IFRS Transition and Regulatory Compliance

Kelly Gorman, Deputy Director Corporate Finance Branch

NASAA 2011 Corporation Finance Training SeminarJuly 7-8, 2011

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Disclaimer:“The views that I am going to express today are my own and do not necessarily represent those of the Commission or my colleagues.”

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Presentation Outline

Summary of Corporate Finance’s IFRS Initiatives

Top 10 Tips for filing the First IFRS Interim Report

OSC IFRS Releases No. 1 and No. 2

Q2/Q3 Filing Tips

Questions

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Corporate Finance’s IFRS Initiatives

Revised rules published in October 2010 to accommodate IFRS transition – terminology changes and transitional issues

Two targeted reviews of public companies’ IFRS transition disclosure (OSC Staff Notice 52-718 and CSA Staff Notice 52-326)

OSC Issuer Guide Top 10 Tips for Public Companies Filing their First IFRS Interim Financial Report issued November 2010 (www.osc.gov.on.ca/IFRSGuide)

In-house seminars for public companies continuing throughout 2011

OSC IFRS Release No. 1 – Filing Deficiencies in Issuers’ First IFRS Interim Financial Reports (www.osc.gov.on.ca/IFRSRelease1)

OSC IFRS Release No. 2 – A Reminder Before You File Your First

IFRS Interim Financial Report (www.osc.gov.on.ca/IFRSRelease2)

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Top 10 Tips

Summary of tips included in OSC Issuer Guide:

1. Acceptable accounting principles

2. Auditor involvement

3. Q1 filing extension

4. Financial statement defaults

5. IFRS financial statement presentation

6. Q1 financial statement notes

7. IFRS reconciliations

8. Management’s discussion and analysis (MD&A)

9. CEO/CFO certification

10. Prospectus and other offering issues

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Tip #1 – Acceptable Accounting Principles

Revised rules published in October 2010 to accommodate transition to IFRS

Website address www.osc.gov.on.ca/IFRSRelatedRuleAmendments

Domestic issuers will be required to prepare financial statements in accordance with IFRS as issued by the International Accounting Standards Board (IASB) for fiscal years beginning on or after January 1, 2011

Companies will adopt IFRS on varied timelines through 2011 – avoid investor confusion by clearly identifying accounting principles used in all financial information released.

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Tip #2 – Auditor Involvement

First IFRS interim financial report is not required to be audited or reviewed under securities law

When an auditor is involved, the review would include:

• current and comparative period results

• opening IFRS statement of financial position

• notes, including IFRS 1 reconciliations

Auditor involvement with the first IFRS interim financial report remains a decision of the company and its Board

A notice to reader is required to be disclosed when an auditor did not review the interim financial report.

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Tip #2 – continued

OSC Staff Notice 51-718 - Key Considerations Relating to an Auditor’s Involvement

Notice to reader required when:

• Review is not completed for all of the periods presented

• Auditors are unable to complete their review

• Auditors express a reservation of opinion in their review report

We noted a significant level of non-compliance with this requirement

• In these cases, issuers were requested to re-file their interim financial statements with the required disclosure

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Tip #2 – continued

Corporate governance guidelines suggest that Boards should be responsible for identifying business risk and ensuring that appropriate systems are implemented to manage these risks

The interim filing responsibility of audit committees under NI 52-110 includes a review of:

• interim financial report

• related MD&A

• interim earnings press release

Companies should ensure that the financial information released in the first three quarters of 2011 is accurate and will not require restatement after the annual audit.

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Tip #3 – Q1 Filing Extension

Filing deadline for Q1 extended by 30 days as follows:

Intended to assist management with CEO/CFO certification process and timing of meetings of boards of directors and audit committees

Companies should note that subsequent quarter and annual filing deadlines have not been extended.

* Since May 15, 2011 is a Sunday, the actual filing deadline in Ontario would be Monday, May 16, 2011.

