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Preparing for InternationalFinancial ReportingStandards (IFRS)

January 27, 2011

www.pwc.com/ca

PwC

Introductions and Welcome

2IFRS for Managers

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Objectives

By the end of the session participants will be able to:

1. Describe the financial reporting changes in Canada, the reasons forthe changes, and the timeline for IFRS adoption

2. Describe the key changes in presentation and disclosure under IFRS,and key terminology used

3. Describe some of the most significant areas of accounting differencesbetween IFRS and Canadian GAAP

4. Describe the main areas of likely impact on different industries

5. Describe the European experience and results of the PwC survey offund managers

6. Describe the significant areas of impact of IFRS on the assetmanagement industry

3IFRS for Managers

IFRS – implications foranalysts and portfoliomanagers

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Agenda

• Financial reporting in Canada is changing – how may this impactyour investment decisions:

– Background to IFRS and ASPE

– IFRS – Presentation and disclosure differences

– IFRS – Accounting differences and industry issues

– The European Experience

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Background to InternationalFinancial Reporting Standards(IFRS) and Accounting Standards forPrivate Enterprises (ASPE)

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What is changing for your investees ?

7

IFRS

ASPE

CurrentCanadian

GAAP

Canadian GAAP is changing – all enterprisesneed to make a change, some need to make achoice…..

Existing CICA Handbook will be replaced in 2011!

2011

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Key dates and milestones for CanadianEnterprises (for a calendar year end company)

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Discloseanticipatedconversion effects(optional)

FirstIFRSinterims

First annualfinancialstatementsunder IFRS

Dec 31,2009

Dec 31,2010

Mar 31,2011

Dec 31,2011

First annualfinancialstatementsunder ASPE

AS

PE

IFR

S

Disclose IFRSconvergenceplan includingquantificationof anticipatedeffects

JAN 1, 2010Transition date

Opening BalanceSheet - collectcomparatives

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IFRS Overview

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IFRS principles

• Accounting standards built about a “framework”

• Principles vs. rule based

• Substance over form

• Little “industry-specific” GAAP

• Fair value model

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What is IFRS and why has Canada chosen toadopt it?

A global shift – More than 100 countries require, permit, or are converging to IFRS

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IFRS adoption status in major

international markets

US US GAAP

Canada Converging to IFRS

Mexico Converging to IFRS

Chile Converging to IFRS

Hong Kong IFRS

Japan Converging to IFRS

India Converging to IFRS

UK IFRS

Australia IFRS

Countries converging to IFRSs with the goal of adoption

Countries that require or permit IFRSs

Countries pursuing convergence with IFRSs, but with no plan to adopt

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IFRS / US GAAP convergence plans

• Roadmap published

• Milestones set

• FASB require improvements inIFRS by 2011

• 2010 G20 meeting confirmedintention

• Foreign Private Issuers who fileIFRS financial statements arenot required to file a separate USGAAP reconciliation

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Upcoming changes to IFRS

• No stable platform – IFRS is changing

• Current projects include:

– Leasing

– Revenue recognition

– Financial instruments

– Consolidation

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IFRS – Presentation and disclosuredifferences

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IFRS Financial Statements – terminology ischanging……

• IFRS: Statement of Financial Position

– CGAAP = Balance Sheet

• IFRS: Statement of Comprehensive Income

– CGAAP = Income Statement

– Extraordinary gains and losses are not permitted under IFRS

• Statement of Cash Flow – required for all entities

• Statement of Equity

• Notes to the financial statements

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IFRS Financial Statements – note disclosure isincreasing……

• Support the numbers on the faceof the financial statements toprovide additional detail

• IFRS can be expected to result inincreased disclosure

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Canadian early adopters

(January 1, 2009)

% increase in size ofannual report upontransition to IFRS

Thomson Reuters 12%

Anooraq Resources Corp. 76%

Eastern Platinum Ltd. 42%

Northern Dynasty MineralsLtd.

13%

SouthGobi Energy 57%

Tethys Petroleum 86%

Gerdau Ameristeel Corp. 14%

* Source: Estimated based on number of pages in recent IFRSstatements compared to previous Canadian GAAP statements

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IFRS Financial Statements

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• Example Illustrative IFRS Financial Statements are available fordownload on the PwC website – please see:

http://www.pwc.com/gx/en/ifrs-reporting/ifrs-illustrative-financial-statements-pwc-publications.jhtml

Illustrative IFRS Financial Statements are available for industriesincluding:

– Banking,

– Insurance,

– Investment funds,

– Investment property, and

– Private equity.

