantages?
-
À partir de quel moment doit-on les détenir?
-
Lorsque les conditions changent, comment en tenir compte?
b) Existe-t-il des pratiques divergentes quant au moment de la décomptabilisation des
créances? Dans l’affirmative, veuillez décrire les différentes pratiques.
Les membres n’ont pas relevé de telles divergences.
c) Dans quelle mesure est-il courant pour les entreprises à capital fermé canadiennes de
réaliser des opérations de titrisation ou d’affacturage?
Certains membres ont indiqué que les entités à capital fermé s’engagent dans plus de transactions
d’affacturage que par le passé, mais tous les membres ont noté que les opérations de titrisation sont
très peu courantes auprès des PME.
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Question 8 : Décomptabilisation des passifs
a) Des difficultés d’ordre pratique se posent-elles au moment de déterminer si un passif est
éteint ou s’il est plutôt modifié? Dans l’affirmative, veuillez donner des exemples de ces
difficultés.
Les membres n’ont pas noté de difficulté d’ordre pratique, outre des difficultés d’application du
paragraphe A52 lorsqu’il s’agit d’un instrument financier composé dont l’une des composantes est un
élément de capitaux propres, car ce genre de situation n’est pas traité dans les modalités
d’application ni dans les exigences.
b) La comptabilisation d’une modification ou d’une extinction de passif financier pose-t-elle
des difficultés? Dans l’affirmative, veuillez décrire ces difficultés.
Les membres sont d’avis que les exigences sont claires pour les passifs éteints. Par contre, elles ne
le sont pas lorsque le passif ne répond pas aux conditions pour être considéré comme éteint. Dans
cette situation, l’annexe de la norme n’aborde que la question des coûts liés à la transaction. Ils se
sont questionnés, dans ce dernier cas, à savoir si la valeur comptable et le taux d’intérêt de
l’instrument modifié devraient être révisés. Certains pensent qu’un nouveau taux d’intérêt effectif doit
être calculé pour tenir compte des flux monétaires révisés, reconnaissant ainsi les effets de la
modification sur la durée restante du prêt. Toutefois, certains pensent que le taux d’intérêt effectif
initial doit être maintenu pour actualiser les flux monétaires révisés et que par conséquent, on doit
réviser la valeur comptable du prêt modifié et reconnaître le gain ou la perte aux résultats. Ils
aimeraient que les exigences soient clarifiées dans cette situation. Ils ont indiqué que selon la
pratique actuelle, souvent rien n’est fait au moment de la modification, donc le taux d’intérêt effectif
futur s’en trouve modifié. Le comité consultatif sur les entreprises à capital fermé du CNC ne semble
pas avoir repéré de diversité dans l’application pratique, par contre, celle-ci n’est pas expliquée dans
les résumés des discussions donc les membres ne sont pas en mesure de conclure sur cette
application. Des membres ont noté que les directives prévues dans les IFRS (IAS 39.AG8) sont plus
claires à cet égard et ils se sont questionnés sur l’application des IFRS à ce sujet.
D’autres difficultés relevées ont trait aux dettes convertibles en actions, comme indiqué
précédemment à la question 8a), et également lorsque les conditions de conversion sont modifiées.
Des membres se sont demandé comment considérer la composante présentée dans les capitaux
propres dans l’analyse des flux de trésorerie. Dans de telles circonstances, « le test du 10 % » prévu
au paragraphe A52 a) du chapitre 3856 n’est pas facile à appliquer en l’absence de modalités
d’application ou de directives. De plus, les indications qui étaient présentées dans les CPN-88 et 71
apportaient certaines clarifications très utiles, mais celles-ci n’ont pas été reprises dans les NCECF.
13
Selon ces membres, les dettes convertibles en actions faisant l’objet de modifications sont fréquentes
dans la PME et le CNC devrait élaborer des indications plus précises concernant ces instruments.
Question 9 : Comptabilité de couverture
a) L’application des dispositions relatives à la comptabilité de couverture contenues dans le
chapitre 3856 pose-t-elle des difficultés d’ordre pratique? Dans l’affirmative, veuillez fournir
des exemples détaillés de ces difficultés.
Les membres qui appliquent la comptabilité de couverture considèrent que les critères d’application
de la norme sont trop restrictifs. Les situations prévues ne représentent que les situations qui
n’exigent aucune preuve quant à l’efficacité des couvertures, mais cette extrême simplification ne
permet pas de refléter dans les états financiers la substance de plusieurs couvertures par ailleurs très
efficaces. Étant donné que l’utilisation de la comptabilité de couverture est un traitement facultatif, ils
ne voient pas l’utilité et la pertinence d’en limiter son application dans la mesure où une entreprise
accepte de démontrer et de documenter l’efficacité d’une stratégie donnée, dans la mesure où la
stratégie est autorisée par le conseil d’administration par exemple. Certes, les situations prévues
peuvent permettre une application de la comptabilité de couverture simplifiée, sans obligation de
documentation de l’efficacité, mais ceci ne devrait toutefois pas empêcher son utilisation dans un
grand nombre d’autres situations. Ils ont indiqué que les exigences et restrictions actuelles ne se
prêtent pas bien à une situation de gestion du risque plus sophistiquée qui fait appel notamment à
l’utilisation de la valeur à risque comme mesure principale du risque ou à des portefeuilles plus
diversifiés.
Certains membres ont mentionné que dans plusieurs situations les positions sont prises pour plus de
30 jours ce qui ne leur permet pas d’utiliser la comptabilité de couverture malgré l’efficacité de cette
dernière. De plus, la date de règlement ne devrait pas être nécessairement retenue dans le cas de
couverture d’opérations futures (3856.A62c)), car la couverture du montant d’une opération et la
couverture de son financement sont deux couvertures tout à fait distinctes, même si dans plusieurs
situations elles peuvent être effectuées simultanément. Ainsi, les situations prévues présentement ne
semblent pas permettre de couvrir le coût d’un achat important si son financement est effectué par
une dette à long terme.
Certains membres ont noté que dans le secteur public (par la norme IPSAS 29, Recognition and
Measurement of Financial Instruments) on prévoit des normes moins restrictives relativement à la
comptabilité de couverture et que le CNC pourrait s’en inspirer. D’autres membres ont indiqué que
certains concepts liés aux couvertures dans IFRS 9 devraient être retenus dans les NCECF ou qu’on
devrait y converger. Pour certaines plus grandes entités, le fait que les instruments financiers sujets à
14
la comptabilité de couverture ne soient pas les mêmes selon les normes pour les entreprises à capital
fermé que selon les IFRS cause une certaine confusion, notamment auprès de leurs banquiers.
b) Devrait-il être permis d’appliquer la comptabilité de couverture à d’autres catégories de
relations et d’éléments de couverture? Dans l’affirmative, à quelles catégories de relations et
d’éléments de couverture l’application de la comptabilité de couverture devrait-elle être
permise?
Certains membres proposent de converger vers IFRS 9 et d’appliquer la comptabilité de couverture
aux mêmes éléments et relations de couverture.
Des membres ont indiqué qu’il n’est pas clair pour eux, en NCECF, si la comptabilité de couverture
peut être appliquée lorsque seulement une portion d’un instrument est couverte, alors que cette
situation est clairement traitée dans les IFRS.
c) Dans quelle mesure est-il courant, pour les entreprises à capital fermé, de conclure des
opérations comportant des relations de couverture ou des éléments de couverture? En quoi
l’élargissement du champ d’application de la comptabilité de couverture permettrait-il
d’améliorer l’utilité de l’information financière?
Il est courant pour plusieurs grandes entreprises à capital fermé d’utiliser la comptabilité de
couverture et de couvrir des positions à risque. Pour d’autres, des instruments de couverture sont
utilisés, mais la comptabilité de couverture n’est pas appliquée, car elle est trop restrictive. Les plus
petites entreprises à capital fermé utilisent parfois des instruments de couverture, mais appliquent
très rarement la comptabilité de couverture, généralement parce qu’elle est jugée trop complexe. Un
élargissement du champ d’application de la comptabilité de couverture ne changerait rien pour ces
dernières.
15
Question 10 : Informations à fournir
a) Les préparateurs et les utilisateurs estiment-ils que la quantité d’informations à fournir
selon la norme est appropriée?
Les membres n’ont pas indiqué que la quantité d’information était inappropriée.
b) La conformité aux obligations d’information du chapitre 3856 pose-t-elle des difficultés
d’ordre pratique? S’il y a lieu, veuillez donner des exemples de ces difficultés ainsi que des
exemples d’informations à fournir qui, selon vous, ne sont pas utiles.
Les membres sont d’avis que les obligations d’information ne posent généralement pas de difficultés
d’ordre pratique et qu’elles ne sont pas très coûteuses à appliquer pour les entreprises.
Toutefois, des membres ont noté les difficultés d’application précisées ci-dessous.
Ils ont cité le paragraphe 3856.46 qui exige de présenter des informations relatives aux manquements
ayant eu lieu au cours de la période. Les membres indiquent qu’en pratique ces informations sont très
difficiles à certifier ou à préparer, notamment lorsque les ÉF périodiques qui sont disponibles ne font
pas l’objet d’une mission d’audit ou d’examen, ou encore lorsque la publication d’ÉF intermédiaires
n’est pas exigée. Ils se sont questionnés sur l’utilité de cette information dans les ÉF, car elle est de
toute façon souvent déjà connue par le créancier.
Des membres ont également émis des commentaires au sujet du paragraphe .43 qui exige de
présenter des informations uniquement pour les dettes à long terme. Selon eux, des exigences
similaires devraient être ajoutées pour les prêts à demande et les autres formes de dettes à court
terme, à l’exclusion des créances courantes comme les fournisseurs. D’autres membres sont d’avis
que les informations sont moins pertinentes pour les dettes à court terme.
c) Les préparateurs et les utilisateurs estiment-ils que les dispositions concernant les
informations à fournir sur les risques et incertitudes des paragraphes 3856.53 et .54
contribuent à fournir des informations financières utiles? Dans la négative, comment pourraiton améliorer ces indications afin d’accroître l’utilité de l’information financière, compte tenu
de leur coût d’application?
Selon les membres, les risques associés aux intérêts sur les dettes sont évidents ou implicites pour le
créancier et la majorité des utilisateurs à la lecture des informations sur les modalités d’emprunt dans
la note sur la dette à long terme. Ils pensent que les utilisateurs comprennent naturellement que les
dettes à taux variable exposent l’entité à un risque de flux de trésorerie et que les dettes à taux fixe
exposent à un risque de justes valeurs. Selon eux, la même conclusion s’applique au risque de
liquidité relatif aux dettes.
16
Les informations relatives aux concentrations de crédit sont pertinentes selon les membres, de même
que les informations fournies au sujet des soldes en devises. Ils ont conclu, par contre, que
l’information semble moins pertinente lorsque les utilisateurs sont très limités (direction et autorités
fiscales par exemple). Les opinions sont partagées concernant les informations au sujet du risque de
crédit, certains membres sont d’avis que l’exposition au risque de crédit est évidente à la lecture du
bilan, alors que pour d’autres, elle devrait être clairement décrite dans les notes complémentaires.
Question 11 : Autres questions
Y a-t-il d’autres points problématiques pour les parties prenantes, dont il n’a pas été question
ci-dessus? Dans l’affirmative, veuillez fournir des précisions, y compris des exemples dans la
mesure où cela est pertinent.
Les membres ont identifié ci-dessous d’autres points problématiques qui n’ont pas été reflétés dans
les commentaires précédents.
AUTRES TYPES DE PLACEMENTS
Des membres ont noté que le chapitre 3855 de la partie V incluait une liste des éléments qui ne
répondaient pas à la définition d’un instrument financier (avec justificatifs), ce qui en clarifiait le champ
d’application et permettait de mieux comprendre la définition. Ils recommandent au CNC d’ajouter ce
genre de précisions dans le chapitre 3856 afin de clarifier, entre autres, les situations énoncées ciaprès.
Des membres se sont interrogés au sujet de l’évaluation d’autres types de placements par exemple
les lingots d’or et les valeurs de rachat des polices d’assurance-vie. Dans le cas du premier élément,
selon eux, on devrait clarifier le chapitre 3856, de façon similaire à ce qui est indiqué dans IFRS 9
Implementation Guidance B.1. Comme l’élément ne représente pas de la trésorerie ou un contrat (ou
une entente contractuelle), certains sont d’avis qu’on ne doit pas appliquer le chapitre 3856, mais
plutôt le chapitre 3051 qui prévoit une comptabilisation au coût. Toutefois, ils ne sont pas
nécessairement d’avis que le coût est une valeur pertinente pour ce type de placements.
Au sujet de la valeur de rachat d’une police d’assurance-vie, la tendance est de comptabiliser cet
élément à la valeur de rachat. Or cette valeur ne correspond ni à la juste valeur ni au coût. Il n’est pas
clair pour les membres quel chapitre ou principe de mesure des NCECF s’applique aux polices
d’assurance-vie dont le bénéficiaire est l’entité à capital fermé. Des précisions devraient être incluses
dans les NCECF à ces égards.
Concernant les polices d’assurance-vie, des questionnements ont également été soulevés au sujet
d’un passif financier, résultant d’une obligation pour l’entité de racheter certaines actions au décès
17
des actionnaires au montant de la couverture d’une police d’assurance-vie, afin de refléter les
particularités d’une convention entre actionnaires. Selon des membres, dans ces circonstances, les
normes actuelles pourraient amener à comptabiliser les actions rachetables au passif au montant du
produit de l’assurance-vie dont la société est bénéficiaire, mais ne permettraient pas de comptabiliser
la contrepartie à recevoir de l’assureur. Certains soulèvent la possibilité d’envisager une
compensation « anticipée » entre l’actif financier à venir résultant de la réclamation d’assurance à
l’assureur au décès et le passif financier relié; cette compensation permettrait de refléter le fait que le
rachat n’affectera pas les liquidités de la société au décès des actionnaires soumis à la convention
entre actionnaires. Des membres ont indiqué que le CPN-91 de la partie V incluait des précisions à ce
sujet (pour les sinistres) et qu’on devrait incorporer des directives plus claires dans les exigences
actuelles.
COMMISSIONS ET COÛTS DE TRANSACTION
Le chapitre 3856 présente les commissions et les coûts de transaction comme étant des notions
distinctes et comportant leurs propres définitions au paragraphe 5. Des membres ont mentionné
qu’en pratique, les commissions et coûts de transaction sont regroupés lors de leur comptabilisation
et ils recommandent en conséquence au CNC de simplifier la norme en les regroupant.
