20 questions20 Questions Directors and Audit Committees Should Ask about IFRS Conversions RevisedWritten by rafik greiss, FCa, CP a (illinois) Simon Sharp, CaHow to use this publicationeach “20 Questions” briefing is designed to be a concise, easy-to-read introduction to an issue of importance to directors. t he question format reflects the oversight role of directors which includes asking management — and themselves — tough questions.in some cases, boards and audit committees may not want to ask the questions directly and prefer to ask the Chief a udit executive or management to include the topics or answers to the questions in the annual audit plan or other presentations to the Committee. t he questions are not intended to be a precise checklist, but rather a way to provide insight and stimulate discussion on important topics.t he comments that accompany the questions provide directors with a basis for critically assessing the answers they get and digging deeper as necessary. t he comments summarize current thinking on the issues and the practices of leading organizations. a lthough the questions apply to most medium to large organizations, the answers will vary according to the size, complexity and sophistication of each individual organization.Written by rafik greiss, FCa, CP a (illinois) Canadian iFrS l eader, ernst & youngSimon Sharp, Ca Senior Manager, ernst & youngProjeCt direCtion gigi dawe Principal, risk ...
20 Questions Directors and Audit Committees Should Ask about IFRS Conversions
able o ontents RF IRI GR RSI R SIRIS hat ill convertin to IFRS mean or our business 2 o do e lan to aroach the conversion to IFRS hat are the ke areas that need to be addressed durin the conversion hat is the timeline or our IFRS conversion roect, hat resources ill be required and ho much ill it cost hat can e learn rom the uroean nion conversion eerience FII RRIG SIRIS o ill convertin to IFRS imact eternal financial reortin in our oraniation hat ill be the imact on manaement reortin o ill manaement address the need or 200 financial inormation reared under both anadian G and IFRS hat are our cometitors and industr eers doin 0 ill ublicl accountable enterrises be required to al IFRS throuhout their rou structures o ill IFRS imact ta reortin and ta filins
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FII RRIG SIRIS 2 ther than financial reortin, hich other business areas ill be imacted b the conversion an our current I sstems handle the business’ revised data collection requirements under IFRS hat IFRS trainin rorams are manaement lannin to rovide to finance ersonnel R R SI RIS hat are the most sinificant risks associated ith convertin to IFRS hat are the other ke risks associated ith convertin to IFRS o can our oraniation take advantae o the oortunities resented b the conversion to IFRS o ill convertin to IFRS imact our stakeholders, and hat should be done to manae the eectations o caital markets hat should the role o our auditor be in the conversion rocess, and do e need a third art advisor indeendent rom our auditor 20 ther than financial reortin interit, hat are the other imlications or boards o directors R FI R IFRI
RIS RSIG GR R Brian Ferguson, FCA, Chair Bran eld, FCA, ICDD Andre acDougall, B ichael B eagher, FCA Anne arie ’Donovan, FCA Sue ane, FCA, CDir eter Roberts, FCA Debi Rosati, FCA, ICDD Catherine Smith, ICDD IRRS ISR GR iles eikle, FCA, Chair ohn Caldell, CA illiam Dimma, FICD, ICDD ohn Ferguson, FCA ordon all, FSA, ICDD Carol ansell B Ronald sborne, FCA om eddie, FCA ulaine Saucier, C, FCA, FICD a Stehen, CA eter Stehenson, hD, ICDD I SFF Ian ague, CA Director, uidance and Suort igi Dae rincial, Risk anagement and overnance Beth Deaele, B rincial, Risk anagement and overnance
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reace he Risk versiht and Governance oard o the anadian Institute o hartered ccountants commissioned this document to hel boards o directors, and articularl audit committees, to ulfill their oversiht resonsibilities relatin to the conversion to International Financial Reortin Standards (IFRS) lthouh the anadian transition to IFRS ill occur in 20, boards o directors need to bein no to address the imlications o the conversion or their oraniation his involves consideration not onl o the conversion rocess itsel, but o issues relatin to risk, stakeholder relations, financial reortin, and internal controls hich ill be triered b the transition In rearin or the conversion, anadian comanies have the benefit o the eerience o comanies in the uroean nion ho converted to IFRS in 200 