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IFRS – accounting differences andindustry issues

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Potential areas of difference: IFRS compared toCanadian GAAP

• First time adoption of IFRS

• Revenue recognition

• Employee future benefits

• Financial instruments

• Debt/equity classification

• Income taxes

• Business combinations

• Foreign exchange

• Joint ventures

• Impairments

• Leases

• Property, plant & equipment

• Contingent liabilities andprovisions

• Asset retirement obligations

• Disclosure requirements

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Industry implications – Energy (Oil and Gas,Mining)

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Joint ventureaccounting

Hedge accountingAsset retirementobligations

Exploration andevaluation costs

Impairment ofassets

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Industry implications – Agriculture and Forestry

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Impairment ofassets

Biological assetsAsset retirement

obligations

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Industry implications – Real estate

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Constructioncontracts

Investmentproperties

Borrowing costs

Impairment ofassets

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Industry implications – General Manufacturing

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Employee benefits

Hedge accountingAsset retirement

obligations

Lease accounting

Revenuerecognition –construction

contracts

Impairment ofassets

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Industry implications – Financial institutions –banking

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Employee benefits

ConsolidationFinancial

instruments

Enhanceddisclosures

Insurancecontracts

Revenuerecognition

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Industry implications – Rate regulated entities

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Employee benefits

Rate regulationAsset retirement

obligations

Lease accounting

Revenuerecognition

Impairment ofassets

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Accounting Standards for Private Enterprises(ASPE)

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A ‘Made in Canada’ approach….

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What is ASPE and why has it been chosen?

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“one size does not necessarily fit all”

Discussion paper May 2007

Exposure draft April 2009

Final standard issued in December 2009

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Accounting Standards for Private Enterprises -principles

• Available to all private enterprises – including subsidiaries ofpublicly accountable enterprises

• Based on existing Canadian GAAP

• Some existing interpretive guidance embedded

• Simplified existing financial reporting

• Reduced disclosure requirements

• Some existing accounting guidance is deleted

• Early adoption is permitted

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Implications for financial ratiosExample, impact on debt to equity ratio andEDITDA:

Company XYZ - December 31, 2009

EBITDA - $5 million, Debt - $20 million*, Equity - $10 million**

* Debt includes only $18 million of term loan and $2 million of liabilities related to aninterest in a joint venture

** Equity includes common shares, retained earnings and $5 million of contingentlyputtable preferred shares

Other information:

• XYZ has $20 million of net present value of operating lease commitments

• XYZ has $2 million of previously written down indefinite-lived intangible assets (notgoodwill) which now prove to be fully recoverable

• XYZ has an interest in a joint venture for which it currently accounts for usingproportionate consolidation; $1 million of losses included in retained earnings relateto the interest in the joint venture of which $0.5 million was incurred in 2009

• XYZ elects to fair value a building on transition, and records a transitional adjustmentof $2m. The building is depreciated over a remaining life of 10 years.

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Implications for Financial RatiosExample impact on debt to equity ratio andEBITDA (cont’d)

IFRS differences

1) Operating leases qualify as capital leases; $20m of commitments on BS

2) $5m of preferred shares classified as debt rather than equity

3) Impairment losses of $2m recognized in prior periods reversed

4) Fair value adjustment to building is recorded in equity ($2m) less $0.2m depreciation charged inthe year

ASPE differences

1) Interest in JV uses the cost method rather than proportionate consolidation

2) Impairment losses of $2m on intangibles cannot be reversed

3) Fair value adjustment to building is recorded in equity ($2m) less $0.2m depreciation charged inthe year

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Debt Equity D/E Ratio EBITDA Debt / EBITDA

Current C GAAP 20.0 10.0 2.0 5.0 4.0

IFRS 45.0 8.8 5.1 6.8 6.6

ASPE 18.0 12.8 1.4 5.3 3.4

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The European Experience

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What was the reaction of investors when Europeconverted to IFRS?

