THE IMPACT OF NEW CANADIAN AUDITING AND ACCOUNTING STANDARDS ON AGENCIES CONTRACTING WITH TORONTO CHILDREN'S SERVICES

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1 ON AGENCIES CONTRACTING WITH TORONTO CHILDREN'S SERVICES New Canadian auditing and accounting standards have come into effect. The transition to the new standards is mandatory and will impact all three of the major reporting entities: publicly accountable enterprises, private enterprises, and not-for-profit organizations. The purpose of this guide is to provide an overview of the changes, when they become effective, and how this impacts the financial reporting requirements for child care operators who must submit audited financial statements to Toronto's Children's Services *. WHAT IS THE DIFFERENCE BETWEEN AUDITING STANDARDS AND ACCOUNTING STANDARDS? A. Auditing standards are a set of guidelines used by external auditors to conduct financial statement audits. The standards include mandatory procedures that must be performed by the auditor in order to ensure the accuracy and consistency of the auditor's findings and specify a minimum level of performance by the auditor. B. Accounting standards are a set of guidelines used by accountants, bookkeepers, clerks, etc. to prepare financial statements. The standards are made up of various rules, theories, and principles relating to the appropriate methods for recording, summarizing, presenting, and disclosing an entity's income, expenses, assets, and liabilities. Audited financial statements must be prepared using an approved reporting framework (set of accounting standards that are applicable to the organization). A. NEW CANADIAN AUDITING STANDARDS Canada s Auditing and Assurance Standards Board has adopted International Standards on Auditing (ISAs). These new standards are called Canadian Auditing Standards (CAS) and replace the Canadian generally accepted auditing standards (GAAS). The new CAS provide auditors with audit tools and procedures that are applicable to financial statement audits, regardless of the size, complexity, or type of organization. TO WHOM DO THE NEW CAS APPLY? The new CAS apply to financial statement audits of all entities (e.g. private or public, profit or not-forprofit, and in both the private and public sectors). Regardless of the reporting framework used to prepare financial statements, external auditors must plan and complete audits in compliance with the new standards. * This guide has not been endorsed, adopted, approved, disapproved, or otherwise acted upon by the Auditing and Assurance Standards Board or by any Board or Committee of the Canadian Institute of Chartered Accountants (CICA) or any Provincial Institute/Ordre. It has been prepared by Toronto Children's Services to provide child care operators with a general overview of the changes in Canadian auditing and accounting standards and does not address all of the changes in the standards or their potential impacts and is not intended to be, nor should it be, considered as an authoritative source. March 18, 2013 Page 1 of 6

2 WHEN DID THE NEW CAS COME INTO EFFECT? All financial statements with periods ending on or after December 14, 2010 must be audited in accordance with the new CAS and adoption is mandatory. WHAT IS THE IMPACT OF THE NEW CAS ON CHILD CARE OPERATORS? All child care operators who are required to submit audited financial statements to Toronto Children's Services must ensure that financial statements with fiscal years ending on or after December 14, 2010 are audited in accordance with the new CAS. The most significant changes that result from the adoption of CAS relate to the new format for the Independent Auditors' Report. The new format clearly explains the objective and scope of the audit, and the differences between the roles of management and the auditor in preparing and auditing the financial statements. The new auditing standards also allow the auditor to provide the reader with additional information to draw attention to special circumstances, where applicable. There is also a new requirement regarding the date of the auditors' report which for most organizations will mean the report cannot be dated earlier than the date the financial statements have been approved by the board of directors. CAS also differ from the old GAAS with respect to certain audit situations. Two situations which will likely impact child care operators are related-party transactions and going concern, which are briefly described below. Related-Party Transactions: CAS require the auditor to perform specific procedures to verify the completeness of management's representations regarding related-party relationships and transactions. Sufficient audit evidence must be gathered to ensure that related-party relationships and transactions are appropriately recorded and disclosed in the financial statements. Auditors must also evaluate whether there is a risk of fraud, misstatement, or intentional management nondisclosure. Although the previous standards suggested similar procedures, they were not required. Going Concern: Financial statements are prepared under the assumption that the entity is a "going concern"; that operations will continue for the foreseeable future (at least the next 12 months). This assumption is based on management's assessment of the entity's viability and determines the way the financial statements are prepared. The auditor evaluates the suitability of management's assessment. The new standards require enhanced communication between the auditor and the board of directors about the use of the going concern assumption in preparing the financial statements. If events or conditions identified during the audit cast significant doubt on the organization's ability to continue, the auditor must disclose this to the board. Additionally, if there is significant uncertainty about the organization's ability to continue and the financial statements are not prepared using the going concern assumption, the auditor must disclose this in sufficient detail in the auditors' report and in the notes to the financial statements. Although the format for the auditors' report has changed and auditors must follow the new CAS, the auditors' report will continue to make reference to "Canadian generally accepted auditing standards". Toronto Children s Services Page 2 of 6

