© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Focus on financial reporting 2016 Annual update
kpmg.ca
Contents Introduction 3
Ways KPMG can help 4
Publicly accountable enterprises 5
Financial Reporting Considerations Arising from Global Events 5
Update on IFRS 5
Canadian Regulatory Developments Applicable to all Issuers 13
US GAAP Update & US Regulatory Developments 17
Private enterprises 25
Developments in Accounting Standards for Private Enterprises 25
Not-for-profit organizations 28
Accounting Standards for Not-for-Profit Organizations
(Part III of the CPA Canada Handbook – Accounting) 28
Public sector entities 30
Developments in Public Sector Accounting Standards 30
Appendix 32
Acronyms 32
Websites 32
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3
Introduction The past couple of years have seen a number of significant new standards being released, such as
Revenue, Leases, and Financial Instruments. Additionally, there have been a number of amendments
issued to various standards. Recently the International Accounting Standards Board (IASB) confirmed that
the theme for its activities until 2021 will be “Better Communication” in financial statements. The IASB
aims to improve the communication effectiveness of financial statements by taking a fresh look at how
financial information is presented and grouped together. The US Financial Accounting Standards Board
(FASB) has also moved its focus away from the major standards (revenue recognition, leases, and financial
instruments) during the latter half of 2016, and has shifted its efforts to foundational issues, such as the
statement of cash flows and the disclosure framework. While the objectives of the IASB and FASB are
similar, the projects are no longer being jointly developed.
The IASB’s and FASB’s new Revenue and Financial Instruments Standards will take effect in 2018 (and in
2019 for the FASB’s Impairment Standard), followed by Leases one year later (in 2019). Collectively, the
adoption of these standards will require significant time and resources. With just over a year to complete
implementation efforts for those standards effective in 2018, public companies should strive to finalize
their detailed assessments as quickly as possible to allow sufficient time to design and implement new
processes and controls and calculate the transition adjustment (i.e., opening retained earnings adjustment
and restated periods if retrospectively adopting the standard).
The rapidly approaching effective dates have also drawn the attention of regulators. Both European
and US regulators have issued statements with respect to their expectation of transparent disclosures
regarding the impact of the new standards on the financial statements. Specifically, they have indicated
that they would expect disclosures of the expected impact of the new standards and status of
implementation projects as early as the 2016 annual financial statements. In November 2016, the
Ontario Securities Commission (OSC) issued Staff Notice 52-723, Financial Reporting Bulletin, which
also highlights the expectation for increasingly detailed disclosure about the expected effects of the new
standards. The OSC explained that as reporting issuers make progress in their implementation efforts,
the impact should become more reasonably estimable and reporting issuers should be able to provide
progressively more detailed qualitative and quantitative information. Although other regulators have not
as yet specifically communicated their expectations, entities should be aware that their key stakeholders
may also expect incremental disclosures.
With respect to private enterprises, the Accounting Standards Board (AcSB) has seen a change in
the private world as domestic enterprises are now operating globally and entering into more complex
transactions. As part of the strategic plan for the period 2016–2021, the AcSB goals remain focused
on a high-quality set of standards which will produce decision-useful information for creditors and other
frequent users of the financial statements while responding to the changes seen in the domestic
enterprise environment.
The AcSB recently established the Not-for-Profit Advisory Committee to provide input on standard-setting
matters of interest to private sector not-for-profit organizations (NFPOs). The objectives for the next five
years include carrying out improvement initiatives after consideration of the advice of the Advisory
Committee and feedback from stakeholders, conducting research, including considerations, on recognizing
revenues from contributions, and developing and implementing a process to manage the maintenance of
Part III – Accounting Standards for Not-for-Profit Organizations.
This publication is intended to help boards of directors, audit committee members, corporate management
and other interested parties to identify and address international, Canadian, US regulatory and other
financial reporting developments that may affect their organizations. To facilitate ease of finding the
information most relevant to your organization, we have arranged this publication by organization type
and the applicable financial reporting framework.
The information in this edition is based on pronouncements released prior to November 15, 2016. For
pronouncements released after this date, please refer to the website of the standard setter or regulator
in question, or contact your KPMG adviser.
Focus on financial reporting is of a general nature, intended solely to increase awareness of financial
reporting developments. Readers should consult the original pronouncements and/or their financial
advisers for detailed guidance on the application of these standards.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
4
Ways KPMG can help KPMG professionals assist clients in understanding their financial reporting framework, be it International
Financial Reporting Standards (IFRS), Accounting Standards for Private Enterprises (ASPE), or standards
applicable to not-for-profit or public sector organizations or pension plans. Additionally, we have a range
of publications and resources addressing developments in these areas and the implications for
Canadian enterprises.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
5
Publicly accountable enterprises Financial Reporting Considerations Arising from Global Events In addition to changes in accounting standards, recent significant global events, such as Brexit, may
also impact financial reporting. While it will be some time before the longer-term effects of these results
become clear, the short-term effect may be elevated economic uncertainty. These short-term effects
may result in increased market volatility for asset prices and exchange rates; credit rating downgrades;
potential difficulty in obtaining or renewing credit in certain sectors; and a potential for curtailment in
investment and acquisition activity until the uncertainty subsides, which may contribute to lower
short-term economic growth forecasts and higher risk premiums.
As a consequence of recent events, management will need to assess the impact of the increased
economic uncertainty and market volatility on interim and annual financial statements. Management
will also need to monitor developments in future periods to assess what impact, if any, they have on
their business risk assessment, strategy and business plans, forecasts and financial reporting.
For reporting entities that are expected to be significantly impacted by these outcomes, the financial
statement implications are likely to be a need to:
– consider the potential effects of the events on asset valuations, onerous contracts, recognition of
deferred tax assets, recoverability of receivables, hedge effectiveness testing, going concern
assessments, and covenant compliance;
– provide appropriate/enhanced disclosure so the users are able to understand the effects of the events
on the entity's financial position, financial performance and cash flows – in particular, disclosure of
risks, significant judgments and key assumptions in the financial statements;
– consider the impact of increased uncertainty on significant judgments and the sensitivity of key
assumptions underlying valuations and forward-looking estimates, such as impairment tests; and
– consideration of subsequent events to conclude whether the market volatility implies that valuations
recognised at the period-end would be materially different had they been determined today and
whether this market volatility triggers the requirement for increased disclosure in the financial
statements. Additionally, careful consideration should be given to whether disclosure is appropriate
for material changes to assumptions that have been used for impairment testing, if those assumptions
have significantly changed subsequent to the year end.
Entities may also be subject to requirements for other supplementary disclosures in interim and annual
reports outside of financial statements, which focus on trends in operations and principal business risks
and uncertainties. The scope of these requirements may be broader and more forward-looking in nature.
Determining which disclosures are appropriate requires consideration of what is important in the context
of the entity and its operations. Accordingly, when relevant, it is important that management conducts a
robust evaluation of how these events may affect their operations, including the business risks and
uncertainties they may be exposed to.
For more information, refer to Brexit: Financial reporting implications.
Update on IFRS A number of amendments were issued in prior years and became effective for annual periods beginning
on or after January 1, 2016, as follows:
– Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11)
– Disclosure Initiative (Amendments to IAS 1)
– Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16
and IAS 38)
– Annual Improvements to IFRSs 2012-2014– IFRS 5, IFRS 7, IAS 19, IAS 34
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
6
– Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12
and IAS 28)
– Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41)
– IFRS 14 Regulatory Deferral Accounts
– Equity Method in Separate Financial Statements (Amendments to IAS 27)
For a summary of these amendments, refer to 2015 edition of Focus on financial reporting 2015.
In addition, there have been a number of IFRS developments, including new and proposed standards,
amendments to existing guidance, interpretations and narrow-scope amendments, some of which could
raise significant implementation and reporting concerns for Canadian companies in the near future.
New guidance issued: New IFRSs
The following is a summary of new guidance issued by the IASB since the previous edition of Focus on
Financial Reporting was released. This edition covers IFRS developments up to November 15, 2016.
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16, the much-anticipated standard on lease accounting. IFRS 16
eliminates the current dual accounting model for lessees, which distinguishes between on-balance sheet
finance leases and off-balance sheet operating leases. Instead, IFRS 16 introduces a single, on-balance
sheet accounting model that is similar to current finance lease accounting. Lessor accounting remains
similar to current practice (i.e., lessors continue to classify leases as finance and operating leases).
All companies that lease major assets for use in their business will see an increase in reported assets and
liabilities. In addition, companies will now recognize a front-loaded pattern of expense for most leases,
even when they pay constant annual rentals. This will affect a wide variety of sectors, from retailers that
lease stores to airlines that lease aircraft. The larger the lease portfolio, the greater the impact on key
reporting measures such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
While removing the dividing line between the classification of operating and finance leases in current
guidance, the new standard makes the distinction between contracts that meet the definition of a lease
rather than a service contract even more critical, as leases will now be recognized on the balance sheet.
There are likely to be a number of arrangements that are currently accounted for as leases that fall outside
the new definition of a lease introduced in IFRS 16.
The new definition increases the focus on who controls the use of the underlying asset throughout the
term of the arrangement. On transition to IFRS 16, companies can choose whether to apply a practical
expedient to ‘grandfather’ their previous assessment of which existing contracts are, or contain, leases.
For each major lease, a lessee will recognize a liability for the present value of future lease payments.
The lease liability will be measured at amortized cost using the effective interest rate, which creates a
front-loaded interest expense. The lessee will also recognize a ‘right-of-use’ asset, which will be measured
at the amount of the lease liability plus initial direct costs, prepaid lease payments, and estimated costs to
dismantle, less any incentives received. Lessees will generally depreciate the right-of-use asset on a
straight-line basis.
IFRS 16 introduces a requirement to reassess key judgements, such as lease term, at each reporting date,
which is a significant change from current guidance. It is no longer possible to compute a lease
amortization schedule on lease commencement and roll that schedule forward at each reporting date.
Instead, companies will need to consider whether to re-measure the lease liability and right-of-use asset
at each reporting date. Significant judgement will likely be needed in determining whether there is a
change in relevant factors, or a change in the lessee’s economic incentive to exercise or not exercise
renewal or termination options.
