Financial Reporting Insights & Update
January 12, 2017
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Presenters Mark Pinch, CPA, CA Associate Chief Accountant, Ontario Securities Commission 20 Queen Street West, 22nd floor, Toronto ON M5H 3S8 Phone: 416-593-8057
[email protected]
Alex Fisher, CPA, CA Senior Accountant, Ontario Securities Commission 20 Queen Street West, 22nd floor, Toronto ON M5H 3S8 Phone: 416-593-3682
[email protected] https://ca.linkedin.com/in/alexfishercpa
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Disclaimer
The views we are about to express are our own, and are not necessarily representative of the Ontario Securities Commission or its staff.
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Agenda • Office of the Chief Accountant • OSC Staff Notice 52-723 Disclosure Effectiveness Going Concern Non-GAAP Financial Measures Fair Value Measurement Effective Implementation of IFRS 9, IFRS 15 & IFRS 16 • Role of the Audit Committee
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Office of the Chief Accountant
OFFICE OF THE CHIEF ACCOUNTANT
To provide protection to investors from unfair, improper or fraudulent practices and to foster fair and efficient capital markets and confidence in capital markets.
To support the OSC in creating and promoting a high-quality framework for financial reporting by market participants.
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OSC Staff Notice 52-723
Table of Contents Introduction ....................................................................................... 2 Executive Summary ............................................................................. 2 Disclosure Effectiveness ....................................................................... 4 Going Concern .................................................................................... 5 Non-GAAP Financial Measures ............................................................... 7 Fair Value Measurements ..................................................................... 8 Considerations for Implementation of IFRS 9, IFRS 15, and IFRS 16 ........ 14
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Disclosure Effectiveness
Disclosure Documents
Communication Tools
Consider and assess: • Are the financial reports providing insights into the business? • Is the information clear and concise? • Is the information entity-specific? • Is information carried forward from prior year financial reports still relevant and necessary for compliance with IFRS? • Is relevant information being obscured by a large amount of irrelevant and immaterial information?
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Going Concern Material Uncertainties
Going Concern Disclosures (IAS 1.25)
No Going Concern Disclosure
Significant Judgements Disclosure? (IAS 1.122)
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Going Concern
Consider and assess: Are investors receiving adequate level of information about: Significant going concern risks? Relevant management judgements being exercised? Mitigating factors that are being considered by management in making these assessments?
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Going Concern
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Non-GAAP Financial Measures GLOBAL INITIATIVES
CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures (2016)
Statement on Non-GAAP Financial Measures
SEC Regulation G General Rules Regarding Disclosure of Non-GAAP Financial Measures
Thinking About Disclosures in a Broader Context
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Guidelines on Alternative Performance Measures
Principles of Disclosure Initiative
CSA Staff Notice 52-306 (Revised) NON-GAAP FINANCIAL MEASURES (2016)
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Non-GAAP Financial Measures CANADIAN EXAMPLES
Notes: • The above information was prepared by the staff of the Ontario Securities Commission. Based on the non-GAAP financial measure definition in CSA Staff Notice 52-306 (Revised) – Non-GAAP Financial Measures (2016). • Note 1 refers to fiscal 2014/2015. Figures in billions.
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Non-GAAP Financial Measures PRACTICE OBSERVATIONS Are non-GAAP measures “changing your story”?
Are your nonGAAP measures more prominent than your GAAP measures?
Is your GAAP number first? In earnings releases, MD&A etc.
How many nonGAAP measures do you really need to tell your story? Non-GAAP disclosure overload? Too many measures, reconciliations, explanations, etc.? 14
‘Operating Earnings’ excluding impairment?
Are adjustments removing the ‘bad stuff’ without explaining why?
Non-GAAP Financial Measures Processes
Judgments
Controls
Audit Committee
Policy
Reviews
Purpose
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Non-GAAP Financial Measures AUDIT COMMITTEE The Center for Audit Quality published Questions on Non-GAAP Measures: A Tool for Audit Committees: • What is the purpose of the non-GAAP measure? Would a reasonable investor be misled by the information? • Has the non-GAAP measure been given more prominence than the most directly comparable GAAP measure? For example, an earnings release headline or caption that may present a non-GAAP measure without the comparable GAAP measure? • How many non-GAAP measures have been presented? Is this necessary and appropriate for investors to understand performance? • Why has management selected this particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries? • Does the company’s disclosure provide substantive detail on the purpose and usefulness of the non-GAAP disclosure for investors? • How is the non-GAAP measure calculated? Does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measure? • How does management use the measure, and has that been disclosed? For example, is the measure linked to executive compensation? • Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP? Could the title or description of the measure be confused with a GAAP measure?