• In 2006, 187 fund managers participated in an IFRS survey:

– 79% believed transition to IFRS was a positive change

– Key benefits of IFRS included: Improved transparency andmanagement information, and consistency of reporting

– IFRS influenced investment decisions

Source: 2006 PwC/IpSOS MORI survey

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Questions

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Useful sources of information

http://www.pwc.com/ca

http://www.pwc.com/ca/en/directorconnect/ifrs-handbook.jhtml

http://www.ifrs.org/Home.htm

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Useful sources of information

IFRS website –www.pwc.com/ifrs

Putting IFRS in Motion Series(industry specific):

• Banking

• Insurance

• Mining

• Oil and Gas

• Real Estate

• Retail and Consumer

• Energy and Utilities

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Asset Management

IFRS formanagersKey items to addressmoving towards 2011

PwC

Agenda

1. National Instrument 31-103 and 52-107 regulatory requirements

2. IFRS heat map

3. IFRS 1

4. Common accounting areas impacted by IFRS

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National Instrument 31-103 and 52-107 regulatoryrequirements

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National Instrument 52-107

2.1 Application —

1) This Instrument does not apply to investment funds.

2) This Instrument applies to all financial statements and interimfinancial information delivered by registrants to the securitiesregulatory authority or regulator under National Instrument31-103 Registration Requirements and Exemptions

IFRS for Managers“”Excerpt from October 1, 2010, Supplement to OSC Bulletin” 39

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NI 31-103 Part 12 requirements

• Registered firms must deliver annual financial statements andunaudited financial information (some exceptions).

• All financial statements and interim financial information deliveredunder NI 31-103 must comply with NI 52-107. Acceptable accountingprinciples, auditing standards and reporting currency.

IFRS for Managers40“”Excerpt from October 1, 2010, Supplement to OSC Bulletin”

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October 1, 2010 Amendments to NI 31-103Annual Financial Statements (Section 12.10)

1) Annual financial statements delivered to the regulator for financial yearsbeginning on or after January 1, 2011 must include the following:

a) a statement of comprehensive income, a statement of changes inequity and a statement of cash flows, each prepared for the mostrecently completed financial year and the financial year immediatelypreceding the most recently completed financial year, if any;

b) a statement of financial position, signed by at least one director of theregistered firm, as at the end of the most recently completed financialyear and the financial year immediately preceding the most recentlycompleted financial year, if any;

c) notes to the financial statements; and

2) The annual financial statements must be audited.


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October 1, 2010 Amendments to NI 31-103Interim Financial Information (Section 12.11)

1) Interim financial information delivered to the regulator for interim periodsrelating to financial years beginning on or after January 1, 2011 may belimited to the following:

a) a statement of comprehensive income for the 3-month period endingon the last day of the interim period and for the same period of theimmediately preceding financial year, if any;

b) a statement of financial position, signed by at least one director of theregistered firm, as at the end of the interim period and as at the endof the same interim period of the immediately preceding financialyear, if any.

2) The interim financial information delivered to the regulator must beprepared using the same accounting principles applied in the annualfinancial statements.


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Exemptions for financial year beginning in 2011

• Annual financial statements, the interim financial information, andthe working capital form may exclude comparatives. This impactstransition date!

• First interim financial information, completed working capital formand description of any NAV adjustments (IFM) must be delivered nolater than 45 days after the end of the interim period.

* Position may differ for managers who are subsidiaries of publiccompanies


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October 1, 2010 Amendments to NI 52-107

Sections 3.2(3) & (4)

3) Financial statements and interim financial information required for registrants underNI 31-103 must

a) be prepared in accordance with Canadian GAAP applicable to publiclyaccountable enterprises, except that any investments in subsidiaries,jointly controlled entities and associates must be accounted for asspecified for separate financial statements in IAS 27, and

b) in the case of annual financial statements,

i) include the following statement:

These financial statements are prepared in accordance with thefinancial reporting framework specified in paragraph 3.2(3)(a)[subsection 3.2(4) – for first year] of National instrument 52-107Acceptable Accounting Principles and Auditing Standards forfinancial statements delivered by registrants. and

ii) describe the financial reporting framework used toprepare the financial statements.

