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January 2010 - Tim Holloway, Ca
 

January 2010 - Tim Holloway, Ca

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Accounting Standards for Private Enterprise - KPMG

Accounting Standards for Private Enterprise - KPMG

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    January 2010 - Tim Holloway, Ca January 2010 - Tim Holloway, Ca Presentation Transcript

    • Accounting Standards for Private Enterprises
    • Presenters
      • Sean Reid
      • Partner, KPMG
      • 604.793.4708
      • Tim Holloway
      • Senior Manager, KPMG
      • 604.854.2282
    • Accounting Standards for Private Enterprises
      • Background
      • Focus on general purpose financial statements
      • Different user needs
        • Lenders vs equity investors
        • Ability to request more information
      • Preparers/auditors often have less accounting resources
      • Different cost/benefit
    • Accounting Standards for Private Enterprises
      • GAAP for Private Enterprises
        • Based on existing Canadian GAAP
        • Stand alone set of standards
          • No EICs and only 6 AcGs retained
        • Available to all NPAEs (no size test)
        • Reduced volume of disclosures (approx 50%)
          • Section 1400 fair presentation requirements may lead to additional disclosures
          • 2 proposed disclosures (management compensation and government remittances in arrears) were removed from final standard. Still need to disclose A/P for government remittances
    • Accounting Standards for Private Enterprises
        • EIC Abstracts
        • Not retained in current form
          • Too rules oriented
        • Material from 29 Abstracts embedded in proposed standards, primarily:
          • Financial instruments
          • Income taxes
          • Leases
          • Related parties
          • revenues
      • New CICA Handbook
      • Standards that apply to:
      • Part I - International Financial Reporting Standards
      • Part II - Accounting Standards for Private Enterprise (unless they elect to apply IFRS)
      • Part III - Accounting Standards for Not-for-Profit Organizations
      • Part IV - Accounting standards for Pension Plans
      • Part V - Entities before the mandatory effective date of the relevant parts above (old handbook)
      Accounting Standards for Private Enterprises
        • Status
        • Final standard issued on December 15, 2009
        • Effective for fiscal periods beginning on or after January 1, 2011 (calendar year-end: 2011, others: fiscal 2012)
        • Early adoption permitted (starting in 2009)
        • Five year “life” before re-evaluation
        • IFRS for SME approved by IASB but not a Canadian GAAP solution
      Accounting Standards for Private Enterprises
      • Transition Issues
      • New Handbook Section 1500 – First time adoption
      • General approach is retrospective
        • Optional elections (to retrospective application)
        • Mandatory exceptions (to retrospective application)
      • Three balance sheets
      • (assume 2011 conversion  January 1, 2010, December 31, 2010, 2011)
      • Two income statements
      • (assume 2011 conversion  years ended December 31, 2010 and 2011)
      • Mandatory Disclosures in year of adoption, reconciliation to previously reported amounts for:
        • Opening retained earnings (i.e. from December 31, 2009 reconciled to Jan 1, 2010
        • Net income for comparative year (i.e. 2010 as previously reported reconciled to the restated 2010 net income)
        • Material adjustments to cash flows
      Accounting Standards for Private Enterprises
      • Implementation date
      • Fiscal year-end date for first year implemented
      • Transition date
      • (generally) two years before implementation date – ie January 1, 2010 for December 31, 2011 implementation
      Key Dates
    • Accounting Standards for Private Enterprises
      • Optional Elections include:
        • Business Combinations (HB 1582 et al)
        • Can elect to not apply Business Combinations to business combinations before transition date.
        • Fair Value
        • Can elect to measure items of PPE at fair value on date of transition and use that as deemed cost
        • Employee Future Benefits
        • Can elect to recognize all cumulative actuarial gains and losses at the date of transition
        • Cumulative Translation Account
        • Can elect to reset CTA to zero on date of transition
        • Stock-based compensation
        • Can elect to not apply calculated method to awards issued prior to the date of transition
      Accounting Standards for Private Enterprises
      • Optional Elections (cont’d)
        • Other
          • Financial Instruments
          • Asset retirement obligations
      • Exceptions to retrospective application of standards
        • Derecognition of financial assets and financial liabilities
        • Hedge accounting
        • Estimates (cannot use hindsight)
        • Non-controlling interests
      Accounting Standards for Private Enterprises
      • Differential Reporting
        • Existing differential reporting options become accounting policy choices, no requirement for shareholder approval
          • Subsidiaries
          • Long-Term Investments
          • Interests in Joint Ventures
          • Goodwill and Intangible Assets
          • Share Capital
          • Income Taxes
          • Financial Instruments – Disclosure and Presentation
        • Previous differential option to present tax basis preferred shares as equity has now been codified in standards.