It ill be crucial or all directors to have a eneral understandin o hat the transition to IFRS ill mean or their oraniation embers o audit and other board committees ill require a reater level o detail hile the level o detail in this document ma be more directl relevant to members o audit committees, it ill also rovide a solid oundation or all board members his document rovides suested questions or boards to ask themselves, senior manaement and others For each question, there is a brie elanator backround and some sues tions oth the rocess and the imlications o the conversion to IFRS ill var idel amon anadian comanies, and no list o questions can be universall alicable irectors must use their on udment to determine i there is additional inormation that the need, but these questions are desined to ocus thouht and discussion on the issue he Risk versiht and Governance oard acknoledes and thanks the members o the irectors dvisor Grou or their invaluable advice, the authors Rafik Greiss and Simon Shar o rnst oun , and the I sta ho rovided suort to the roect Brian Ferguson, FCA hair, Risk versiht and Governance oard
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Introduction In 20, the accountin rameork under hich financial statements in anada are reared or all ublicl accountable enterrises ( s) ill chane to International Financial Reortin Standards (IFRS) Generall acceted accountin rinciles (G) in anada, as e currentl kno them, ill cease to al or this rou o entities and ill be relaced b IFRS In ractice, reerences to anadian G ill remain in reulator and leal contets IFRS ill be incor orated into the anadian G handbook he anadian Securities dministrators (S) ororate Governance Guidelines state that, as art o their steardshi role, boards o directors are resonsible or “the identification o the rinci al risks o the issuers’ business and ensurin the imlementation o aroriate sstems to manae these risks” In addition, the Guidelines state that boards are resonsible or the “issuers internal ’ control and manaement inormation sstems” he resonsibilit or eecutin the conversion to IFRS ill rest ith manaement It ill be the board’s resonsibilit to la an oversiht role and ensure that manaement has dischared its reson sibilities and eecuted an eective conversion onvertin to IFRS ill be one o the most undamental chanes that s ill have to deal ith over the net e ears Such a momentous chane ill brin ith it both sinificant risks and oortunities, and boards need to be reared or the chane i the are to adequatel ulfill their unction in this area and dischare their overall steardshi resonsibilities he questions in this document are desined to hel directors, and audit committee members in articular, understand the otential scoe o the chane man aement eercise that the conversion ma resent to their business he ill also rovide uidance to the board o directors and the members o its articular committees on hat questions the should be askin manaement as the reare or the conversion he questions are oranied into our main rous onversion roect considerations 2 Financial reortin considerations onfinancial reortin considerations ther board considerations CSA Cororate overnance uidelines 20
been set deliberatel to allo directors to better understand the issues manaement ill ace durin a conversion and thereb better reare boards to ulfill their oversiht role throuhout the conversion eriod What constitutes a publicly accountable enterprise? he reace to the I andbook defines a publicly accountable enterpriseas “an entit, other than a notorrofit oran iation, or a overnment or other entit in the ublic sector, that (i) hasissued, or is in the rocess o issuin, debt or equit instruments that are, or ill be, outstandin and traded in a ublic market (a domestic or orein stock echane or an overthecounter market, includin local and reional markets) or (ii) holds assets in a fiduciar caacit or a broad rou o outsiders as one o its rimar businesses anks, credit unions, insurance comanies, securities brokers/dealers, mutual unds and investment banks ticall meet the second criterion above ther entities ma also hold assets in a fiduciar caacit or a broad rou o outsiders because the hold and manae financial resources entrusted to them b clients, customers or members not involved in the manaement o the entit oever, i the do so or reasons incidental to a rimar business (as, or eamle, ma be the case or travel or real estate aents, cooerative enterrises requirin a nominal membershi deosit, or sellers that receive ament in advance o deliver o the oods or services, such as utilit comanies), that does not make them ublicl accountable” his definition does not reclude other entities rom also adotin IFRSs It is a “rincilebased” definition that requires entities to consider or themselves hether the fit ithin it he ublic Sector ccountin oard requires that Government usiness nterrises adot IFRSs
