OCTOBER 2014 WWW.BDO.CA ASSURANCE AND ACCOUNTING ACCOUNTING STANDARDS FOR PRIVATE ENTERPRISES (ASPE) UPDATE 2014 Introduction During 2014, a number of changes were made to or proposed for Part II of the CPA Canada Handbook Accounting: Accounting Standards for Private Enterprises (ASPE). Some of these changes are a result of the Accounting Standards Board s (AcSB s) fourth Annual Improvements Process. In addition, new Section 3462, Employee Future Benefits, an amendment to Section 3475, Disposal of Long-lived Assets and Discontinued Operations, and amendments to various sections resulting from the 2013 Annual Improvements process became effective in 2014. Three major improvements were also made to ASPE during the year: new Section 1591, Subsidiaries, and new Section 3056, Interests in Joint Arrangements, were issued and amendments were made to Section 3051, Investments. This publication will discuss the above changes and will conclude with a discussion on projects the AcSB currently has in progress. Standards Effective in 2014 The following new Section and amendments to existing Sections became effective during 2014. Employee Future Benefits In May 2013, new Section 3462, Employee Future Benefits was issued. This Section replaces Section 3461 of the same name. The major change resulting from this new Section is the elimination of the deferral and amortization approach to accounting for defined benefit plans. Under Section 3462 entities are required to immediately recognize all gains and losses arising from defined benefit plans when they are incurred. As a result of this change, an entity will experience more volatility in its financial statements. Under this new Section a change was also made to the accounting for defined contribution plans and as a result, past service costs must now be recognized in the current period. Section 3462 is effective for years beginning on or after January 1, 2014. Refer to our publications, Employee Future Benefits What you need to know about Sections 3462 and 3463 and ASPE at a Glance: Section 3462 Employee Future Benefits, for a detailed look at the effect of this new Standard. Disposal of Long-lived Assets and Discontinued Operations During 2013, an amendment was made to Section 3475, Disposal of Long-lived Assets and Discontinued Operations, which revised the definition of a discontinued operation. The reason for this change was that the previous definition often resulted in more disposals being presented as discontinued operations under ASPE than would be required under International Financial Reporting Standard (IFRS) 5, Noncurrent Assets Held for Sale and Discontinued Operations. This did not make sense as ASPE was not intended to be more onerous to apply than IFRS. The revised definition results in a higher threshold for disposals to be classified as a discontinued operation compared to the previous definition. As a result, fewer disposals will qualify as discontinued operations in practice. This change brings Section 3475 in line with IFRS 5. This new definition of a discontinued operation is effective for years beginning on or after January 1, 2014. 2013 Annual Improvements to ASPE The purpose of the ASPE Annual Improvements Process is to clarify guidance or wording in the standards, and to correct for unintended consequences, conflicts or oversights in the standards. Any amendments that result from the Annual Improvements Process apply to all entities adopting and those currently following ASPE. As a result of the 2013 Annual Improvements Process, amendments were made to the following Sections and these amendments are effective for years beginning on or after January 1, 2014:
2 Business Combinations Section 1582, Business Combinations, previously required contingent consideration to be remeasured only on settlement. However, in some cases the actual payment of the consideration is deferred past the date on which the contingency is resolved and in these situations the guidance in Section 1582 was not clear as to when remeasurement should occur. As a result, Section 1582 was amended to clarify that contingent consideration is remeasured when the contingency is resolved. In addition, an amendment was made to address a concern that particular disclosures required by Section 1582 were not relevant or of significant benefit when a subsidiary is subsequently accounted for using the cost or equity methods. As a result, Section 1582 was amended and the following disclosures are now only required when the subsidiary is consolidated: A condensed balance sheet showing the amounts recognized as of the acquisition date for each major class of assets acquired and liabilities assumed; The amount of the non-controlling interest in the acquiree recognized at the balance sheet date and the measurement basis for that amount; and The amount of any gain recognized in a bargain purchase. Subsidiaries Section 1590, Subsidiaries, previously did not address how a change of ownership should be accounted for when the cost or equity method was used to account for a subsidiary. To address this issue, Section 1590 was amended to clarify that the accounting for a change in ownership should be based on the accounting policy used to account for the subsidiary. Interests in Joint Ventures Similar to Section 1590, Section 3055, Interests in Joint Ventures, previously did not address how a change of ownership should be accounted for. To address this issue, Section 3055 was amended to clarify that the accounting for a change in ownership interest should be based on the accounting policy used to account for the interest in the joint venture. Non-controlling Interests Section 1602, Non-controlling Interests, was amended to clarify that an entity does not deduct non-controlling interests in determining net income. An additional amendment was also made to clarify that exchange gains and losses arising from the translation of a self-sustaining foreign operation that are attributable to the non-controlling interest should be included in the non-controlling interests component of equity. Financial Instruments Section 3856, Financial Instruments, was amended to clarify that a financial instrument is not classified as a liability when it would only be redeemed by economic compulsion, rather than by a contractual requirement. Classification in Section 