Subsequent Events SLIDE 1 (title slide) This presentation is intended to provide an overview of the main features of the Accounting Standards Board s Re-exposure Draft on Subsequent Events. The Re-exposure Draft is the official version of the Board s proposals. Nothing in this presentation overrides the Re-exposure Draft, which contains details not covered in this presentation. Comments on the Re-exposure Draft proposals are due by May 31, 2005. An important part of the Board s process is the exposure of proposed standards for public comment, and consideration of the input received. Viewers of this presentation are encouraged to provide their comments on any aspect of the Re-exposure Draft. The Re-exposure Draft also includes questions on which the Board particularly seeks comment. NEXT SLIDE: Background
Background SLIDE 2 The Subsequent Events project is part of the AcSB s Accounting Standards Improvements Project. It has been undertaken to improve and harmonize the Section with the IASB s improved version of IAS 10, Subsequent Events and US accounting practices, based on the AICPA s Codification of Statements on Auditing Standards AU Section 560, Subsequent Events. The AcSB proposes that this Re-exposure Draft will result in a standard that will enhance subsequent event information in financial statements. The AcSB plans to issue the standard in the fourth quarter of 2005, to be adopted for interim and annual periods ending on or after June 30, 2006. Earlier application is encouraged. NEXT SLIDE: What is new
What is new SLIDE 3 This Re-exposure Draft proposes the following significant enhancements compared with today s financial reporting: to distinguish the subsequent event reporting periods for publicly accountable enterprises and entities other than publicly accountable enterprises; to extend the reporting periods for both types of entities to include those events that occur between the balance sheet date and the date of authorization for issue of the financial statements; for entities other than publicly accountable enterprises, to limit the reporting of subsequent events between the date of completion and the date of authorization for issue of the financial statements to those that management are aware of; to require disclosure of the subsequent event date (that is, the date to which an entity searches for and identifies subsequent events); for entities other than publicly accountable enterprises, to require disclosure of the dates of events that management are aware of that occur between the date of completion and the date of authorization for issue of the financial statements; and to require that disclosures for adjusting subsequent events be updated in light of new information received up to the date of authorization for issue of the financial statements. NEXT SLIDE: Underlying principles
Underlying principles SLIDE 4 The proposed section is based on three underlying principles, which are the same as those which underlie the current section 3820. First, the subsequent event reporting process is to provide users of financial statements with relevant information about events occurring after the balance sheet date that may influence their analysis of the financial position of the entity at the balance sheet date, and its results of operations and cash flows for the period then ended. Second, to be useful, the information must be received by users of the financial statements before it loses its capacity to influence decisions. Third, in preparing financial statements, entities consider the implications and financial effects of events occurring after the balance sheet date and, when those events will probably influence decisions of financial statement users; information about them is recognized and/or disclosed in financial statements. NEXT SLIDE: Scope
Scope SLIDE 5 The proposed new Section will apply to all entities in accounting for subsequent events. The proposed amendments to the Section have been reviewed by the Differential Reporting Advisory Committee and the Not-for-Profit Advisory Committee. The Committees believe the proposals are operational for qualifying non-publicly accountable enterprises and not-for-profit organizations. The Differential Reporting Advisory Committee appreciates that the AcSB has revised the previously proposed approach for reporting subsequent events by non-public entities in the reexposure draft. To promote the effectiveness of the proposed standards, DRAC has recommended that several practical examples be developed and issued to assist practitioners in implementing these new recommendations. The proposed new Section will apply to the preparation of general purpose financial statements. NEXT SLIDE: Subsequent event period - Today