3 In addition to related-party transactions and going concern, there are also differences between the old and new standards with respect to group audits, use of experts, estimates, and confirmations. Since certain audit situations may not apply to all organizations, or may differ in their importance, operators are encouraged to speak directly with their auditors if they have any questions or concerns regarding the adoption of CAS and how it will impact their organization. B. NEW CANADIAN ACCOUNTING STANDARDS The accounting standards known as Canadian generally accepted accounting principles (GAAP) were applicable to many types of reporting entities and are contained in the CICA Handbook Accounting (CICA Handbook). The CICA Handbook has been restructured to include multiple frameworks and some organizations that previously used the standards in the CICA Handbook must now follow the standards set out in the CICA's Public Sector Accounting Handbook (PSA Handbook). Whether child care operators use the standards in the CICA Handbook or the PSA Handbook will depend on whether they operate within the private or public sectors, respectively. PUBLIC SECTOR The public sector includes governments and government-controlled organizations (e.g. colleges, universities, hospitals). Governments and government-controlled organizations must use Public Sector Accounting Standards (PSAS). PSAS are set out in the PSA Handbook. PRIVATE SECTOR The private sector includes all entities that are not controlled by any government (municipal, provincial, or federal). The accounting standards for private sector organizations are set out in the CICA Handbook. As previously indicated the CICA Handbook has been restructured. There are now five parts: Part I Part II Part III Part IV Part V International Financial Reporting Standards (IFRS) Accounting Standards for Private Enterprises (ASPE) Accounting Standards for Not-for-Profit Organizations (ASNPO) Accounting Standards for Pension Plans (not applicable to child care operators) Pre-changeover accounting standards (also known as "old" GAAP) NOT-FOR-PROFIT ORGANIZATIONS PRIVATE OR PUBLIC SECTOR? Not-for-profit organizations may operate within the private or public sector. A not-for-profit organization operating in the private sector is not controlled by the government and is simply referred to as a "notfor-profit organization", or NPO. A not-for-profit organization operating in the public sector is controlled by the government and is termed a "government not-for-profit organization" or GNPO. NPO s must follow the standards in the CICA Handbook. GNPO s must follow the standards in the PSA Handbook. Toronto Children s Services Page 3 of 6

