DICO Regulatory Guidance

Transcription

1 4711 Yonge Street Suite 700 Toronto ON M2N 6K8 Telephone: Toll Free Fax: , rue Yonge Bureau 700 Toronto (Ontario) M2N 6K8 Téléphone : Sans frais : Télécopieur : IFRS UPDATE May 2010 Conversion to International Financial Reporting Standards DICO Regulatory Guidance TABLE OF CONTENTS 1. Introduction.2 2. Transition to IFRS Securitization/Syndications/Sales of Loans2 4. Financial Instruments 3 5. Loan Loss Provisioning 3 6. Property, Plant and Equipment Business Combinations, Joint Ventures, Lease Originations, Employee Benefits, Provisions and Contingencies.5 8. Statement of Presentation and Note Disclosure. 5 NEXT STEPS... 6 Internet Home Page : E -mail:info@dico.com Page d'accueil Internet : Courriel : info@soad.com

2 DICO Regulatory Guidance Page 2 1. Introduction This document provides a summary of the Regulatory Guidance ( guidance ) that DICO intends to implement for Ontario credit unions and caisses populaires ( credit unions ) in transitioning from Canadian Generally Accepted Accounting Standards (CGAAP) to International Financial Reporting Standards (IFRS). This guidance is based on the Regulatory Guidance developed by the Credit Union Stabilization Funds of Canada IFRS Regulators Working Group (RWG). The RWG reviewed OSFI s final IFRS Advisory, as well as the issues raised by the National IFRS Readiness Initiative, to develop relevant and consistent regulatory guidance for Canadian credit unions. The RWG believes its regulatory guidance aligns credit unions application of IFRS with other financial entities reporting under IFRS and is not to be interpreted in a way that is inconsistent with or contrary to IFRS. 2. Transition to IFRS IFRS 1, First-time Adoption of International Financial Reporting Standards, sets out the procedures that an entity must follow when it adopts IFRS for the first time. In the absence of IFRS 1, retrospective application of all standards would be required upon transition. IFRS 1 instead provides a set of optional and mandatory exceptions and exemptions to IFRS that are designed to provide entities some relief from full retrospective application. The choices made by credit unions with respect to the IFRS 1 exemptions will impact opening retained earnings and/or Accumulated Other Comprehensive Income, which may, in turn, have an impact on regulatory capital. Regulatory Capital DICO will consider applications for a phase-in of the net impacts on retained earnings and regulatory capital on a case by case basis. Institutions requesting a phase-in of these impacts should provide supporting rational including a detailed impact analysis along with a reconciliation of changes to retained earnings at transition date (Refer Section 8). 3. Securitization/Syndications/Sales of Loans IFRS provides specific guidance on the treatment of these transactions. If risk associated with any transaction is retained by the credit union, necessitating recognition on balance sheet, the appropriate level of capital must be held to offset this risk. Credit unions should review the documentation and substance of all securitizations, syndications, and sales of loans (mortgage pools). In the event that these agreements are recognized on the balance sheet, credit unions will be required to apply the appropriate risk-weight for these assets in accordance with the current risk-weighted capital regulations. Credit unions are encouraged to review the documentation and substance of all syndications, loan sales and securitizations with their external auditors to ensure that, where appropriate, assets continue to be recognized under IFRS.

3 DICO Regulatory Guidance Page 3 Specific Transition for NHA MBS/CMB/IMPP Transactions (CMHC Program) In line with OSFIs approach, insured mortgages sold through the CMHC Program up to and including March 31, 2010 will be excluded from the calculation of the asset to capital ratio ( leverage ratio). For CMB/IMPP transactions completed up to and including March 31, 2010, all existing and future reinvestments newly reported on the balance sheet as a result of IFRSs will also be excluded from regulatory capital in determining the leverage ratio upon conversion to IFRS. It is anticipated that the risk weighting of these items will be 0% provided credit unions are the beneficiary of the insurance policies. There may also be a reduction in retained earnings and regulatory capital as a result of any reversal of prior period gains on sales associated with CMHC Programs, as well as losses resulting from bringing back assets on balance sheet when securitized assets are no longer derecognized. As indicated in Section 2 above, DICO will consider applications for a phase-in of the net impacts on retained earnings and regulatory capital on a case by case basis. 4. Financial Instruments Financial instrument changes to CGAAP in 2006 are closely aligned with IFRS. We are not issuing any additional guidance at this time NOTE: Presentation of Member Shares Under IAS 32 Liability vs. Equity and IFRIC 2 Member shares in Co-operative Entities all credit union shares will need to be reviewed to confirm correct financial statement presentation. Shares currently presented as equity which are determined to be classified as liabilities under IFRS will affect the financial statement presentation but will not change the calculation of regulatory capital on the regulatory financial reporting forms submitted by credit unions. 5. Loan Loss Provisioning Credit unions will need to develop an appropriate methodology that fully recognizes IAS 39 requirements for determining loan loss provisions based on their own individual circumstances and the complexity of their loan portfolio. In determining an appropriate methodology we encourage credit unions to also refer to industry guidelines and best practices as applicable.

