Maria Alano Laset July 2010 Session 1 of 6 Webinar IFRS. Amendments to Form 1

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1 Maria Alano Laset July 2010 Session 1 of 6 Webinar IFRS Amendments to Form 1

2 A word of caution For the purpose of regulatory accounting and reporting From a regulatory perspective For regulatory accounting and reporting X Not from the perspective of preparing generalpurpose financial statements 2

3 6 webinars on the amendments to Form 1 To assist Dealer Members in understanding the changes to Form 1 Session # Overview of the changes to Form 1 Planning for the changeover Opening IFRS balance sheet Prescribed IFRS departures and prescribed accounting treatments Changes to Statement A balance sheet Changes to Statement E income statement Changes to Statement F equity Other Coverage 3

4 Scope of the IFRS project IIROC Board approvals were obtained as part of the process. IFRS focus group formed (Dec 2008) Strategic plan presented to IIROC Board (Jan 2009) Input from Dealer Member IFRS Survey ((Feb to Apr 2009) Survey results and staff recommendations presented to IIROC Board (Jun 2009) IIROC Notice Publication of survey results and staff recommendations for a 60-day comment period Communicate Amend Proposed Form 1 amendments Provided to the Broker audit committee for feedback and input (Mar 2010) Provided to the FAS Capital Formula Subcommittee for feedback (Apr 2010) Provided to the FAS for feedback (May 2010) Proposed Form 1 amendments for IIROC Board approval (June and August 2010) Communicate Publish revised Form 1 for a 60-day comment period (Aug to Oct 2010) 4 Finalize CSA approval (Oct 2010)

5 Form 1 is a special purpose report with prescribed departures and prescribed accounting treatments. General-purpose financial statements Provides general-purpose financial information For various users with different needs Premise: Going concern basis Requires full compliance with IFRS with certification vs. Form 1 - Regulatory report Form 1 is a special-purpose report. Intended for only two users: IIROC and CIPF. The focus is to determine the capital adequacy of a Dealer Member on a solvency basis. With prescribed IFRS departures and prescribed accounting treatments 5

6 Changes to presentation, recognition and valuation Margin rules remain unchanged. = Margin rules remain unchanged. = Calculation of regulatory margin based on IIROC Rule 100 remains unchanged. However,? Difference in accounting standards - affecting presentation, recognition, valuation may affect RAC and Early Warning. 6

7 Amendments to Form 1 The changes are to primarily reflect the IFRS standards. Nature of changes To reflect IFRS standards To clarify IIROC s prescribed IFRS departures and prescribed accounting treatments To make housekeeping changes Types of changes from a regulatory perspective Significant substantive changes: 1. Notional income tax expense to be removed affects Dealer Members that are structured as partnerships 2. Extraordinary items no longer exist 3. Valuation of securities with defined approaches Minor changes 7

8 Valuation of securities The most significant change is the use of fair value approach. Level 1 Level 2 Level 3 Use of valuation techniques with unobservable inputs and assumptions Cost IFRS 3-level fair value hierarchy Use of quoted prices in an active market Use of valuation techniques with observable data inputs If level 3 is not viable, cost is an alternative. = = Same. Unchanged. New New Same. Unchanged. IIROC 5-level market value hierarchy Different from IFRS If the value of a security cannot be reliably measured, show no value with a disclosure on the client statement. 8

9 Valuation of securities The same value will be used for inventory and client positions. IFRS 3-level fair value hierarchy IIROC 5-level market value hierarchy Inventory Client positions Level 1 - Use of quoted prices in an active market Level 2 - Use of valuation techniques with observable data inputs IIROC: Unchanged IIROC: New IIROC: Unchanged IIROC: New Level 3 - Use of valuation techniques with unobservable inputs and assumptions Cost - If level 3 is not viable, use cost. IIROC: New IIROC: Unchanged IIROC: New IIROC: Unchanged IFRS: Departure If the value of a security cannot be reliably measured, show no value with a disclosure on the client statement. IIROC: Unchanged 9

10 Regulatory reporting format Although the overall reporting format of Form 1 remains unchanged, there are a few minor changes. What Current To change Why Name of the regulatory report Joint Regulatory Financial Questionnaire and Report (JRFQ&R or simply the Q) Form 1 One SRO for investment dealers Name of management certification Certificate of partners or directors Certificate of UDP and CFO To reflect National Instrument changes Order of the management certification Found at the end of Part I Comes before the auditors report Management s representation and responsibility for the regulatory report Number of auditors reports One auditors report for Part I and another auditors report for Part II One combined auditors report One combined report with no substantial change Nature and substance of Statement G A summary of subloan changes Opening IFRS balance sheet Redundant information Replaced by one-time transitional requirement for opening balance sheet Order of note disclosures Part of Statement A Separate item after all the statements Increased importance under IFRS 10

11 Proposed election to defer IFRS conversion Small Dealer Members will be given the choice to defer their changeover to IFRS. In general, changeover to IFRS will begin on January 1, Three conditions must be met to qualify for the election: 1. Either a Type 1 or Type 2 introducer 2. Neither meets the definition of nor is deemed a publicly accountable enterprise (PAE) 3. Fiscal year starts on January 1, February 1, March 1 or April 1 A Dealer Member meeting the criteria must notify IIROC of this election at the start of its 2011 fiscal year. IIROC will notify the Dealer Member whether it has been approved to postpone its changeover. The election will give small Dealer Members an extra fiscal year to changeover. 11

12 Planning for the changeover to IFRS You need to plan for a successful IFRS conversion. A top-down approach with the involvement of the board of directors, UDP and CFO is advisable. Involvement with other departments is essential. You need to continually ask the question: What is the economic substance of the transaction? Update your firm s accounting policies and procedures. Depending on your back-office set-up, coordinate with carrying broker or service bureau. Communicate with your panel auditors. Consider obtaining assistance from professional accounting consultants. Train staff. 12

13 Word of caution Due to the potential complexity of the changeover, some of you may want to seek advice from professional accounting consultants. A good place to start is your external auditors. 13

14 Next session Session 2 will be on the opening IFRS balance sheet. Session # Overview of the changes to Form 1 Planning for the changeover Opening IFRS balance sheet Prescribed IFRS departures and prescribed accounting treatments Changes to Statement A balance sheet Changes to Statement E income statement Changes to Statement F equity Other Coverage 14