18
TRANSLATION
February 9, 2015
Rebecca Villmann, CPA, CA
CPA (Illinois)
277 Wellington Street West, Toronto, ON M5V 3H2
Dear Ms. Villmann:
Please find enclosed the joint comments of the Technical working groups on ASPE and NFPOs
(Financial accounting – Part II and Part III) as well as the Sector-specific working group on cooperatives of
the Ordre des comptables professionnels agréés du Québec on the Request for Information
entitled "Post-Implementation Review: Section 3856, Financial Instruments."
We would appreciate receiving a copy of the English translation of our comments.
Please note that neither the Ordre des comptables professionnels agréés du Québec nor any of
the persons involved in preparing the comments shall have any liability in relation to their use
and no guarantee whatsoever shall be provided regarding these comments, as specified in the
following disclaimer.
Yours truly,
Annie Smargiassi, CPA auditor, CA
Representative of the Technical working groups on ASPE and NFPOs (Financial accounting –
Part II and Part III) and the Sector-specific working group on cooperatives
Encl. Disclaimer and comments
DISCLAIMER
Subject to the conditions described herein, the documents prepared by the technical and sectorspecific working groups of the Ordre des comptables professionnels agréés du Québec (the
Order), hereinafter referred to as the “comments,” provide the opinion of members on statements
of principles, documents for comment, associates’ drafts and final exposure drafts published by
the Accounting Standards Board, Auditing and Assurance Standards Board, Public Sector
Accounting Board, Risk Management and Governance Board, and other organizations.
The comments submitted should not be relied upon as a substitute for engagements entrusted to
professionals with specialized knowledge in their field. It is important to note that the legislation,
standards and rules on which the comments are based may change at any time and that, in
some cases, the comments may be controversial.
Neither the Order nor any person involved in preparing these comments shall have any liability in
relation to their use and no guarantee whatsoever shall be provided regarding these comments.
These comments are not binding on the technical and sector-specific working groups, the Order
or the Office of the syndic in particular.
Users of the comments shall take full responsibility for, and assume all risks relating to, the use
of the comments. They agree to release the Order from any claim for damages that could result
from a decision they made based on these comments. They also agree not to mention the
comments in the opinions they express or the positions they take.
COMMENTS OF THE TECHNICAL WORKING GROUPS ON ASPE AND NFPOs (FINANCIAL ACCOUNTING – PARTS II AND PART III) AND
THE SECTOR-SPECIFIC WORKING GROUP ON COOPERATIVES OF THE ORDRE DES CPA DU QUÉBEC ON THE REQUEST FOR
INFORMATION ENTITLED “POST-IMPLEMENTATION REVIEW: SECTION 3856, FINANCIAL INSTRUMENTS”.
2
THE TERMS OF REFERENCE OF THE WORKING GROUPS
The terms of reference of the Technical working groups on ASPE and NFPOs (Financial accounting –
Part II and Part III) as well as the Sector-specific working group on cooperatives of the Ordre des comptables
professionnels agréés du Québec are to collect and channel the views of practitioners and members
in business, industry, government and education, as well as those of other persons working in related
areas of expertise.
For each exposure draft or other document reviewed, the working group members share the results of
their analysis. Consequently, the comments below reflect the views expressed and, unless otherwise
specified, all of the working group members agree on these comments.
The Order has not acted upon and is not responsible for the comments expressed by the working
groups.
COMMENTS OF THE TECHNICAL WORKING GROUPS ON ASPE AND NFPOs (FINANCIAL ACCOUNTING – PARTS II AND PART III) AND THE
SECTOR-SPECIFIC WORKING GROUP ON COOPERATIVES OF THE ORDRE DES CPA DU QUÉBEC ON THE REQUEST FOR INFORMATION
ENTITLED “POST-IMPLEMENTATION REVIEW: SECTION 3856, FINANCIAL INSTRUMENTS”.
3
GENERAL COMMENTS
Members indicated that accounting standards for private enterprises should be developed to meet the
needs of small as well as larger private entities. Some of the members attending the meeting came
from large private entities and generally felt that simplifying the standards should be balanced against
the needs of these larger entities. They mentioned, for example, that hedge accounting has been
simplified to the point that it no longer meets the needs of some larger entities. Some members who
did not attend the consultation had also made these remarks in previous discussions. More specific
comments in this regard are provided further on in the text.
According to members, it is important that financial statement preparers and users not perceive ASPE
as lower quality standards.
According to many members, the standards should not be overly simplified without providing
appropriate application material. They mentioned the need for implementation guides since they help
in using professional judgment and ensure better comparability in applying the standards.
Implementation guides offer more advantages than disadvantages for financial statement preparers
and users, especially since many EIC Abstracts have not been included in Part II.
Some members feel that having to pay for CPA Canada’s implementation guides is an impediment for
certain financial statement preparers and assurance providers, in particular smaller entities, and that a
minimum amount of material should be provided free of charge to ensure adequate and uniform
application of the standards. Members also indicated that implementation guides are published too
late to help them apply the standards on a timely basis.
Certain members are uncomfortable with the presentation, via an application supplement, of very
specific guidance that goes well beyond the requirements in the main part of the standard, even if the
supplement is an integral part of the standard. They cited paragraph 3856.A52 as an example.
Members also mentioned the lack of ASPE examples, which are useful in discussing and analyzing a
given situation. They indicated that an implementation guide, for example CPA Canada’s Guide to
Accounting Standards for Private Enterprises, cannot replace a complete and understandable
standard.
According to some members, the requirements and language used in the standard are complex and
that the AcSB should strive to simplify the wording. Members also pointed out during previous
meetings that they must often refer to the English material to understand certain parts of the French.
4
Several members mentioned that more focus should be put on the needs of FS users other than
banks. They indicated that in many cases, the only users are shareholders and tax authorities, and
that consequently the presumption that the principal users are banks does not consider the reality of a
number of enterprises. Other members mentioned that the framework should not be based on the
premise that the private entity is small and only presents non-complex transactions; in their opinion,
this does not reflect the reality of many entities that apply ASPE.
AcSB QUESTIONS
Are there challenges in practice in determining the initial fair values of financial assets and
liabilities? If so, for what types of transactions is determining fair value difficult? How common
are these transactions and what factors make it difficult to determine fair value?
According to members, SMEs are often faced with application challenges regarding the requirement
in paragraph 3856.07 to initially measure financial instruments at fair value.
They pointed out that the main challenges are in determining the interest (discount) rate to initially
measure reduced-rate loans or interest-free loans at fair value.
As examples of problem situations, they mentioned financing purchase price balances resulting from
business acquisitions that are often at highly reduced rates, balances of interest-free sales granted by
certain suppliers for the purchase of equipment, unsecured loans from governments or government
entities, and venture capital loans. These situations are common and the terms relating to these
financial liabilities are very different from the normal terms granted by financial institutions;
determining the interest rate poses a significant practical challenge, and is difficult for management to
justify and for assurance providers to certify. Since these instruments are different from “similar
instruments (similar as to currency, term, type of interest rate, or other factors) with a similar credit
rating” and, given their nature, often do not have a market equivalent, members have experienced a
number of application challenges in this regard, and paragraphs A8 to A11 in Section 3856 are of no
use whatsoever in helping them make an informed judgment. For example, in certain situations, the
interest-free loan finances an entire transaction while there is no market security that can finance
more than a certain percentage of an acquisition. In addition, a number of members deplore the fact
that chapter 45 of CPA Canada’s Guide to Accounting Standards for Private Enterprises does not
address more complex situations and deals only with the simplest cases.
5
Some members indicated that the requirement to initially measure financial instruments at fair value is
sometimes difficult to apply and has a significant effect only in the case of relatively rare transactions;
members suggest that this requirement be completely eliminated. Other members proposed
simplifying the requirement, for example by allowing financial liabilities to be measured at fair value by
discounting them at the risk-free interest rate or by giving the choice to initially measure financial
instruments at fair value or at the amount of consideration. Members’ positions are split in this regard.
Certain members also questioned the exclusion from the scope of Section 3856 of contracts issued by
an acquirer for contingent consideration in a business combination until such time as the contingency
is resolved. They pointed out that by not “accreting” a contingent consideration payable in the long
term until such time as the contingency is resolved could cause the entity to report a highly overstated
liability in the meantime.
However, a number of members also mentioned that initial measurement of assets and liabilities at
fair value is justified and that it prevents entities from unduly manipulating their bottom line. They gave
car dealers who offer interest-free loans as an example; under the current requirements, interest
revenue from the financing granted is disclosed separately, over the term of the loan, to avoid
overstating the sales figure.
Regarding initial measurement at fair value, in the case of a contract entered into with a customer,
members believe that ASPE should specify, as is done in IFRS, that there is no obligation to initially
measure at fair value if, at contract inception, the entity expects that the period between when the
entity transfers a promised good or service to a customer and when the customer pays for that good
or service will be one year or less, even if the effect is significant (see that latest version of IFRS
9.5.1.3, IFRS 15.63 and IFRS 15.BC236). Since there are no exceptions under ASPE in this regard,
members are not clear on whether or not they should rely on IFRS for initial measurement. According
to members, ASPE should not be more stringent than IFRS.
(a) Do you agree that equity securities quoted in an active market should be measured at fair
value, while equity securities not quoted in an active market are measured at cost and debt
securities are measured at amortized cost, unless the entity elects to measure them at fair
value? If not, why not?
Yes, members agree that equity securities quoted in an active market should be measured at fair
value; in their opinion, this is the most relevant value for users.
6
(b) Are there challenges in practice in determining when an equity security is required to be
measured at fair value (i.e., when it is considered to be quoted in an active market vs. a thinly
traded market)? If so, please describe these challenges.
Yes, several members are encountering application challenges and feel that additional guidance is
needed to help them clearly identify equity securities quoted in an active market.
In their opinion, it is very difficult to determine whether certain investments are actually equity
securities quoted in an active market. They mentioned, for example, mutual funds for which, in the
absence of specific application guidance, it is not always clear whether or not they are equity
securities and whether or not the market is active.
Members indicated that in the absence of clear guidance in ASPE, they often refer to IFRS. They
mentioned that IFRS 13 provides much more guidance than Section 3856 in Part II. Moreover, while
members feel that additional guidance on determining fair value would be useful, they do not believe it
needs to be as detailed as in IFRS 13.
Other members mentioned that there is no problem in measuring fair value in many situations.
How common is it that private enterprises measure financial instruments, other than equity
Members indicated that this is not a common occurrence, but that it depends on the types of entities
and the investments they hold.
Members pointed out that in some situations where it is difficult to measure fair value, they call on
valuation experts.
Several NFPOs subsequently measure their investments at fair value. These organizations seem to
prefer fair value rather than amortized cost, which requires considering amortization of premiums and
discounts. Fair value provided by a broker is simpler to use.
Are there challenges in determining whether to apply Section 3840 or Section 3856 to aspects
of accounting for financial assets or liabilities besides initial measurement? If so, please
describe these challenges.
Members wondered about transactions with certain related parties that do not meet the definition of
related parties in Section 3840, for example non-dependent children. In their opinion, these
7
relationships are often an indication that the amount of consideration was not agreed upon in an arm’s
length transaction between knowledgeable, willing parties, in accordance with the definition of fair
value. They pointed out that, in substance, this is often a related party.
Some members believe that financial assets and liabilities resulting from such transactions should
also be excluded from the initial measurement at fair value requirement. Some members indicated
that a number of other transactions are not always carried out at arm’s length, for example
transactions between close friends.
Several members mentioned that for certain financial instruments, for example debt convertible into
shares issued in favour of related parties, in particular shareholders, subsequent measurement and
presentation pose a problem. According to paragraph 3856.08, the issuer must initially measure the
financial liability in accordance with Section 3840. Since paragraph 3856.22 (which allows the equity
component to be measured as zero) also deals with initial measurement, one might conclude that it
cannot be applied to compound financial instruments resulting from a related party transaction.
However, the fact that paragraph 3856.22 is in the “Presentation” (as opposed to the “Measurement”)
part of Section 3856 could lead to the conclusion that it applies to financial instruments resulting from
a related party transaction. Some clarification in this regard would be useful.
Members also indicated that measuring financial instruments resulting from related party transactions
in the presentation of NFPO financial statements in accordance with Part III of the CPA Canada
Handbook should be clarified. Since paragraph 3856.08 requires that financial instruments resulting
from a related party transaction be initially measured in accordance with Section 3840, some
members would have relied on Section 3840 in Part II for measuring transactions since this is not
addressed in Section 4460, Part III. However, Section 3840 clearly indicates that it applies only to
financial statements of profit-oriented enterprises. Without clarifications, application differences may
be numerous.
(a) Are there challenges in practice in applying the impairment guidance in Section 3856? If so,
Members mentioned that they had not encountered any issues in applying the impairment guidance in
Section 3856.
(b) If you are a user of financial statements, do you find the impairment information useful and
timely? Are there ways in which the information could be made more useful?
8
In the members’ opinion, the information is useful and timely, and they have not noted any application
challenges.
9
instrument should be classified as a liability or equity? If so, how common is this and what are
liability and an equity element? If so, how common is this and what are the challenges? Please
provide examples.
Members combined their answers to questions 6(a) and 6(b). They mentioned that they often use the
zero measurement option for the equity component, so in many situations, they have no application
issues.
However, some members indicated that they had difficulty identifying a liability that represents a
financial liability that is indexed to a measure of the entity’s financial performance or to changes in the
value of the entity’s equity” and for which specific guidance is provided in paragraph 3856.14. They
wondered whether or not a contract was required to conclude that a financial instrument is subject to
Section 3856. In their opinion, the requirements in paragraph 3856.14 are unclear, especially since
the paragraph does not specify which types of instruments are subject to the requirements. They
pointed out that the definition of a contract is unclear and that IFRS are much more precise in these
respects.
Here are some situations noted by members that would require clarifications:
-
financial liabilities for which the amount payable is based on performance criteria (for example,
a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA).
-
preferred shares redeemable at the option of the holder at values based on the entity’s
performance.
They also noted discrepancies between the French and English versions of paragraph 3856.22. In
their opinion, this could result in differences in practice. Here are the relevant excerpts from the CPA
Canada Handbook:
French version (one could conclude that only two methods are acceptable):
“.22
Les deux méthodes suivantes sont acceptables aux fins de l'évaluation
initiale des éléments distincts de passif et de capitaux propres d'un instrument visé par
le paragraphe 3856.21 :
a)
L'élément de capitaux propres est évalué à zéro. La totalité du produit de
l'émission est attribuée à l'élément de passif.
10
b)
La valeur de l'élément le plus facile à évaluer est déduite du produit total
de l'émission. La différence donne la valeur de l'élément restant.”
English version (it is implicit that methods other than those indicated are possible):
“.22
Acceptable methods for initial measurement of the separate liability and equity
elements of an instrument to which paragraph 3856.21 applies include the following:
(a)
The equity component is measured as zero. The entire proceeds of the
issue are allocated to the liability component.