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October 1, 2010 Amendments to NI 52-107

4) Despite paragraph (3)(a), financial statements and interim financialinformation for periods relating to a financial year beginning in 2011may be prepared in accordance with Canadian GAAP applicable topublicly accountable enterprises, except that

a) any investments in subsidiaries, jointly controlled entitiesand associates must be accounted for as specified forseparate financial statements in IAS 27,

b) comparative information relating to the precedingfinancial year must be excluded, and

c) the first day of the financial year to which the financialstatements or interim financial information relates must beused as the date of transition to the financial reportingframework.

Transition Date – January 1, 2011

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Auditors’ Report

• The financial statements and related auditors’ report should beprepared under a special purpose framework.

• Special purpose framework – A financial reporting frameworkdesigned to meet the financial information needs of specific users.The financial reporting framework may be a fair presentationframework or a compliance framework.

• CAS 800 provides guidance on the use of this framework.

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IFRS heat map

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IFRS heat map

The more significant areas that could impact IFRS managers are summarized below.

• First Time Adoption

• FinancialInstruments

• Impairment of Assets• Income Taxes

• RevenueRecognition

• Provisions andContingentLiabilities

• Debt/equityclassification

• Property, Plant andEquipment

• Leases

• Disclosures

Fin

an

cia

lS

tate

me

nts

Imp

ac

t

High

Level of Implementation Effort HighLow

Graph summary of potential impact areas

Low

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The differences presented therein have been rated high, medium or low, based on ageneric assessment of the impact on financial statements and implementation effort.Each company’s facts and circumstances will be different.

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IFRS 1

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Scope of IFRS 1?

• Mandatory guidance for entities preparing IFRS financial statementsfor the first time.

• First financial statement to contain an explicit and unreservedstatement of compliance with IFRS only if the entity fullycomplies with IFRS regardless of the fact that the regulator requiresa disclosed basis of accounting.

• IFRS 1 does not apply to companies that already apply IFRS for localreporting purposes (ie: can only apply IFRS 1 one time)

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IFRS 1General Principles

• Requires a first-time adopter to apply the version of IFRS effective atthe reporting date retrospectively, as if the Company hadalways presented financial statements in accordance with IFRS(subject to certain exemptions and exceptions)

• Reporting date is the end of the latest period covered by financialstatements or interim financial information

• YE Dec 31, 2011 or Q1 March 31, 2011 (first annual or interim filingsfor a calendar year company)

• Disclosures required to highlight transition

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Date of transition

• The date of transition to IFRS is defined as “beginning of the earliestperiod for which an entity presents full comparative informationunder IFRS in its first IFRS financial statements”

• Under NI 31-103, January 1, 2011 for calendar year company (unlesscomparatives were disclosed then January 1, 2010)

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Opening balance sheet

• Opening IFRS balance sheet is the starting point for all subsequentaccounting under IFRS.

• Prepare an opening IFRS balance sheet at date of transition

• January 1, 2011 for calendar year-end companies (unless additionalIFRS comparative year presented)

• Reflects all adjustments from Canadian GAAP to IFRS

• Disclose reconciliation of equity under GAAP (12/31/10) to equityunder (1/1/11)

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Opening balance sheet (cont’d)

• Recognize assets and liabilities required by IFRS

• De-recognize any assets and liabilities that don’t qualify forrecognition under IFRS

• Remeasure all recognized items in accordance with IFRS

• Record impairment charges on opening balance sheet

• Classify assets, liabilities and equity as required under IFRS

• Net impact of these adjustments will usually be recorded in openingretained earnings (or other equity accounts).

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Accounting policies

• Select accounting policies that comply with IFRS in force at thereporting date

• Accounting policies should be applied retrospectively to openingIFRS balance sheet (Jan 1, 2011)

• Recognize changes in accounting policies generally in equity inthe opening IFRS balance sheet

• Transitional provisions of individual IFRS standards DO NOTAPPLY to a first-time adopter (apply IFRS 1).

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Exemptions and exceptions

• Mandatory exceptions from retrospective application

• Optional exemptions from retrospective application

Costs Benefits

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Mandatory exceptions

Four mandatory exceptions from retrospective application:

• De-recognition of financial assets and financial liabilities

• Hedge accounting

• Estimates

• Non-controlling interests

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Accounting estimates

• IFRS 1 prohibits use of hindsight to create or revise estimatesunder Canadian GAAP unless objective evidence of an error.

• New estimates are based on information known at the opening IFRSbalance sheet date (Jan 1, 2011)

• Proposed amendments by IASB on IFRS 1

Prohibitsuse of

hindsight!