3856 focuses on the substance of the contractual requirements and does not look beyond this. In addition, the previous hedge accounting requirements in Section 3856 did not achieve the intended result when a foreign currency denominated anticipated purchase transaction was hedged by a foreign exchange forward contract that settled by an exchange of currencies before the hedged transaction was recognized. When the foreign currency received upon settlement of the hedging contract was held continuously between the date the forward contract was settled and the date the hedged purchase transaction was recognized, the foreign currency did not qualify as a hedge and any gain or loss on translating the foreign currency was recognized directly in income. As a result, Section 3856 was amended to correct this oversight. The requirements for hedge accounting are complex and we recommend consulting with your BDO advisor if you are considering using hedge accounting. As a result of the changes made through the 2013 Annual Improvements Process, consequential amendments were also made to Section 1520, Income Statement, and Section 1540, Cash Flow Statement. Standards Effective in 2015 As a result of the 2014 ASPE Annual Improvements Process, amendments were made to the following Section and these amendments are effective for years beginning on or after January 1, 2015:
3 Financial Instruments When a hedge of an anticipated transaction matures after the anticipated transaction occurs, Section 3856, Financial Instruments, was previously not clear on how to account for the hedging item if a reporting period ended between the date the hedge transaction occurred and the date the hedging item matured. An amendment was made to Section 3856 to clarify that in this situation, the hedging item is remeasured at the balance sheet date using the spot rate in effect at that date, with any gain or loss included in net income. An additional amendment was made to Section 3856 to clarify the disclosures required when current trade accounts receivable are impaired. Section 3856 previously required an entity to disclose the carrying amount of impaired financial assets, by type of asset, and the amount of any related allowance for impairment. For certain financial assets, such as current trade receivables, impairment may be assessed on a group basis. In this situation, it was unclear whether the carrying amount of impaired financial assets was required to be disclosed since the allowance does not relate to specific items. The amendment clarifies that the disclosure of the carrying amount of impaired financial assets is required for financial assets other than current trade receivables. For current trade receivables an entity must disclose the amount of any allowance for impairment. Standards Effective in 2016 As previously mentioned, the AcSB has adopted a process to make minor improvements to ASPE through the annual improvements process. To avoid standards overload, the AcSB tries to limit major changes to ASPE to every two years. During 2014 the major changes outlined below were issued in Part II of the Handbook. Subsidiaries In August 2014, the AcSB issued new Section 1591, Subsidiaries, which replaces Section 1590 of the same name. Accounting Guideline 15 (AcG-15), Consolidation of Variable Interest Entities, has also been withdrawn and replaced by guidance included in new Section 1591. Section 1591 requires the use of professional judgment to determine when control is obtained through means other than equity interests. The guidance on accounting for subsidiaries controlled through equity interests that was in former Section 1590 has been retained in Section 1591. When control of an enterprise is obtained through means other than equity interests, the following additional guidance on control has been included in Section 1591: Explanations of how to apply the existing definitions of a subsidiary and control of an enterprise when the rights of equity interests may not be the dominant factor in determining who controls an enterprise; Descriptions of the types of contractual arrangements that may give one enterprise control over another; Facts and circumstances to consider when assessing whether an enterprise has control over another enterprise, such as: The entity s degree of involvement in the inception of the other enterprise and decisions made at that time in determining its purpose and design; How decisions are made about the strategic policies that could affect the right and ability to obtain future economic benefits and related risks; and The risks to which the other enterprise was designed to be exposed. An enterprise would be required to review contractual arrangements to consider all facts and circumstances, including call rights or put rights related to the activities of the other enterprise, liquidation rights and rights to make decisions about activities that affect the enterprise s ability to obtain future benefits; and Guidance to distinguish rights that are designed to protect the interest of the enterprise holding those rights without giving it control from rights that do confer control. New Section 1591 excludes situations involving contractual arrangements between enterprises under common control. For example, if Company A has 100% ownership of Company B and also has 100% ownership of Company C, Companies B and C are under the common control of Company A. In this situation, new Section 1591 would not apply to the accounting for contractual arrangements between Company B and Company C. Instead, Company B and Company C would each report their own rights and obligations related to the contractual arrangements between the two companies in accordance with other applicable Sections. Under Section 1591, an entity that chooses to prepare non-consolidated financial statements can continue to account for subsidiaries controlled through voting interests, potential voting interests, or a combination thereof, using the cost or equity method. Subsidiaries that are controlled through contractual arrangements or in combination with voting interests, potential voting interests, or a combination thereof, are accounted for according to the nature of the contractual arrangements in accordance with the applicable Section of the Handbook if preparing non-consolidated financial statements.
