CPA Canada Financial Reporting Alert

Transcription

1 FEBRUARY 2014 CPA Canada Financial Reporting Alert ASPE AMENDED 2013 Annual Improvements to Accounting Standards for Private Enterprises In October 2013, the Accounting Standards Board ( AcSB ) made several amendments to improve accounting standards for private enterprises as set out in Part II (Accounting Standards for Private Enterprises) of the CPA Canada Handbook Accounting. These amendments are the results of the 2013 annual improvements. This CPA Canada Financial Reporting Alert highlights the changes in each of the Sections affected, discussing effects beyond accounting. Why do the 2013 Annual Improvements to ASPE matter to me? The following standards have been amended as a result of the 2013 annual improvements: Section 1520, Income Statement Section 1540, Cash Flow Statement Section 1582, Business Combinations Section 1590, Subsidiaries Section 1602, Non-Controlling Interests Section 3055, Interests in Joint Ventures Section 3856, Financial Instruments These amendments should be reviewed by the following enterprises to determine if they are affected: Private enterprises that apply Part II of the CPA Canada Handbook Accounting; and Not-for-profit organizations using the standards in Part III. 1

2 What are Annual Improvements? ASPE are changed periodically through two processes: major improvements and annual improvements. The purpose of the annual improvements is to amend ASPE to clarify guidance or wording and to correct for unintended consequences, conflicts or oversights. These amendments are bundled together to reduce the number of individual changes to the standards. Major improvements result in significant changes to ASPE and are separate projects for each standard that they affect. When are these amendments effective? For annual financial statements relating to fiscal years beginning on or after January 1, Earlier application is permitted. What are the key changes? Section 1582, Business Combinations Clarification that remeasurement of contingent consideration occurs when the contingency is resolved Reduced disclosures for business combinations when the subsidiary is subsequently accounted for under the cost or equity method Paragraph (b) has been amended to clarify that contingent consideration is remeasured when the contingency is resolved, regardless of when the payment is made. For example, if the payment is deferred past the date on which the contingency is resolved, the remeasurement should still occur on the date that the contingency is resolved. As a result of this amendment, Section 3856, Financial Instruments paragraph (k), which describes the situations where Section 3856 does not apply, has been amended to clarify that contracts issued for contingent consideration are exempted from Section 3856 until such time as the contingency is resolved. Paragraph has been amended and paragraph A has been added to reduce the required disclosures when a subsidiary is accounted for under the cost or equity method. Previously the disclosures in Section 1582 were applicable for all business combinations, regardless of the subsequent accounting for the subsidiary. When a subsidiary is subsequently accounted for under the cost or equity method, certain of those disclosures were not relevant or of significant benefit. Those disclosures have been removed from paragraph and paragraph A now lists the disclosures that are required only when a subsidiary is consolidated.. Section 1590, Subsidiaries Clarifies that a change in ownership interest is accounted for based on the accounting policy used to account for the subsidiary Paragraph has been amended to clarify that the accounting for a change in ownership should be based on the accounting policy used to account for the subsidiary. While Section 1602, Non-Controlling Interests provided guidance on how to account for a change in ownership of a consolidated subsidiary, Section 1590 previously did not address how a change in ownership should be accounted for when the cost or equity method is used to account for a subsidiary. As a result of this amendment, Section 3055, Interests in Joint Ventures paragraph has been amended to clarify that the accounting for a change in ownership interest is based on the accounting policy used to account for the interest in joint ventures.. 2 CPA Canada Financial Reporting Alert, AMENDED 2013 Annual Improvements to Accounting Standards for Private Enterprises