20 Questions Directors and Audit Committees Should Ask about IFRS Conversions
ccountin Standards oard o anada hie financial oficer anadian Institute o hartered ccountants anadian Securities dministrators uroean nion Financial ccountin Standards oard Forein rivate issuers Generall acceted accountin rinciles International ccountin Standards International ccountin Standards oard International ccountin Standards ommittee International Financial Reortin Standards Inormation technolo Income a ct o anada rivate enterrise otorrofit oraniation Grou containin onl s ublicl accountable enterrise Grou containin at least one Securities chane ommission
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20 Questions Directors and Audit Committees Should Ask about IFRS Conversions
ackround Origins o IFRS sinle set o lobal accountin standards has been under develoment or over three decades since the International ccountin Standards ommittee (“IS”) as first established in oda, this suite o standards comrises International ccountin Standards (“ISs”) first issued b the IS and, subsequent to ril 200, IFRS issued b the IS’s successor, the International ccountin Standards oard (“IS”), as ell as interretations o those standards he IS’s mission includes the develoment o “a sinle set o hih qualit, understandable and enorceable lobal accountin standards that require transarent and comarable inorma tion in financial statements and other financial reortin…” he IS seeks to “brin about converence o national accountin standards and International ccountin Standards and International Financial Reortin Standards to hih qualit solutions”2 It asn’t until 200, ith the advent o the uroean ommission’s requirement or ublic comanies reortin ithin the uroean nion (“”) to reare consolidated financial state ments comliant ith IFRS, that IFRS bean to be idel alied around the orld, and the IS could be said to have moved sinificantl to achievin its oal ustralian and other standard setters soon olloed the and toda over 00 countries either require or ermit the use o IFRS or ublic coman reortin 2IASCF Foundation Constitution, Februar 200
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IFRS in Canada arl in 200, the ccountin Standards oard (“cS”) released its strateic lan or carrin out its standardsettin mandate in anada he lan reconies that accountin standards or ublic comanies ma not be suitable or other orania tions, and the cS oresees the need or searate strateies dealin ith dierent cateories o reortin entit nder the lan, anadian G or s ill convere ith IFRS over a transitional eriod his transition eriod etends to 20, ith the first financial reorts o s required to coml ith IFRS bein or accountin eriods commencin on or ater anuar , 20 he cS has also issued ne accountin standards or rivate nterrises (“s”), but has et to finalie its roosals or notorrofit oraniations (“s”) IFRSs continue to chane It is eected that there ill be no sinificant ne IFRSs mandator or 20 calendar ears, but several sinificant chanes are eected in 202 and subsequentl In some cases, these chanes ill be available or earl adotion onsideration ill need to be iven to hen a ar ticular entit decides to adot such chanes he cS sta ublishes a summar o hich IFRSs are eected to al or anadian chaneover in 20, available rom the cS eb site Rationale or conversion he cS’s rationale or conversion to IFRS centres on the anticiated benefits to anadian comanies o reortin usin a sinle lobal set o account in standards Some believe that the increased comarabilit o financial statements arisin rom alin IFRS ill imrove accessibilit to lobal caital markets, ossibl reduce anadian comanies’ cost o caital and thereb imrove their lobal cometitiveness hen considerin the alternative otion o S G, the cS cites the olloin influences on its decision loer cost o comliance is eected ith a rincilesbased accountin rameork such as IFRS than ith the more detailed S G sstem 2 he oint artnershi beteen the IS and FS means that, over time, the dierences beteen IFRS and S G ill diminish as oint standards are issued
Accounting Standards in Canada e Directions, ublished b the AcSB at httacsbcanadaorg olrgacaidoanabrcnaantianctsetitstheitiv itemd