4 This new standard is effective for fiscal years beginning on or after January 1, 2016. Earlier application is permitted. This Section must be applied retrospectively; however, some transitional provisions have been included to provide relief upon adoption of this Section. As a result of this new Section, consequential amendments were also made to Sections 1500, First-time Adoption, and Section 1601, Consolidated Financial Statements. Interests in Joint Arrangements New Section 3056, Interests in Joint Arrangements, was issued in August by the AcSB and replaces Section 3055, Interests in Joint Ventures. In Section 3056, the term joint venture is replaced by joint arrangement. A joint arrangement would encompass jointly controlled operations, jointly controlled assets and jointly controlled enterprises. The term venturer has also been replaced by the term investor in a joint arrangement. This new Section reduces the accounting policy options for joint arrangements so the accounting more faithfully represents the nature of the investment. As a result, the option to account for all types of joint arrangements using the proportionate consolidation method, equity method or cost method has been eliminated. Instead, Section 3056 specifies the accounting by an investor for an interest in a joint arrangement according to whether it is an interest in jointly controlled operations, jointly controlled assets or a jointly controlled enterprise. An investor in a jointly controlled operation or a jointly controlled asset accounts for its interest in the joint arrangement by recognizing its share of the assets controlled, liabilities incurred, revenues and expenses. An investor in a jointly controlled enterprise has an accounting policy choice to: Account for all interests using the equity method; Account for all interests using the cost method; or Perform an analysis of each interest to determine whether it is an interest in the individual assets and liabilities rather than an interest in the net assets and, if so, account for those individual assets and liabilities. If an investor chooses the third option, application guidance has been added to the standard to assist investors in performing this analysis. If it is determined that the investor has rights to the individual assets and obligations for the individual liabilities relating to the jointly controlled enterprise then the investor recognizes its interest in the joint arrangement by recognizing its share of assets controlled, liabilities incurred, revenues and expenses. However, if it is determined that the investor has rights to the net assets of the jointly controlled enterprise then the investor makes an accounting policy choice to account for all such interests using either the equity method or the cost method. Section 3056 carries forward the definitions of jointly controlled operations, jointly controlled assets and jointly controlled enterprises; guidance on contributions and transactions for jointly controlled operations and jointly controlled assets; and presentation and disclosure requirements from Section 3055. However, for contributions to a joint arrangement, the requirement in Section 3055 to defer and amortize the portion of a gain that does not relate to the amount of cash received or fair value of other assets received that do not represent a claim on the assets of the joint arrangement has not been carried forward to new Section 3056. This new standard is effective for fiscal years beginning on or after January 1, 2016. Earlier application is permitted, but only if an investor discloses this fact and applies the amendments to Section 3051, Investments, at the same time. Specific transitional proposals have been provided for changes from the proportionate consolidation method to the equity or cost method and for changes from the equity or cost method to accounting for the investor s interests in the individual assets and liabilities of a joint arrangement. As a result of this new Section, consequential amendments were also made to Sections 1500, First-time Adoption, Section 1506, Accounting Changes, Section 1520, Income Statement, and Section 1521, Balance Sheet. Investments As a result of the issuance of new Section 3056, changes have also been made to Section 3051, Investments. An amendment was made to clarify that the scope of Section 3051 includes investments subject to significant influence and certain other non-financial instrument investments (such as works of art and other tangible assets held for investment purposes), but does not include other investments (such as subsidiaries and interests in joint arrangements). Guidance was also added on contributions and other transactions between an investor and an equity-accounted investee that is consistent with the guidance in new Section 3056. The amendments to Section 3051 are effective for annual financial statements relating to fiscal years beginning on or after January 1, 2016. Earlier application is permitted. However, if the amendments are applied before January 1, 2016, new Section 3056 must also be applied at the same time.