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IFRS optional exemptionsAre they likely to apply to managers?

Yes No Exemption

X Business combinations

X Fair value or revaluation as deemed cost (ie: PPE)

X Employee benefits

X Cumulative translation differences

X Compound financial instruments

XTransition date for subsidiaries, associates and jointventures

X Designation of financial assets and financial liabilities

X Share-based payments

If relevant, then consult!

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IFRS Optional ExemptionsAre they likely to apply to managers?

Yes No Exemption

X Insurance contracts

X Arrangements with leases

XFair value measurement of no-active market financialinstruments at initial recognition

X Service concession arrangements

X Borrowing costs

XInvestments in subsidiaries, jointly controlled entitiesand associates

XDecommissioning liabilities included in the cost ofproperty, plant and equipment (PP&E)

If relevant, then consult!

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Disclosures

• IFRS requires enhanced disclosures, even in situations where theremight not be any CGAAP to IFRS differences

• Some of the more common areas where additional disclosures arerequired include:• IAS 1 Presentation of Financial Statements

• IAS 24 Related Party Transactions

• Areas requiring management estimates (sensitivities)

• IAS 7 Cash Flow Statement

• IAS 12 Income Taxes

• IAS 37 Provisions, Contingent Liabilities and Contingent Assets

• IFRS 1 First Time Adoption of IFRS

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Illustrative Balance Sheet

Sample Co.Statement of Financial Position

(in Canadian dollars)

$ $

December 31,2011

$

January 1,2011

$

Assets

Current assets

Cash 1,000 250

Marketable securities 1,280 870

Accounts receivable

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Illustrative Income Statement

Sample Co.Statement of IncomeFor the year ended December 31

(in Canadian dollars)

2011$

Revenue 92,000

Management fees 2,450

Interest income 94,450

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Common accounting areas impacted by IFRS

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Common accounting areas impacted by IFRS(cont’d)

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Area Key issues What needs to beconsidered

Management fees Revenue from service contracts is recognized in amanner consistent with the performance of theservice being rendered, to the extent that thecollection of the revenue is reasonably certain asrequired by Section 3400, Revenue.

In most circumstances, collection of managementfee income from Funds managed is reasonablycertain and such fees are recognized in the periodin which they arise.

IFRS revenue recognition principles aresimilar to Canadian GAAP, but with lessdetailed guidance. Principles for revenuerecognition under IFRS are to recognizerevenue when probable future economicbenefits, revenue and costs are measurable,risks and rewards have been transferred.

Performance fees Performance fees may differ considerably in theirstructure and often involve complexities such asmulti-yeararrangements and high watermarks.

Revenue from such arrangements isrecognized only to the extent that theamount of consideration to be receivedis reliably measurable and ultimatecollection is reasonably certain asrequired by Section 3400, Revenue.

Canadian GAAP is generally aligned withIFRS for revenue recognition as noted above.

The criteria described above can be used toassess when these performance fees may berecognized.

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Trailingcommissions

Trailing commissions paid to thirdparties are accounted for as services are received,in accordance with the terms of the contractualarrangement with the investment advisor.

Trailing commissions are typicallyconsidered to be incurred over time tothe extent that the payment is dependent on aninvestor retaining an investment with themanager for a period of time. Such costs areaccrued and accounted for as expenses over theperiod during which services are provided.

Certain trail commissions may fit thedefinition of financial liability under IFRS,thereby requiring them to be recognized onthe balance sheet upon sale of theinvestment and the associated revenuerecognized over the term of the contract.How these are recognized may impact acompany’s cost and incentive structures

Placement fees A third party adviser may be paid an upfrontfinders fee for sourcing investor assets for thefund.

Placement fees under IAS 18 Appendix likelymeet the definition of “incremental costsattributable to securing an investmentmanagement contract”.

Recognized as an asset and amortized.

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Upfront commissionspaid to financialadvisors

Including relatedamortization,impairment andderecognition

Initial fees paid to third parties (e.g. deferredcommissions paid to advisors by investmentmanagers) are deferred and amortized over theperiod during which revenue is expected to beearned.

Two views:a) IAS 18 Appendix treated as “incremental costs

attributable to securing an investmentmanagement contract”.

b) Intangible asset (IAS 38, C GAAP 3064)

Basis of amortization, impairment andderecognition is getting renewed emphasis giventhe changeover to IFRS.