Issuer Standard deadline Extended deadline for Q1

Non-venture issuer 45 days – May 15, 2011 * 75 days – June 14, 2011

Venture issuer 60 days – May 30, 2011 90 days – June 29, 2011

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Tip #3 – continued

2010Annual Financial

StatementsCGAAP

Mar 31, 2011First IFRS Interim

Report(with 2010

comparatives restated using IFRS)

March 30, 2012Filing deadline

2011Annual Financial Statements

IFRS(with 2010 comparatives

restated using IFRS)

Year endDec 31, 2010

March 31, 2011Filing deadline

Year end Dec 31, 2011

* Since these days fall on a weekend, the actual filing deadline in Ontario will be the first following business day.

June 14, 2011Filing deadline

Timing for calendar year-end companies:

Non-venture

VentureMar 31, 2011

First IFRS Interim Report

(with 2010 comparatives restated

using IFRS)

June 29, 2011Filing deadline

2010Annual Financial

StatementsCGAAP

April 30, 2011Filing deadline*

2011Annual Financial Statements

IFRS(with 2010 comparatives

restated using IFRS)

April 29, 2012Filing deadline*

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Tip #4 – Financial Statement Defaults

It is the fundamental responsibility of every public company to meet its reporting obligations

In meeting our investor protection mandate we will generally respond with a cease trade order (National Policy 12-203)

Companies that determine they will not be able to file IFRS financial statements should inform the market on a timely basis

Not filing IFRS financial statements by the deadline is a significant breach of securities law.

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Tip #5 – IFRS Financial Statement Presentation

The first IFRS interim financial report must have the following:

• opening IFRS statement of financial position (January 1, 2010 for a calendar year-end company)

• the statement of comprehensive income immediately following the income statement, when presenting the statement of total comprehensive income as two statements

• presentation currency must be displayed on the face of the financial statements

Going forward – the statement of cash flows is only presented for the year-to-date period

Failure to file the opening IFRS statement of financial position in the first IFRS interim financial report will be considered a significant financial statement filing default.

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Tip #5 – continued

Statement of Financial Position as at :(in CAD $, in 000s)

First Interim Financial Period

Comparative year end

Opening Statement of Financial Position

March 31, 2011 December 31, 2010

January 1, 2010

Property, plant and equipment (Note 7) 8,250 8,009 8,399

Goodwill (Note 8) 1,370 1,370 1,370

Intangible assets (Note 6) 58 58 58

Total non-current assets 9.678 9,437 9.827

Trade and other receivables (Note 5) 3,628 4,452 3,710

Inventories (Note 4) 2,764 2,475 3,362

Cash and cash equivalents (Note 3) 1,959 1,367 748

Total current assets 8,351 8,294 7,820

Total assets 18.,029 17,731 17,647

Interest-bearing loans (Note 9) 13,425 13,364 13,520

Restructuring provision 0 0 0

Deferred Tax Liability 1,039 1,039 1,039

Total liabilities 14,464 14,403 14,559

Issued capital (Note 10) 1,500 1,500 1,500

Retained earnings 2,065 1,828 1,588

Total equity 3,565 3,328 3,088

Example of first IFRS interim statement of financial position:

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Tip #6 – Q1 Financial Statement Notes

IAS 34 Interim Financial Reporting: purpose of interim financial reporting is to update from latest annuals

• hence, less note disclosures are generally required in interims

However, we believe a first time adopter’s first IFRS interim financial report should include disclosure that exceeds the minimum disclosure requirements under IAS 34 to provide meaningful information to investors

First IFRS interim report should contain sufficient information to enable users to understand how the transition to IFRS affected previously reported results.