(b)
The less easily measurable component is allocated the residual amount
after deducting from the entire proceeds of the issue the amount separately
determined for the component that is more easily measurable.”
(c) When an instrument is determined to be a compound instrument, are there challenges in
Members noted specific application issues for convertible debt instruments and other instruments with
embedded derivatives. EIC-164 provided some useful clarifications on these instruments.
Some members also concluded that the guidance in paragraph 3856.14(c) requiring that the liability
be adjusted at each reporting date to the higher of the amortized cost of the debt or “the amount that
would be due at the balance sheet date if the formula determining the additional amount was applied
at that date (the conversion or intrinsic value)” should be amended. In the members’ opinion, when
the intrinsic value (or the conversion value) is higher than the fair value of the instrument, IFRS would
require discounting the value (discounted amount) whereas ASPE does not provide any explanation
in this regard. Members believe that simplification of ASPE results in their recognizing a higher
amount on initial measurement than the amount that would have been recognized under IFRS, and
that this amount would not be adjusted at each reporting date. In their experience, since the
requirements in paragraph 3856.14 are very different from the IFRS requirements, a number of
preparers and assurance providers tend to overlook them or to not apply them appropriately.
Members pointed out application challenges with Section 3856, paragraph B5(a) in Appendix B, which
is reproduced below:
11
“The transferred assets have been isolated from the transferor — put presumptively
beyond the reach of the transferor and its creditors, even in bankruptcy or other
receivership.”
Since this condition is based on legal aspects, members mentioned that in certain situations, they
would require a legal opinion, which can be expensive and complex.
Furthermore, according to some members, paragraph B5 is based on “surrendering control” over
receivables transferred as opposed to the concept of “retention of risks and rewards” which is
included in Section 3400 on revenue recognition. In their opinion, the explanations previously
provided in EIC-9, but which were not duplicated in Section 3856, should be reviewed and
reconsidered. For several members, the criteria on retaining effective control over receivables
transferred and the concept of risks and rewards are difficult to apply in practice. The following
questions were raised in this regard:
-
What are the risks and rewards?
-
At what point should they be retained?
-
When conditions change, how are they accounted for?
(b) Is there divergence in practice on when receivables are derecognized? If so, please
Members have not noted any divergence in practice.
Canada?
Certain members indicated that private enterprises are involved in more factoring transactions than in
the past, but all members noted that securitization transactions are very uncommon in SMEs.
(a) Are there challenges in practice in determining when a liability should be accounted for as
an extinguishment versus a modification? If so, please provide examples of these challenges.
Members did not note any challenges in practice other than in applying paragraph A52 in the case of
a compound financial instrument when one of the components is an equity element, because this type
of situation is not addressed in either the application material or the requirements.
12
Members feel that the requirements are clear for extinguished liabilities. However, they are not clear
when a liability does not satisfy the conditions for being considered extinguished. In this situation, the
appendix to the standard merely addresses the issue of transaction costs. In this case, they wondered
whether the carrying amount and interest rate of the modified instrument should be revised. Some
members think that a new effective interest rate needs to be calculated to take into account the
revised monetary flows, thereby recognizing the effects of the modification until the loan matures.
However, others feel that the original effective interest rate should be maintained to discount the
revised monetary flows and that, consequently, the carrying amount of the modified loan must be
revised and the gain or loss recognized in income. They would like the requirements to be clarified in
this regard. They indicated that in current practice, often nothing is done when the modification is
made, so the future effective interest rate ends up being modified. It seems that the AcSB’s Private
Enterprise Advisory Committee did not identify any divergence in practical application; however, since
this has not been explained in the discussion summaries, members are not in a position to reach a
conclusion regarding this application. Members noted that the guidance provided for in IFRS (IAS
39.AG8) is clearer in this regard, and they wondered how IFRS should be applied in this situation.
Other challenges identified have to do with debt convertible into shares, as indicated earlier under
question 8(a), and also with when the conversion terms are modified. Members wondered how they
should consider the component presented in equity in the cash flow analysis. Under these
circumstances, the “10% test” provided for in paragraph A52(a) of Section 3856 is not easy to apply in
the absence of application material or guidance. In addition, the guidance in EIC-88 and EIC-71
provided some very useful explanations, but they were not duplicated in ASPE. According to these
members, debt convertible into shares subject to modifications is frequent in SMEs and the AcSB
should develop more specific guidance for such instruments.
(a) Are there challenges in practice in applying the hedge accounting requirements in Section
3856? If so, please provide detailed examples of these challenges.
Members who apply hedge accounting feel that the application criteria are too restrictive. Section
3856 addresses only situations that do not require any proof of hedge effectiveness, but this extreme
simplification does not allow for the substance of a number of very effective hedges to be reflected in
the financial statements. Since hedge accounting is an optional treatment, members do not see the
usefulness and relevance of limiting its application when an enterprise agrees to demonstrate and
document the effectiveness of a given strategy, provided that the strategy is authorized by the board
of directors, for example. While the situations addressed can allow for the application of simplified
13
hedge accounting, with no requirement to document effectiveness, this should not prevent its use in a
great many other situations. Members indicated that the current requirements and restrictions do not
fit neatly in more complex risk management situations that call for the use of value-at-risk as the main
measure of risk or more diversified portfolios.
Some members mentioned that in several situations, positions are taken for more than 30 days, which
does not allow them to use hedge accounting despite its effectiveness. Furthermore, the date of
settlement should not necessarily be used for hedges of anticipated transactions (3856.A62c)),
because hedging the amount of a transaction and hedging its financing are two completely separate
hedges, even if in many situations they can be carried out simultaneously. Thus, the situations
currently addressed do not seem to allow for a hedge of the cost of a major purchase if it is financed
with long-term debt.
Some members noted that for the public sector, IPSAS 29, Recognition and Measurement of
Financial Instruments provides for less restrictive standards on hedge accounting, and that the AcSB
could take this lead. Other members indicated that certain hedging concepts in IFRS should be
retained or emulated in ASPE. For some larger entities, the fact that financial instruments subject to
hedge accounting are not the same under the standards for private enterprises as those under IFRS
causes confusion, in particular for their bankers.
hedging items? If so, for what types of hedging relationships and hedging items should hedge
accounting be permitted?
Some members suggest converging towards IFRS 9 and applying hedge accounting to the same
hedging items and relationships.
A number of members indicated that it is unclear to them whether, under ASPE, hedge accounting
can be applied when only part of an instrument is hedged, while this situation is clearly addressed in
IFRS.
(c) How common are transactions that involve these hedging relationships or hedging items
for private enterprises? How would increasing the scope of hedge accounting improve the
usefulness of financial reporting?
It is common among many large private enterprises to use hedge accounting and to hedge at-risk
positions. Others use hedging instruments but do not apply hedge accounting because it is too
restrictive. Smaller private enterprises sometimes use hedging instruments but rarely apply hedge
14
accounting because it is generally deemed too complex. Increasing the scope of hedge accounting
would not change anything for these smaller entities.
15
(a) Do preparers and users think that the standard requires an appropriate level of disclosure?
Members did not indicate that the level of disclosure was inappropriate.
(b) Are there any challenges in practice complying with the disclosure requirements in Section
3856? If applicable, please provide examples of challenges and examples of disclosures you
think do not result in useful information.
Members feel that the disclosure requirements generally do not pose any challenges in practice and
that they are not too expensive for enterprises. However, some members noted some specific
application challenges, as described below.
They cited paragraph 3856.46, which requires the disclosure of any defaults or breaches occurring
during the period. Members indicated than in practice, it is very difficult to provide assurance on, or to
prepare, this information, in particular when the interim financial statements that are available are
neither audited nor reviewed, or when there is no requirement to issue interim financial statements.
They questioned the usefulness of disclosing this information in the financial statements, since the
creditors are often already aware of it.
Some members also commented on paragraph 3856.43, which requires disclosures of only long-term
debt. In their opinion, similar requirements should be added for demand loans and other forms of
short-term debt, excluding current receivables such as trade receivables. Other members believe that
disclosures about short-term debt are less relevant.
(c) Do preparers and users think that the disclosures on risks and uncertainties in paragraphs
3856.53-.54 provide useful financial information? If not, how could this guidance be improved
to increase the usefulness of financial reporting taking into account the cost of applying such
guidance?
According to members, the risks associated with interest on debts are obvious or implicit for creditors
and for most users when they read the terms of the loans in the note on long-term debt. They believe
that users naturally understand that variable-rate debts subject the entity to a cash flow risk, and that
there is a fair value risk associated with fixed-rate debts. In their view, the same conclusion applies to
liquidity risk related to debts.
According to members, disclosures of concentrations of credit risk are relevant, as are disclosures of
foreign currency balances. However, they found that the information seems less relevant when the
number of users is very limited (management and tax authorities, for example). Opinions are divided
16
regarding disclosures of credit risk, as some members feel that credit risk exposure is obvious when
reading the balance sheet, while others believe it should be clearly described in the notes to the
financial statements.
Do stakeholders have additional concerns on topics not covered by the above questions? If
Members identified the following additional concerns that were not reflected in the preceding
comments.
OTHER TYPES OF INVESTMENTS
Some members noted that Section 3855 in Part V included a list of items that did not meet the
definition of a financial instrument (with justification), which helped to clarify the scope and to
understand the definition. They recommend that the AcSB include this type of list in Section 3856 in
order to clarify the situations outlined below, among others.
Members wondered about measuring other types of investments, for instance gold bars and the cash
surrender value of life insurance policies. In the case of the first item, members felt that Section 3856
should be clarified in a similar way as IFRS 9 Implementation Guidance B.1. Since the item does not
represent cash or a contract (or a contractual agreement), some members believe that Section 3856
should not be applied, but rather Section 3051, which provides for the cost basis of accounting.
However, they do not necessarily feel that cost is a relevant value for these types of investment.
As for the cash surrender value of life insurance policies, the tendency is to recognize this item at the
surrender value. However, this value does not correspond to either the fair value or cost. Members
are not clear on which ASPE section or measurement principle to apply to life insurance policies for
which a private entity is the beneficiary. Clarifications should be included in ASPE in these respects.
With respect to life insurance policies, questions were also raised about a financial liability resulting
from the entity’s obligation to redeem certain shares upon the death of a shareholder for the amount
of life insurance coverage, in order to reflect the specifics of a shareholder agreement. According to
some members, under these circumstances, the existing standards could result in recognizing
redeemable shares as a liability for the amount of the life insurance proceeds of which the entity is the
beneficiary, but would not allow recognition of the consideration receivable from the insurer. Some
members mentioned the possibility of an early offsetting between the financial asset that will result
from the insurance claim upon death and the related financial liability; this offsetting would reflect the
fact that the redemption will not affect the entity’s cash position when shareholders who are subject to
17
the shareholder agreement pass away. Members indicated that EIC-91 in Part V included
explanations in this regard (for claims) and that clearer guidance should be included in the current
requirements.
FEES AND TRANSACTION COSTS
Section 3856 presents fees and transaction costs as separate concepts with their own definitions in
paragraph 5. Some members mentioned that in practice, fees and transaction costs are combined for
recognition purposes, and they recommend that the AcSB simplify the standard by doing the same
thing.
18
February 9, 2015
Email: ed.accounting@cpacanada.ca
Ms. Rebecca Villmann, CPA, CA
Regarding: Comments on the Post-Implementation Review: Section 3856,
Financial Instruments Request for Information
Dear Rebecca:
We would like to thank you for this opportunity to comment on the above-mentioned
Request for Information (RI). We believe that post-implementation reviews of recent
standards are an important stage of the normalization process.
Our expanding firm located in Montreal has around 100 employees and is a member
of the PKF International network. We are very interested in the development and
improvement of accounting standards for private enterprises (ASPE), which are used
by the majority of our clients.
Regarding the current RI, our experience shows that Section 3856 is perceived as
being very complex to read, understand and apply. Practitioners, preparers and users
(notably lenders) often tell us that the terminology used in the Section is difficult to
understand and that finding to which practical situations the requirements apply is not
readily apparent. As an example, very few of them can describe a practical
application after reading the requirements on indexed financial liabilities (paragraph
3856.14). However, they will understand once we offer explanations using simpler
wording and give an example. In this context, we believe that it is necessary to
continue to simplify and clarify Section 3856, whether in regards of the terminology
used or the requirements themselves.
We are also concerned by the important increase in the number of non-ASPE
compliant financial statements (compilation engagements) and of qualified audit and
review opinions in the last years. This could have a negative impact on the trust of the
users towards ASPE. Improvements to Section 3856 may be beneficial in this regard.
1
February 9, 2015
If you have any questions, I will be pleased to discuss them with you. Please contact
me at 514 729-3221, or by e-mail at sophie.bureau@fbbl.ca.
Yours truly,
Sophie Bureau, CPA, CA
Associate Partner
FAUTEUX, BRUNO, BUSSIÈRE, LEEWARDEN, CPA, LLP
AMD/SB/sp
Enclosures
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Appendix 1
Are there challenges in practice in determining the initial fair values of financial
assets and liabilities? If so, for what types of transactions is determining fair
value difficult? How common are these transactions and what factors make it
difficult to determine fair value?
Common challenges
For most financial instruments (FI), the fair value (FV) is equal to the amount of the
consideration exchanged (short-term accounts receivable, advances with market
interest rates, short-term accounts payable, loans with market interest rates, etc.).
However, where the FV is not equal to the consideration, the requirement to initially
measure a FI at its FV results in significant costs and efforts for our clients. This fact
is true for the entire term of the FI – and that provides few benefits to the users of the
financial statements.
Notably, there are challenges in practice when a private enterprise receives an
interest-free loan, or a loan with a (potentially) non-market interest rate from a
venture capital organization, or from the government or a government-related entity.
Most private enterprises do not have the necessary internal resources to measure the
FV of such a liability when it is issued. They also lack the means necessary to
account for it upon its initial recognition and thereafter. Entities must therefore incur
significant costs to initially measure the loan and to account for it during its entire
term.
Our experience shows that management and shareholders do not see any benefit in
using this accounting method, do not always understand it well, and do not use the
data it provides (i.e. amount of liability differs from amount payable, interest expense
disagrees from interest payable, etc.). Our experience also shows that creditors
(including loan providers) do not see more benefits in using it, even if they may
understand it. Some of them “undo” the accounting done based on initial FV for ratio
calculation purposes, while others let the numbers as they are or accept a qualified
audit opinion or review report upon a request by the entity instructing not to measure
at FV a FI on its initial recognition. We are not aware of any creditors of our clients
for whom this accounting method is important. We feel they do not care.
There are also similar challenges in practice with long-term advances from members
of the board, with (potentially) non-market interest rates, to which Section 3840 does
not apply on initial recognition pursuant to paragraphs 3856.08-.09 because it is their
sole relationship with the entity (or with another related party that does not comply
with the Section 3840 definition of a related party (e.g. a parent and an adult child)).
