VIEWPOINTS: Applying IFRSs in the Oil and Gas Industry

Transcription

1 VIEWPOINTS: Applying IFRSs in the Oil and Gas Industry REPORTING FUNDS FLOW APRIL 2016 Background Reporting of Funds Flow in Canada Many users of financial statements, such as investors and investment analysts, are interested in information based on cash flows. 1 Historical cash flow information is often used as an indicator of the amount, timing and certainty of future cash flows. Such information is also useful when checking the accuracy of past assessments of future cash flows and when examining the relationships between profitability, net cash flow and changing commodity prices. 2 IAS 7 Statement of Cash Flows states the amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the entity have generated sufficient cash flows to repay loans, maintain the operating capability of the entity, pay dividends and make new investments without recourse to external sources of financing. Information about the specific components of historical operating cash flows is useful (in conjunction with other information) when forecasting future operating cash flows. 3 1 The oil and gas industry is capital intensive and requires significant upfront capital investment. Such investment is often reflected in the statement of profit and loss in later periods as non-cash expenses such as depletion, accretion, and/or impairment. Along with income performance measures, many users of financial statements, such as investment analysts and investors, are also interested in information based on cash flows. 2 IAS IAS 7.13 Oil and Gas Industry Task Force on IFRSs International Financial Reporting Standards (IFRSs) create unique challenges for junior oil and gas companies. Financial reporting in the sector is atypical due to significant differences in characteristics between junior oil and gas companies and other types of companies. The Canadian Association of Petroleum Producers (CAPP), the Explorers and Producers Association of Canada (EPAC) and the Chartered Professional Accountants of Canada (CPA Canada) created the Oil and Gas Industry Task Force on IFRSs to share views on IFRS application issues of relevance to junior oil and gas companies. The task force views are provided in a series of papers available through free download. These views are of particular interest to chief financial officers, controllers and auditors. The views expressed in this series are non-authoritative and have not been formally endorsed by CAPP, EPAC, CPA Canada or the organizations represented by the task force members. THE EXPLORERS AND PRODUCERS ASSOCIATION OF CANADA 1

2 In some cases, users of financial statements may want to receive additional information on cash flows arising from operating activities, excluding changes in non-cash working capital or other expenditures. In the Canadian oil and gas industry, one such piece of information is often described as funds flow. In Canada, funds flow, as a performance measure, can be found in various publically available reporting documents as either an additional measure (e.g., additional subtotal) within the statement of cash flows or, more often, as a non-gaap 4 financial measure presented in other reporting documents outside the financial statements, such as the Management s Discussion and Analysis (MD&A), press releases, and prospectus documents. Funds flow, as a performance measure, has evolved from industry practice as a relevant measure for financial performance but it is not a defined measure nor does it have a standardized meaning. As such, variations in composition and presentation occur. Composition When disclosing funds flow, companies often begin with cash flows from operating activities before non-cash changes in working capital and in some cases, before spending on decommissioning liabilities. The appropriateness of other adjustments, besides the ones mentioned in the preceding sentence, may be questioned. Presentation The presentation, particularly labelling or naming, of funds flow is somewhat inconsistent among Canadian companies. Naming of funds flow is problematic when the label used is already: a defined term within IFRS (e.g., cash flows ) referenced within IFRS (e.g., cash generated from operations ) 5 or not sufficiently distinguished from the minimum required disclosure items (e.g., cash flows from operating activities ). This document discusses the factors to consider when presenting additional subtotals (e.g., funds flow) within the statement of cash flows prepared in accordance with IFRS. The document does not address the inclusion of such measures within the notes to the financial statements. Management should carefully consider the requirements in IFRS before including a subtotal for funds flow in the statement of cash flows. If an additional subtotal is included in the statement of cash flows because it is deemed to provide relevant information to users, it would generally follow that such a measure may be relevant to further discuss within the MD&A. 4 As defined in CSA Staff Notice (Revised) Non-GAAP Financial Measures (2016) 5 Refer to IAS 7 Illustrative Examples 2 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow April 2016