The IASB has introduced two practical expedients which upon election permit the lessee to recognize
the lease payments for certain leases as expenses on a straight-line basis, rather than applying the
on-balance sheet accounting model. The two practical expedients relate to short-term leases – leases
with a lease term of 12 months or less – and low-value items – leases for which the underlying asset
is of low value when it is new (even if the effect is material in aggregate).
The new standard takes effect for annual reporting periods beginning on or after January 1, 2019. Early
adoption is permitted for companies that also adopt IFRS 15 Revenue from Contracts with Customers.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
7
Upon adoption, an entity will be able to choose either of the following transition approaches:
a) retrospective approach – an entity may choose to retrospectively adjust all prior periods presented; or
b) cumulative catch-up approach – an entity may choose not to restate comparatives and instead adjust
opening retained earnings at the date of initial application.
Before the effective date, companies will need to gather significant additional data about their leases,
and make new estimates and calculations. For some companies, a key challenge will be gathering the
required data. For others, more judgemental issues will dominate (e.g., identifying which transactions
contain leases).
For more details, refer to KPMG’s web article, KPMG’s SlideShare Presentation and First Impressions:
IFRS 16 Leases.
The FASB also issued its new lease accounting standard in 2016, Topic ASC 842 Leases, and while the
definition of a lease is converged between Topic 842 and IFRS 16, and both standards committed to the
on-balance sheet recognition of leases by lessees, the two standards are not fully converged. For a
summary of the FASB lease accounting standard refer to the US GAAP Update section.
New guidance issued – Amendments to existing standards
Disclosure on Changes in Financial Liabilities (Amendments to IAS 7)
For some time, investors have been calling for more disclosures on net debt, a term not defined in IFRS.
In February 2016, the IASB responded by issuing Amendments to IAS 7 Statement of Cash Flows. These
amendments require disclosures that enable users of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes arising from cash flow and non-cash changes.
One way to meet this new disclosure requirement is to provide a reconciliation between the opening and
closing balances for liabilities arising from financing activities; however, the objective could also be
achieved in other ways, which might be a relief for financial institutions or other entities that already
present enhanced disclosures in this area.
Although disclosure of changes in other assets and liabilities is possible, changes in liabilities arising
from financing activities must be disclosed separately.
The amendments are effective for periods beginning on or after January 1, 2017, with earlier
application permitted.
For more details, refer to KPMG’s publication Disclosure on changes in financing liabilities.
Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to
IAS 12)
In January 2016, the IASB issued Amendments to IAS 12 Income Taxes to clarify the deferred tax
treatment for debt instruments and the determination of ‘future taxable profit’ for the recognition of
deferred tax assets.
The amendments clarify that the existence of a deductible temporary difference on debt instruments
measured at fair value is dependent solely on a comparison of the carrying amount of an asset and its tax
base at the end of the reporting period, and is not affected by possible future changes in the carrying
amount or expected manner of recovery of the asset.
The methodology to determine future taxable profits has been clarified to state that the future taxable
profit, for the purpose of the recognition of a deferred tax asset, is not the bottom line of the tax return,
but rather the bottom line of the tax return adjusted for the reversing taxable temporary differences and
deductible temporary differences to avoid double counting. Consequently, taxable profit used for
assessing the utilization of deductible temporary differences is different from taxable profit on which
income taxes are payable.
The amendments are effective for annual periods beginning on or after January 1, 2017, with earlier
application permitted. The amendments shall be applied retrospectively. The impact on your financial
statements will depend on your tax environment and how you currently account for deferred taxes.
For more details, refer to KPMG’s publication Deferred tax assets on unrealised losses.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
8
Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2)
In June 2016, the IASB published amendments to IFRS 2 Share-based Payment – Classification and
Measurement of Share-based Payment Transactions to resolve ambiguity about how to account for certain
types of arrangements in IFRS 2 Share-based Payment.
The amendments provide clarification on the following:
– Measurement of cash-settled share-based payments – the amendments provide clarification that a
cash-settled share-based payment is measured using the same approach as equity-settled share-based
payments (i.e., the modified grant date method). The new requirements do not change the cumulative
amount of expense that is ultimately recognized, because the total consideration for a cash-settled
share-based payment is still equal to the cash paid on settlement.
– Classification of share-based payments settled net of tax withholdings – some share-based payment
arrangements permit or require the entity to withhold a portion of the shares that would otherwise be
issued to the employee, and to pay the tax authorities on the employee’s behalf. Prior to the
amendments, a question existed as to whether the portion of the share-based payment that is
withheld in these instances should be accounted for as equity-settled or cash-settled. The
amendments clarify the conditions under which a share-based payment transaction with employees
settled net of tax withholdings is accounted for as equity-settled.
– Accounting for a modification of a share-based payment from cash-settled to equity-settled – the
amendments clarify that at the modification date, the liability for the original cash-settled share-based
payment is derecognized; the equity-settled share-based payment is measured at its fair value as at the
modification date and recognized to the extent that the services have been received up to that date,
with the difference recognized in profit or loss immediately.
The new requirements could affect the classification and/or measurement of these arrangements – and
potentially the timing and amount of expense recognized for new and outstanding awards.
The amendments apply for annual periods beginning on or after January 1, 2018. As a practical
simplification, the amendments can be applied prospectively. Retrospective, or early application is
permitted if information is available without the use of hindsight.
For more details, refer to KPMG’s publication Clarifying share-based payment accounting.
Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
(Amendments to IFRS 4)
In November 2016 the IASB agreed that an entity would apply IFRS 17 (previously IFRS 4 Phase II) for
annual periods beginning on or after January 1, 2021, assuming that it is published in the first half of 2017
– well after the effective date of IFRS 9 Financial Instruments. IFRS 9 will cover a majority of an insurer’s
investments; therefore, the expected differing effective dates created concerns related to temporary
volatility and accounting mismatches in profit or loss. Some companies have also expressed concerns
about the need to implement two significant changes in accounting on different dates, which will increase
costs and complexity.
In September 2016, the IASB issued amendments to its existing insurance contracts standard, IFRS 4.
The amendments introduce two approaches that supplement existing options in the Standard that can
be used to address the temporary volatility as a result of the different effective dates of IFRS 9 and the
forthcoming insurance contracts standard.
The amendments:
– provide a reporting entity (whose predominant activity is to issue insurance contracts) a temporary
exemption from applying IFRS 9 until the earlier of:
a) the application of the forthcoming insurance contracts Standard; or
b) January 1, 2021 (to be applied at the reporting entity level) (referred to as the ‘temporary
exemption’); and
– give entities issuing insurance contracts the option to remove from profit or loss the incremental
volatility caused by changes in the measurement of specified financial assets upon application of
IFRS 9 (referred to as the ‘overlay approach’). This option will be in place until the new Insurance
Contracts standard comes into effect.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
9
Additionally, the Board decided to provide relief for investors in associates and joint ventures by permitting
a Company to not apply uniform accounting policies when the investee applies IAS 39 and the investor
applies IFRS 9, or vice versa, when applying the equity method of accounting.
In response to constituents’ concerns that the proposed disclosure requirements for the temporary
exemption from applying IFRS 9 Financial Instruments for insurance companies would result in excessive
costs and burdens on preparers, the Board has agreed to revise the disclosure requirements. The decision
will limit the need to perform solely payments of principal and interest assessments to those financial
assets that are not held for trading or managed on a fair value basis.
For more details, refer to KPMG’s publication Insurance – Fine-tuning the forthcoming standard. For more
details on the Insurance Contracts project refer to the Update on major projects section.
Clarifications to IFRS 15 Revenue from Contracts with Customers
In May 2014, the IASB and the FASB issued their new joint standard on revenue recognition –
IFRS 15/ASC Topic 606 Revenue from Contracts with Customers. The standards are effective for annual
periods beginning January 1, 2018 (for US public business entities: for fiscal year beginning after
December 15, 2017, and interim periods within those fiscal years).
Since the previous edition of Focus on financial reporting, the IASB and FASB have continued
redeliberations of the standards and have issued clarifications with respect to a number of topics. While
the IASB has issued a single set of amendments, the FASB has published a series of amendments. While
the new Revenue Standards are no longer completely converged, the IASB and FASB hope that the
wording differences will not result in significantly different outcomes in practice. For additional information
on the FASB amendments refer to the US GAAP Update section.
In April 2016, the IASB issued its final amendments to IFRS 15 – Clarifications to IFRS 15 Revenue from
Contracts with Customers. The amendments do not change the underlying principles of the Standard but
provide clarification on how those principles should be applied. The amendments include new examples
and clarification on the following guidance in IFRS 15:
– identifying performance obligations (the promise to transfer a good or a service to a customer) in a
contract (step 2 of the revenue model);
– determination of when revenue from granting a license of intellectual property should be recognized –
at a point in time or over time;
– determination of whether an entity is a principal (the provider of a good or service) or an agent
(responsible for arranging for the good or service to be provided); and
– the provision of transitional relief to reduce cost and complexity for an entity when it first applies the
new Standard.
Comments and industry feedback have indicated that the implementation efforts are more significant and
time-consuming than anticipated. Accordingly, entities are encouraged to begin the implementation
process, if not already done, and should strive to finalize their detailed assessments as quickly as possible
to allow sufficient time to design and implement new processes and controls, identify the technology
systems affected by the new data and accounting requirements, and evaluate the effect of the new
Standard on other functions and processes, such as financial planning and analysis, business operations,
and legal.
For additional information, refer to KPMG’s publications for IFRS and US GAAP, Revenue Issues In-Depth
and Revenue Transition Options: What is the best option for your business? For the latest news on the
Revenue Standard and additional publications, refer to IFRS – Revenue and Revenue: FASB Updates
Revenue Standard.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
10
Guidance currently under development – Update on major projects
The following is a summary of guidance currently under development by the IASB:
Update on Insurance Contracts Project
In June 2013, the IASB proposed a new accounting and reporting model for insurance contracts by issuing
a revised exposure draft. The proposals apply not only to entities that are generally considered insurance
entities, but to all entities that:
– issue insurance or reinsurance contracts;
– issue or hold reinsurance contracts;
– issue investment contracts with a discretionary participation feature (provided that they also issue
insurance contracts); or
– issue certain financial guarantees.
Since the previous edition of Focus on financial reporting, the Board completed its planned technical
redeliberations and instructed the Staff to begin the balloting processing for the forthcoming insurance
contracts standard. The new insurance contracts standard is expected in the first half of 2017 and,
assuming that target is met, will have an effective date of January 1, 2021.