5 As a result of the changes to Section 3051, significant consequential amendments were also made to Section 1500, First-time Adoption, and to Section 3831, Non-monetary Transactions. Projects on the Go Exposure Draft - 2014 Improvements to ASPE As previously discussed, some of the amendments proposed during the 2014 ASPE Annual Improvements Process have already been approved and issued in Part II of the Handbook. However, at the time of the writing of this publication, one proposed amendment had not yet been approved. This proposed amendment relates to Section 3462, Employee Future Benefits, and clarifies when a funding valuation can be used. Paragraph 3462.031 currently allows an entity to use a funding valuation to determine the obligation for an unfunded defined benefit plan. The funding valuation must be prepared on a basis consistent with other funding valuations. The proposed amendment clarifies that in order to use this option an entity must have at least one funded defined benefit plan. This option allows an entity that uses a funding valuation for funded defined benefit plans to measure all of its defined benefit plans on a consistent basis. This proposed amendment would be effective for years beginning on or after January 1, 2015. Earlier application is permitted, but only if the amendment to paragraph 3462.031 is applied to all of an entity s benefit plans. According to the decision summary from the AcSB s July 16, 2014 meeting, the Board agreed in principle with this proposed amendment. However, due to concerns raised by some stakeholders and the Private Enterprise Advisory Committee the relevant paragraphs will be redrafted to further clarify certain aspects. As a result, the AcSB plans to re-expose this proposal. Exposure Draft - Redeemable Preferred Shares Issued in a Tax Planning Arrangement The AcSB believes that the accounting for redeemable preferred shares issued in a tax planning arrangement, as currently set out in Financial Instruments, paragraph 3856.23, needs to be re-examined, as a number of issues have arisen in respect of redeemable preferred shares, such as scope, reclassification and measurement. Currently paragraph 3856.23 allows redeemable preferred shares issued in a tax planning arrangement under specific sections of the Income Tax Act to be presented at par, stated or assigned value as a separate line item in equity. The AcSB has issued an Exposure Draft proposing the withdrawal of paragraph 3856.23. Withdrawal of paragraph 3856.23 would require these types of redeemable preferred shares to be presented as a liability, consistent with other financial liabilities. The liability would be initially measured at fair value. The corresponding debit would be presented as a separate component of equity. As the preferred shares are redeemed, the balance in this separate category of equity would be reclassified to retained earnings. Information on the origin of this separate component of equity and its relationship to the redeemable preferred shares would be disclosed. The liability would be subsequently measured at amortized cost, unless the redemption provisions are linked to the performance of the entity. The proposed change would be effective for fiscal years beginning on or after January 1, 2016 and would be required to be applied retrospectively. This proposed change would have a significant impact on entity s following ASPE that have redeemable preferred shares that currently fall under paragraph 3856.23 as there will be a increase in the total amount of liabilities and a decrease in the total amount of equity. For example, the proposed change in presentation and measurement could have a significant effect on debt covenants and may require renegotiation of lending agreements prior to the date this change would be effective. As a result, we encourage affected entities to familiarize themselves with the proposed changes outlined in this Exposure Draft, which can be accessed on the ASPE page of the Financial Reporting & Assurance Standards Canada website or by clicking here, and to submit their comments to the AcSB by the deadline of January 15, 2015. Agriculture When accounting standards for private enterprises set out in Part II of the CPA Canada Handbook were being developed, stakeholders noted that one important topic not addressed in Canadian Generally Accepted Accounting Principles was accounting for agricultural activity. Agriculture is a significant industry in Canada and due to the lack of accounting standards addressing the unique aspects of agriculture, there is diversity in accounting practices. The AcSB reviewed and approved a discussion paper (subject to reviewing draft changes) in May 2014 and at their July meeting noted that the discussion paper with a comment period of 120 days is expected to be issued by the end of this year.
6 Subsidiaries This project aims to clarify the accounting for a subsidiary that uses the cost or the equity method. Section 1590, Subsidiaries, provides an accounting policy option for a private enterprise to either consolidate its subsidiaries or account for its subsidiaries using the equity method or the cost method. This project will examine whether the requirements of Section 1582, Business Combinations, should apply when a private enterprise chooses to account for its subsidiaries using the cost or the equity methods of accounting. The AcSB has recently amended the scope of this project to also include accounting for an investment using the cost or equity method as the ownership interest changes. For example, when the ownership interest in an investment increases from a small interest to one that provides significant influence and then to control, and the investment is accounted for at cost at each stage. An exposure draft is expected to be issued in the second quarter of 2015. Conclusion As we head closer to the end of the year, now is the time to check in with your BDO advisor about how the changes made and the upcoming changes to the standards will affect your organization. The information in this publication is current as of October 1, 2014. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.