Subsequent event period - Today SLIDE 6 Section 3820 used in practice today defines the subsequent event period as between the balance sheet date and the date of completion. Whereas, IAS 10, defines the period as between the balance sheet date and the date when the financial statements are authorized for issue, and in the United States, AU Section 560, defines the subsequent event period as between the balance sheet date and the date the financial statements are issued. In today s reporting environment, there is increasing pressure on entities to provide full, complete and timely information. Enhanced information about subsequent events will increase the quality and relevance of information provided to financial statements users. Furthermore, accounting standard setters around the world are working towards the global harmonization of accounting standards. In Canada, public companies who report their financial statements in other jurisdictions are voluntarily choosing to follow IAS or US practices for accounting for subsequent events. Public entities also use various sources to disclose material non-adjusting events. For such entities, financial statements are just one part of a larger database of information that users access in making their decisions regarding public companies. However, for private companies, such additional information is often not publicly available. NEXT SLIDE: Subsequent event period Benefits & Concerns
Subsequent event period Benefits & Concerns SLIDE 7 Extending the subsequent event period to the date of authorization for issue will enhance the usefulness of financial statements by providing relevant information to users, implementing the practice followed by some preparers and meeting users expectations. The date of authorization for issue of the financial statements is becoming more important given proposed changes in auditing standards, governance regulations, and securities legislation. For example, the International Audit and Assurance Standards Board revised International Standard on Auditing 700, The Independent Auditor s Report on a Complete Set of General Purpose Financial Statements, such that the audit report date should not be earlier than the date that those with the recognized authority have determined that a complete set of financial statements has been prepared. It would be beneficial if the cut-off date for subsequent event reporting was consistent with these new requirements. The proposed section will also be harmonized with IAS 10 and US practice. For private companies, the AcSB understands that there can be a significant delay between when the financial statements are completed and the date they are authorized for issue by the board of directors. The AcSB s Differential Reporting Advisory Committee and respondents to the March 2004 Exposure Draft expressed this concern and were troubled by the additional costs that would be incurred by private companies because of additional work required to identify and audit subsequent events after the date of completion of the financial statements. NEXT SLIDE: Subsequent event period AcSB Conclusion
Subsequent event period AcSB Conclusion SLIDE 8 For all types of entities, the AcSB concluded that the benefits to users of extending the subsequent event period from the date of completion of the financial statements to the date of authorization for issue exceed any potential costs. The AcSB recognizes that the extension of the period to the date of authorization for issue of the financial statements may result in additional work and cost for preparers and auditors. To minimize these concerns, the AcSB proposes in the re-exposure draft that non-public entities only report subsequent events that management become aware of between the date of completion and the date of authorization for issue of the financial statements. During this period, these entities will have a passive rather than an active responsibility to identify subsequent events. Public entities will have an active responsibility to search for and identify subsequent events. When there is a lengthy period between the dates auditors complete their work and the approval of the financial statements, to further minimize costs, management and directors may be motivated in future to complete and authorize the financial statements for issue on a more timely basis. Any entity will have the flexibility under this Section to report subsequent events to a later date. For example, entities will be able to follow US practices and report subsequent events to the date of issue while still complying with the Canadian requirements. NEXT SLIDE: Definition - Publicly accountable enterprises
Definition Publicly accountable enterprises SLIDE 9 To distinguish the subsequent event reporting obligations between public and non-public entities, the AcSB proposes in the Re-exposure Draft to adopt the concept of publicly accountable enterprises, which is used elsewhere in the CICA Handbook Accounting, such as in DIFFERENTIAL REPORTING, Section 1300. Publicly accountable enterprises include entities that make securities filings or public enterprises, co-operative business enterprises, deposit taking institutions including regulated financial institutions, enterprises subject to rate regulation, government business enterprises and government business-type organizations. NEXT SLIDE: Definition Entities other than publicly accountable enterprises
Definition Entities other than publicly accountable enterprises SLIDE 10 Non-public entities are considered to be entities other than publicly accountable enterprises, and include small and private entities, not-for-profit organizations and pension plans. NEXT SLIDE: Subsequent event period Defined