In their technical redeliberations and discussions, the Board has addressed the following:
– the level of aggregation for recognition of onerous contracts and allocation of the contractual service
margin (CSM);
– principles-based allocation of insurance finance income or expenses to profit or loss;
– the provision of guidance on what changes in the fulfilment cash flows relate to future service and
thus, adjust the CSM, and what changes relate to current or past services and thus, do not adjust
the CSM; and
– that the variable fee approach should not apply to reinsurance contracts issued or held.
The impacts for insurers are significant and implementation will be complex. The challenges involved
reach beyond accounting and will require significant changes to measurement and reporting of
performance, asset-liability and capital management, broad business decisions, systems and processes,
and resources.
For more details, refer to KPMG’s publication IFRS Newsletter – Insurance and KPMG’s website
IFRS – Insurance.
Guidance currently under development – Narrow-scope amendments
Annual Improvements to IFRSs 2014-2016 Cycle
In November 2015, as part of its process to make non-urgent but necessary amendments to IFRSs,
the IASB issued an exposure draft proposing narrow-scope amendments to the following standards:
– IFRS 1 First-time Adoption of International Financial Reporting Standards
– Deletion of short-term exemptions for first-time adopters.
– IAS 28 Investments in Associates and Joint Ventures
– clarification that a venture capital organization or other qualifying entity may elect to measure its
investments in an associate or joint venture at fair value through profit or loss. This election can be
made on an investment-by-investment basis.
– IFRS 12 Disclosure of Interests in Other Entities
– clarification that the disclosure requirements for interests in other entities also apply to interests
that are classified as held for sale or distribution.
The IASB expects to publish the final amendments in December 2016. The expected effective date of
the amendments is for annual periods beginning on or after January 1, 2018.
For additional information, refer to IASB Work Plan.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
11
Transfers of Investment Property (Amendments to IAS 40)
In November 2015, the IASB published the Exposure Draft Transfers of Investment Property (Proposed
amendment to IAS 40).
The proposed amendments:
– state that an entity shall transfer a property to, or from, investment property when, and only when,
there is a change in use of a property supported by evidence that a change in use has occurred; and
– re-characterize the list of circumstances when there is a change in use as a non-exhaustive list of
examples of evidence that a change in use has occurred instead of an exhaustive list.
The Board expects to publish the final amendments in December 2016. The expected effective date of
the amendments is for annual periods beginning on or after January 1, 2018.
For additional information refer to IASB Work Plan.
Exposure Draft: Definition of a Business and Accounting for Previously Held
Interests (Proposed Amendments to IFRS 3 and IFRS 11)
In June 2016, the IASB issued the Exposure Draft: Definition of a Business and Accounting for Previously
Held Interests (Proposed Amendments to IFRS 3 and IFRS 11).
As part of the Post-implementation Review (PIR) of IFRS 3, it was identified that stakeholders find it
difficult to apply the definition of a business in IFRS 3. The proposed amendments are intended to provide
entities with clearer application guidance to help distinguish between a business and a group of assets
when applying IFRS 3.
The amendments propose that if substantially all the fair value of the gross assets acquired (i.e., the
identifiable assets and non-identifiable assets) is concentrated in a single identifiable asset or group of
similar identifiable assets, then the set of activities, together with the assets acquired, is not a business.
As IFRS 3 is the result of a joint project between the IASB and the FASB, the proposed amendments to
IFRS 3 and the Proposed Accounting Standards Update Clarifying the Definition of a Business, issued by
the FASB in November 2015, are based on substantially converged tentative conclusions.
To address diversity in practice regarding acquisitions of interests in businesses that are joint operations,
the IASB has also proposed amendments to IFRS 3 and IFRS 11. The proposed amendments are intended
to clarify the accounting for previously held interests in the assets and liabilities of a joint operation when
an entity obtains control or joint control of a business that is a joint operation.
The proposed amendments will clarify that on obtaining:
a) control, an entity should remeasure previously held interests in the assets and liabilities of the joint
operation in the manner described in paragraph 42 of IFRS 3; and
b) joint control, an entity should not remeasure previously-held interests in the assets and liabilities of
the joint operation.
The comment period ended October 31, 2016.
For more details, refer to KPMG’s publication Clarifying business acquisition accounting.
Proposed changes: IAS 16 Property, Plant and Equipment: Proceeds before
Intended Use
The IFRS Interpretations Committee (the Committee or IFRIC) received a request to clarify how net
proceeds from selling items produced while testing an item of property, plant and equipment (PPE)
under construction should be recognized.
Current guidance in IAS 16(b) explains that the cost of PPE includes ‘any costs directly attributable to
bringing the asset to the location and condition necessary for it to be capable of operating in the manner
intended by management.’ Additionally, paragraph 17(e) provides examples of directly attributable costs,
including the costs of testing whether the asset is functioning properly after deducting the net proceeds
from selling any items produced while bringing the asset to that location and condition.
The Committee issued a tentative agenda decision in July 2014, and due to concerns raised in comment
letters received, the Committee then explored additional options to provide clarification with respect to
the accounting for the costs of PPE.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
12
In 2016, the Committee recommended narrow-scope amendments to IAS 16 to prohibit the deduction of
proceeds from the sale of items produced while making an item of PPE available for use from the cost of
that PPE. Consequently, an entity would recognize the proceeds from selling such items, and the costs of
producing those items, in profit or loss applying the applicable Standards.
In October 2016, the IASB has tentatively decided to propose the amendments to IAS 16 and an exposure
draft is expected in 2017.
For additional information refer to IASB Work Plan.
Guidance currently under development – Proposed interpretations of
standards (draft IFRICs)
Draft IFRIC: Foreign Currency Transactions and Advance Consideration
Under current IFRS, foreign currency transactions are recorded in the entity’s functional currency by
applying the spot exchange rate on the date of the transaction (i.e., on the date when the transaction
first qualifies for recognition).
However, when foreign currency consideration is paid or received in advance of the item it relates to –
which may be an asset, an expense or income – IAS 21 The Effects of Changes in Foreign Exchange
Rates is not clear on how to determine the date of the transaction. This has resulted in diversity in practice
when translating the related item. To address this, the Committee has issued a Draft Interpretation.
The Interpretation would apply when an entity:
– pays or receives consideration denominated or priced in a foreign currency; and
– recognizes a non-monetary prepayment asset or deferred income liability (e.g., non-refundable advance
consideration) before recognizing the related item at a later date.
The date of the transaction – which is required to determine the spot exchange rate for translation – would
be the earlier of:
– date of initial recognition of the non-monetary prepayment asset or deferred income liability; and
– date that the related item is recognized in the financial statements.
The Committee has tentatively decided that the effective date of the interpretation should be January 1,
2018, with earlier application permitted. The interpretation is expected to be released in December 2016.
For additional information, refer to KPMG’s publication IFRS Breaking News – Foreign currency
transactions – Advance consideration.
Draft IFRIC: Uncertainty over Income Tax Treatments
The Committee issued a draft interpretation that seeks to clarify the accounting for income tax treatments
that have yet to be accepted by tax authorities, while also aiming to enhance transparency. More
specifically, the draft interpretation aims to address the issue: how do you reflect uncertainty in accounting
for income tax?
The Committee completed its discussions of matters raised in the comment letters and in
September 2016, tentatively decided to retain the following proposals included in the draft interpretation:
– the scope – the Interpretation would apply to income taxes within the scope of IAS 12 Income Taxes,
and would not explicitly address interest and penalties;
– the requirement for an entity to assume that a taxation authority with the right to do so will
(re)-examine amounts reported to it, and have full knowledge of all relevant information;
– using a ‘probable’ threshold for the recognition of the effect of uncertainty, and the measurement
methods to reflect uncertainty;
– the reference to relevant disclosure requirements in IAS 1 Presentation of Financial Statements
and IAS 12, and to include that reference in the Application Guidance; and
– the transition requirements.
For more details, refer to KPMG’s publication IFRS Breaking News – Accounting for uncertain tax
treatments. For additional updates refer to the IASB Work Plan.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
13
IFRS Interpretations Committee Agenda Decisions
IAS 12 Income Taxes – Expected Manner of Recovery of Indefinite Life
Intangible Assets when Measuring Deferred Tax
The Committee discussed a request for clarification on how to determine the expected manner of
recovery of an indefinite life intangible asset for the purposes of measuring deferred tax. The Committee
noted that an entity applies the principle and requirements in paragraph 51 and 51A of IAS 12 Income
Taxes when measuring deferred tax on an indefinite life intangible asset, and as a result, an entity
determines the expected manner of recovery of the carrying amount of the indefinite life intangible asset,
and reflects the tax consequences that follow from that expected manner of recovery.
In November 2016, the Committee issued an agenda decision that prohibits applying the requirements in
paragraph 51B of IAS 12 for non-depreciable property, plant and equipment by analogy to intangible assets
with indefinite useful life when measuring deferred tax. Application of the principle in paragraph 51B
would result in deferred tax assets or liabilities being measured using the tax rate applicable to the sale
of an indefinite life intangible assets, which is the rate currently used by a number of entities. Depending
on individual facts and circumstances, entities may need to reconsider the tax rate applied in calculating
deferred taxes arising from indefinite life intangible assets.
In light of the existing requirements in IFRS Standards, the Committee determined that neither an
interpretation nor an amendment to the Standard is considered necessary and consequently, this issue
was not added to its agenda. Entities should consider the potential implications on financial reporting, and
if impacted by these clarifications, should account for the resulting changes in deferred taxes as a change
in accounting policy which is effective immediately.
For additional information refer to the IFRIC Updates.
Canadian Regulatory Developments Applicable to all Issuers The following is a summary of recent Canadian securities regulatory rules, instruments, policies, and
documents that are applicable to a broad range of issuers. The summary discusses a number of proposed
and final amendments, as well as staff notices issued since the previous edition of Focus on financial
reporting. As a result of the harmonization efforts of the Canadian Securities Administrators (CSA),
securities markets are governed by a number of largely harmonized national or multilateral instruments,
which are on CSA member websites. Many of the links in this document refer to the Ontario Securities
Commission (OSC) website; however, readers should refer to the member site in their own jurisdiction.