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Tip #6 – continued

A statement of unreserved compliance with IAS 34 Interim Financial Reporting required by NI 52-107

Separate disclosure of Canadian GAAP errors identified during the transition to IFRS (consider whether previous CGAAP filings need to be restated and re-filed)

Appropriate headings and subtotals in financial statements as required by IFRS

The first IFRS interim financial report must include the following:

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Tip #6 – continued

All significant accounting policies under IFRS

A summary of IFRS 1 exemptions & elections taken by the company

January 1, 2010 balances in comparative information in the financial statement notes

Appropriate explanatory note disclosure that may exceed the minimum disclosure requirements in IAS 34 to sufficiently explain transition

The first IFRS interim financial report should include the following to provide meaningful disclosure to investors:

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Tip #7 – IFRS 1 Reconciliations

IFRS requires reconciliations that help explain how the transition from Canadian GAAP to IFRS affected the company’s results

The reconciliations are required to be disclosed in the first interim financial report notes as follows (for calendar year-end companies):

Any material adjustments to the statement of cash flow resulting from transition must also be described qualitatively or quantitatively

Reconciliation from CGAAP to IFRS for Q1:

Equity: January 1, 2010, December 31, 2010, and March 31, 2010.

Total Comprehensive Income: The year ended December 31, 2010, and The three months ended March 31, 2010.

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Tip #7 – continued

IFRS does not mandate a specific format for the reconciliations

Give sufficient detail to enable investors to understand the material adjustments

If errors are identified, the reconciliations must distinguish correction of errors from changes in accounting policies

Starting point of total comprehensive income reconciliation should be total comprehensive income in accordance with previous GAAP

Explanatory notes are needed to explain individual reconciling items

Reclassification adjustments on the statements

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Tip #7 – continued

Example of equity reconciliation:

Reconciliation of equity at January 1, 2010 (date of transition to IFRS)

(in CAD $, in 000s) Note CGAAP$

Effect of transition to

IFRS$

IFRS$

Property, plant and equipment 1 8,299 100 8,399

Goodwill 2 1,220 150 1,370

Intangible assets 2 208 (150) 58

Total non-current assets 9,727 100 9.827

Trade and other receivables 3,710 0 3,710

Financial assets 3 2,962 400 3,362

Cash and cash equivalents 748 0 748

Total current assets 7,420 400 7,820

Total assets 17,147 500 17,647

Interest-bearing loans 13,520 0 13,520

Restructuring provision 4 250 (250) 0

Deferred Tax Liability 5 579 460 1,039

Total Liabilities 14,349 210 14,559

Issued capital 1,500 0 1,500

Retained earnings 6 1,298 290 1,588

Total equity 2,798 290 3,088Reconciliations also required as at December 31, 2010 and March 31, 2010 in first IFRS interim financial report

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Tip #7 – continued

Example of total comprehensive income reconciliation:

Reconciliation of total comprehensive income for year ended December 31, 2010

(in CAD $, in 000s) Note CGAAP$

Effect of transition to

IFRS$

IFRS$

Revenue 2,153 0 2,153

Cost of sales 1 (1,670) (35) (1,705)

Gross profit 483 (35) 448

General and administration 2 (132) (28) (160)

Sales and marketing (107) 0 (107)

Other gains and losses (net) 3,4 (46) (24) (70)

Income before income tax 198 (87) 111

Non-controlling interest 5 (9) 9 0

Income tax 6 (67) 19 (48)

Net income (loss) for the year 122 (59) 63

Changes in fair value of cash flow hedges 3 5 (4) 1

Cumulative translation adjustment 29 0 29

Other comprehensive income (loss) for the period

34 (4) 30

Total comprehensive income 156 (63) 93

Reconciliations also required for the three months ended March 31, 2010 in the first IFRS interim financial report.

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Tip #8 – MD&A

Pre-IFRS transition MD&A disclosure should include:

• a detailed status update of the company’s IFRS changeover plan

• key decisions about accounting policy choices under IFRS 1 and other relevant IFRS standards

• a discussion of the impact of accounting policy choices on each line item in the financial statements (quantification if available)

As required by our MD&A form, disclosure of expected changes in accounting policies should include a discussion of the expected effect on the company’s financial statements or a statement that the company cannot reasonably estimate the effect.