      Accounting Standards for Private Enterprises
      • Financial instruments
      • Fair value for equity instruments traded in an active market and free-standing derivatives; “mark to market” adjustments to income
      • Amortized cost for all other financial instruments (method not prescribed)
      • Fair value option to elect fair value measurement for any instrument – irrevocable election on initial recognition
      • Fair value adjustments through income – no concept of “other comprehensive income”
      • Transaction Costs on Financial instruments
      • Expense transaction costs for instruments carried at fair value
      • Capitalize transaction costs for financial instruments measured at amortized cost
      Accounting Standards for Private Enterprises
      • Simplified hedging model but restricted application
        • where contract terms match (i.e. no ineffectiveness) e.g. interest rate swaps and foreign currency contracts
        • Note disclosure with no need to establish or disclose FV of hedging instrument
      • No need to identify, segregate and measure embedded derivatives
      • Option to not bifurcate compound financial liabilities (i.e. convertible debt)
      • Revised impairment model – trigger
        • Adverse change in amount or timing of cash flows from expectation at beginning of period
      Accounting Standards for Private Enterprises
      • Income taxes
      • As a policy choice an entity can choose to account for taxes using taxes payable method
      • On transition date all adjustments through retained earnings
      • No significant reduction in required disclosures for private entities
      • Attempt to clarify requirements of previous differential disclosure requirements
      • If taxes payable used – requirement for rate reconciliation is still required.
      Accounting Standards for Private Enterprises
      • Employee future benefits
      • Simplified approach available for defined benefit plans as an accounting policy choice
        • Use actuarial valuation prepared every three years or more frequently (for funding purposes) or when a significant event occurs, to measure obligation
        • Recognize all actuarial gains and losses and past service costs in income when they occur (no smoothing)
        • Still need to roll-forward liability and measure assets at the end of each year.
        • Net Income will be more volatile (need to consider covenants tied to Net Income (i.e. EBITDA))
      • Less disclosure in this section from previous GAAP requirements
      Accounting Standards for Private Enterprises
      • Callable Debt (“EIC 122”)
      • Status quo confirmed
      • Presentation options - “Mezzanine” presentation
      Accounting Standards for Private Enterprises
      • Inter-corporate Investments
      • Retain option to use equity or cost method for inter-corporate investments; except
        • must fair value investments in entities that are traded in an active market (adjustments through income); cannot elect equity or cost accounting
      • 1582 Business Combinations, 1601 Consolidated Financial Statements, 1602 Non-controlling Interests
      • Goodwill and other intangibles
      • Impairment testing only when there is a “triggering event or circumstance”
      • Intangible Assets
      • Option to expense development costs
      • Must be consistently applied / cannot select on a project by project basis
      Accounting Standards for Private Enterprises
      • Impact of new standards on other areas
      • Contracts eg. Debt covenants
      • HR: bonus and other incentive schemes
      • Taxation: effect of GAAP on taxable income
      • IT and other data systems
      • Internal controls
      Accounting Standards for Private Enterprises
      • Currently multiple GAAPs in the market
      • Canadian GAAP with or without differential reporting
      • XFI GAAP with or without differential reporting
      • Canadian GAAP for PEs
      • IFRS
      • IFRS for SM Es (not considered Canadian GAAP)
      Accounting Standards for Private Enterprises
      • Factors to consider in determining which GAAP to adopt:
        • Users of the financial statements and their needs
        • Strategic long-term goals of the entity (e.g. imminent IPO or sale to a strategic international company in the shorter term); may be costly to go back and restate
        • Internal resources available and skills/competency of those resources; training required
        • Impact on any systems or processes currently being used
        • Impact on any existing contracts (banks, compensation arrangements, supplier/customer contracts)
        • GAAP adopted by competitors ; consistency and comparability of financial statements to others
        • Cost of adoption and ongoing compliance of private company GAAP vs. IFRS
        • GAAP for private companies may change in 5 years
      Accounting Standards for Private Enterprises
      • Decisions to consider within PE GAAP:
      • Transition date
      • First time adoption elections
      • Do existing contracts need to be amended?
      • Select among accounting policy options including
        • Consolidation / equity accounting / cost model
        • Bifurcation of compound financial liabilities
        • Straight line or effective interest rate method
        • Taxes payable or tax allocation model
        • Expense or capitalize qualifying development costs
        • Accounting model for pension plans
        • Indices for stock option plans
      Accounting Standards for Private Enterprises
      • Questions?
      Accounting Standards for Private Enterprises