January 2010 - Tim Holloway, Ca


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Accounting Standards for Private Enterprise - KPMG

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January 2010 - Tim Holloway, Ca

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