Ongoing Requirements for Issuers and Insiders
Non-GAAP Financial Measures
In January 2016, CSA Staff Notice 52-306 (Revised) Non-GAAP Financial Measures, was issued. This
notice reflects the clarifying amendments to IAS 1 Presentation of Financial Statements regarding
additional sub-totals presented in financial statements. Since guidance is provided in IAS 1 on additional
sub-totals, the CSA has removed that guidance from the notice. The notice now focuses primarily on the
disclosures required when non-GAAP measures are disclosed. These disclosures are consistent with the
prior notice.
Guidance is also provided on disclosing additional subtotals before filing financial statements and the
presentation of additional subtotals in the statement of cash flows.
For additional details, refer to CSA Staff Notice 52-306 (Revised).
Amendments to Early Warning System and Take-Over Bids
In February 2016, the CSA announced Notice of Amendments to Early Warning System comprising
amendments to MI 62-104 Take-Over Bids and Issuer Bids and NI 62-103 Early Warning System and
Related Take-Over Bids and Insider Reporting Issues, and changes to NP 62-203 Take-Over Bids and
Issuer Bids. The amendments, which came into effect in May 2016, harmonize the take-over bid and
issuer bid regime for all Canadian jurisdictions.
The three key elements of the take-over bid and issuer bid regime are:
i. an extension of the minimum bid period to 105 days;
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
14
ii. an irrevocable minimum tender condition of more than 50% of the outstanding securities; and
iii. a requirement to extend the bid period by at least 10 days once the minimum tender condition has
been met and all other terms and conditions of the bid have been complied with or waived.
The amendments enhance the quality and integrity of the take-over bid regime and increase the ability of
the security holders to make educated and coordinated tender decisions while providing boards with more
time and discretion in forming a response to a take-over bid.
The changes to Canada’s early warning system, although not as extensive as initially proposed, require
disclosure of any decreases in ownership, control or direction of 2% or more or when a security holder’s
ownership, control or direction falls below the early warning threshold of 10%. The amendments provide
greater transparency about significant holdings of reporting issuers' securities under the early warning
system. They are intended to enhance the quality and integrity of the early warning system in a manner
that is suitable for the Canadian public capital markets.
For more information, refer to NI 62-103, Early Warning System and Related Take-Over Bids and Insider
Reporting Issues and NP 62-203, Take-Over Bids and Issuer Bids.
Insider Reporting
In February 2016, OSC Staff Notice 51-726 Report on Staff’s Review of Insider Reporting and User Guides
for Insiders and Issuers was released, announcing the findings from an issue-oriented review of the
continuous disclosure records and insider filings of 100 reporting issuers whose principal regulator is
Ontario. The OSC found insider reporting deficiencies in 70% of the issuers (requiring at least one insider
to file a remedial filing), and issued comments to approximately 20% of the reporting issuers reviewed,
requesting that that they implement, on a going-forward basis, an internal process to reconcile insiders’
reporting holdings to filings. Overall, approximately 15% of the 1500 reporting insiders required new
insider reports to be filed. There was minimal correlation between the size of the reporting issuer and
the occurrence of material insider reporting deficiencies.
The report also highlighted various non-material deficiencies and other common findings and made
recommendations to improve the quality of insider reporting and to improve insider trading policies.
Appendices to the report provide checklists highlighting some of the key points reporting insiders and
reporting issuers should consider, and also example scenarios in a question and answer format.
For more information, refer to NI 51-726, Report on Staff’s Review of Insider Reporting and User Guides
for Insiders and Issuers.
Summary Findings from CSA Continuous Disclosure Reviews
In July 2016, the CSA issued Staff Notice 51-346 Continuous Disclosure Review Program Activities for the
Fiscal Year Ended March 31, 2016, which summarized the results of their continuous disclosure reviews.
The goal of the program is to improve the completeness, quality and timeliness of continuous disclosure
provided by reporting issuers in Canada. This program was established to assess the compliance of
continuous disclosure documents and to help issuers understand and comply with their obligations under
the continuous disclosure rules so that investors receive high quality disclosure.
The fiscal 2016 results were comparable to those of 2015, with 62% of review outcomes requiring issuers
to take action to improve and/or amend their disclosure. In some cases, issuers were referred to
enforcement, cease traded or placed on the default list.
For details, refer to CSA Staff Notice 51-346.
OSC Whistleblower Program
In July 2016, the OSC released OSC Policy 15-601 Whistleblower Program, which became effective
July 14, 2016.
The policy provides guidance on the Whistleblower Program (WP), including the practices generally
followed by the OSC and by staff in administering the WP in accordance with the requirements of
Ontario securities law, the nature of the information and criteria that would make an individual eligible
for a whistleblower award, and the factors considered in determining eligibility for, and the amount of,
a whistleblower award.
For more information, refer to OSC Policy 15-601.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
15
Proposed Changes to TSX Disclosure Requirements for Compensation
Arrangements
In May 2016, the Toronto Stock Exchange (TSX) proposed amendments to disclosure requirements for
security based compensation arrangements, such as stock option plans or similar plans that would result
in the issuance of securities from treasury. A new disclosure form, Form 15, requires disclosures in a
tabular format.
TSX-listed companies will be required to include in their proxy circulars:
– if an outstanding award includes a multiplier, the multiplier must be explained and the maximum
payout must be used when disclosing the number of listed securities issuable;
– annual burn rate for the past fiscal year would be required in all proxy circulars. The annual burn rate for
the past three years would be required when a compensation plan is being approved by shareholders;
and
– default vesting provisions would have to be summarized for all arrangements, including whether
vesting is time-based and/or performance based.
The TSX no longer requires listed entities to disclose in their proxy circulars information about the
maximum number of securities available to insiders, the method for determining exercise prices and
formula for calculating market appreciation of Stock/Share Appreciation Rights (SARs), the ability to
transform stock options into SARs, terms for stock options, causes of cessation of entitlements,
previously approved amendments, assignability, financial assistance, and entitlements subject to
shareholder ratification.
The comment period for the proposal ended June 27, 2016.
For details, refer to TSX Request for Comments – Amendments to TSX Company Manual.
TSX Proposes Issuer Website Disclosures
In May 2016, the TSX proposed amendments that would introduce a requirement that listed issuers
maintain a publicly accessible website posting current copies of: constating documents; corporate
policies that impact meetings of security holders and voting; security holder rights plans; security based
compensation arrangements such as stock option plans; and certain corporate governance documents,
including charters of board committees, code of ethical business conduct, position descriptions, board
mandate, whistle-blower policies, anti-corruption polices and other environmental and social policies.
Some of the above documents duplicate documents required under Canadian securities laws to be filed
on the System for Electronic Document Analysis and Retrieval (SEDAR).
The comment period for the proposal ended June 27, 2016.
For details, refer to TSX Request for Comments – Amendments to TSX Company Manual.
Proposed changes to the Canada Business Corporations Act
On September 28, 2016, after a 3-year consultation process, the Canadian federal government introduced
Bill C-25: An Act to amend the Canada Business Corporations Act et al., the first substantive review of the
Canada Business Corporations Act (the CBCA) in 15 years. The proposed amendments apply to CBCA
corporations with publicly traded securities or which are otherwise considered to be distributing
corporations. The amendments are intended to, among other things: reform some aspects of the process
for electing directors by implementing a majority vote standard for director elections, requiring annual
director elections and prohibiting slate elections; modernize communications with shareholders; clarify
the prohibition of bearer shares; and require certain corporations to provide shareholders with disclosure
related to diversity among directors and senior management.
The proposed amendments could bring about significant changes to the corporate governance of CBCA
corporations. CBCA corporations and their boards of directors are encouraged to carefully review Bill C-25
and consider its potential impact.
For more information, refer to the Parliament of Canada website.
Reporting under the Extractive Sector Transparency Measures Act
On June 1, 2015, the Extractive Sector Transparency Measures Act (ESTMA) came into effect. ESTMA
requires companies that are engaged in the commercial development of oil, gas and minerals to report
annually on their payments to governments in all jurisdictions globally.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
16
Reports are due no later than 150 days after the end of the respective financial year. Therefore, the first
ESTMA Annual Report will be due no later than May 30, 2017 and will cover payments made from
January 1, 2016 – December 31, 2016.
For details, visit KPMG in Canada's ESTMA site.
Updates Related to Prospectus Rules
Simplified Rights Offering
In December 2015, the CSA repealed NI 45-101 Rights Offering, and amended NI 45-106 Prospectus
Exemptions, to bring into force new rules relating to prospectus-exempt rights offering.
A rights offering is an offering by an issuer to its existing security holders, who receive rights entitling
them to purchase additional securities, typically at a discounted price. This type of financing would
require a prospectus unless the issuer can rely on a prospectus exemption as contained in the amended
NI 45-106.
The new rules eliminate any requirement for the securities regulator’s approval. This change is expected
to significantly reduce the time to complete a rights offering. TSX approval of the proposed offering is
required before the offering can proceed.
The new rules also permit an increase in the number of securities that can be issued by way of a rights
offering from 25% to 100% of the issuer’s already outstanding securities in any 12-month period. The
new rules came into effect December 8, 2015.
For more information, refer to NI 45-101 Rights Offering.
Exempt Market Initiatives
In January 2016, the CSA and OSC both issued notices summarizing various initiatives completed
to modernize the exempt market regulatory regime in Canada; CSA notice 45-314 Updated List of
Current Exempt Market Initiatives and Summary of Key Capital Raising Prospectus Exemptions in
Ontario, respectively.
Additional information is available on the OSC website.
Exempt Market Filings
NI 45-106 Prospectus Exemptions has been amended to introduce a new harmonized report of exempt
distributions, Form 45-106F1 Report Exempt Distribution, which became effective June 30, 2016.
Investment fund issuers and non-investment fund issuers that distribute securities under certain
prospectus exemptions are required to file Form 45-106F1.
In April 2016, the CSA released Staff Notice (SN) 45-308 Guidance for Preparing and Filing Reports of
Exempt Distribution under NI 45-106 Prospectus Exemptions to assist issuers, underwriters and their
advisors to prepare for the transition to the new report. The SN was revised in September 2016.
Also in April 2016, members of the CSA, except for the British Columbia Securities Commission and the
Ontario Securities Commission, published Multilateral CSA Staff Notice 13-323 Frequently Asked
Questions About Making Exempt Market Offering and Disclosure Filings on SEDAR. This SN provides
clarity regarding which exempt market filings will be required to be filed on SEDAR along with their
respective SEDAR access level and required filing format.