Under IFRS, it is likely that many upfrontcommissions previously deferred underCanadian GAAP will continue to qualify fordeferral. Key considerations as follows:

Amortization – systematic basis

Impairment – CGU and how to define‘lowest level’

Derecognition – methodology to bedeveloped (consider at unit level versustranche level?)

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Area Key issues What needs to be considered

Provisions andcontingent liabilities

When should provisions berecognized? This is importantgiven the number and type oflegal issues outstanding at anypoint in time.

A provision should be recognized if it is probable that a liabilityhas been incurred. Recognize on the basis of legal ORconstructive obligation

Canadian companies generally use the threshold of 75% whendetermining whether an event is “likely” to occur. The“probable” threshold used under IFRS is lower, generallyaccepted to be more than 50%. Therefore, additionalprovisions may be recorded under IFRS using the lowerthreshold.

IFRS requires that, where the effect of the time value of moneyis material, the long-term portion of a provision will have to bediscounted.

Recognition of constructive obligations will become morecommonplace under IFRS.

Onerous contract: Contract in which the unavoidable costs ofmeeting the obligation exceed the economic benefits expectedto be received under it.

Recognize present obligation under the contract as a provision,measured at the lower of fulfillment cost and compensation (orpenalties) arising from failure to fulfill it.

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Debt/equity Distinction of debt and equityinstruments.

Anything in equity that is other than a common share, shouldbe carefully evaluated to determine if it qualifies for equityclassification under IAS 32

Issues are surfacing (REITs, income trusts, mutual funds,convertible debt), including

• Contingent settlement and multiple settlement provisions

• Puttable shares

• Derivatives on own equity

Broad principles are similar:Classify as liability if:• Issuer could be obliged to settle in cash or

another financial instrument, or

• Instrument will or may be settled in a variablenumber of the entity’s own equity instruments

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Financial instruments How are financial instruments,including derivatives and hedgesaccounted for and disclosed?

Decide on designation/classification at date of transition andsubsequent measurement:• trading securities (fair value through profit or loss)• available for sale (fair value through OCI)• held to maturity securities (amortized cost)• loans and receivables (amortized cost)• derivatives (fair value through profit and loss)• investment in equity instruments not quoted in active

markets and FV not reliably determinable (cost)• derivatives linked to and settled in unquoted equity

instruments (cost)

Note: financial instrument accounting is relatively similar giventhe recent adoption of Section 3855. Some subtle differences.

AFS financial assets

AFS financial assets can be measured at cost only when:

IFRS: there is no quoted market price in an active marketand fair value cannot be reliably measured. There is apresumption under IFRS that FV can be reliably measured.Canadian GAAP: there is no quoted price in an activemarket.

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Financial instruments How are financial instruments,including derivatives and hedgesaccounted for and disclosed?

Impairment

At each period, there is a need to assess whether objectiveevidence exists that a financial asset is impaired.

IFRS: if objective evidence of impairment then a chargeto income is recorded.Canadian GAAP: similar to IFRS, however underCanadian GAAP for AFS securities a loss is recognizedonly if is ‘other then temporary’.

Foreign exchange

Foreign exchange on AFS investments is measured as follows:

IFRS: for monetary AFS assets the change in FVattributable to foreign exchange is recognized in P&L.Remaining FV change goes to OCI.For non-monetary AFS financial assets (equityinstruments), entire change in FV, including foreignexchange, is recognized in OCI.Canadian GAAP: entire change in FV, including foreignexchange, for all AFS assets is recognized in OCI.

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Property, plant andequipment (notincluding investmentproperties)

How should capital assets beclassified and valued:a) at time of transition andb) on an on-going basis.

IFRS requires assets to be disaggregated into the underlyingcomponents (“componentization approach”) and amortizedover their separate lives.

This approach may be at a more detailed level than currentlyapplied and may involve significant management judgement aswell as additional analysis than is currently being carried outby managers.

Under IFRS, property, plant and equipment can be measuredusing either using the cost model or the revaluation model.Under the revaluation model, organizations can periodicallyrevalue property, plant and equipment (other than investmentproperty, which is accounted for under IAS 40) to fair value.