There are also similar challenges with long-term amounts receivable/payable from the
sale/purchase of a business.
1
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Overall, we believe that the requirement to initially measure a FI at its FV runs
counter to the cost-benefit objective of ASPE. We encourage the Accounting
Standards Board (AcSB) to review this requirement so as to eliminate it altogether or
offer a choice of method (FV or consideration exchanged). As a minimum, we
believe a practical expedient should be added to allow entities to estimate a FV using
an easily available interest rate.
Contracts with customers
If the requirement to initially measure a FI at its FV is maintained, we encourage the
AcSB to add the same relief (exception) in paragraph 3856.07 that is found in IFRS
for significant financing components included in contracts when customers are
expected to pay within 12 months. We do not see any reason for which ASPE should
be different than IFRS in this regard. Some of our clients would benefit from this
relief. The wording of the exception should make clear that the entity does not need
to initially measure those trade receivables at FV even when the effects of the
financing component could be significant.
The last versions of IFRS 9 and IAS 39 include the following exceptions:
IFRS 9 5.1.3 “Despite the requirement in paragraph 5.1.1, at initial recognition, an entity shall measure
trade receivables that do not have a significant financing component (determined in accordance with
IFRS 15) at their transaction price (as defined in IFRS 15).”
IFRS 15.63 “As a practical expedient, an entity need not adjust the promised amount of consideration
for the effects of a significant financing component if the entity expects, at contract inception, that the
period between when the entity transfers a promised good or service to a customer and when the
customer pays for that good or service will be one year or less.” (Emphasis added)
IFRS 15.BC236 “The boards acknowledged that the relief could produce arbitrary outcomes in some
cases because the financing component could be material for short-term contracts with high implicit
interest rates and, conversely, could be immaterial for long-term contracts with low implicit interest
rates. However, the boards decided to exempt an entity from accounting for the effects of any
significant financing component on contracts with an expected duration of one year or less for the
following reasons: (a) application of IFRS 15 would be simplified. This is because an entity would not
be required to: (i) conclude whether those contracts contain the attributes of a financing component
that are significant to those contracts (see paragraph BC232); and (ii) determine the interest rate that is
implicit within those contracts. (b) the effect on the pattern of profit recognition should be limited
because the exemption would apply only to financing arrangements that are expected to expire within
12 months (i.e. when either the customer pays or the entity performs).”
2
Appendix 1
(a) Do you agree that equity securities quoted in an active market should be
measured at fair value, while equity securities not quoted in an active market
are measured at cost and debt securities are measured at amortized cost, unless
the entity elects to measure them at fair value? If not, why not?
Yes, we agree.
(b) Are there challenges in practice in determining when an equity security is
required to be measured at fair value (i.e., when it is considered to be quoted in
an active market vs. a thinly traded market)? If so, please describe these
challenges.
General comments
We are aware that some preparers and practitioners face challenges in determining
when an equity security is considered to be quoted in an active market in some very
limited circumstances (notably when the frequency of trading is low or when the
quantities traded are low). However, except for the following issue regarding the
“classification” of funds, we do not have important challenges in this regard in our
practice. Paragraphs 3856.A9-A11 offer enough guidance (very similar to IFRS 13).
Funds
Regarding investments in (mutual) funds, there is confusion as to how they should be
measured after initial recognition. We see diversity in practice: some believe that they
are (all) investments in equity instruments that are quoted in an active market (unless
clearly stated otherwise), while others elect to measure them at FV by designating
them when they are first recognized. There are also discussions regarding the
meaning of a quoted fund or a mutual fund. What is meant by a quoted fund? What is
a mutual fund? Is there a difference in the accounting of a mutual fund and of other
types of fund? Do we have to “look through” the fund, and then decide upon the
measurement depending on what type of investments are owned by the fund: shares,
debt securities, cash? Do we have to look at how the issuer presents the investment in
its own financial statements (classified as equity or liability)? Should we consider the
legal form of the investment (units or shares)? In our practice, we notice that almost
all those investments are measured at FV anyway.
We believe there should be clarifications regarding investments in funds, and a
practical expedient if needed.
3
Appendix 1
How common is it that private enterprises measure financial instruments, other
than equity securities quoted in an active market, at fair value? Is there
sufficient guidance on how to determine fair value? If not, what additional
guidance should be provided?
None of our clients measure other FI at FV, except for investments in debt
instruments that some private enterprises and not-for-profit organizations (NFPO)
choose to measure at FV to have their complete investments portfolio at FV.
There is sufficient guidance on how to determine FV in these circumstances. These
entities choose to measure their investments at FV only if the FV is easily available.
Are there challenges in determining whether to apply Section 3840 or Section
3856 to aspects of accounting for financial assets or liabilities besides initial
measurement? If so, please describe these challenges.
General comments
We must first say that, similarly to Section 3856, Section 3840 is generally perceived
by our staff and clients as being complex to read, understand and apply, even if it is
an old section of the CPA Canada Handbook - Accounting. In this context, many
preparers and practitioners measure financial assets originated or acquired and
financial liabilities issued or assumed in a related party transaction (RPT) without
realising that they are in fact applying paragraphs 3856.08-.09. We must be vigilant
because there is a risk of errors for parties whose sole relationship with the entity is in
the capacity of management, which are deemed to be unrelated third parties pursuant
to paragraph 3856.09.
Designation
We have been aware of discussions regarding whether an entity can elect to measure
a financial asset or financial liability at FV in accordance with paragraph 3856.13(a)
when the asset has been originated or acquired or the liability has been issued or
assumed in a RPT and has been measured in accordance with Section 3840 on its
initial recognition. We never had to deal with this issue in our practice.
4
Appendix 1
Compound FI
The accounting by the issuer of a FI that contains both a liability and an equity
element (convertible debenture) is not clear when the instrument is issued in a RPT.
Pursuant to paragraph 3856.08, the issuer is required to initially measure the liability
in accordance with Section 3840. However, because the practical expedient provided
by paragraph 3856.22 also relates to initial measurement, some believe that it cannot
be applied to this FI. A clarification in this regard would be welcome. We do not see
any reason for which a compound instrument issued in a RPT should not benefit from
the same practical expedient.
Not-for-profit organizations
Application of paragraph 3856.08 could be clarified for NFPO. Some understand that
it is implicit since, as NFPO do not apply Section 3840, they do not have any relief
regarding the measurement of financial assets originated or acquired or financial
liabilities issued or assumed in a RPT. Others think that there is a relief for NFPO
even if they do not apply Section 3840.
(a) Are there challenges in practice in applying the impairment guidance in
Section 3856? If so, please describe these challenges.
Challenges are mostly related to:
-
the identification and assessment of indicators of impairment;
-
the determination as to whether a significant adverse change has occurred
during the period in the expected timing or amount of future cash flows;
-
the determination of the expected timing and amount of future cash flows;
-
the determination of the rate of interest to use to calculate the present value of
the cash flows; and
-
the determination of the amount that could be realized by selling the assets.
All these concepts are complex for most private entities. We believe there is diversity
in practice as to whether all these “details” are applied consistently. However, we
believe that entities are generally able to estimate a reasonable amount of impairment
loss if needed.
5
Appendix 1
(b) If you are a user of financial statements, do you find the impairment
information useful and timely? Are there ways in which the information could
be made more useful?
Our understanding of the needs of the users of financial statements is that information
on impairment currently provided is limited and sufficient. For financial assets other
than current trade receivables, an entity shall disclose the carrying amount of
impaired financial assets by type of asset, and the amount of any related allowance
for impairment. For current trade receivables, an entity shall disclose the amount of
any allowance for impairment. An entity shall also disclose the amount of any
impairment loss or reversal of a previously recognized loss.
(a) Are there challenges in practice in applying the guidance to determine
whether an instrument should be classified as a liability or equity? If so, how
common is this and what are the challenges? Please provide examples.
Shares
Challenges that we see in our practice are mostly related to the classification of shares
redeemable at the option of the holder or mandatorily redeemable by the entity.
The biggest challenge for preparers and practitioners is to obtain all the information
related to the shares (shareholders’ agreement, modifications to shareholders’
agreement, other separate agreements, etc.).
Challenges related to the exception in paragraph 3856.23 have already been indicated
in our answer to the recent Exposure Draft regarding that paragraph.
In some situations, there are also challenges in applying the other exception in
paragraph 3856.A28. First of all, the exception is sometimes completely forgotten
upon the issuance of the shares, notably because it is in an appendix of Section 3856.
This exception is also sometimes overlooked in the years after the issuance of the
shares, when there are modifications in the context that could require their
reclassification because all the criteria in paragraph 3856.A28 are no longer met. For
example, a reclassification may be required upon the issuance of other shares that are
non-redeemable. We note that a reclassification of the shares after their issuance
could seem to contradict what is indicated in the last sentence of paragraph 3856.A22
when the terms of the shares themselves have not changed:
3856.A22 “The classification made at inception continues at each subsequent reporting date until the
terms of the financial instrument change or it is removed from the entity’s balance sheet”.
6
Appendix 1
Application of the exception in paragraph 3856.A28 can be complex and
misunderstood depending of the numerous different situations (mix of shares with
different characteristics issued and redeemed at different dates). There are notably
challenges when there are venture capital investors.
Following are two “simple” examples that could lead to diversity in practice:
1. Year 1: Three shareholders hold all the common shares of an entity. Shares
are mandatorily redeemable by the entity upon the death of the holder at their
FV at that date. = All the shares are classified in equity because they meet all
the criteria in paragraph 3856.A28.
Year 2: Common shares are issued to a new shareholder. New shares do not
have any redemption features. = The new shares are classified in equity. Some
may conclude that the redeemable shares must be reclassified as liabilities
because all the criteria in paragraph 3856.A28 are not met anymore (the
redemption feature is not extended to all the common shares). Others may
determine that no reclassification is needed because the terms of the first
common shares issued have not changed.
2. Year 1: Same as example #1.
Year 2: Common shares are issued to a new shareholder which is a company
(not redeemable upon the death of the holder). They are mandatorily
redeemable by the issuer after 5 years at their FV at that date. = Some may
conclude that all the shares must be classified as liabilities because all the
criteria in paragraph 3856.A28 are no longer met because the redemption
event is not the same for all the shares. There would be no equity instrument.
Others may determine that only the new shares must be classified as liabilities
because they have a “preferential right” (redeemable after 5 years); the old
shares are kept in equity because they are the “real” common shares.
(b) Are there challenges in practice in determining whether an instrument
contains both a liability and an equity element? If so, how common is this and
what are the challenges? Please provide examples.
Convertible debts
Challenges in our practice in determining whether an instrument contains both a
liability and an equity element are not common. They mostly arise when a convertible
debt is issued, notably to venture capital investors. The challenge is with the
classification of the conversion feature when the shares that would be issued upon
conversion would be redeemable at the option of the holder or mandatorily
redeemable by the entity. There is nothing explicit in Section 3856 on this: should we
“look through” the conversion feature or not? Moreover, if we conclude that we must
look at the substance and that the conversion feature must be classified as a liability,
there is no explicit requirement in Section 3856 regarding the classification or the
measurement of an embedded liability derivative. See our answer to Question 11 on
that matter.
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Appendix 1
(c) When an instrument is determined to be a compound instrument, are there
challenges in practice in accounting for such instruments? If so, how common is
Challenges are not common with the accounting of compound instruments because of
the application of the practical expedient provided in paragraph 3856.22(a). This
practical expedient is very important for private entities and is almost always chosen
over another method. Challenges mostly happen in two circumstances:
1. When amounts payable vary in part or in whole based on a formula (see our
comments on “indexed” liability in our answers to Question 11);
2. When there is a debt modification (see our answers to Question 8).
(a) Are there challenges in practice in applying Appendix B to determine how to
We have rarely seen a potential sale of receivables in our client base. However, we
are aware of the complexity of Appendix B and of the fact that the first criterion in
paragraph 3856.B5(a) often requires a legal opinion. Some thought could be given to
see if simpler requirements could be developed for simple situations. As an example,
the old EIC-9, “Transfer of receivables”, was based on the concept of transferring the
significant risks and rewards of ownership and on the substance of all the related
transactions involved rather than their legal form.
(b) Is there divergence in practice on when receivables are derecognized? If so,
We are not aware of any divergence in practice on when receivables are
derecognized.
(c) How common are securitization and factoring transactions for private
enterprises in Canada?
We rarely see securitization or factoring transactions in our client base.
8
Appendix 1
(a) Are there challenges in practice in determining when a liability should be
accounted for as an extinguishment versus a modification? If so, please provide
examples of these challenges.
General comments
We had some challenges in practice in determining when a liability should be
accounted for as an extinguishment versus a modification. The first challenge is to
remember that there is a potential extinguishment and that paragraph 3856.A52 (the
“10% test”) or paragraph 3856.A56 (for line of credit or revolving debt) apply,
particularly when there is no exchange of cash at the modification date. These
requirements are often forgotten, notably because they are in an appendix of Section
3856. The “10% test” is also seen as a very complex rule to apply in practice.
Compound FI
The requirements regarding the “10% test” in paragraphs 3856.A52-.A53 do not deal
explicitly with compound FI. For example, do modifications (extensions, changes in
the conversion price or in the conversion ratio, etc.) in a conversion option presented
in equity have an impact on the calculation of the “10% test” and, if so, how? When
private entities issue convertible debt instruments, those are often modified before
their maturity date. Guidance on that matter would be useful.
(b) Are there challenges in accounting for a modification or extinguishment of
financial liabilities? If so, please describe these challenges.
Modifications resulting in an extinguishment of a convertible debt instrument
Paragraph 3856.A36 requires allocating the consideration paid upon the
extinguishment of a convertible debt instrument to the liability and equity elements.
This is fairly easy when the initial measurement of the equity element was zero.
However, when the initial measurement of the liability and equity elements was
based on measuring one or both components at its FV, the consideration paid must be
allocated on the same basis as that used in the original allocation of the proceeds
received by the entity on issuance of the convertible instrument.
There are challenges with this requirement, notably regarding what is meant by
“same basis”. We have seen diversity in practice. Some may conclude that “same
basis” means that the entity must use the “same accounting method” to allocate the
consideration paid on extinguishment as that used for the original allocation of the
proceeds received on issuance of the convertible instrument. For example, that could
mean that the entity is required to (re)evaluate, at the date of the extinguishment, the
FV of the component of the convertible debt that was more easily measurable on its
initial recognition, to allocate first the consideration paid to this component, then to
allocate the residual amount of the consideration paid to the other component. This
method, or another method that requires FV measurements, is complex and costly for
private entities. Others may conclude that “same basis” means that the consideration
paid can be allocated between the liability and equity components based on the same
proportions, e.g. 90% - 10%, as those used in the original allocation of the proceeds
received on issuance.