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Tip #8 – continued

Post-IFRS transition MD&A disclosure should include a comprehensive discussion of the transition to IFRS from management’s point of view

1.13(b) of 51-102F1 does not apply

Where securities rules require pre-IFRS transition financial information the issuer can present this information in accordance with Canadian GAAP

• for example, selected annual information for three years and the summary of quarterly results for eight quarters

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Tip #9 – CEO/CFO Certification

The CEO and CFO must certify the first IFRS interim financial report and related MD&A

To address the risk of material misstatement of financial information prepared in accordance with IFRS, companies need to establish or modify existing ICFR and DC&P

Non-venture issuers need to disclose any changes made to ICFR relating to IFRS in the first quarter MD&A filed in 2011

Companies should be aware that the wording in the standard form has been revised to align with IFRS. CFO and CEO should ensure they are completing the most recent forms in 2011.

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Tip #10 – Prospectus and Other Offering Issues

Overview of issues:

Timing considerations

• Auditor involvement

• No extension for financial statements included in an IPO prospectus

Use of mixed GAAPs allowed (pre-transition date info required can be CGAAP)

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Tip #10 – continued

Timing Considerations:

Auditor involvement in offering documents

• no securities law changes to audit and review requirements for financial statements in a prospectus

• auditors may be required to perform selected audit procedures on the opening IFRS statement of financial position to complete their review and provide consent

• such procedures may require additional time to complete

We urge companies and their advisors to consider these matters well in advance of filing a preliminary prospectus to avoid delays in filing and obtaining a receipt from securities regulators for offering documents.

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Q1 2011 – First IFRS Interim Financial Reports

OSC IFRS Release No. 1 – Filing Deficiencies in Issuers’ First IFRS Interim Financial Reports

• IFRS 1 Reconciliations

• opening IFRS statement of financial position

• statement of changes in equity

OSC IFRS Release No. 2 – A Reminder Before You File Your First IFRS Interim Financial Report

• includes tip sheet

Ensure that your interim financial report meets the requirements of IFRS and securities legislation.

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Q2/Q3 Filing Tips - Financial Statements

For calendar year-end companies, the required financial statements for Q2 are as follows:

Statement of Financial Position

As at: June 30, 2011 December 31, 2010

Statement of Cash Flows

The six months ended June 30, 2011, and The six months ended June 30, 2010.

Statement of Comprehensive Income

The three and six months ended June 30, 2011, and The three and six months ended June 30, 2010.

Statement of Changes in Equity

The six months ended June 30, 2011, and The six months ended June 30, 2010.

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Q2/Q3 Filing Tips - IFRS 1 Reconciliations

For calendar year-end companies, the required reconciliations for Q2, Q3 and year end are as follows:

Q2:

Q3:

Year end:

Reconciliation from CGAAP to IFRS for:

Equity: June 30, 2010

Total Comprehensive Income: The three months ended June 30, 2010, and The six months ended June 30, 2010.

Reconciliation from CGAAP to IFRS for:

Equity: January 1, 2010 December 31, 2010

Total Comprehensive Income: The year ended December 31, 2010.

Reconciliation from CGAAP to IFRS for:

Equity: September 30, 2010

Total Comprehensive Income: The three months ended September 30, 2010,

and The nine months ended September 30, 2010.

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Q2/Q3 Filing Tips - Disclosure Expectations

IAS 34.15: disclose any events or transactions that are material to an understanding of the current interim period

IFRS 1.33: if a first-time adopter did not disclose information material to an understanding of the current interim period in the most recent annual financial statements:

• Disclose that information in the current interim financial report; or

• Include a cross-reference to another published document that includes it

The other published document that includes the information can be the Q1 2011 interim financial report

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Questions?