3 Additional Line Items, Headings and Subtotals 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. As it relates to the statement of profit or loss and other comprehensive income, IAS 1 explicitly states that an entity should present additional line items, headings and subtotals when such presentation is relevant to an understanding of the entity s financial performance. 6 When an entity presents additional subtotals, those subtotals should be: comprised of line items made up of amounts recognized and measured in accordance with IFRS presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable consistent from period to period 7 displayed with no more prominence than the subtotals and totals required in IFRS reconciled with the subtotals or totals required in IFRS. IAS 1 provides similar guidance for the presentation of additional line items, headings and subtotals in the statement of financial position 8 but is silent on presentation for the statement of cash flows because the International Accounting Standards Board (IASB) has indicated this will be considered as part of the broader Principles of Disclosure project. 9 Similarly, IAS 7 does not address the presentation of additional line items, headings and subtotals in the statement of cash flows. Non-GAAP Financial Measures The Canadian Securities Administrators CSA Staff Notice (Revised) Non-GAAP Financial Measures provides guidance to an issuer that discloses non-gaap financial measures, as defined in the notice. To obtain a complete understanding of the notice, readers are encouraged to download and read the publication in its entirety. For reference, selected extracts are included below. Non-GAAP Financial Measures Defined For the purpose of this notice, a non-gaap financial measure is a numerical measure of an issuer s historical or future financial performance, financial position or cash flow that is not specified, defined or determined under the issuer s GAAP (as that term is defined in National Instrument Acceptable Accounting Principles and Auditing Standards) and is not presented in an issuer s financial statements. A non-gaap financial measure excludes amounts that are included in, or includes amounts that are excluded from, the most directly comparable measure specified, defined or determined under the issuer s GAAP. 6 IAS B 7 The subtotal should be consistently presented and calculated from period to period (in accordance with paragraph 45 of IAS 1), subject to possible changes in accounting policy or estimates assessed in accordance with IAS 8. 8 IAS A 9 The IASB expects to publish a discussion paper on the Disclosure Initiative Principles of Disclosure in the second half of April 2016 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow 3

4 Presentation of Additional Subtotals in the Statement of Cash Flows for IFRS Financial Statements IAS 1 includes requirements that apply to additional subtotals presented in the statement of financial position and statement of profit or loss and other comprehensive income (see paragraphs 55A, 85A and 85B of IAS 1). The practices outlined in the paragraphs noted, will also help ensure that additional subtotals presented in the statement of cash flows do not mislead investors. When a financial measure is presented within the financial statements, the financial measure is not a non-gaap financial measure. Issue What are some factors to consider when presenting additional subtotals (e.g., funds flow) within the statement of cash flows? Viewpoints To ensure financial statements contain relevant information, IAS 1 provides some flexibility in the presentation of financial statements. However, that flexibility is balanced with the need to ensure information is reliable, understandable and comparable. The Statement of Cash Flows Because neither IAS 1 nor IAS 7 provides explicit guidance on the inclusion of additional line items, headings and subtotals (such as funds flow) within the statement of cash flows, the exercise of judgment is necessary to develop and apply an appropriate accounting policy for such items. 10 There is nothing in IAS 1 or IAS 7, however, which would preclude the use of additional line items, headings and subtotals as long as it is done appropriately. CSA Staff Notice (Revised) Non-GAAP Financial Measures refers to the guidance in IAS 1 regarding additional subtotals presented in the statement of financial position and statement of profit or loss and other comprehensive income (see paragraphs 55A, 85A and 85B of IAS 1) and goes on to state that the practices outlined in the paragraphs noted, will also help ensure that additional subtotals presented in the statement of cash flows do not mislead investors. When presenting an additional subtotal within the statement of cash flows, care should be taken to ensure the additional subtotal does not mislead or undermine the reliability, understandability and comparability of the financial statement. The table below considers how the subtotal principles in IAS 1 could potentially be applied to an additional subtotal (e.g., funds flow) within the statement of cash flows. The table summarizes the principles in IAS 1 and includes questions for consideration. 10 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 7 12 provide guidance on the selection and application of accounting policies. 4 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow April 2016