Refer to NI 45-106, Prospectus Exemptions, SN 45-308, Guidance for Preparing and Filing Reports on
Exempt Distribution under NI 45-106 Prospectus Exemptions and SN 13-323, Frequently Asked Questions
About Making Exempt Market Offering and Disclosure Filings on SEDAR.
Proposed OSC Rule to Modernize Framework for Distribution of Securities
Outside of Ontario
In June 2016, the OSC proposed OSC Rule 72-503 Distributions Outside of Canada and Companion Policy
which would replace existing guidance found in a note entitled “Interpretation Note 1 Distributions of
Securities outside Ontario.” The interpretation note provided guidance that, where an issuer and
intermediaries take “reasonable precautions” to ensure that securities distributed outside of Ontario
“come to rest” with investors outside of Ontario, and there are no other circumstances that would call
into question the integrity of Ontario capital markets, the OSC would take the view that a prospectus was
not required, nor was an exemption from the prospectus requirements necessary.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
17
The proposed rule would also provide an exemption from the dealer and underwriter registration
requirement in respect of a distribution of securities to individuals or companies outside of Canada,
subject to certain conditions.
Issuers relying on most of the exemptions will be required to file the Proposed Form 72-503F Report of
Distributions Outside of Canada electronically in Ontario, pursuant to OSC Rule 11-501 Electronic Delivery
of Documents to the Ontario Securities Commission.
Comments on the proposed rule were due September 28, 2016.
Industry Specific Guidance
Annual Summary Report for Dealers, Advisers and Investment Fund Managers
In July 2016, the OSC published SN 33-747 Annual Summary Report for Dealers, Advisers and Investment
Fund Managers for registered firms and individuals (collectively, registrants) that are directly regulated by
the OSC. The annual report provides an update on the OSC Registrant Outreach program, summarizes
current trends in registration and in deficiencies identified through compliance reviews, highlights the
types of regulatory action taken regarding serious non-compliance and misconduct, summarizes new and
proposed rules and policy initiatives, and provides details of where registrants can get more information
about their regulatory obligations.
For additional details, see SN 33-747, Annual Summary Report for Dealers, Advisers and Investment Fund
Managers.
Other industry specific guidance that has been released:
Summary Report for investment fund and structured product issuers
Proposed Changes to NI 81-102 Investment Funds
Conflicts of Interest Issues for Captive Dealers
Cost Disclosure, Performance Reporting and Client Statements
Proposals to Enhance the Obligations of Advisers, Dealers and Representatives toward their Clients
Amendments to Registration Requirements
Proposed Modernization of Investment Fund Product Regulation
US GAAP Update & US Regulatory Developments For Canadian SEC registrants that have chosen to adopt US GAAP as their reporting framework, the
challenge to keep abreast of developments in US GAAP remains. KPMG US’s website provides the
resources needed to help stay current with US GAAP and regulatory developments.
The Current Developments: US publications, available on the Audit Committees Institutes section on
kpmg.ca, summarize major developments including upcoming financial reporting matters and ongoing
standard setting and other activities, including FASB, EITF, SEC and PCAOB activities. They also discuss
the status of IASB and FASB projects, including revenue recognition, leases and financial instruments.
Highlighted below is a summary of some of the significant financial reporting issues in 2016 that may
affect companies reporting under US GAAP. For more detailed information, please refer to the links
following the summary and the Current Developments: US publications.
A number of standards were issued in prior years and became effective for annual periods beginning on
or after January 1, 2016, as follows:
– Consolidation Guidance
– Customer’s Accounting for Fees in a Cloud Computing Arrangement
– Presentation of Debt Issuance Costs
– Accounting for Share-based Payments with Certain Performance Targets
– Going Concern
– Eliminating the Concept of Extraordinary Items
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18
For a summary of these amendments and a complete listing of the standards effective in 2016 refer to
Focus on financial reporting 2015 and Current Developments: US.
New guidance issued and effective in 2017
The following are new accounting standards affecting public business entities for the first time in 2017,
more precisely for fiscal years, including interim periods within those years, beginning after December 15,
2016.
Effect of Derivative Contract Novations on Existing Hedge Accounting
Relationships
The FASB issued ASU 2016-05 which clarifies that a change in one of the parties to a derivative contract
(through novation) that is part of a hedge accounting relationship does not, by itself, require de-designation
of that relationship, as long as all other hedge accounting criteria continue to be met.
For more information, refer to FASB ASU 2016-05 and Defining Issues 15-53.
Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued ASU 2016-06 which clarifies that determining whether the economic
characteristics of a put or call are clearly and closely related to its debt host requires only an assessment
of the four-step decision sequence outlined in FASB ASC paragraph 815-15-25-42. Additionally, entities are
not required to separately assess whether the contingency itself is clearly and closely related.
For more information, refer to FASB ASU 2016-06 and Defining Issues 15-53.
Balance Sheet Classification of Deferred Taxes
As part of the initiative to reduce complexity in accounting standards, the FASB issued ASU 2015-17 to
simplify the presentation of deferred income taxes. The amendments in this Update require that deferred
tax liabilities and assets be classified as non-current in a classified statement of financial position. The
amendments in this Update apply to all entities that present a classified statement of financial position.
Share-based Payment Accounting
In March 2016, the FASB issued a standard that simplifies the accounting for share-based payment
transactions.
Under the new standard, all companies:
– will record all excess tax benefits and tax deficiencies as an income tax benefit or expense in the
income statement (i.e., the standard eliminates the additional paid-in capital (APIC) pool), and classify
excess tax benefits as an operating activity in the statement of cash flows;
– may elect an accounting policy to either (a) estimate the number of forfeitures (current US GAAP),
or (b) account for forfeitures when they occur;
– can withhold up to the maximum individual statutory tax rate without classifying the awards as a
liability; and
– will classify the cash paid to satisfy the statutory income tax withholding obligation as a financing
activity in the statement of cash flows.
For more information, refer to Current Developments: US.
New guidance issued – effective in future years
Leases (ASC Topic 842)
In February 2016, the FASB issued its new lease accounting standard, which requires lessees to recognize
most leases, including operating leases, on-balance sheet via a right of use asset and lease liability.
Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less)
off-balance sheet, consistent with current operating lease accounting. The critical accounting
determination will be whether a contract is or contains a lease. The lease classification distinction,
which remains broadly consistent with current US GAAP, will affect how lessees measure and present
lease expense and cash flows. After a lease is identified, a lessee will classify a lease as an operating
or finance lease. Under this model, many property leases would have straight-line recognition of lease
expense (operating lease), whereas many leases of other assets would have front-loaded recognition
of lease expense (finance lease).
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 19
In contrast to lessee accounting, the new standard does not make extensive changes to lessor
accounting. However, the FASB changed certain aspects of the lessor accounting guidance that lessors
should be mindful of (e.g., changes to the definition of initial direct costs and accounting for collectability
uncertainties in a lease). Those changes were made principally to align with changes made to the lessee
accounting guidance (e.g., the definition of a lease and the definition of lease payments) and to align key
aspects of the lessor accounting guidance with the new revenue standard (e.g., to align the guidance
about allocating consideration in a multi-element arrangement). In addition, the new standard prospectively
eliminates leveraged lease accounting.
The standard is effective for public companies for interim and annual periods in fiscal years beginning
after December 15, 2018. For all other entities, the standard is effective for fiscal years beginning after
December 15, 2019, and interim periods in fiscal years beginning one year later. All entities may adopt
the standard immediately.
The new standard requires a modified retrospective transition, which means that both lessees and lessors
will apply the new guidance at the beginning of the earliest period presented in the financial statements.
However, lessees and lessors may elect to apply certain practical expedients on transition. An entity that
elects to apply all of the practical expedients generally will continue to account for leases that commence
before the effective date based on current US GAAP, unless the lease is modified (or re-measured) on or
after the effective date. However, lessees will recognize operating leases on-balance sheet each reporting
period (including retrospectively) at the present value of the remaining minimum rental payments (as that
term is applied in current US GAAP). The new standard provides specific transition guidance for sale-
leaseback transactions, build-to-suit leases, leveraged leases, and amounts previously recognized for
leases in business combinations.
For additional information, refer to FASB ASU 2016-09, KPMG’s Current Developments: US and Leases:
Issues in Depth.
Revenue (ASC Topic 606)
The FASB issued three additional amendments to the recently issued revenue standard. These
amendments are expected to be the last amendments to the new revenue recognition model before it
becomes effective January 1, 2018 for US public companies with a calendar year-end. The additional
amendments address:
– licenses of intellectual property, including whether the performance obligations are satisfied over time
or at a point in time, how to apply the sales and usage based royalties exception, and evaluating
restrictions when assessing how many licenses are granted;
– determination of which goods and services are distinct in the context of the contract, and therefore
constitute separate performance obligations;
– how to apply the control principle to conclude whether the company is the principal or the agent in the
transaction; and
– other practical expedients and clarifications, including (1) the measurement date for non-cash
consideration, (2) a practical expedient for reporting sales taxes, (3) additional practical expedients for
transition, and (4) additional guidance about recognizing non-refundable payments when collectability of
the entire arrangement consideration is not probable and the arrangement therefore does not qualify as
a contract with a customer.
In May 2016, the FASB also proposed minor technical corrections related to the revenue standard. The
proposed guidance would:
– supersede the preproduction cost guidance related to long-term supply arrangements;
– clarify the requirements for impairment testing of contract costs;
– clarify the onerous contract test for construction- and production-type contracts;
– clarify the scope of the revenue standard with respect to insurance contracts and fixed odds wagering
contracts; and
– provide additional relief from the disclosure requirements for remaining performance obligations
for specific situations in which an entity need not estimate variable consideration in order to
recognize revenue.
In September 2016, the FASB issued four additional technical corrections and improvements on narrow
aspects of the new revenue recognition guidance.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20
The corrections proposed will:
– clarify that guarantee fees (other than product or service warranties) are not in the scope of the new
revenue guidance;
– more closely align an example in the standard with the new guidance on presentation of receivables;
– eliminate a reference to a contract liability in an example on refund liabilities; and
– retain today’s guidance on the accrual of advertising costs.
The proposed amendments would address narrow issues and would not change any of the principles in
ASC Topic 606 or the consequential amendments.