Conversion tielineamle td ill still be required to reort under eistin anadian G or 200 hen one considers the racticalities o the cS’s conversion timeline, it becomes clear that there his means that comanies have little time is not as much time as one miht first eect to remainin to understand the imacts o con comlete the transition to IFRS Fiure outlines vertin to IFRS, conduct aroriate lannin the eected timeline or “amle td ” activities, decide on a conversion aroach, select convertin to IFRS amle td has a fiscal ear revised IFRScomliant accountin olicies, train end o ecember he first set o annual IFRS ersonnel, and test and roll out imlementation financial statements or amle td ill be or the strateies his is in addition to runnin their da ear endin ecember , 20 hese financials toda oerations and addressin the comliance ill need to include comarative inormation also issues arisin rom the cS’s converence comiled under IFRS or the ear endin ecember activities durin the transition eriod , 200 In order to determine the rofit and loss result and cash flos or 200, manaement ill In order to kee investors and other stakeholders also need to restate amle td’s oenin balance inormed about the comin chane in financial sheet rom anadian G to IFRS his date, reortin, the S has issued requirements or anuar , 200 is knon as amle td’s “transi entities to include disclosure o their roress , tion date” as this is the earliest date the coman is toard IFRS conversion in their 200 200 and required to reare IFRS inormation Further, as a 200 manaement discussion and analsis teurlblicacccoomuntasnu,ndearImFRleSctodmmmuesntcisnubmiitthqtuhaerhe AcSB has issued amendments to eisting Canadian AA, r endin ar h , 20 hese too ill needthe main, these amendments relate to ac alicable in 200 In quarte ccounting or financial instruments and disclosure o related risks IFRS comaratives ence, the first IFRS filin illCSA Sta otice 220 Disclosure o ected Changes in be uarter , 20 ne must also remember thatAccounting olicies Relating to Changeover to International Financial Reorting Standards Figure IFRS onversion imeline Preparing or IFRS filing reuireents Fiscal filing reuireents enin eternalIFRSSF nnualIFRSequit reconciliations FileCanadian AAPfinancial statements nnualIFRScomrehensive income reconciliations InterimIFRScomrehensive income reconciliations InterimIFRSequit reconciliations
reareIFRSannual and interim reconciliations and note disclosures
Involve auditor ith oenin internalIFRSSF and 200IFRSinterim financial statements
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InterimIFRSfinancial statements (IS comliant)
InterimIFRSnote disclosure (IS comliant) includin elanations o material items rom the IFRS 200 annual eriod
20 Questions Directors and Audit Committees Should Ask about IFRS Conversions
onversion roect onsiderations What ill converting to IFRS ean or our business? IFRS adotion ill result in maor chane or business he chane driven b IFRS ill not be restricted to the finance unction onvertin to IFRS ill not merel be a technical accountin eercise but more a idesread chane manae ment eercise that ill imact man areas o the business n business unction required to reare financial inormation, or imacted b financial inormation, has the otential or chane Given the eected chane in earnins and financial osition, one should eect chanes to eecutive and emloee evaluation and • comensation lans (uman Resources), • orein echane and hedin activities (reasur), cororate income taes (aation), • • ratios and bank covenants (Finance and reasur), • internal controls and rocesses (Finance), • investor relations and communication to cai tal markets (Finance and Investor Relations), • manaement reortin (Finance), and • I and data sstems (I)
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s one can see rom the otential chanes, various committees o the board o directors, in addition to the audit committee, ill have a vested interest in the conversion to IFRS, includin uman Resources, ecutive omensation and Risk anaement Secificall, the SCorporate Governance Guidelinesstate that the board o directors should, as art o their overall steard shi resonsibilit, assume resonsibilit or • the identification o the rincial risks o the issuers’ business and ensurin the imle mentation o aroriate sstems to manae these risks, • adotin a communication olic or the issuer, and • the issuer’s internal control and manaement inormation sstemsll this bein said, it is imortant to note that each coman’s concerns and the etent to hich IFRS ill imact them ill be dierent For some, the imacts ill be ervasive or others, the ma be minimal