Subsequent event period Defined SLIDE 11 The proposed new Section extends the subsequent reporting period for all entities. Publicly accountable entities will search, identify and report subsequent events that occur between the balance sheet date and a date no earlier than the date of authorization for issue. Entities other than publicly accountable enterprises will search, identify and report subsequent events that occur between the balance sheet date and a date no earlier than the date of completion of financial statements. Between the date of completion and the date of authorization for issue, while not required to actively search for events, these entities will report subsequent events of which management is aware. In proposing the passive responsibility to report subsequent events, the AcSB believes that management will become aware of significant subsequent events through the activities they conduct to manage their business. Accordingly, the AcSB believes that under the proposed Section, the passive search will result in entities other than publicly accountable entities identifying and reporting material subsequent events up to the date of authorization for issue, a date later than an audit or review report date. NEXT SLIDE: Definition - Date of authorization for issue
Definition Date of authorization for issue SLIDE 12 To assist users in identifying what date subsequent events are reported to, the following definition of the date of authorization has been developed: the date of authorization for issue is the date at which those charged with governance, such as a Board of Directors, approve for issue the financial statements, including the related notes. Depending on an entity s governance practices, the authority to approve the financial statements may be or could be delegated to the Board of Directors, an Audit Committee or others. When the positions of managers, directors and shareholders of an entity are occupied by the same individuals, the date of authorization for issue is no earlier than the date when these individuals, in their capacity as directors and shareholders, authorize the financial statements for issue to third parties. NEXT SLIDE: Definition - Date of completion
Definition Date of completion SLIDE 13 To assist entities other than publicly accountable enterprises in determining the date of completion, the AcSB proposes the following definition in the Re-exposure Draft: Date of completion is the date when management: (i) has completed the process of gathering information and preparing the financial statements; and (ii) determines that the financial statements, including the related notes, result in a fair presentation in accordance with generally accepted accounting principles as required by general standards of financial statement presentation, Section 1400, except in regard to isolated, known outstanding items that have a narrow impact on the financial statements. In other words, the date of completion is the date at which the financial statements are substantially complete. The AcSB believes that the definition proposed may result in a change of practice from what preparers do today, since financial statements are not always substantially complete at the date of completion of audit fieldwork which is the date typically used in practice today. The exception is to prevent the situation where isolated outstanding items would delay an entity from completing the financial statements and thereby result in extending the period in which an entity must actively search for and identify subsequent events. To qualify for the exception, the items outstanding must be few and known, and must have a narrow impact on the financial statements. For example, the determination of the amount of an owner-manager s year end bonus upon completion of the entity s tax return may qualify as such an item. Timelines of key events in the financial statement preparation process are included in the Illustrative examples of the Re-exposure Draft to illustrate how different entities may determine the subsequent event reporting dates, such as the date of authorization for issue and the date of completion. NEXT SLIDE: Recognition and Measurement
Recognition and Measurement SLIDE 14 The Re-exposure Draft proposes that an entity should adjust the amounts recognized in its financial statements for subsequent events that: occur during the subsequent event reporting period; provide evidence of conditions that existed at the balance sheet date; and are material. To assist users in identifying adjusting subsequent events, the Re-exposure Draft includes a list of examples that require an entity to adjust the amounts recognized in its financial statements. NEXT SLIDE: Going concern
Going concern SLIDE 15 To strengthen financial reporting, a reminder is included in the Re-exposure Draft that an entity reviews whether it remains a going concern up to the date of authorization for issue of the financial statements. Up to that date, an entity considers the effect of subsequent events on its operating results or financial position. If the effect is so pervasive that the viability of the business is brought into question, then the going concern assumption is no longer appropriate and a fundamental change in the basis of the accounting is required. NEXT SLIDE: Disclosure Subsequent event date