The Transition Resource Group for Revenue Recognition (TRG) was formed to discuss issues arising from
implementation of the new standard and inform the FASB about those implementation issues. In the past
couple of years the TRG has met 8 times and discussed more than 50 implementation issues. The TRG
has generally agreed on the following implementation issues:
– companies should not write off contract assets that exist at the time of certain contract modifications;
– companies should not recognize work-in-process assets for performance obligations satisfied over time
because control transfers to the customer continuously as the company performs;
– offers for discounted goods or services that accumulate from prior purchases typically provide the
customer with a right. Companies will need to apply judgment in determining whether they have
provided a right when other customers who have made no prior purchases also receive discount
offers, and in determining whether the right, if any, is material. The FASB staff will perform additional
outreach to understand how the travel and entertainment industry would apply the guidance to loyalty
status programs; and
– loan servicing fees and financial guarantee fees earned by financial institutions fall outside the scope of
the new revenue standard, while deposit-related fees are within the scope.
At the most recent TRG meeting in November 2016, the TRG discussed:
– transfer of control when a performance obligation is satisfied over time;
– recognition and measurement of incremental costs of obtaining a contract as an asset and estimating
the period of amortization;
– accounting for a sales-based or usage-based royalty promised in exchange for a license of intellectual
property that includes a minimum guaranteed amount; and
– accounting for upfront payments made to customers.
The improvements that the FASB has made in response to the feedback should increase consistent
application of the standard, which benefits financial statement users, and should reduce cost and
complexity both at the implementation and on an ongoing basis.
For additional information, refer to KPMG’s Current Developments: US, publications Latest on Revenue
Recognition, Revenue: Issues In-Depth, KPMG’s Accounting Change Survey, and Revenue – Transition
Options, FASB ASU 2016-08, ASU 2016-10, ASU 2016-12, and FASB – Transition Resource Group
for Revenue.
New Accounting for Equity Investments and Financial Liabilities
The FASB issued the first of three standards related to accounting for financial instruments. The new
standard will significantly change the income statement effect of equity investments and the recognition
of changes in fair value of financial liabilities when the fair value option is elected. The changes include:
– measuring equity investments with readily determinable fair values at fair value and recognizing
changes in fair value in net income;
– choosing whether to measure equity investments without readily determinable fair values at (1) fair
value or (2) cost adjusted for changes in observable prices minus impairment. Changes in
measurement under either alternative must be recognized in net income;
– recognizing changes in fair value related to instrument-specific credit risk in other comprehensive
income if the fair value option for financial liabilities is elected; and
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
21
– assessing valuation allowances for deferred tax assets related to available-for-sale debt securities in
combination with their other deferred tax assets.
The standard is effective for public business entities for fiscal years beginning after December 15, 2017,
including interim periods in those fiscal years (i.e., January 1, 2018, for public companies with a calendar
year-end). For all other entities, it is effective for fiscal years beginning after December 15, 2018, and
interim periods in fiscal years beginning after December 15, 2019. Entities may early adopt the provisions
related to the recognition of changes in fair value of financial liabilities.
For more information, refer to FASB ASU 2016-01 and Defining Issues 16-1.
Financial Instruments – Credit Losses
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard will
significantly change how companies measure and recognize credit impairment for many financial
instruments.
The new current expected credit loss model will require companies to immediately recognize an estimate
of credit losses expected to occur over the remaining life of the financial assets that are in the scope of
the standard. Companies may need to collect more data and significantly change their systems,
processes, and internal controls to comply with the requirements of the new standard.
The FASB also made targeted amendments to the current impairment model for available-for sale debt
securities.
The changes are effective for public business entities that are SEC filers, for annual and interim periods in
fiscal years beginning after December 15, 2019, and for non-SEC filers for annual and interim periods in
fiscal years beginning after December 15, 2020.
For more information, refer to FASB ASU 2016-13 and Defining Issues 16-23, Latest on Financial
Instruments, Q&As on Recognition and Measurement.
Cash Flow Classification Guidance
With an expectation to reduce diversity in practice in areas for which authoritative guidance did not
previously exist, the FASB has issued a standard that provides cash flow classification guidance on
eight issues:
– debt prepayment or extinguishment costs;
– settlement of zero-coupon bonds or bonds issued at a discount with insignificant cash coupon;
– contingent consideration payments made after a business combination;
– proceeds from the settlement of insurance claims;
– proceeds from the settlement of corporate-owned life insurance policies;
– distributions received from equity method investees;
– beneficial interests in securitization transactions; and
– separately identifiable cash flows and applying the predominance principle.
The standard is effective for public business entities for fiscal years beginning after December 15, 2017,
including interim periods in those fiscal years (i.e., January 1, 2018, for public companies with a calendar
year-end). For all other entities the standard is effective for fiscal years beginning after December 15,
2018, and interim periods in fiscal years beginning after December 15, 2019. Companies may early adopt
the guidance only if they adopt all issues at the same time.
For more information, refer to FASB ASU 2016-15 and Defining Issues 16-22.
Recognition of Breakage for Certain Prepaid Stored-value Products
The FASB issued a narrow scope exception to the financial liability guidance that allows entities to
recognize breakage on prepaid stored-value products consistent with how breakage is recognized
under the new revenue standard. The exception applies to prepaid stored-value products in physical or
digital form, with stored monetary values that are redeemable for goods and services, including those
that can be redeemed for cash. Examples include prepaid gift cards issued on specific payment networks
and redeemable at network-accepting merchant locations, prepaid telecommunications cards, and
travellers’ cheques. The scope exception does not apply to products that can be redeemed only for cash
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
22
(i.e., non-recourse debt, bearer bonds, or trade payables), are subject to escheatment laws, are attached
to a segregated bank account (e.g., debit cards), or are associated with customer loyalty points.
The new guidance is effective for public companies in fiscal years beginning after December 15, 2017,
and interim periods in those years. For all other entities, it is effective for fiscal years beginning after
December 15, 2018, and interim periods in fiscal years beginning after December 15, 2019. Early adoption
is permitted, including adoption in an interim period.
For more information, refer to FASB ASU 2016-04 and Defining Issues 15-53.
Other FASB Projects
Proposed Accounting Standards Update: Service Concession Arrangements
(Topic 835)
It has been observed that there is diversity in practice in how an operating entity determines the customer
of the operation services for transactions within the scope of Topic 835, Service Concession
Arrangements. The FASB has proposed an accounting standards update in November 2016 to address this
diversity.
For service concession arrangements within the scope of Topic 835, the operating entity should not
account for the infrastructure as a lease or as property, plant, and equipment, but should refer to other
Topics to account for various aspects of the service concession arrangement. When applying the revenue
guidance under Topic 605, Revenue Recognition, or Topic 606, Revenue from Contracts with Customers,
it has been observed that it is not clear who is the customer of the operation services (i.e., the grantor or
the third-party users) for certain arrangements. The proposed amendments would clarify the identity of the
customer and eliminate the diversity in practice, as well as reduce the complexity and enable more
consistent application of other aspects of the revenue guidance, which are affected by this customer
determination.
The comment period ends January 6, 2017.
For more information, refer to Proposed Accounting Standards Update: Service Concession
Arrangements.
Financial Services – Insurance (Topic 944)
In September 2016, the FASB issued an Exposure Draft Targeted Improvements to the Accounting for
Long-Duration Contracts which focuses on targeted improvements to the existing recognition,
measurement, presentation, and disclosure requirements for long-duration contracts issued by an
insurance entity. The proposed amendments address the following:
– improving the timeliness of recognizing changes in the liability for future policy benefits by requiring
updated assumptions be used to measure the liability for future policy benefits;
– simplifying and improving the accounting for certain options or guarantees embedded in variable
contracts;
– simplifying the amortization of deferred acquisition costs; and
– improving the effectiveness of the required disclosures.
The comment period ended December 15, 2016.
For more information, refer to Proposed Accounting Standards Update – Financial Services – Insurance
and Latest on Insurance.
Derivatives and Hedging (Topic 815)
In September 2016, the FASB issued the proposed updates for hedging activities with the objective of
improving the financial reporting of hedging relationships to better portray the economic results of an
entity’s risk management activities in its financial statements through changes to both the designation
and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
The proposed amendments address the following issues:
– risk component hedging in hedging relationships involving non-financial risk and interest rate risk;
– refining the accounting for the hedged item in fair value hedges of interest rate risk;
– recognition and presentation of the effects of hedging instruments;
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
23
– other simplifications of hedge accounting guidance; and
– amendments to disclosures.
The comment period ended November 22, 2016.
For more information, refer to Proposed Accounting Standards Update: Derivatives and Hedging.
Emerging Issues Task Force Activities
The following table presents a list of significant issues discussed by the FASB’s Emerging Issues Task
Force (EITF) in 2016 that remain open at the time of this publication.
Topics For more information, see
proposed ASU:
Restricted Cash Restricted Cash
Employee Benefit Plan Master Trust Reporting Employee Benefit Plan Master Trust
Reporting
Determining the Customer of the Operation Services in a Service
Concession Arrangement
Service Concession Arrangements
Regulatory Guidance and Other Activities
Guidance about Non-GAAP Financial Measures
The SEC staff, Center for Audit Quality (CAQ), and the International Organization of Securities
Commissions (IOSCO) published additional guidance to help financial statement preparers and audit
committees evaluate the usefulness and acceptability of non-GAAP financial information.
The SEC staff published additional Compliance & Disclosure Interpretations (C&DIs) that describe
prohibited practices, including:
– providing misleading financial measures, for example:
– excluding normal operating expenses;
– presenting the measures inconsistently between periods;
– including gains, but excluding charges; and
– individually tailoring accounting principles;
– presenting non-GAAP financial measures more prominently than GAAP measures; and
– disclosing per share non-GAAP liquidity measures.
The CAQ released a new tool to help audit committees assess whether management’s presentation
of non-GAAP metrics provides investors with meaningful financial information. Based on the SEC’s
non-GAAP rules, the CAQ tool emphasizes:
– transparency, including ways audit committees can consider the purpose, prominence, and labeling
of non-GAAP information;
– consistency, including questions audit committees can ask management to determine whether
non-GAAP measures are consistent and balanced; and
– comparability, including questions audit committees can ask management to assess the comparability
of non-GAAP measures presented.