3 Section 1602, Non-Controlling Interests Clarification that non-controlling interests are not deducted in arriving at net income Clarification regarding the allocation of exchange gains and losses Paragraph has been amended to clarify that non-controlling interests are not a deduction in arriving at net income. Paragraph A has been added to clarify the allocation of exchange gains and losses arising from the translation of the financial statements of a self-sustaining foreign operation that are attributable to the non-controlling interests. These exchange gains and losses that are recognized in a separate component of shareholders equity and that are attributable to the non-controlling interest should be included in the non-controlling interests component of equity. As a result of these changes, amendments were required with respect to presentation of the income statement and calculation of cash flows from operating activities when using the indirect method. Section 1520, Income Statement: An amendment was made to paragraph , adding item (g), requiring that the attribution of net income to the parent company and to non-controlling interests be presented separately on the face of the income statement, in order to clarify that non-controlling interests are not a deduction in calculating net income. Section 1540, Cash Flow Statement: Non-controlling interests was removed from paragraph (a) to correct an error. Non-controlling interests should not be added back when calculating the cash flows from operating activities under the indirect method. Section 3856, Financial Instruments Clarification that a financial instrument redeemable only by economic compulsion is not classified as a financial liability Clarification of the treatment of hedging relationships using foreign exchange forward contracts that mature before the hedged item is recognized Paragraph 3856.A26A has been added to clarify that in absence of a contractual obligation to redeem a financial instrument, economic compulsion does not cause the instrument to be classified as a financial liability. Economic compulsion can be described as a situation when an entity will have to take a particular course of action in the future because that action will be so much more economically advantageous than any of the available alternatives. An example of economic compulsion: Private equity investors often attempt to build a liquidity mechanism into their investments by establishing a right that allows them, after a certain period of time, to have the issuing enterprise sold if a triggering even or circumstance, such as an IPO, has not occurred. This right is a form of a sale right and its objective is to provide the investors with the leverage to recover their investment. The issuing enterprise would then have the option to comply with the mechanisms of the sale right or, within an agreed time frame, to trigger a call right. This call right would be the right, but not the obligation, of the enterprise to avoid the application of the sale right by purchasing the shares of the investors. The investors control the timing of the transaction because the enterprise cannot exercise the call right unless investors have exercised their sale right. In this situation, it might be advantageous to redeem the investors shares to prevent what would amount to the expropriation of the enterprise, or the common shares, by the investors. The issuing enterprise has the right, but not the obligation, to redeem the shares in order to avoid the application of the sale right by the investor. Paragraph 3856.A62A has been added to clarify the treatment of hedging relationships using foreign exchange forward contracts that mature before the hedged item is recognized Foreign exchange forward contracts may be settled net by transferring the gain or loss amount, or gross by exchanging the two currencies. When a foreign exchange forward contract is designated as a hedge of an anticipated purchase transaction and the contract settles gross before the purchase is recognized, the foreign currency acquired on settlement of the contract is initially recognized at the spot rate in effect on the settlement date. When the foreign currency is held continuously between the date the contract is settled and the date the purchase transaction is recognized, any gain or loss on translating the foreign currency cash held is presented as a separate component of equity until the purchase is recognized. Previously, this gain or loss would have been recorded directly in income. With this amendment, when the purchase is recognized, the gain or loss on the foreign currency held is transferred from the separate component of equity to the carrying amount of the asset acquired in the purchase transaction or to net income in accordance with paragraph (a). Paragraph 3856.A62A cannot be applied to hedges of anticipated sales transactions. FEBRUARY

4 What are the transitional requirements? Retrospective application is required in accordance with Section 1506, Accounting Changes, with the following exceptions: In respect of the amendment regarding contingent consideration (amendments to Section 1582, Business Combinations), an entity should not adjust contingent consideration that has been extinguished in periods prior to the adoption of this amendment. The amendment to the hedge accounting requirements in Section 3856 is effective for hedging relationships in effect at January 1, 2014 with earlier application permitted at dates on or after January 1, What are the audit implications? The amendments may require the auditor to discuss the following items with management: Financial statement presentation and disclosure relating to non-controlling interests and/or business combinations. Measurement of contingent consideration where the payment is made after the date the contingency is resolved. Accounting for a change in ownership interests. Classification of financial instruments redeemable only by economic compulsion. Measurement and presentation of hedging relationships of anticipated purchase transactions using foreign exchange forward contracts. Some audit implications might include having the auditor: Consider the requirements in CAS 300, Planning an audit of financial statements. Although the annual improvements do not results in significant changes to ASPE, practitioners should ensure that, where relevant, the amendments have been applied appropriately and that the nature, timing and extent of audit procedures in the audit plan are sufficient to address the risks of material misstatement arising from their application. Consider the reporting implications of any retrospective application of the amended accounting standards, in particular CAS 710, Comparative information corresponding and comparative financial statements. The auditor may need to perform additional procedures and have additional reporting responsibilities with respect to comparative information. 4 CPA Canada Financial Reporting Alert, AMENDED 2013 Annual Improvements to Accounting Standards for Private Enterprises

5 Comments on this Financial Reporting Alert, or suggestions for future Financial Reporting Alerts should be sent to: Taryn Abate, CPA, CA Principal Chartered Professional Accountants of Canada 277 Wellington Street West Toronto, Ontario M5V 3H2 CPA Canada undertakes initiatives to support businesses and practitioners. This publication is based on the ASPE as of February It provides non-authoritative guidance and has not been adopted, endorsed, approved or otherwise acted upon by the Accounting Standards Board, any CPA Canada board or committee, the governing body or membership of CPA Canada or any provincial institute/ordre. Practitioners are expected to use professional judgment in determining whether the material in this publication is both appropriate and relevant to the circumstances of their particular engagements. Copyright 2014 Chartered Professional Accountants of Canada FEBRUARY