4 DICO Regulatory Guidance Page 4 These include: OSFI accounting guidelines C-1 and C-5 (subject to amendments) 1 BIS document: Sound Credit Risk Assessment and Valuation for Loans) 1 The NRI Loan Loss Provision Toolkit Credit union external auditors We are currently in the process of completing revisions to By-law #6 and supporting guidance material, and expect to publish revised documents for review and comment in mid May 2010 that are compliant with IFRS. This will include modifying the definitions and measurement of the non-specific (collective) allowance and examples of different approaches for consideration. Institutions will still need to ensure that the measurement techniques employed are reviewed with the external auditor to ensure that they fully meet the requirements under IFRS. We also recognize that the loan loss provisioning requirements under IFRS require more robust measurement than currently allowed under Canadian GAAP. In many cases credit unions will likely have to make adjustments to the amounts of loan loss allowances recorded at transition which will likely result in an increase in retained earnings at that time. This adjustment is not expected to result in any material change to regulatory capital as these amounts are already included in the calculation of regulatory capital. Credit unions are strongly encouraged to preserve any increase in retained earnings at transition when reviewing their capital policy and to ensure that adequate capital is maintained to cover potential future loss exposure as appropriate. The amount of any loan loss allowance in excess of the individual (specific) loan loss allowances will continue to be included as part of regulatory capital up to 0.75% of assets (Class 1) and 1.25% of risk weighted assets (Class 2). 6. Property, Plant and Equipment Own Use Property (IAS 16) For own-use property, any fair value gains or losses upon transition and subsequent revaluation gains and losses are to be excluded in determining regulatory capital, as these assets are not easily sold without disrupting the operations of the entity. This exclusion from capital will be addressed in credit unions regulatory financial reporting. Investment Property (IAS 40) For investment property, any fair value gains or losses upon transition and subsequent revaluation gains and losses to be recognized in determining regulatory capital. 1 Links are provided to the documents in the RWG Guidance

5 DICO Regulatory Guidance Page 5 For mixed-use property, the regulatory capital treatment will be based on the IFRS reporting requirements. 7. Business Combinations, Joint Ventures, Lease Originations, Employee Benefits, Provisions and Contingencies We are not issuing any additional guidance at this time. 8. Statement Presentation and Note Disclosure IAS 1, Presentation of Financial Statements, sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content, including comparative financial information. Paragraph 24 of IFRS 1 requires credit unions to prepare a number of reconciliations explaining how the transition from CGAAP to IFRS affected its reported financial position, financial performance and cash flows. Accounting In order to ensure a smooth transition and enable DICO to understand the significant adjustments that may impact regulatory capital, credit unions are required to submit a copy of their reconciliation of opening Retained Earnings (CGAAP to IFRS) with explanations of all key differences of the IFRS opening balance sheet (statement of financial position) as follows: Financial Year End IFRS Transition Date IFRS Conversion Date Retained Earnings Reconciliation - Report Due by Class 1 Class 2 December Jan. 1, 2010 Jan. 1, 2011 Nov. 30, 2011 Aug. 1, 2010 January Feb. 1, 2010 Feb. 1, 2011 Dec. 31, 2011 Sep. 1, 2010 February Mar 1, 2010 Mar 1, 2011 Jan. 31, 2011 Oct. 1, 2010 March Apr. 1, 2010 Apr. 1, 2011 Feb. 28, 2011 Nov. 1, 2010 April May 1, 2010 May 1, 2011 Mar 31, 2011 Dec. 1, 2011 May Jun. 1, 2010 Jun. 1, 2011 Apr. 30, 2011 Jan. 1, 2011 June Jul. 1, 2010 Jul. 1, 2011 May. 31, 2011 Feb. 1, 2011 July Aug. 1, 2010 Aug. 1, 2011 Jun. 30, 2011 Mar. 1, 2011 August Sep. 1, 2010 Sep. 1, 2011 Jul. 31, 2011 Apr. 1, 2011 September Oct.1, 2010 Oct.1, 2011 Aug.31, 2011 May. 1, 2011 October Nov. 1, 2010 Nov. 1, 2011 Sep. 30, 2011 Jun. 1, 2011 November Dec.1, 2010 Dec.1, 2011 Oct. 31, 2011 Jul. 1, 2011 We are not issuing any additional guidance on this issue at this time.

6 DICO Regulatory Guidance Page 6 NEXT STEPS A summary of the key DICO milestones relating to the transition to IFRS is provided below. May 2010 to June 2010 Loan Loss Provisioning: By-law #6 and Application Guide We expect to publish revised documents or alternative application tools that are compliant with current IFRS requirements. Draft proposals will be issued by the end of May for review and comment. August 2010 to October 2011 Impact Analysis Institutions will be required to submit a reconciliation of capital at the IFRS transition date under previous CGAAP and IFRS conversion. We will be providing an Impact Analysis Template in June for institutions to identify the specific impacts of IFRS for each material change. September 2010 Any necessary regulatory changes will be submitted for consideration and approval for implementation effective January 1, Credit unions with a transition date other than January 1, 2011 will not be subject to these regulatory changes until their particular conversion date. Any proposed changes to existing guidance that may also be necessary (e.g. Capital Adequacy Guideline) will also be provided at that time. October 2010 Reporting Forms (emir) We do not anticipate any material changes to the reporting requirements under IFRS although we will provide full details of any changes as a result of conversion to IFRS by October 1, Ongoing Further Interpretation We will continue to interact with credit unions and monitor developments and potential changes to IFRS. We will issue further clarification on the interpretation of IFRS as required.