The IOSCO Statement on Non-GAAP Financial Measurements provides a framework for preparing
disclosures that (1) contribute to the reliability and year-to-year comparability of non-GAAP financial
measures and (2) reduce the potential for misleading disclosure. The elements of the framework include
“using non-GAAP measures for unbiased purposes only” and “providing issuers with ready and easily
available access to information about non-GAAP disclosures.”
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 24
For more information, refer to C&DIs, Defining Issues 16-20, CAQ Questions on Non-GAAP Measures
Press Release, and IOSCO Press Release.
SEC Staff Focus Areas
The SEC staff has frequently commented on certain matters in its recent filing reviews:
– internal control over financial reporting;
– segment identification and disclosure;
– income tax disclosure;
– fair value disclosure, including fair value disclosures by insurers;
– oil and gas price declines;
– Non-GAAP financial measures (see SEC Staff and Others Provide Guidance about Non-GAAP Financial
Measures);
– predecessor financial statements in initial registration statements; and
– international reporting matters, including Venezuelan operations (i.e., consistent use of appropriate
exchange rates and deconsolidation evaluations).
For more information, refer to Issues In-Depth.
Accounting for the Appropriations Act
The Consolidated Appropriations Act, 2016 was signed into law on December 18, 2015. The law made
permanent certain provisions in the IRS Code that recently expired or that were scheduled to expire,
including the research credit and the exception under Subpart F for active financing income. The law
also extended other expired provisions, including certain energy provisions.
While the current and deferred effects of tax law changes are recognized in the financial statements in
the period in which the change is enacted (i.e., the period containing December 18, 2015), the provisions
extending through at least December 31, 2016, have continuing relevance in fiscal 2016 when estimating
the 2016 annual effective tax rate.
For more information, refer to Legislative Update: President Obama Signs Year-end Tax Legislation.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
25
Private enterprises In keeping with the previously stated commitment to minimizing the frequency of changes to the
Accounting Standards for Private Enterprises, Canada’s Accounting Standards Board (AcSB) approved
the issuance of amendments to Section 1591 Subsidiaries and 3051 Investments and narrow scope
amendments to Sections 1591 Subsidiaries and 3056 Interest in Joint Arrangements. The AcSB also
revised the timing of the annual improvement process such that no annual improvement amendments
will be issued in 2016. As enumerated below, the AcSB has issued its exposure draft for the 2017
annual improvements.
Developments in Accounting Standards for Private Enterprises Updates to ASPE are done through:
– major improvements, and
– annual improvements for clarifications on guidance or wording, or to correct for relatively minor
unintended consequences, conflicts or oversights.
New guidance issued
Subsidiaries and Investments
The AcSB approved the issuance of amendments to Section 1591 Subsidiaries and Section 3051
Investments to address the accounting for a subsidiary and an investment subject to significant influence
when the cost method is used, recognizing that there has been diversity in practice in the application of
the cost method. The final handbook material is to be published in December 2016.
The underlying principle of the amendments is that:
– a consistent approach should be applied to investments and interests in subsidiaries that are
accounted for using the cost method; and
– the initial measurement of an interest in a subsidiary that is subsequently accounted for using the
cost method should be on a basis similar to other business combinations, specifically as it relates
to acquisition related costs, contingent consideration, pre-existing relationships and subsequent
accounting for contingent consideration.
The key aspects of the amendments to subsidiaries when the cost method is used are as follows:
– initial cost would be measured at the acquisition-date fair value of the consideration transferred,
including contingent consideration. Contingent consideration is re-measured when the contingency
is resolved;
– acquisition-related costs are expensed as incurred;
– pre-existing relationships would be required to be separately identified and settlement of such
relationships is considered a separate transaction;
– no recognition of bargain purchase gains (i.e., “negative goodwill”);
– for a step acquisition, there is no re-measurement of the previously held interest. This includes where
acquisition related costs have been capitalized in accordance with Section 3856 Financial Instruments.
Entities would, however, be required to consider whether the cost of the additional interest acquired
indicates an impairment; and
– at a reporting date, where the initial accounting is incomplete as a result of working capital adjustment
clauses or other reasons, the carrying amount of the interest in the subsidiary is based on provisional
amounts. Such provisional amounts are adjusted in the period they are finalized, with the
measurement period not to exceed one year from the acquisition date. Adjustments to provisional
amounts are not retrospectively recognized in the prior period.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
26
The key aspects of the amendments to investments subject to significant influence when the cost
method is used are as follows:
– initial cost would be measured at the acquisition-date fair value of the consideration transferred;
– acquisition-related costs are expensed as incurred; and
– for acquisitions of additional interests there is no re-measurement of the previously-held interest.
This includes where acquisition-related costs have been capitalized in accordance with Section 3856
Financial Instruments. Entities would, however, be required to consider whether the cost of the
additional interest acquired indicates an impairment.
The AcSB chose not to add a similar requirement to expense acquisition-related costs for investments
subject to significant influence when the equity method is applied, as such a change was considered
to be outside of the scope of the project.
The amendments will be effective for fiscal years beginning on or after January 1, 2018, with earlier
application permitted.
Joint Arrangements and Subsidiaries
The AcSB approved the issuance of narrow-scope amendments to Section 1591 Subsidiaries, and
Section 3056 Interests in Joint Arrangements, with the final handbook material to be published in
December 2016. The amendments provided the following clarifications, which are effective for fiscal years
beginning on or after January 1, 2017, with earlier application permitted:
– transitional provisions under Section 1591 and 3056 can only be applied on the initial application of the
standard and may not be applied if an enterprise changes its accounting policy at any time after the
initial application; and
– an enterprise preparing non-consolidated financial statements is not required to assess whether
contractual arrangements give rise to control.
In addition, Section 1591 was amended to clarify the accounting where control exists as a result of the
combination of voting interests and contractual arrangements and the subsidiary is not consolidated.
Specifically, the amendments clarify that the voting interest is accounted for using either the cost or equity
method and the contractual arrangement is accounted for in accordance with the nature of the contractual
arrangement. This amendment is effective for fiscal years beginning on or after January 1, 2018.
Exposure Drafts
Annual Improvements
In September 2016, the AcSB issued Exposure Draft 2017 Annual Improvements to Accounting Standards
for Private Enterprises, which proposes the following narrow scope amendments:
– modify Section 1505 Disclosure of Accounting Policies to require the disclosure of accounting policies
be provided in one of the first notes rather than the current, more prescriptive requirement, as the first
note to the financial statements;
– change the disclosure requirements under Section 1506 Accounting Changes for a change in
accounting policy to require disclosure of the amount of the adjustment required in the prior periods
presented rather than for the adjustment required for the current period presented;
– clarification of the presentation and disclosure requirements under Section 1521 Balance Sheet
including that assets under capital lease should be presented separately on the face of the balance
sheet or disclosed in the notes to the financial statements;
– clarification on the reversal of previous write downs as a result of foreign currency translation of assets
valued at lower of cost and market; and
– clarification that under Section 3065 Leases, only the amount of the allowance for impairment, not the
carrying amount of impaired operating lease receivables, is required to be disclosed, consistent with
the requirements under Section 3856 Financial Instruments, for current trade receivables.
The AcSB expects to issue these final amendments in the third quarter of 2017, with the amendments to
be effective for years beginning on or after January 1, 2018, with retrospective application and the ability
to early adopt.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
27
Other projects
Redeemable Preferred Shares Issued in a Tax Planning Arrangement –
a Liability
Under the AcSB’s Exposure Draft Redeemable Preferred Shares Issued in a Tax Planning Arrangement,
which was issued in October 2014, the AcSB had originally agreed that redeemable preferred shares in
a tax planning arrangement meet the definition of a liability and had proposed eliminating ASPE’s equity
treatment. In response to comment letters and roundtable discussions on the exposure draft, the AcSB
subsequently had further analysis performed to facilitate the development of alternatives to the existing
classification exception and to gather an understanding of the characteristics of tax planning arrangements
where redeemable preferred shares are issued. As a result of this analysis, the AcSB is discussing the
viability of a classification exception on the basis of retention of control of the entity. Further testing of
the characteristics of tax planning arrangements and where such arrangements would or would not meet
a classification exception based on the retention of control is ongoing.
The AcSB has agreed that any change as a result of this project will be effective no earlier than
January 1, 2018.
Agriculture
Recognizing that there is diversity in practice, the AcSB issued a discussion paper in December 2015
which examines the accounting for living animals or plants and the harvested product from these assets.
The discussion paper addresses the recognition and measurement of biological assets, including
unharvested crops, agricultural produce and animals held for sale, and bearer plants and animals. The
AcSB’s preliminary views provided in the discussion paper include:
– biological assets should be recognized when the asset definition and recognition criteria are met as set
out in Section 1000 Financial Statement Concepts;
– unharvested crops, including both annual crops and long-term crops, such as timber, should be
measured at cost;
– agricultural produce and animals held for sale should be measured at current value when certain
conditions are met and at cost when those conditions are not met; and
– bearer plants and animals should be measured at amortized cost. The AcSB acknowledged that any
preliminary view for the measurement of bearer animals will be controversial as this area has the
greatest diversity in practice.
The discussion paper also considers impairment models that could be applied and presentation and
disclosure requirements.
Following the initial comment period, the AcSB held a series of in-person roundtable discussions across
the country and has approved the creation of an agricultural advisory committee to assist the AcSB in the
development of accounting standards for private enterprises in the agricultural sector.
Post-implementation Review of Section 3856 Financial Instruments
The AcSB, in its first ever post-implementation review, solicited comments on experience in applying
Section 3856 Financial Instruments. The financial instruments standard was one of the most significant
changes in developing ASPE and as a result was considered a good candidate for post implementation
review. Such a review allows the AcSB to assess whether the standard provides useful information, and
how it can be improved, whether there are any unexpected costs or challenges in its application and
whether there are areas that represent interpretation challenges.
While the feedback provided suggested overall support for the principles and requirements of the
standard, there were several areas of concern identified, including challenges with the initial
measurement of some types of financial instruments, confusion regarding the scope and measurement
of financial instruments with related parties, and questions regarding the usefulness of some risk and
uncertainty disclosures which tend to be boilerplate and non-enterprise specific. The AcSB continues to
analyze the feedback received to determine what, if any, aspects of Section 3856 should be considered
for amendment.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
28
Not-for-profit organizations Accounting Standards for Not-for-Profit Organizations
(Part III of the CPA Canada Handbook – Accounting) This section discusses developments in accounting standards for Not-for-Profit Organizations (NPOs)
since the 2015 edition of Focus on financial reporting.