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Appendix 1
When private entities issue convertible debt instruments, those are often modified
before their maturity date. Clarifications would be useful. A simple method like the
one based on proportions in the example in the previous paragraph is consistent with
the costs/benefits objective of ASPE.
3856.A36 “On extinguishment of a convertible debt instrument, the issuer allocates the consideration
paid to the liability and equity elements as follows:
(a)
When the initial measurement of the equity element was zero in accordance with paragraph
3856.22(a), the consideration is allocated first to the liability, up to the carrying amount of
the debt, including accrued interest, and the balance, if any, to the equity element.
(b)
When the initial measurement of the liability and equity elements was based on measuring
one or both components at its fair value in accordance with paragraph 3856.22(b), the
consideration is allocated on the same basis as that used in the original allocation of the
proceeds received by the entity on issuance of the convertible instrument.” (Emphasis
added)
Modifications not resulting in an extinguishment
We also had to deal with challenges related to the accounting for modifications not
resulting in an extinguishment:
General comments
Section 3856 does not indicate how to account for modifications (extensions, changes
in the interest rate or in the amount of monthly payments, etc.) when the terms of the
modified liability are not substantially different from those of the initial liability (i.e.
no extinguishment). Paragraph 3856.A55 deals only with fees and transaction costs
when an exchange or modification is not accounted for as an extinguishment.
More precisely, Section 3856 does not indicate if the carrying amount of the initial
liability must remain unchanged at the modification date (which may result in an
adjustment of the effective interest rate in the future, for example if the only
modification relates to a maturity date and the debt was issued with a zero interest
rate and measured at FV on initial recognition) or if the carrying amount of the
liability must be adjusted at the modification date to reflect changes in the timing and
amount of future cash flows and the adjustments recognized in net income (using the
initial effective interest rate). There is a similar requirement in the following
paragraph IAS 39.AG8 requiring to adjust the carrying amount of the financial
liability. We have sometimes heard that there should be “no impact at all” when there
is no extinguishment but, most of the time, there will be one, whether at the time of
the modification or thereafter: the effective interest rate will change in the future or
there will be an immediate impact in net income.
IAS 39.AG8 “If an entity revises its estimates of payments or receipts, the entity shall adjust the
carrying amount of the financial asset or financial liability (or group of financial instruments) to reflect
actual and revised estimated cash flows. The entity recalculates the carrying amount by computing the
present value of estimated future cash flows at the financial instrument’s original effective interest rate
or, when applicable, the revised effective interest rate calculated in accordance with paragraph 92. The
adjustment is recognised in profit or loss as income or expense. […]”
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Appendix 1
Because private entities often modify their financial liabilities before their maturity
date, guidance on that matter would be useful.
Compound FI
There are the same challenges as for convertible debt instruments. Paragraph
3856.A36 indicates how the issuer should allocate the consideration paid to the
liability and equity components on extinguishment of a convertible debt. However,
Section 3856 is silent where modifications do not result in an extinguishment of the
liability component of a convertible debt instrument.
In addition, neither Section 3856 nor any other Section of ASPE indicates whether
the equity component (conversion option) should be adjusted (for example, if the
term or exercise price of the conversion option is modified) and, if so, how.
When private entities issue convertible debt instruments, those are often modified
before their maturity date. Guidance on that matter would be useful.
(a) Are there challenges in practice in applying the hedge accounting
requirements in Section 3856? If so, please provide detailed examples of these
challenges.
General comments
Very few of our clients apply hedge accounting. When they do, it is only for basic
bank loans hedged with basic interest rate swaps or for basic anticipated foreign
currency transactions hedged with basic foreign exchange forward contracts. We do
not encourage our clients to apply hedge accounting, mostly because, as the rules are
complex, they do not have internal resources to apply them and the net benefits
would be minimal for them.
Interest rate swaps
We would like to point out that most of our clients that apply hedge accounting to
interest rate swaps indicated that they have not really chosen to buy those swaps.
They say that they asked for a loan with a fixed interest rate or a variable interest rate
and finally end up with a loan combined with an interest rate swap to accommodate
their needs. It seems more and more financial institutions do those combinations for
their own business reasons, without always explaining to their clients that a swap is a
derivative that must be accounted for and measured at FV at each balance sheet date
if hedge accounting is not applied. This situation causes some issues in practice,
notably because paragraph 3856.31(a) requires the entity to designate that hedge
accounting will be applied to the hedging relationship and formally document it at its
inception.
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Appendix 1
Acquisition of an equipment
Regarding the anticipated acquisition of a major equipment denominated in a foreign
currency hedged with a foreign exchange forward contract, there seems to be
diversity in practice as to whether hedge accounting is allowed when the acquisition
will be financed with a long-term debt. This is caused by the criterion in paragraph
3856.A62(b) which requires that “the forward contract matures within 30 days of the
settlement of each designated anticipated transaction” (emphasis added). Clarification
on that matter would be useful.
(b) Should hedge accounting be permitted for other types of hedging
relationships and hedging items? If so, for what types of hedging relationships
and hedging items should hedge accounting be permitted?
As noted in our answer to Question 9 (a), very few of our clients apply hedge
accounting and they only do so for basic hedging relationships. We are not aware of
any of our clients who would like to have hedge accounting permitted for other types
of hedging relationships and hedging items. However, we are aware that
representatives of some industries would appreciate this, for types of hedging
relationships and hedging items that they regularly use, that are not “so complex” and
that are very effective.
We would agree with increasing the scope of hedge accounting only if this does not
increase the complexity of hedge accounting requirements for hedging relationships
already permitted.
(c) How common are transactions that involve these hedging relationships or
hedging items for private enterprises? How would increasing the scope of hedge
accounting improve the usefulness of financial reporting?
We are not aware of any of our clients who would like hedge accounting permitted
for other types of hedging relationships and hedging items.
(a) Do preparers and users think that the standard requires an appropriate level
of disclosure?
Except for what is indicated in our answers to Question 10 (b) and Question 10 (c),
our experience shows that preparers and users generally think that the level of
disclosure is appropriate.
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Appendix 1
(b) Are there any challenges in practice complying with the disclosure
requirements in Section 3856? If applicable, please provide examples of
challenges and examples of disclosures you think do not result in useful
information.
Following are some challenges for which we often receive questions and that cause
diversity in practice. Clarifications would be helpful:
-
Amounts of each category: The requirement in paragraph 3856.38 to disclose
the carrying amounts of each category of financial assets (at amortized cost, at
FV and at cost) is confusing. It is not clear if the total amount of each of the
three categories is required, or if a list of the types of assets in every category
is sufficient when their carrying amounts are disclosed elsewhere, or if
nothing more is required when the accounting policy clearly indicates the
measurement method of each type of assets and amounts are disclosed
elsewhere.
-
Interest rate: Paragraph 3856.43 requires to disclose the interest rate of some
financial liabilities, without specifying if it is the rate stipulated in the
contract, the effective interest rate, or both when they are different.
-
Shares classified as financial liabilities:
o Payments of the next five years: Based on our experience, information
on shares classified as financial liabilities is often presented elsewhere
than in the note on long-term debt. In these situations, the amount of
payments estimated to be required in each of the next five years
disclosed in the note on long-term debt does not include those
pertaining to share repurchases. However, paragraph 3856.45 requires
disclosure of the aggregate amount of payments estimated to be
required in each of the next five years to meet repayment of financial
liabilities. Clarification should be provided on whether all the
disclosure requirements regarding financial liabilities set out in
paragraphs 3856.43-.46 apply to redeemable shares classified as
liabilities.
o Disclosure required by Section 3240: It is not clear if (all the)
disclosures required by paragraphs 3240.20-.22 apply to shares
classified as financial liabilities. Paragraph 3240.01 does not explicitly
exclude shares classified as liabilities. However, paragraphs 3240.03.18 seem to be relevant only for shares classified as equity. Also,
paragraph 3240.19 about presentation only refers to preferred shares
issued in certain tax planning arrangements that are classified as
equity.
13
Appendix 1
-
Defaults: Paragraph 3856.46 requires that for financial liabilities recognized at
the balance sheet date, an entity shall disclose: (a) whether any financial
liabilities were in default or in breach of any term or covenant during the
period that would permit a lender to demand accelerated repayment; and (b)
whether the default was remedied, or the terms of the liability were
renegotiated, before the financial statements were completed. Our current
understanding is that (a) requires a disclosure if there was a default during the
period even if it was remedied before the balance sheet date. This is an
important challenge for preparers. Defaults that seem to have occurred during
the period are generally based on calculations made with internal financial
statements that were often not prepared in accordance with ASPE. Also,
defaults that should have been identified may be missed for the same reason.
The challenges are greater for practitioners that have to audit or review this
information. We believe the costs of this requirement are too high compared
to its benefits. We do not believe that small clarifications are sufficient.
Disclosure should be limited to default at the balance sheet date.
-
Derivative-related assets or liabilities: Required disclosures are not clear in
financial statements prepared after a hedged item is recognized, during the
period where the hedging item is recognized as a derivative-related asset or
liability in accordance with paragraph 3856.33(c). Do the disclosures required
in paragraph 3851.51(a) on hedge accounting still apply (exclusively)? Or
should other disclosures similar to those required for derivatives in paragraphs
3856.48-.49 be provided?
-
Items of income:
o Disclosure of specific items: Pursuant to paragraph 3856.52 (and
paragraph 1520.04(k)), an entity shall disclose specific items of
income, expense, gains or losses either on the face of the statements or
in the notes to the financial statements (net gains or net losses
recognized on FI, total interest income, total interest expense on
current financial liabilities, interest expense on long-term financial
liabilities separately identifying amortization of premiums, discounts
and financing fees, and the amount of any impairment loss or reversal
of a previously recognized loss.). Except for the last part regarding
impairment, this requirement causes challenges in practice:
 Net gains or losses: what should be, or not be, included in this
amount, notably regarding FV variations?
 Total interest income: what should be, or not be, included in
this amount, and notably regarding interest earned on FI
measured at FV?
 Interest expense on long-term financial liabilities separately
identifying amortization of premiums, discounts and financing
fees: Is the cost of separating these expenses really worth the
benefits?
14
Appendix 1
o Combination of the requirements in paragraphs 3856.52/1520.04(k)
and 1520.03 (b) (ii): The combination of these requirements also
causes challenges in practice. Paragraph 1520.03(b)(ii) requires to
present separately, on the face of the income statement, income from
investments other than non-consolidated subsidiaries and joint
arrangements accounted for using the cost or equity method, showing
separately: income from investments measured using the cost method
(pursuant to Section 3051 and Section 3856), income from
investments measured using the equity method (pursuant to Section
3051) and income from investments measured at FV (pursuant to
Section 3856). Again, what should be included or not in “income”
causes challenges. Also, finding a way to comply with the minimum
requirements of paragraphs 3856.52 and 1520.03(b)(ii) in a
comprehensive and relevant way for the users of financial statements
is often difficult. Information required by paragraph 1520.03 must be
split in a specific way and presented on the face of the income
statement, and information required by paragraph 3856.52 must be
separated in a different way. Moreover, because of Section 1520
requirements, some “non-investment” entities that own investments
may end up with three new lines on the face of their income statement,
that are required because amounts are “material”, but that are not
“important” for their business.
(c) Do preparers and users think that the disclosures on risks and uncertainties
in paragraphs 3856.53-.54 provide useful financial information? If not, how
could this guidance be improved to increase the usefulness of financial reporting
taking into account the cost of applying such guidance?
We do not think that the disclosures (the note) on risks and uncertainties required by
paragraphs 3856.53-.54 (and A66-A67) provide useful financial information. We are
not aware of any user reading these disclosures (the note). Moreover, private entities
generally do not have the necessary internal resources to prepare it.
The little pieces of information that may be relevant, if any, are usually found among
other information. If we withdraw:
-
the definitions of each type of risks (often kept even if not required because if
a user ever reads the note, the definitions are needed to understand what the
note is about);
-
the redundant information about interest rate risk (indicating that the entity
has an interest rate risk because the future cash flows/FV of a loan with a
variable/fixed interest rate will fluctuate due to changes in market interest
rates, even if this is made obvious by reading the description of the loan in the
long-term debt note);
-
the non-specific information about credit risk (because it is obvious: credit
risk is, by nature, inherent for all financial assets);
15
Appendix 1
-
the redundant information about liquidity risk (because it is obvious: liquidity
risk is, by nature, inherent for all financial liabilities); and
-
the redundant information about other price risk (which is often obvious by
reading the description of many FI),
we are left with only small pieces of relevant information. In our practice, the only
relevant information left may be about concentrations of currency risk and of credit
risk related to accounts receivable and payable.
Therefore, we believe that these requirements run counter to the cost-benefit
objective of ASPE. We encourage the AcSB to delete paragraphs 3856.53-.54 (and
A66-A67) and replace them by a requirement to disclose concentrations of currency
and credit risks related to accounts receivable and payable, either on the face of the
balance sheet or in the notes.
relevant.
Following are some additional concerns:
-
Examples of assets and liabilities that are not FI: Paragraph 3856.02 indicates
common examples of FI. It would be useful to add common examples of
assets and liabilities that are not FI (income taxes, prepaid expenses, etc.),
similar to previous paragraphs 3855.A6-A8. Examples should include
investments in gold bullions (see IFRS 9 Implementation Guidance B.1) and
cash surrender value of a life insurance policy (already indicated in paragraph
3856.03(d)). We often have questions in these regards.
-
Financing fees and transaction costs: Many preparers use the wrong
terminology (the most frequent error is to call legal fees “financing fees”
instead of transaction costs) or do not make any difference between both items
and, accordingly, may account for financing fees (to compensate the lender)
and transaction costs the wrong way. We wonder if it is really important to
differentiate the two items in Section 3856.
-
Embedded derivatives that are financial assets or liabilities: There is no
explicit requirement in Section 3856 regarding embedded derivatives that are
financial assets or liabilities. Paragraph 3856.21 requires the issuer of a FI that
contains both a liability and an equity element to classify the instrument’s
component parts separately. In this situation, the embedded derivative is an
equity component. However, there are FI where the embedded derivatives are
asset or liability components. A clarification stating that embedded derivatives
that are assets or liabilities do not have to be separated from the host contract
would be useful. This clarification should be consistent with the requirements
on “indexed” financial liabilities (paragraph 3856.14), which may include
embedded derivatives.
16
Appendix 1
-
“Indexed” financial liability:
o Designation: The link between paragraphs 3856.13 and 3856.14
should be clarified. Is it possible to elect to measure an “indexed”
financial liability at FV? Paragraph 3856.13 indicates that an entity
may elect to measure any financial liability at FV. That could make a
difference when the FV of an “indexed” liability is lower than the
amortized cost.
o Application concerns: We appreciate the practical expedient in
paragraph 3856.14. However, it results in questions by preparers and
users. We believe there could be diversity in practice. Clarifications
would be useful. Here is a simple example:
 Debt issued for $1M, payable in 5 years at the higher of its FV
at that date and $2M. FV after 1 year: $1.5M. FV after 2 years:
$1.3M.