5 Analogous Guidance Principle Considerations Relevance IAS 1.85 IAS 1.86 An entity should present additional subtotals when such presentation is relevant to an understanding of the entity s financial performance. Has appropriate analysis and judgment been applied to determine whether the additional subtotal would qualify for separate disclosure within the statement of cash flows? Composition IAS 1.85A(a) The subtotal should be comprised of line items made up of amounts recognized and measured in accordance with IFRS. Is the additional subtotal comprised of line items from the statement of cash flows that have the same classification (e.g., operating activities)? Does the additional subtotal reflect amounts recognized and measured in accordance with IFRS? Labelling IAS 1.85A(b) The subtotal should be presented and labelled in a manner that makes the line items that constitute the subtotal clear and understandable. Is the additional subtotal clearly labelled? Is the label attributable to the additional subtotal meaningful, understandable and sufficiently distinguishable from the IAS 7 measures of cash, cash flows, and cash flows from operating activities (or similar measure)? Consistency IAS 1.85A(c) The subtotal should be consistent from period to period. If the composition of the additional subtotal has changed, are the changes as well as the rationale for the changes clearly explained within the notes to the financial statements? If the composition of the additional subtotal has changed, is the label applied still appropriate? Prominence IAS 1.85A(d) The subtotal should not be displayed with more prominence than the subtotals and totals required in IFRS. Is the additional subtotal displayed with equal or less prominence (e.g., bolding, highlighting, underlining etc.) than an IAS 7 required subtotal such as cash flows from operating activities? April 2016 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow 5

6 Analogous Guidance Principle Considerations Reconciliation IAS 1.85B The subtotal should be reconciled with the subtotals or totals required in IFRS. Does the additional subtotal contain a clear quantitative reconciliation to the most directly comparable measure required in IFRS, such as cash flows from operating activities? (Generally, it will be clear how the subtotal reconciles to the most directly comparable measure.) To further contextualize the above content, readers may find paragraph 38G in the Basis for Conclusion on IAS 1 informative. 6 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow April 2016

7 The Oil and Gas Industry Task Force on IFRSs Members Kevin Hamm, CPA, CA (Chair) Canadian Natural Resources Limited Steve Aubin, CPA, CA Deloitte & Touche LLP Scott Bandura, BMath, MAcc, CPA, CA, CPA (Illinois, USA) PricewaterhouseCoopers LLP Brad Bennett, CPA, CA Vermilion Energy Inc. Dale Brown, CPA, CA Grant Thornton LLP Kerry Clark, CPA, CA Ernst & Young LLP Jeff Dashkin, CPA, CA Sean Du Plessis, CPA, CA MNP LLP Steven Glover, MBA, FCPA, FCA Canmore, Alberta Katherine Gomes, CPA, CA ARC Resources Ltd. Imam Hasan, CPA, CA KPMG LLP Adrienne Viala, CPA, CA Husky Energy Inc. Lorraine L. Walker, CPA, CA BDO Canada LLP Observer Janice Anderson, CPA, CA Alberta Securities Commission Staff Ben Brunnen Canadian Association of Petroleum Producers Gary Leach Explorers and Producers Association of Canada Alex Fisher, CPA, CA Chartered Professional Accountants of Canada Toronto, Ontario Comments on this Viewpoints or suggestions for future Viewpoints should be sent to: Alex Fisher, CPA, CA Principal, International Financial Reporting Standards Research, Guidance and Support Chartered Professional Accountants of Canada 277 Wellington Street West Toronto, Ontario M5V 3H2 For more information on IFRSs visit: April 2016 Viewpoints: Applying IFRSs in the Oil and Gas Industry Reporting Funds Flow 7