Joint Not-for-Profit Review
The AcSB included not-for-profit organizations in its issued-for-comment draft strategic plan for 2016–
2021. The proposed core strategy includes maintaining a separate set of accounting standards for areas
unique to not-for-profit organizations while continuing to direct them to Part II of the CPA Canada
Handbook – Accounting for non-unique areas (such as employee future benefits and financial instruments).
The AcSB formed a not-for-profit advisory committee to provide input into this process and approved three
projects. These three projects are outlined below:
i. Accounting Standards Improvement – Phase 1
– Tangible capital assets
– Intangible assets
– Works of art, historical treasures, collections and similar items
– Related party transactions
– Allocated expenses
ii. Accounting Standards Improvement – Phase 2
– Controlled and related entities
– Expense reporting by function and object
– Economic interests
iii. Contributions – Revenue Recognition and Related Matters
– Contributions
– Size exemption ($500,000) for tangible capital assets and intangibles
– Financial statement presentation
The AcSB has indicated that it anticipates the release of an exposure draft related to Accounting Standards
Improvement – Phase 1 in the first quarter of 2017. The AcSB decision summaries document indicated
that the exposure draft will propose that NPOs adopt the following:
– apply accounting standards for private enterprises in Part II of the Handbook to report the capitalization,
amortization and disposal of tangible assets and continue to apply the existing Part III standards for
intangible assets;
– recognize write-downs to reflect a partial loss of service potential of tangible and intangible assets still
in use. The net carrying value of the tangible and intangible assets would be written down to their
replacement cost or fair value;
– continue to apply the existing standards in Part III for works of art, historical treasures and similar items
that are not part of a collection;
– recognize collections held by NPOs on the statement of financial position at either cost or nominal
value;
– recognize write-downs to reflect a partial loss of service potential of a collection (i.e., the cost of the
collection would be written down to its replacement cost or fair value);
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
29
– choose whether to apply the proposals relating to collections retrospectively and use transition relief to
measure the cost of collections in a practical manner; and
– apply the proposals for write-downs of tangible and intangible assets prospectively.
The AcSB has also indicated that the exposure draft will propose an effective date of January 1, 2019,
with an option to defer to April 1, 2020, for March year-ends.
Post-implementation Review
As noted in the previous section, the AcSB solicited comments on experience in applying Section 3856
Financial Instruments. This standard, located in Part II, also applies to not-for-profit organizations who
apply Part III.
Reminders of Certain Guidance Previously Issued
As a reminder, the following section was previously issued and is effective in 2016:
Section Effective for fiscal years
Investment in Joint Ventures Beginning on or after January 1, 2016
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
30
Public sector entities Developments in Public Sector Accounting Standards This section discusses developments in public sector accounting standards since the 2015 edition of
Focus on financial reporting.
New guidance issued
There was no new guidance issued in 2016.
Post-implementation review
The Public Sector Accounting Board (PSAB) has completed its first post-implementation review. This
review related to PS3410 Government Transfers. PSAB subsequently issued a Feedback Statement – Post
Implementation Review and a PSAB Matters Article – Staying the Course on Government Transfers.
The review identified two main issues and considerable commentary was received related to both. These
issues related to the authority to pay and recipient accounting for capital transfers. PSAB concluded that
PS3410 Government Transfers is a principles-based standard that meets the original public interest
objectives. PSAB further concluded that issuing an accounting guideline could be perceived as overriding
due process.
Reminders of certain guidance previously issued
As a reminder, PSAB previously issued the following sections that are effective in 2016 or future years:
Sections Effective for fiscal years
Introduction to Public Sector Accounting Standards Beginning on or after January 1, 2017
Related Party Disclosures, Section 2200 Beginning on or after April 1, 2017
Inter-entity Transactions, Section 3420 Beginning on or after April 1, 2017
Assets, Section 3210 Beginning on or after April 1, 2017
Contingent Assets, Section 3320 Beginning on or after April 1, 2017
Contractual Rights, Section 3380 Beginning on or after April 1, 2017
Restructuring Transactions, Section 3430 Beginning on or after April 1, 2018
Financial Instruments, Section PS3450 Beginning on or after April 1, 2019, with early
implementation for government organizations
transitioning from Part V of the CPA Canada
Handbook – Accounting. Early adoption is
permitted.
Portfolio Investments, Section PS3041
Foreign Currency Translation, Section PS2601
Financial Statement Presentation, Section PS1201
PSAB projects underway
The following section discusses the major projects currently with the Public Sector Accounting Board:
Related party transactions for not-for-profit organizations
PSAB issued an exposure draft which proposed the removal of Section PS4260 Disclosure of related party
transactions by not-for-profit organizations and amendment of the transitional provision of Section PS2200
Related party disclosures. Sections PS4260 and PS2200 are very similar except that PS2200 does not
include the concept of significant influence or economic interest. However, disclosures for significant
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
31
influence and economic interest are required by Section PS4250, Reporting controlled and related entities
by not-for-profit organizations. The change would be effective for fiscal years beginning on or after
January 1, 2018. The Handbook section is anticipated to be approved in December 2016.
Revenue
A Statement of Principles entitled Revenue was issued in August 2013 with the objective of providing
recognition, measurement and presentation guidance for revenues common to government and
government organizations other than tax revenue and government transfers. The statement focused on
two main areas of revenue – exchange transactions and unilateral (non-exchange) transactions. During
2016, PSAB received updates on the project, including consideration of the recognition of revenue arising
from licences and permits and multiple performance obligations. An exposure draft is anticipated in the
first quarter of 2017.
Retirement Obligations
A Statement of Principles entitled Retirement Obligations was issued in August 2014 that proposed
principles for the recognition, measurement, presentation and disclosure of legal obligations associated
with the retirement of tangible capital assets currently in productive use. The proposal included retirement
obligations based on an agreement, contract, legislation or a constructive or equitable obligation and
where the acquisition, construction, development, change in circumstance or subsequent use of the
tangible capital asset creates a liability. Comments were received and reviewed. PSAB is also considering
the inclusion of solid waste closure and post-closure costs in this project. An exposure draft is expected in
the first quarter of 2017.
Employment Benefits
PSAB has approved a project to review Sections PS3250 Retirement benefits and PS3255 Post-retirement
benefits as a result of significant changes in types of pension plans and related accounting concepts. The
project has been divided into two phases. The first phase will review measurement issues such as
deferral of experience gains and losses and discount rate. The second phase will involve the accounting
for new types of plans, including shared risk plans. Phase two will also include consideration on
accounting for multiemployer defined benefit plans and vested sick leave benefits. An invitation to
comment related to the first phase is expected in the first quarter of 2017.
Concepts Underlying Financial Performance
The objective of this project is to review and amend, if necessary, the conceptual framework in
Sections PS1000 Financial Statement Concepts and PS1100 Financial Statement Objectives. This project
will consider the concepts underlying the measure of financial performance and could also affect Section
PS1021 Financial Statement Presentation. PSAB issued a third consultation paper in March 2015. During
2016, PSAB continued to discuss these issues.
PSAB Strategic Initiative
An invitation to comment was issued on May 30, 2016, related to the vision, mission and strategic
objectives to guide the standard-setting activities of PSAB. Comments were received and the strategic
plan is anticipated to be released in the second quarter of 2017.
Public Private Partnerships
The public private partnerships task force was established to assist PSAB in developing authoritative
guidance specific to public private partnerships. The project will include two phases. The first phase
will relate to specific issues, including project scope, recognition and measurement of public private
partnerships and disclosure requirements. The second phase will focus on the accounting for public
private partnerships.
A statement of principles related to the first phase of the project is expected in the first quarter of 2017.
Financial Instruments – Subsequent Issues
PSAB held consultations across the country in 2016 to obtain a better understanding of issues with
implementation of Sections PS2601 Foreign currency translation and PS3450 Financial instruments. PSAB
will discuss the technical issues identified in the consultation, including the accounting for hedges, at their
December 2016 meeting.
Focus on financial reporting | 2016 Annual update
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 32
Appendix Acronyms
ASC Accounting Standards Codification (US GAAP) MI Multilateral Instrument
ASU Accounting Standards Update (US GAAP) NI National Instrument
AcSB Accounting Standards Board NP National Policy
APIC Additional Paid-In Capital NPO Not-for-profit Organization
ASPE Accounting Standards for Private Enterprises OCI Other Comprehensive Income
CAQ Center for Audit Quality OSC Ontario Securities Commission
CBCA Canada Business Corporations Act PCAOB Public Company Accounting Oversight Board
CPA Chartered Professional Accountant PIR Post Implementation Review
CPAB Canadian Public Accountability Board PPE Property, Plant, and Equipment
CSA Canadian Securities Administrators PS Public Sector
CSM Contractual Service Margin PSA Public Sector Accounting
EBITDA Earnings before interest, taxes, depreciation,
and amortization
PSAB Public Sector Accounting Board
ESTMA Extractive Sector Transparency Measures Act SARs Stock/Share Appreciation Rights
FASB Financial Accounting Standards Board (US) SEC Securities Exchange Commission
GAAP Generally Accepted Accounting Principles SEDAR System for Electronic Document
Analysis and Retrieval
IAS International Accounting Standard SN Staff Notice
IASB International Accounting Standards Board TRG Transition Resource Group (US GAAP)
IFRIC International Financial Reporting
Interpretations Committee, now known as the
IFRS Interpretations Committee
TSX/TSE Toronto Stock Exchange
IFRS International Financial Reporting Standards US United States
MD&A Management’s Discussion and Analysis WP Whistleblower Program
WebsitesAICPA www.aicpa.org KPMG www.kpmg.ca
ASC www.albertasecurities.com OSC www.osc.gov.on.ca
FASB www.fasb.org SEC www.sec.gov
IASB www.iasb.org PSAB www.frascanada.ca
kpmg.ca
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 15005.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Focus on financial reporting KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership
estab-lished under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative
(“KPMG International”). KPMG member firms around the world have 189,000 professionals in
152 countries.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss
entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
The content of this publication is copyrighted with all rights reserved. Portions may be reprinted with
acknowledgement to the firm. We would appreciate being notified of any reproduction or reuse.
Contact us Robert G. Young, FCPA, FCA
Editor, Focus on financial reporting
T: 416-777-8338