Pursuant to paragraph 3856.14(c), “at each reporting date, the
entity should adjust the carrying amount of the liability to the
higher of: (i) the amortized cost of the debt; and (ii) the amount
that would be due at the balance sheet date if the formula
determining the additional amount was applied at that date (the
conversion or intrinsic value).”.
Firstly, regarding (i), it is difficult to apply the paragraph
3856.05 definition of amortized cost to this FI. Notably, what
is meant by “plus or minus the cumulative amortization of any
difference between that initial amount and the maturity
amount”? What is the impact of the “higher of” amount in
paragraph 3856.14?
Secondly, regarding (ii), what is meant by “intrinsic value”?
We understand that this notably means that we should consider
the FV today, not estimate the FV in 4 years and calculate its
present value today. But should we calculate the present value
of the 2M$ that is fixed?
In the current example, some may conclude that the liability
after 1 year would be the higher of (i) $1.2M, being the initial
amount of $1M + amortization of the $1M difference over
5 years, and (ii) $1.5M = $1.5M. Some may determine that the
liability after 2 years would be the higher of (i) $1.4M, being
the initial amount of $1M + amortization of the $1M difference
over 5 years, and (ii) the result of the formula being $1.4M
because the FV is lower = $1.4M. Others could conclude
differently.
17
Appendix 1
-
Life insurance: Shares mandatorily redeemable by the entity at the death of
the holder at the amount of a life insurance policy held by the entity is still an
issue for private entities. This situation often ends up with a qualified audit or
review opinion because the entity refuses to present the shares as liabilities
and to measure them at an amount based on their redemption price, while the
asset (the cash surrender value of the life insurance policy) is measured at a
much lower amount.
-
Appendix A: This appendix contains important requirements that should be
included in the main part of the Section, and not in an appendix. As an
example, there are two exceptions to the classification of retractable or
mandatorily redeemable shares as liabilities: one is indicated in the main part
of the Section (paragraph 3856.23) and the other is in appendix A (paragraphs
3856.A28-A29). We suggest including the whole appendix A in the main part
of the Section. Moreover, paragraph 3856.20 could be misleading as it only
clearly refers to the exception in paragraph 3856.23. Paragraph 3856.20 refers
to paragraphs 3856.A22-.A38 as application guidance, which is in our view
different than other requirements.
-
Examples: We are not convinced that excluding examples from Section 3856
is the right approach. We are aware that Section 45 of the ASPE Guide
contains some examples. However, this guide is not part of ASPE and
preparers have to pay for it. ASPE should be useful and understandable on a
stand-alone basis. The application of some of the requirements of Section
3856 would benefit from examples – for instance, the requirements regarding
the “10% test” (paragraph 3856.A52) and, of course, hedge accounting.
-
Reference correction: Paragraph 3856.A54 includes a reference to paragraph
3856.50, which appears to be incorrect. It should probably be replaced by a
reference to paragraph 3856.27.
18
Appendix 2
Comments on French version of Section 3856
1. Acceptable methods for initial measurement of the elements of a compound FI:
The English version of paragraph 3856.22 indicates that “Acceptable methods for
initial measurement of the separate liability and equity elements of an instrument
to which paragraph 3856.21 applies include (…)”. The French version indicates
“Les deux méthodes suivantes sont acceptables (…)”. The English version makes
it clear that other methods can be used, while the French version can lead to
believe that only these two methods are acceptable.
2. Default: The English version of paragraph 3856.46 indicates that “For financial
liabilities recognized at the balance sheet date, an entity shall disclose: (a)
whether any financial liabilities were in default or in breach of any term or
covenant during the period that would permit a lender to demand accelerated
repayment (…)”. The French version indicates “En ce qui concerne les passifs
financiers comptabilisés à la date de clôture, l’entité doit indiquer : a) si, au cours
de la période, l’un ou l’autre de ces passifs financiers se trouvait en souffrance ou
faisait l’objet d’un manquement à quelque condition ou clause restrictive, de sorte
que le prêteur aurait pu exiger un remboursement anticipé (…) ». There is a
nuance between the terminologies used in the two languages. The French version
says “(…) the entity shall disclose: (a) whether any financial liabilities were in
default or in breach of any term or covenant during the period that would have
permitted a lender to demand accelerated repayment (…)”. There is a difference
in the tense of the verb used which could imply a difference in the requirement.
Our answer to Question 10 b) of the RI demonstrates that a clear wording is
important in this area.
3. Extinguishment of a convertible debt instrument: The English version of
paragraph 3856.A36(b) uses the expression “same basis” while the French
version uses the expression “même méthode” (“same method”). There is a nuance
between the terminologies used in the two languages, especially because of the
meaning of a “method” in ASPE. Our answer to Question 8 b) of the RI
demonstrates that a clear wording is important in this area.
19
February 9, 2015
Ms. Rebecca Villmann, CPA, CA
Toronto, ON
M5V 3H2
Dear Ms. Villmann:
Re: Accounting Standards Board’s post-implementation review of Section 3856, Financial
Instruments
We welcome the opportunity to comment on the Accounting Standards Board’s (“AcSB” or the “Board”)
post-implementation review of Section 3856, Financial Instruments within Accounting Standard for
Private Enterprises (“ASPE”).
Please find our responses to your specific questions below.
Are there challenges in practice in determining the initial fair values of financial assets and liabilities? If
so, for what types of transactions is determining fair value difficult? How common are these
transactions and what factors make it difficult to determine fair value?
In certain circumstances, a financial instrument is initially recognized as part of a transaction that has
multiple components. In these instances, each element of the transaction is given separate accounting
recognition. While not a majority of transactions, when these situations do arise, a significant amount
of cost and effort is required to determine the value of the individual components of the transaction –
often because each of the individual pieces does not have a stand-alone value and, given the nature of
private enterprises, many of the assumptions that would be used in a valuation model are not readily
available. While we see these types of transactions in various industries, in our experience they are
most common within the technology sector, and within not-for-profit organizations.
In addition, challenges arise when entities enter into transactions that may or may not be at market
rates. An example of this is a low-interest loan to or from a not-for-profit organization, which may
include an element of a contribution in line with the NPO’s mandate. In addition, when a transaction
is with a counterparty that doesn’t strictly meet the definition of a related party within Section 3840
(i.e. an adult, non-dependent sibling), it may be hard to determine whether the transaction price is
representative of fair value or not. In our experience, entities often do not question whether these
transactions are at a rate other than market. Once a transaction has been identified as one where the
financial instrument’s fair value is different than its face amount, it is again difficult for entities to
determine the appropriate fair value for initial recognition. Inputs into a valuation model are not
readily available, and may or may not be reliable, as there are often not comparable transactions to
look at.
PricewaterhouseCoopers LLP
PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2
T: +1 416 863 1133, F: +1 416 365 8215, www.pwc.com/ca
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
a) Do you agree that equity securities quoted in an active market should be measured at fair value,
while equity securities not quoted in an active market are measured at cost and debt securities are
measured at amortized cost, unless the entity elects to measure them at fair value? If not, why not?
Yes, we agree.
b) Are there challenges in practice in determining when an equity security is required to be measured
at fair value (i.e., when it is considered to be quoted in an active market vs. a thinly traded market)?
If so, please describe these challenges.
We do not believe there are significant challenges in practice in determining when an equity security is
required to be measured at fair value. In certain circumstances judgment is required in making this
assessment, such as when a security is thinly traded. In these circumstances, which we do not
encounter regularly, guidance provided within other accounting frameworks is helpful in arriving at a
conclusion. Another circumstance where it is challenging to determine whether fair value is required
is when the investment is in an entity that is not traded on an exchange, but units are redeemable,
transactions in units happen regularly, and approximations of fair value (for example, “net asset
value” or “NAV”) are readily available. In our experience, most entities optionally designate these
investments at fair value, in which case the assessment of whether or not fair value is actually required
by the standard is not relevant.
How common is it that private enterprises measure financial instruments, other than equity securities
quoted in an active market, at fair value? Is there sufficient guidance on how to determine fair value? If
not, what additional guidance should be provided?
In our experience, entities regularly measure financial instruments at fair value when this value (or an
approximation of this value, i.e. NAV) is readily available. Examples include quoted debt instruments,
certain pooled funds, real estate funds, investment LPs, and private equity funds. Generally, entities
do not choose to measure other financial instruments at fair value.
In many cases, investments in entities that report a regular NAV are measured at fair value by private
enterprises. Given that NAV is not equivalent to fair value, this requires an assessment of the
difference between the two. We believe it would be helpful to include a practical expedient that
permits entities to use NAV, without adjustment, to determine the fair value of investments in entities
with redeemable shares (such as the one that exists in US GAAP at ASC 820-10-35-59).
In general, we believe the challenges with determining fair value are not with respect to the amount of
guidance provided by the standard but, rather, the determination of the appropriate inputs into the
fair value models. As mentioned earlier, many of these inputs are not readily available.
2
Are there challenges in determining whether to apply Section 3840 or Section 3856 to aspects of
accounting for financial assets or liabilities besides initial measurement? If so, please describe these
challenges.
In our experience, there is confusion amongst preparers regarding the interaction between Section
3840 and Section 3856. For many, it is not clear that when a financial instrument is initially
recognized using Section 3840, subsequent measurement is in accordance with the requirements of
Section 3856.
We also note that, other than the illustration included in Example 11, there is no specific guidance in
Section 3840 on the determination of the carrying amount or exchange amount of a newly issued
financial instrument. We believe specific guidance on this would be helpful.
a) Are there challenges in practice in applying the impairment guidance in Section 3856? If so, please
We have not noted challenges in applying the impairment guidance in Section 3856.
b) If you are a user of financial statements, do you find the impairment information useful and timely?
Are there ways in which the information could be made more useful?
n/a
a) Are there challenges in practice in applying the guidance to determine whether an instrument should
be classified as a liability or equity? If so, how common is this and what are the challenges? Please
provide examples.
With the exception of the items noted below, we have not noted significant challenges in applying the
guidance to determine whether an instrument should be classified as a liability or equity.
We do note that the guidance is not clear on the appropriate classification of an instrument that
requires payments based on contingencies outside the control of both the issuer and the holder. An
example of this would be non-redeemable limited partnership units which require a distribution of all
cash flows from the partnership.
We also note that judgment is required in determining the appropriate classification in certain
circumstances:
•
•
whether the limited life of certain entities is considered a redemption feature; and
consideration of a general partnership interest in a limited partnership, that is the most
subordinated instrument, but does not participate significantly in the earnings / net assets of
the partnership
3
b) Are there challenges in practice in determining whether an instrument contains both a liability and
an equity element? If so, how common is this and what are the challenges? Please provide examples.
In general, we have not found significant challenges in practice in determining whether an instrument
contains both a liability and an equity element.
c) When an instrument is determined to be a compound instrument, are there challenges in practice in
accounting for such instruments? If so, how common is this and what are the challenges? Please
provide examples.
Once an instrument is determined to be a compound instrument, we generally do not find there are
challenges in accounting for these. This is because, in our experience, most entities elect to treat the
entire proceeds of the instrument as a liability, and measure the equity component as zero.
a) Are there challenges in practice in applying Appendix B to determine how to account for transfers of
receivables? If so, please describe these challenges.
We do not see the application of Appendix B frequently in practice. When we do, it is usually in the
context of relatively straight-forward factoring arrangements. When Appendix B is used, it is complex,
and difficult for entities to understand and apply. We believe it would be helpful to include illustrative
examples of the most common transfer situations (i.e. factoring with and without recourse).
If the AcSB is considering revisiting the content and requirements of Appendix B, they may wish to
consider whether the guidance with respect to qualifying special purpose entities (“SPE’s”) is relevant
to private enterprises, especially as ASPE offers the option of non-consolidated financial statements.
In addition, the concept of qualifying SPE’s has now been eliminated from US GAAP.
b) Is there divergence in practice on when receivables are derecognized? If so, please describe the
alternatives used.
As mentioned above, we do not see Appendix B used frequently in practice.
c) How common are securitization and factoring transactions for private enterprises in Canada
As mentioned above, we do not see securitization and factoring transactions frequently among entities
that are applying ASPE.
a) Are there challenges in practice in determining when a liability should be accounted for as an
While there are not generally challenges in understanding the criteria for determining when a liability
should be accounted for as an extinguishment rather than a modification, additional application
guidance with respect to this would be helpful. The guidance which existed in the appendix of EIC-88
with respect to the methodology to be used to calculate the present value of the cash flows for
purposes of the 10 percent test was helpful in performing these calculations.
In addition, the requirements in ASPE are not clear with respect to the treatment of non-cash features
4
in assessing whether something is an extinguishment or modification (i.e. the addition of a conversion
option, or granting warrants to a lender in exchange for changes to terms of the debt). This is
complicated by the fact that many entities choose to record the entire amount of a convertible
instrument as a liability, as is permitted by paragraph 3856.22.
b) Are there challenges in accounting for a modification or extinguishment of financial liabilities? If so,
We have not noted significant challenges in accounting for the modification or extinguishment of
financial liabilities.
a) Are there challenges in practice in applying the hedge accounting requirements in Section 3856? If
so, please provide detailed examples of these challenges.
One of the main challenges in applying hedge accounting under Section 3856 is that it is more
restrictive in its scope than IFRS or US GAAP. In our experience, clients enter into various hedging
relationships that are more complex than what is currently contemplated under Section 3856. These
entities would be interested in applying hedge accounting to more complex relationships.
We also note that many entities, once they do meet the criteria for hedge accounting, find it difficult to
determine exactly what the accounting entries are. We believe it would be helpful to add illustrative
examples to the standard, to assist entities that are applying hedge accounting.
b) Should hedge accounting be permitted for other types of hedging relationships and hedging items? If
so, for what types of hedging relationships and hedging items should hedge accounting be
permitted?
We find the most common transactions where entities would like to apply hedge accounting under
ASPE but cannot are interest rate hedges of anticipated debt issuances, because these transactions do
not qualify for the “critical terms match” approach. Perhaps two hedging frameworks (the existing
one, and a more comprehensive one for those that wish to use it) would be a consideration.
In addition, we note that paragraph 3856.A62 requires the hedging item to mature within 30 days of
“settlement” of the designated transaction. We believe it is unclear whether settlement refers to the
date of the purchase/sale, or the date the related payable/receivable is settled. We believe it would be
helpful to clarify this requirement. In addition, we believe an option for an entity to designate either
purchase/sale date, or payment/receipt date would be helpful, as this would permit more entities to
apply hedge accounting, depending on their hedging strategy.
c) How common are transactions that involve these hedging relationships or hedging items for private
enterprises? How would increasing the scope of hedge accounting improve the usefulness of
financial reporting?