4 HOW IS GOVERNMENT CONTROL DEFINED? The CICA defines control as "the power to govern the financial and operating policies of another organization with expected benefits or the risk of loss to the government from the other organization's activities". Based on the CICA's definition, determining whether control exists will depend on the nature of the relationship between a government and an organization. Control must not be confused with an organization's financial dependence upon government. Nor should it be confused with a government establishing regulations to protect the public interest or imposing restrictions or limits upon an organization. Such conditions may be indicative of government influence but do not necessarily equate to government control. A precise checklist for assessing control does not exist. Instead there are various indicators of government control used to evaluate the relationship between a government and an organization. The process for determining whether control exists is subjective and requires professional judgement. Nonprofit operators who have questions regarding the evaluation process for determining control should work directly with their auditors and if necessary, seek guidance from the CICA and the PSA Handbook. WHEN DID THE NEW ACCOUNTING STANDARDS COME INTO EFFECT? Adoption of the appropriate framework on the effective date is mandatory. The effective dates are as follows: Publically accountable enterprises must adopt IFRS for all fiscal years beginning on or after January 1, Private enterprises must adopt ASPE OR IFRS for all fiscal years beginning on or after January 1, NPOs (not controlled by government) must adopt ASNPO OR IFRS for all fiscal years beginning on or after January 1, GFPOs (government-controlled) must adopt PSAS set out in the PSA Handbook for all fiscal years beginning on or after January 1, CAN PRE-CHANGEOVER STANDARDS BE USED TO PREPARE 2012 AUDITED FINANCIAL STATEMENTS? Only NPOs and GNPOs whose 2012 fiscal year ends prior to December 31, 2012 may prepare their 2012 audited financial statements in accordance with pre-changeover standards (old GAAP). NPOs and GNPOs whose 2012 fiscal year ends on or after December 31, 2012 must prepare their 2012 audited financial statements in accordance with the new accounting standards. Refer to Section PS 1300 of the PSA Handbook. Toronto Children s Services Page 4 of 6

5 Since the effective date for publicly accountable and private enterprises was for fiscal years beginning on or after January 1, 2011, public and private enterprises must prepare their 2012 audited financial statements in accordance with the new standards (regardless of the date their 2012 fiscal year ends). WHAT IS THE IMPACT OF THE NEW ACCOUNTING STANDARDS ON CHILD CARE OPERATORS? Under the old standards some operators did not prepare a cash flow statement and could elect to exclude it from their audited financial statements. This is no longer an option. Regardless of the accounting standards used, a cash flow statement must be included in the audited financial statements. When financial statements are prepared using new accounting standards, the change must be disclosed in the notes to the audited financial statements. Operators must also calculate whether adjustments to prior year's comparative information are necessary so that the prior year's information is also presented in accordance with the new accounting standards. Examples of common areas requiring adjustments include financial instruments, impairment of assets (such as goodwill), and employee future benefits. The notes to the financial statements must sufficiently detail any adjustments that were necessary to restate prior year's comparative information, and the impact of such adjustments. However, adjustments to prior year's comparative information may not be necessary in all cases. In these cases, the notes to the financial statements must identify that adjustments were not necessary. Regardless of whether adjustments are necessary, the auditors' report for first-time adopters must clearly convey whether or not prior year's comparative information has been audited in addition to the current year's information. The impact of first-time adoption of new accounting standards and the extent to which prior year's figures must be restated will vary for each child care operator. If operators have any questions or concerns regarding the adoption of new standards, they are encouraged to speak directly with their auditors. WHAT IF 2012 AUDITED FINANCIAL STATEMENTS SUBMITTED DO NOT COMPLY WITH THE NEW AUDITING AND ACCOUNTING STANDARDS? Operators whose 2012 audited financial statements do not comply with CAS or the appropriate accounting standards will be contacted and asked to revise and resubmit audited financial statements that do comply with the new standards. The revisions that are requested will depend on the nature and extent of non-compliance. Operators whose audited financial statements do not comply with the new auditing/accounting standards must have the statements revised at their own cost. Toronto Children s Services Page 5 of 6

6 ADDITIONAL RESOURCES This guide has been prepared by Toronto Children's Services to provide child care operators with a general overview of the changes in Canadian auditing and accounting standards and does not address all of the changes in the standards or their potential impacts. Operators or their auditors who require additional information are strongly encouraged to contact the CICA for additional guidance. Copies of the standards, model financial statements, and implementation guides may also be obtained directly from the CICA. Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, ON M5V 3H2 Tel: Fax: For specific information on the accounting and auditing standards, please visit: Toronto Children s Services Page 6 of 6