Disclosure - Subsequent event date SLIDE 16 At the request of respondents to the March 2004 Exposure Draft, the AcSB proposes that entities disclose the subsequent event date, the date to which entities search for and identify subsequent events. Disclosing the subsequent event date in the financial statements is more relevant than disclosing the date of authorization for issue of the financial statements and who gave that authorization. Unless disclosed, users will be aware that events that occur after the subsequent event date were not reported in the financial statements. To report events that occur between the date of completion and the date of authorization for issue of the financial statements, entities other than publicly accountable enterprises will also be required to disclose the dates of subsequent events during that period of which management is aware. To assist preparers, the AcSB has added guidance on how to disclose the subsequent event date and the dates of any intervening subsequent events. These dates are to be disclosed in either the basis of presentation note, when disclosed, the summary of accounting policies or the balance sheet. The last of these options is a new alternative recommended by exposure draft respondents. NEXT SLIDE: Disclosure Adjusting events
Disclosure Adjusting events SLIDE 17 Between the date of the balance sheet and the date of authorization for issue of the financial statements, an entity may receive new information about conditions that existed at the balance sheet date. The Re-exposure Draft proposes that in these situations, an entity should update disclosures to reflect the adjusting subsequent event, in light of the new information, even when it does not affect the amount that it recognizes in the financial statements. NEXT SLIDE: Non-adjusting events - Identification
Non-adjusting events - Identification SLIDE 18 To provide users of the financial statements with more relevant information on which to base informed decisions, the Re-exposure Draft proposes that an entity should disclose the financial effects of a subsequent event in its financial statements that: occur during the subsequent event reporting period; is indicative of conditions that arose after the balance sheet date; and is material, specifically, that it is probable that information about a non-adjusting event would influence the economic decisions of users made on the basis of the whole financial statements. The Re-exposure Draft proposes to base the disclosure principle for non-adjusting subsequent events on the description of materiality in Section 1000 and adopt the wording about the effect on the financial statements from the improved IAS 10 to: influence the economic decisions of users [made] on the basis of the financial statements to positively require the disclosure of nonadjusting events whose effects are material to the financial statements as a whole. To assist users in identifying non-adjusting subsequent events, the Re-exposure Draft includes a list of examples that require an entity to disclose information that enables users to understand the financial effects of material non-adjusting events in its financial statements. NEXT SLIDE: Non-adjusting events - Disclosure
Non-adjusting events - Disclosure SLIDE 19 To disclose information that enables users to understand the financial effects of non-adjusting subsequent events, the Re-exposure Draft proposes that an entity should disclose at least: (a) the nature of the non-adjusting subsequent event; and (b) an estimate of its financial effect, when practicable, or an explanation as to why such an estimate cannot be made. As a practical way to disclose the financial effect of a subsequent event that has a pervasive effect on the future activities of an entity, an entity may provide supplementary pro-forma financial information. NEXT SLIDE: Revision and Reissuance of Financial Statements
Revision and Reissuance of Financial Statements SLIDE 20 Respondents to the March 2004 Exposure Draft raised concerns regarding the AcSB proposal to remind entities that there may be additional considerations beyond the scope of the Section that they may need to consider when financial statements are reissued, including the need to establish a new date of authorization for issue. Accordingly, the AcSB proposes in the Re-exposure Draft to modify this guidance to indicate that an entity: (a) considers the appropriateness of the subsequent event date ; (b) revises and reissues financial statements only when previously issued financial statements are revised or restated; and (c) considers two options to its consideration of subsequent events. An entity could either (1) disclose the date of the event that resulted in an isolated revision to the financial statements or (2) establish a new subsequent event date if the effect of the event is so pervasive that new financial statements are drafted. If a new subsequent event date is established, an entity extends its active review for subsequent events, and updates the financial statements, as required, to provide relevant and timely information to the financial statements users. For example, an entity revises and reissues its financial statements for the correction of an error. This guidance has been relocated to the end of the Section in paragraphs.29-.30, under the heading Revision and Reissuance of Financial Statements. NEXT SLIDE: Further information
Further information SLIDE 21 The Re-exposure Draft documents, comprising the proposed standard and related background information, including basis for conclusions, are available on the AcSB website at www.acsbcanada.org. We hope you will take some time to review the proposals and respond to the invitation to comment by the deadline of May 31, 2005. Thank you for taking the time to view this presentation. We hope it is helpful to you in understanding the Re-exposure Draft proposals. END