While not pervasive, we do find several entities engage in more complex economic hedging
transactions. In many cases, these entities would benefit from the use of hedge accounting, as this
would result in their financial statements being more reflective of what they are doing economically.
We recognize that entities often have the choice to apply IFRS, but we believe there should be an
opportunity to apply slightly more sophisticated hedging techniques without requiring an entity to
adopt an entirely different framework.
5
For example, entities wishing to hedge anticipated debt transactions are often financing a significant
construction project. In this case, the interest expense being hedged would be significant to their
financial results. Recording the interest expense on the debt, and a separate derivative at fair value is
not reflective of the economic rationale for entering into the transactions.
We also note that IFRS 9 is revising hedge accounting requirements for public entities, making it
easier for them to achieve hedge accounting. As a result of this, we believe more public entities will be
using hedge accounting in the future. We recommend the AcSB consider this development, as private
entities may question why ASPE continues to be restrictive with respect to hedge accounting, while
other accounting frameworks are becoming more flexible.
(a) Do preparers and users think that the standard requires an appropriate level of disclosure?
We have no significant concerns with respect to the disclosure requirements included in the standard.
(b) Are there any challenges in practice complying with the disclosure requirements in Section 3856? If
applicable, please provide examples of challenges and examples of disclosures you think do not
result in useful information.
We have not noted significant challenges in practice in complying with the disclosure requirements.
(c) Do preparers and users think that the disclosures on risks and uncertainties in paragraphs 3856.53.54 provide useful financial information? If not, how could this guidance be improved to increase the
usefulness of financial reporting taking into account the cost of applying such guidance?
We believe that when the disclosure is done appropriately, it provides useful financial information.
However, in many cases we find entities merely include boilerplate, uninformative disclosures with
respect to risks and uncertainties. As a result, disclosures are not seen as being useful or relevant.
It may be helpful to highlight that the intent of the disclosure is to provide an understanding of risks
specific to the entity and not merely a general description of such risks. Illustrative examples of
disclosures that may be relevant, including commentary on why those disclosures have been included
based on specific facts and circumstances, would be helpful (i.e. ageing of receivables where collection
is a significant risk, amount of monetary balances denominated in other currencies, when foreign
currency is a significant risk).
Do stakeholders have additional concerns on topics not covered by the above questions? If so, please
provide details of these concerns, including examples if relevant.
We note it is not explicit in the standard whether an entity is meant to use “trade date” or “settlement
date” for regular way transactions. Paragraph 59 of the Basis for Conclusions to ASPE includes the
following statement: “The AcSB concluded that trade date accounting more accurately reflects the
economic effects of transactions and is the only recognition date that provides transparency for
derivatives”. However, in our experience, entities are unclear whether settlement date is an option
6
under ASPE, and trade date is simply preferred. We believe it would be helpful for the AcSB to clarify
within the standard whether trade date recognition is required for regular way transactions.
The scope of Section 3856 currently excludes contracts to buy or sell non-financial items. We note that
entities in certain commodities industries would benefit from the ability to account for these contracts
at fair value – as this would result in their financial statements more accurately reflecting the
economic substance of their business. We suggest the AcSB consider an option to recognize these
contracts at fair value, similar to the one that exists in IFRS at IAS 39.5A (included in the amendments
to IFRS 9 dealing with hedge accounting):
A contract to buy or sell a non-financial item that can be settled net in cash or another financial
instrument, or by exchanging financial instruments, as if the contract was a financial
instrument, may be irrevocably designated as measured at fair value through profit or loss even
if it was entered into for the purpose of the receipt or delivery of a non-financial item in
accordance with the entity’s expected purchase, sale or usage requirements. This designation is
available only at inception of the contract and only if it eliminates or significantly reduces a
recognition inconsistency (sometimes referred to as an ‘accounting mismatch’) that would
otherwise arise from not recognizing that contract because it is excluded from the scope of this
Standard (see paragraph 5).
The scope of Section 3856 also excludes contingent consideration in a business combination from the
purchaser’s perspective. However, contingent consideration for a seller in a business combination, as
well as contingent consideration in an asset acquisition (for both purchaser and seller) are not
excluded from the scope of the standard. We believe it would be helpful for the AcSB to clarify the
appropriate accounting for contingent consideration in these circumstances, both with respect to
initial recognition and subsequent measurement.
We believe additional guidance on the application of amortized cost would be helpful in circumstances
where payments may vary under the contract (for example, the amount of the payment is contingent
on the occurrence or non-occurrence of certain events). Paragraph 3856.A3 provides guidance on the
accounting for an initial premium or discount. However, it is not clear in the standard whether, in
circumstances where the cash flows vary, the subsequent measurement of an instrument at amortized
cost requires re-estimation of the amount and timing of cash flows under the contract.
We would be pleased to respond to any questions you might have with respect to our comments above.
Questions can be addressed to Michael Walke (michael.walke@ca.pwc.com or 416-815-5011) or Celeste
Murphy (celeste.k.murphy@ca.pwc.com or 403-509-6680).
Yours very truly,
Chartered Accountants
7
Ernst & Young LLP
222 Bay Street
Toronto, ON M5K 1J7
Tel: 416 864 1234
Fax: 416 864 1174
ey.com
Rebecca Villmann, CPA, CA, CPA (Illinois)
February 17, 2015
Dear Ms. Villmann:
Ernst & Young LLP (“EY” or “we”) welcomes the opportunity to provide comments to the Accounting
Standards Board (“AcSB”) on the Post-Implementation Review of Section 3856, FINANCIAL
INSTRUMENTS (the “Post-Implementation Review”).
Our response assesses the effects of Section 3856 on financial statement users, preparers and auditors
based on our experience with the standard in practice. We focused our comments on considering whether
the standard has achieved its intended objectives. We also considered whether the issues that were
important or contentious during the development of the standard as well as issues that have come to the
attention of the AcSB after the standard was published have been adequately addressed by Section 3856,
FINANCIAL INSTRUMENTS (“Section 3856”).
Our responses to the specific questions posed in the Post-Implementation Review are included below.
Comments on Specific Questions Requested by the AcSB
Are there challenges in practice in determining the initial fair values of financial assets and liabilities? If so,
for what types of transactions is determining fair value difficult? How common are these transactions and
what factors make it difficult to determine fair value?
In some instances, there are challenges we have seen in practice in determining the initial fair values of
financial instruments. One area we have noted that represents a challenge is when an entity recognizes a
financial instrument with an off-market rate of interest. This often occurs, for example, when an entity
receives a government loan with a low interest rate. There is sometimes difficulty in determining what an
appropriate rate of interest would be to discount the loan and determine its initial fair value. There is little
guidance in Section 3856 in terms of the interest rate to use apart from the guidance in paragraph 3856.A8
that indicates that the cash receipts should be discounted using the prevailing market rate of interest for a
similar instrument with a similar credit rating. In addition, there is no guidance on how to treat other offmarket conditions such as contingent payments, grace periods, prepayment options, etc.
Another area noted in practice that represents a challenge is determining the fair value of financial
instruments entered into with non-related, non-government lenders or creditors in the open market. Our
clients normally assume that the fair value of these financial instruments is the consideration exchanged and
they do not consider whether any of the terms of the financial instrument contract, including the interest rate,
represent off-market terms that would indicate that the fair value of the financial instrument is different from
the consideration exchanged.
One final area noted in practice that represents a challenge in determining the initial fair value is also in
relation to government loans. Often an entity will receive a government loan with a particular rate of interest,
for example 5%. If we assume that all entities that qualify for this particular government loan receive a 5%
interest rate regardless of their credit rating, but that the credit rating of the entity results in the entity
1
normally receiving an interest rate of 15% from its lenders for a similar loan, it is unclear as to what the initial
fair value of this loan would be. There is an argument to be made that it should be the contractual cash
flows discounted at a rate of 15%, since that is the interest rate that the entity normally receives. However,
a market participant (assuming that they also qualify to receive the government loan) would only pay an
amount equal the cash flows discounted at 5% (i.e. the consideration exchanged) since that is the amount of
the loan they could obtain themselves. Thus it is unclear which would be the correct fair value. Further
application guidance should be added to the Appendix to Section 3856 to clarify this.
Overall, particularly with respect to the discounting of financial instruments with off-market interest rates, we
have found that many of our clients would rather qualify their financial statements than discount the
instrument. This perhaps is an indication that the requirement to record the initial fair value of a financial
instrument with a non-market rate of interest as the present value of all future cash receipts discounted
using the prevailing market rates of interest for a similar instrument with a similar credit rating should be an
accounting policy choice rather than a requirement. Refer to our response to question 3 for further
discussion on fair value.
Do you agree that equity securities quoted in an active market should be measured at fair value, while equity
securities not quoted in an active market are measured at cost and debt securities are measured at
amortized cost, unless the entity elects to measure them at fair value? If not, why not?
We agree that equity securities quoted in an active market should be measured at fair value while equity
securities not quoted in an active market should be measured at cost. In substance these investments are
not held for the same purpose as securities quoted in an active market. As discussed below, we feel that
with respect to debt securities, it is inconsistent to require that equity instruments quoted in an active market
to be measured at fair value while debt securities that have readily available fair values are not required to
be measured at fair value.
Are there challenges in practice in determining when an equity security is required to be measured at fair
value (i.e., when it is considered to be quoted in an active market vs. a thinly traded market)? If so, please
We have noted challenges in practice in applying the definition of equity instrument (which impacts the need
to determine whether it is quoted in an active market) to financial instruments held by our clients as well as
inconsistencies in the requirement to subsequently recognize financial instruments at fair value. With
respect to the definition of equity instrument included in paragraph 3856.05 (e), many of our private clients
have investments in limited partnerships. It is unclear whether an investment in a limited partnership
represents an investment in an equity instrument and therefore whether or not that investment needs to be
subsequently measured at fair value if it is traded in an active market. An amendment to the definition of an
equity instrument to clarify this point would be helpful in alleviating this issue.
A second issue is with respect to investments in mutual funds. An investment in a mutual fund is similar in
nature to an investment in an equity security that is traded in an active market. Both also have readily
determinable fair values. It appears inconsistent to require equity securities traded in an active market to be
recorded at fair value but not to require other financial instruments for which fair values are readily
determinable to be subsequently measured at fair value.
Finally, it also appears inconsistent that an equity instrument that is quoted in an active market would be
required to be measured at fair value whereas a debt instrument that is publicly available would not. In
practice, we generally see entities electing to measure their investments in mutual funds and other publicly
available investments at fair value. It would be more consistent if the requirement to measure a financial
instrument subsequently at fair value was based on whether or not market prices are readily available rather
than the type of instrument it is.
2
How common is it that private enterprises measure financial instruments, other than equity securities quoted
in an active market, at fair value? Is there sufficient guidance on how to determine fair value? If not, what
additional guidance should be provided?
In our experience, it is rare that private entities will subsequently measure financial instruments at fair value,
other than those financial instruments required to be subsequently measured at fair value as well as
marketable securities and investments in mutual funds. Generally, private entities do not believe that
determining the fair value of financial instruments on initial recognition and re-determining the fair value at
each reporting date provides incremental useful information to financial statement users. From the
perspective of our clients, ultimately at the time that the financial instrument is settled, the carrying amount
will be equal to the cash required to be exchanged and thus the re-measurement of the instrument in the
intervening time is an accounting complication. Any differences between the consideration transferred and
the fair value is often either quantitatively or qualitatively not material to the users of the financial statements
and remains as an unadjusted audit difference, if it is not trivial.
We have seen that in practice, accounting for financial instruments at fair value creates undesirable volatility
in a private entity’s financial statements, particularly when such financial instruments with fluctuating fair
values are typically not part of the entity’s normal operating activities. An exception to this view is for a
company that has a significant number of investments in marketable securities. In such cases, the fair value
of those securities is informative to users of the financial statements as it represents the value that could be
obtained from selling the marketable securities.
There is very little guidance included in Canadian accounting standards for private enterprises (“ASPE”) in
regards to the determination of fair value. The guidance is contained in paragraphs 3856.05 (f) and
3856.A9, which consists of general, high level guidance on the determination of fair value. In contrast, there
is significantly more detailed guidance in International Financial Reporting Standard (“IFRS”) 13, FAIR
VALUE MEASUREMENT (“IFRS 13”) in regards to determining fair value. Some of this guidance could be
simplified and adapted as necessary to be included as application guidance in the Appendix to Section
3856. Paragraph 57 of IFRS 13 explicitly requires an entity to consider whether the initial fair value is equal
to the transaction price. Further, paragraphs 58, 59 and B4 of IFRS 13 indicate that in most cases, initial fair
value is equal to the transaction price but discusses factors to consider as evidence to the contrary. This
guidance would be relevant for private entities to help determine whether there are any terms or conditions
included in a given financial instrument that would result in the initial fair value being different from the
transaction price. This is something that is not necessarily considered in practice and in addition, is
something that ASPE currently does not have explicit guidance on. Providing a policy choice with respect to
measuring a financial instrument at fair value will allow entities to consider the recommended additional
guidance while not requiring entities to make such an analysis if cost-prohibitive or complex.
Another area of Section 3856 where additional application guidance could be useful is in regards to
acceptable valuation techniques. Section 3856 does not describe any acceptable valuation techniques for
determining the initial fair value of a financial instrument. This is another area where it would be beneficial to
adapt and include application guidance from IFRS 13 in the Appendix to Section 3856. For example,
paragraphs 61 and 62 of IFRS 13 describe various valuation techniques that could be used to determine fair
value. This would be useful as application guidance to help guide private entities in determining an
appropriate valuation technique to determine the initial fair value of a financial instrument. In addition,
paragraph B2 in IFRS 13 describes what an entity should consider in determining fair value. This would also
be useful guidance to include in Section 3856. Finally, paragraphs B13 and B14 of IFRS 13 indicate
illustrative components of a present value technique and the general principles of a present value technique.
Similar guidance embedded in the Appendix to Section 3856 would be useful in guiding private entities as to
factors to consider in determining the initial fair value of a financial instrument, which would lead to more
consistency in practice.
3
We do not suggest that all the requirements of IFRS 13 be included in Section 3856, but we believe that
consideration should be given to including the general principles of fair value measurement from certain
specific paragraphs of IFRS 13 as additions to the application guidance in the Appendix to Section 3856.
Are there challenges in determining whether to apply Section 3840 or Section 3856 to aspects of accounting
for financial assets or liabilities besides initial measurement? If so, please describe these challenges.