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Non-GAAP Financial Measures AUDIT COMMITTEE (CONT.) • • •
•
• • • • •
Are the non-GAAP measures presented by the company balanced? Do the measures eliminate similar items that affect both revenue and expense, or do they only eliminate one or the other? Has the method or nature of the inputs to the calculation changed since the last time presented? If so, why and have the comparable periods been revised consistently? If the calculation has changed, are the changes adequately described? Is there a need to revise prior period measures for consistency and to avoid a potentially misleading presentation? Would they have been materially different such that the prior period calculations should be revised? Is there a correlation between what the measure presents, and the company’s actual results? For example, if a non-GAAP measure presents positive growth, does that correlate with the GAAP results of the company? If not, have those differences been clearly communicated to investors? Do other companies present this measure or similar measures? If not, why is this measure important for this company but not its peers? Is management aware of differences in their calculation compared to other companies? Why are the calculations different? If there are differences from peers, is the disclosure transparent about how the measure is calculated differently than peers? Have any industry groups defined standard calculations that companies within the industry could follow in order to present more comparable measures to investors? What is the source of the information used in the calculation? Are there adequate controls and oversight in place over both the calculation and disclosure of the measure?
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Fair Value Measurements Real Estate Internal vs. independent external valuations [IAS 40.75(e)] Description of the valuation processes [IFRS 13.93(g)] Disclosures for each class of assets [IFRS 13.93 & .94] Description of inputs used in the fair value measurement [IFRS 13.93(d)]
Investment Funds Description of valuation techniques [IFRS 13.93(d)] Quantitative information about unobservable inputs [IFRS 13.93(d)] Sensitivity to changes in unobservable inputs [IFRS 13.93(h)] Categorization of equity instruments within level 2 of hierarchy
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Fair Value Measurements DESCRIPTION OF THE VALUATION PROCESSES [IFRS 13.93(G)]
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Fair Value Measurements DESCRIPTION OF THE VALUATION PROCESSES [IFRS 13.93(G)]
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Fair Value Measurements DESCRIPTION OF INPUTS USED IN THE FAIR VALUE MEASUREMENT [IFRS 13.93(D)]
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Fair Value Measurements DESCRIPTION OF INPUTS USED IN THE FAIR VALUE MEASUREMENT [IFRS 13.93(D)]
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Fair Value Measurements SENSITIVITY TO CHANGES IN UNOBSERVABLE INPUTS [IFRS 13.93(H)]
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Fair Value Measurements SENSITIVITY TO CHANGES IN UNOBSERVABLE INPUTS [IFRS 13.93(H)]
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Effective Implementation IFRS 9, IFRS 15, & IFRS 16
Auditors IAS 8.30-.31 Audit Committee NI 52-110
Management Implementation Plan NI 51-102 NI 52-109
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Effective Disclosure FINANCIAL STATEMENTS Qualitative IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
.30 known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements…
Quantitative
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Issuers should not be reluctant to disclose quantitative estimates
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Expect more detailed and entity specific disclosure as issuers make progress in implementation
No Surprises! Financial Statements
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Effective Disclosure MD&A •
Discuss and analyze changes to accounting policies, financial statements, business practices etc.…
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Full retrospective transitional approach affects summary of quarterly results in MD&A
NI 51-102 Continuous Disclosure Obligations Form 51-102F1 • Section 1.13 - Changes in Accounting Policies including Initial Adoption •
Section 1.5 – Summary of Quarterly Results
No Surprises! Management Discussion & Analysis 27
Effective Disclosure
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Effective Disclosure Increasingly more detailed qualitative and quantitative information, such as:
status of transition, including significant milestones and anticipated timelines significant implementation matters still to be addressed expected changes in accounting policies revenue streams and reportable segments that are expected to be most significantly affected expected directional impact (e.g., increase or decrease) on relevant financial statement line items expected quantitative impact (either as estimated dollar amount or estimated dollar range) on relevant financial statement line items potential implications on internal controls over financial reporting, data systems, information technology, as well as financing and compensation arrangements potential effects on business practices (e.g., sales, contracting).
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Statement on Implementation of New Accounting Standards “IOSCO stresses importance of implementation and disclosure related to new accounting standards…”
“…Provides a series of matters for issuers, as well as their audit committees and auditors, to consider as issuers adopt the new standards and auditors perform related audit procedures…”
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Role of the Audit Committee INTERNATIONAL DEVELOPMENTS
UK FRC Requirements 2012
SEC Concept Release 2015
Survey Report on Audit Committee Oversight of Auditors 2016
Auditor Reporting 2016/2017
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Role of the Audit Committee CANADIAN CONSIDERATIONS
Concept Paper Examine audit committee disclosure requirements
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Office of the Chief Accountant Staff Notices
• OSC Staff Notice 52-723 – Bulletin (December 2016) • CSA Staff Notice 52-306 – Non-GAAP Financial Measures (January 2016) • OSC Staff Notice 52-721 – Bulletin (September 2013) • OSC Staff Notice 52-720 – Bulletin (February 2012)
Consultations
• Guidelines for Requests for Consultations
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Questions
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