Due to the fact that related party transactions are not within the scope of Section 3856 (and are scoped into
Section 3840, RELATED PARTY TRANSACTIONS (“Section 3840”)) for initial measurement but are within
the scope of Section 3856 for subsequent measurement, there are some transactions for which it is difficult
to determine whether the guidance in Section 3840 or the guidance in Section 3856 applies. For example, if
an entity recognizes impairment on a related party receivable balance, we have seen diversity in practice in
terms of whether the debit side of that transaction is recognized as an expense (i.e. in accordance with
Section 3856) or directly as a charge to equity (i.e. in accordance with Section 3840). It would appear that
Section 3856 would apply for subsequent measurement, but there is no consideration within Section 3856
as to whether this transaction is in the normal course of operations or not. Transactions with related parties
that are not in the normal course of operations accounted for in accordance with Section 3840 would result
in a charge or credit to equity, which seems inconsistent with the accounting treatment that results from
applying Section 3856. It would be helpful to clarify the subsequent accounting for related party financial
instruments. Including some additional guidance in Section 3840 to direct the reader as to when to apply
the guidance in Section 3856 (e.g. for transactions that meet the criteria in paragraph 3840.29) and when to
apply the guidance in Section 3840 (e.g. for transactions that do not meet the criteria in paragraph 3840.29),
similar to the guidance in paragraph 3840.44 on common control business combinations, would be helpful.
Another area within Section 3856 where it is difficult to determine whether to apply Section 3840 or Section
3856 is with respect to the conversion of convertible debt where the convertible debt is held by a related
party. The reader is not directed to the guidance in Section 3840 in determining how to account for such a
transaction. This would clearly be a related party transaction but it is not clear from the guidance in Section
3856 as to whether it would be accounted for in accordance with Section 3840. Adding guidance to the
Appendix in Section 3856 which directs the reader to account for the conversion of convertible debt
instruments held by a related party in accordance with Section 3840 would eliminate this issue.
Are there challenges in practice in applying the impairment guidance in Section 3856? If so, please describe
these challenges.
In general, we have not seen challenges in practice in applying the impairment guidance in Section 3856.
If you are a user of financial statements, do you find the impairment information useful and timely? Are there
ways in which the information could be made more useful?
The impairment information currently required to be disclosed under Section 3856 is useful from a user’s
perspective. It is useful for financial statement users to be informed of a provision against accounts
receivable for a certain amount, in order to evaluate the risks of recovery associated with the carrying
amount of the accounts receivable. Other disclosure requirements might be useful, however, in
circumstances in which there is an unusual triggering event that causes a significant impairment (as
opposed to a general allowance for doubtful accounts provision for example). In these situations, similar to
the disclosure requirements for impairment of long-lived assets, it would be useful to users to be provided
disclosure surrounding the events and circumstances that led to the need to impair the asset along with the
significant assumptions that went into determining the recoverable amount. This would provide users with
more information to support their assessment of the prospect of ultimate recoverability of the financial asset.
4
Are there challenges in practice in applying the guidance to determine whether an instrument should be
classified as a liability or equity? If so, how common is this and what are the challenges? Please provide
examples.
For the most part, although there are situations in which financial instruments have unusual terms or
conditions that make it difficult to determine the appropriate classification of a financial instrument as a
liability or equity, we have not noted common recurring challenges in applying the guidance in this area.
Are there challenges in practice in determining whether an instrument contains both a liability and an equity
element? If so, how common is this and what are the challenges? Please provide examples.
For the most part, although there are situations in which financial instruments have unusual terms or
conditions that make it difficult to determine whether an instrument contains both a liability and an equity
element, we have not noted common recurring challenges in practice in this area.
When an instrument is determined to be a compound instrument, are there challenges in practice in
accounting for such instruments? If so, how common is this and what are the challenges? Please provide
examples.
One issue noted by us in practice reflects an inconsistency within Section 3856 with respect to the
measurement of a financial instrument that contains both a liability and an equity element. Paragraph
3856.22 indicates that “Acceptable methods for the initial measurement of the separate liability and equity
elements of an instrument to which paragraph 3856.21 applies include the following: (a) The equity
component is measured at zero. The entire proceeds of the issue are allocated to the liability component.
(b) The less easily measurable component is allocated the residual amount after deducting from the entire
proceeds of the issue the amount, separately determined for the component that is more easily
measurable.” This paragraph indicates that however the instrument is measured, the total value of the
instrument recognized, whether it is allocated entirely to the liability or to the liability and equity components,
would equal the proceeds of the issue as opposed to the initial fair value of the liability. This is inconsistent
with paragraph 3856.07 which indicates that all financial instruments, except those originating from related
party transactions, are initially measured at fair value. It is unclear whether this is a simplification for the
initial recognition of compound financial instruments or an inconsistency within Section 3856 that should be
addressed.
Are there challenges in practice in applying Appendix B to determine how to account for transfers of
receivables? If so, please describe these challenges.
There are challenges in practice to applying Appendix B in Section 3856 to determine how to account for
transfers of receivables. Most private entities struggle to apply the guidance in Appendix B to Section 3856
appropriately as it is very prescriptive and somewhat complicated to understand. Altering the guidance on
transfers of receivables to make it more principles-based and thus simpler to understand and apply would be
beneficial. This approach would be similar to the treatment of guidance in AcG-15, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, which was revised to be less prescriptive and more principles-based
when it was removed and the guidance added to Section 1591, SUBSIDIARIES. Guidance included in
International Accounting Standard (“IAS”) 39, FINANCIAL INSTRUMENTS: RECOGNITION AND
MEASUREMENT or Section 3400, REVENUE, could be used as starting points in developing a principlesbased approach.
5
Is there divergence in practice on when receivables are derecognized?
alternatives used.
If so, please describe the
In our experience, there is divergence in practice on when receivables are derecognized. That divergence,
however, is not so much based on differences in the interpretation of the guidance in Appendix B to Section
3856 but on entities struggling to understand the guidance and subsequently concluding that they are not
within the scope of Appendix B. This has led to divergence in practice on when receivables are
derecognized.
How common are securitization and factoring transactions for private enterprises in Canada?
In our experience, we have rarely seen securitization transactions, and only occasionally see factoring
transactions entered into by private enterprises in Canada.
Are there challenges in practice in determining when a liability should be accounted for as an
In practice the lending arrangements of most private entities are non-complex and do not involve unique
terms or conditions that would make it difficult to determine when a liability should be accounted for as an
extinguishment versus a modification. There are, however, instances in which the new loans obtained by
our clients do have such unique terms or conditions. For example, the new debt might include prepayment
options or warrants attached. It would be beneficial if there was a more comprehensive list of items to
consider when comparing the present value of cash flows under the old and the new debt than what is
currently listed in paragraph 3856.A53.
Are there challenges in accounting for a modification or extinguishment of financial liabilities? If so, please
Overall, we have not seen many challenges in practice in accounting for a modification or extinguishment of
financial liabilities.
Are there challenges in practice in applying the hedge accounting requirements in Section 3856? If so,
please provide detailed examples of these challenges.
One challenge that we have noted in practice is around determining what the hedged item is in a given
hedging relationship. This challenge arises most frequently with respect to long-term debt. With this
financial instrument, there is an argument to be made that the hedged item is either the debt itself (e.g.
hedged using an interest rate swap or a cross-currency interest rate swap) or the debt repayments (e.g.
hedged using a forward contract). The guidance in paragraph 3856.32 is unclear on whether either or both
of these hedging relationships are acceptable for the purpose of applying hedge accounting.
Should hedge accounting be permitted for other types of hedging relationships and hedging items? If so, for
what types of hedging relationships and hedging items should hedge accounting be permitted?
The majority of private clients that we have seen in practice do not enter into any other arrangements other
than those already permitted in Section 3856 for hedging purposes. Furthermore, most of our clients that
enter into derivative financial instruments that would qualify for hedge accounting choose to account for
them at fair value rather than apply hedge accounting, for simplicity of accounting.
6
How common are transactions that involve these hedging relationships or hedging items for private
enterprises? How would increasing the scope of hedge accounting improve the usefulness of financial
reporting?
As noted above, transactions for private entities that involve hedging relationships or hedging items other
than those already permitted by Section 3856 to apply hedge accounting are not very common. We do not
believe that increasing the scope of hedge accounting would improve the usefulness of financial reporting.
Do preparers and users think that the standard requires an appropriate level of disclosure? Are there any
challenges in practice complying with the disclosure requirements in Section 3856? If applicable, please
provide examples of challenges and examples of disclosures you think do not result in useful information.
For the most part, the disclosure requirements of Section 3856 are appropriate. There are certain areas,
however, that we see in practice as areas where our clients do not feel that the disclosure requirements add
value to the financial statements.
The first such area is from paragraph 3856.38. This disclosure requires that entities disclose the carrying
amount of each of the three categories of financial assets, either on the face of the balance sheet or in the
notes. It would appear from that disclosure requirement that the total amount of financial assets measured
each category should be disclosed in aggregate in a note to the financial statements. In our experience, this
disclosure requirement does not add value to the financial statements from an entity’s perspective as it is
simply a repetition of the information that is included on the balance sheet and does not provide incremental
information about the instruments that is not already included in the financial instruments policy note and/or
the balance sheet. It is also unclear as to why this disclosure requirement only pertains to financial assets
and not financial liabilities as well. We recommend that the AcSB consider removing this disclosure
requirement, and instead require a listing of financial instruments along with how the entity subsequently
measures them in the accounting policy note for financial instruments.
The second area where our clients feel disclosure requirements are not adding additional value is with
respect to the violation of banking covenants as discussed in paragraph 3856.46. This paragraph requires
disclosure of whether the entity was in violation of any of its banking covenants during the period, even if the
entity was not in violation at the balance sheet date. It is unclear what relevance it has to users of the
financial statements if the entity was onside with all of its covenants at the balance sheet date. This is
particularly the case for private entities when one of the main users of the financial statements is the entity’s
lender, who would be aware of the covenant breaches both during the year and at year-end. We
recommend that the AcSB consider amending this paragraph to only require disclosure of a breach of terms
or covenants if the entity is in breach at the balance sheet date.
Do preparers and users think that the disclosures on risks and uncertainties in paragraphs 3856.53-.54
provide useful financial information? If not, how could this guidance be improved to increase the usefulness
of financial reporting taking into account the cost of applying such guidance?
In practice, many of our clients disclose such risks using generic or boilerplate disclosures that do not add
incremental value to the financial statements. For example, they would include a note that indicates that
there is interest rate risk in the entity’s interest bearing liabilities. That statement in itself does not add any
value to the users as it only discloses what is already evident in the financial statements. To rectify this
situation, we propose that the AcSB consider amending the risk disclosure requirements to providing factual
information about what gives rise to these risks. For instance, for foreign currency risk, more useful
disclosures could be provided by requiring the entity to include a listing of all foreign currency denominated
financial instruments, or disclosing the relative percentages of the foreign currency denominated financial
instruments such that the reader is able to understand the quantitative exposure of the entity to currency risk
and evaluate this risk based on the balances. These disclosure requirements should only be applicable for
7
risks in financial instruments that are deemed to be significant, that are not otherwise readily apparent from
the financial statements and for which the probability of changes in the underlying variables is high. This
would both allow the disclosure of such risks to be more meaningful to the users of the financial statements
as well as move away from entities disclosing generic or boilerplate risks and uncertainties that do not add
value overall to the financial statements.
Do stakeholders have additional concerns on topics not covered by the above questions? If so, please
provide details of these concerns, including examples if relevant.
There are certain instruments that are scoped out of Section 3856 that cause difficulties in practice. The first
is described in paragraph 3856.03 (d), which indicates that insurance contracts, including the cash surrender
value of a life insurance policy, are scoped out of Section 3856. The issue with this scope exemption is that
there is no reference to another section of the Handbook where the accounting for the cash surrender value
of life insurance is addressed. Currently, paragraph 3856.03 (d) in Section 3856 is the only reference to the
cash surrender value of life insurance. This is however a common asset on the balance sheet of many
private entities. Consideration should be given as to the addition of guidance on how to account for the cash
surrender value of life insurance, either in Section 3856 or elsewhere in Part II of ASPE.
A second issue with the scope exemption is in relation to paragraph 3856.03 (k), which scopes out
contingent consideration recorded in the financial statements of the acquirer as a result of a business
acquisition. The scope paragraph directs the reader to the accounting included in Section 1582, BUSINESS
COMBINATIONS. This accounting treatment results in the contingent consideration liability not being remeasured until it is settled (as opposed to having the option to measure it at fair value, or alternatively,
amortized cost, each year). In certain circumstances, contingent consideration might not be settled over a
number of years but it might be settled all at once after a longer period. In these circumstances, scoping
contingent consideration out of Section 3856 can create a large gain or loss at the date that the liability is
settled rather than recognizing that gain or loss over the term of the contingent consideration if it were to be
measured at fair value or amortized cost.
A third issue with respect to the scope paragraph of Section 3856 (paragraph 3856.03) is related to
contingent consideration in a transaction other than a business combination. We have seen instances in
practice in which an entity will buy or sell an asset and part of the consideration exchanged will be
contingent on a future event, similar to contingent consideration exchanged in a business combination.
Paragraph 3856.03 is not clear on whether this consideration would be within the scope of Section 3856 or
whether it would be scoped out of Section 3856 and instead scoped into Section 3290, CONTINGENCIES.
This is a transaction that we have seen frequently in practice and the current guidance does not adequately
address this situation.
Another issue we have noted in practice is the inconsistent presentation of capitalized financing fees and
transaction costs, particularly with respect to financial liabilities. While Section 3856 specifies in what
circumstances it is appropriate to capitalize such costs and when it is appropriate to present the capitalized
costs as an asset or as an offset to the recognized financial liability, there is diversity in practice as to how
this is applied. As the result is often only a balance sheet misclassification, the misapplication of the
guidance in Section 3856 (i.e. recording the financing fees and transaction costs as an asset when it should
offset the debt or alternatively recording the financing fees and transaction costs as an offset to a line of
credit when it should be recorded as an asset) results in an unadjusted reclassification difference. In
addition, many private entities do not see the benefit of capitalizing the costs and amortizing them over the
life of the instrument and instead expense the costs immediately to simplify the future accounting. This
again often results in an unadjusted audit difference. Based on these observations noted in practice, it
would appear prudent to have an accounting policy choice to capitalize or expense financing fees and
transaction costs incurred for a financial instrument that will not be subsequently measured at fair value,
similar to the accounting policy choice for development costs.
8
We would be pleased to discuss our comments with members of the AcSB or its staff. If you wish to do so,
please contact Kelly Khalilieh, Associate Partner, National Accounting and Assurance at 416-932-6245
(Kelly.Khalilieh@ca.ey.com) or Eric Spiekman, Professional Practice Director, at 416-943-3779
(Eric.Spiekman@ca.ey.com).
Yours sincerely,
ERNST & YOUNG LLP
Chartered Professional Accountants
Licensed Public Accountants
9

Examen de la mise en œuvre - Financial Reporting and Assurance

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