Managers will have to explicitly assess the reasonableness ofdepreciation rates, useful lives and residual values of items ofproperty, plant and equipment at least at each financial year-end.

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Impairment testing CGU definition and the one stepimpairment test.

One-step impairment test calculated by comparing carryingvalues to the greater of discounted cash flows and fair valueless cost to sell, which differs from the Canadian requirementof using undiscounted cash flows. The recoverable amount ofeach asset or cash generating unit (“CGU”) must bedetermined based on the higher of its fair value less costs tosell and value-in-use (i.e. its recoverable amount). Under IFRS,impairment exists when the recoverable amount of an asset ora CGU is less than its carrying value.

Property, plant and equipment and finite lived intangibleassets must be reviewed to determine whether an indication ofimpairment exists at each reporting date. Indefinite livedintangible assets (and goodwill) are required to be assess forimpairment on an annual basis, or when impairmentindicators are identified.

May result in the recognition of an impairment loss that wouldnot be required under Canadian GAAP.

Impairment charges for property, plant and equipment andintangible asses (in certain circumstances) are subject toreversal under IFRS, which may result in more volatility in theincome statement and implementation of processes to trackoriginal depreciated balances in the event of an impairmentreversal.

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Income taxes Differences in the accounting fortax provisions.

IFRS is similar to existing Canadian GAAP accounting forincome taxes. However there are differences when you get intothe details.

For example, the assessment of tax assets and liabilities, as aresult of filing positions taken, is assessed for accountingpurposes based on the expected outcome in which the assetwill be recovered or the liability will be settled. This differsfrom Canadian GAAP as Canadian GAAP has several ways ofassessing these matters.

In addition, corresponding tax adjustments will need to bemade as a result of IFRS adjustments.

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Stock-basedcompensation

Differences in the accounting forstock- based compensation.

IFRS is similar in many respects to existing Canadian GAAPaccounting for stock- based compensation, but there areseveral measurement and other differences. For example,under IFRS, if a stock-based award is granted with a gradedvesting schedule, each tranche must be accounted for as aseparate arrangement.

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IFRS for Managers


Guarantees Does a subsidiary’s guarantee ofa parent’s debt or that of acompany under common controlfall within the scope of IAS 39and thus require recognition onthe subsidiary’s stand-alonefinancial statements?

Unlike Section 3855, IAS 39 does not contain any exceptionsfor related party guarantees issued to a parent or a subsidiaryunder common control. Financial guarantees fall within thescope of IAS 39 unless the guarantor had previously assertedthat such guarantees are insurance (see IAS 39.2), which isunlikely to be the case for Canadiancompanies transitioning to IFRS.

Under IAS 39, such contracts would be accounted for initiallyat fair value (see IAS 39.43 and AG4(a)) and subsequently(unless designated as at fair value through profit or loss, ifpermitted) at the higher of the amount (a) determined inaccordance with IAS 37; and (b) initially recognized less, whenappropriate, cumulative amortization recognized in accordancewith IAS 18, Revenue (IAS 39.47(d)).

If a subsidiary has guaranteed a debt of its parent company forno premium, the subsidiary would recognize a liability at fairvalue equal to the premiums which would have been chargedby a third party for such a guarantee. The resulting debit wouldlikely be treated as a distribution by the subsidiary to theparent company.

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Form 31-103F1 Calculation of excess workingcapital

IFRS for Managers

Component Potential impacts of IFRS

1. Current assets

2. Less current assets not readily convertible into cash (e.g., prepaid expenses)

3. Adjusted current assetsLine 1 minus line 2 =

4. Current liabilities

5. Add 100% of long-term related party debt unless the firm and the lender haveexecuted a sub-ordination agreement in the form set out in Appendix B and thefirm has delivered a copy of the agreement to the regulator

6. Adjusted current liabilitiesLine 4 plus line 5 =

7. Adjusted working capitalLine 3 minus line 6 =

8. Less minimum capital

9. Less market risk

10. Less any deductible under the firm’s bonding or insurance policy

11. Less Guarantees

12. Less unresolved differences

13. Excess working capital

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Questions

78IFRS for Managers

Thank you

This publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

© 2011 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firmof PricewaterhouseCoopers International Limited, each member firm of which is a separatelegal entity.

Derek Hatoum, Partner, PricewaterhouseCoopersEmail: [email protected]: 416 869 8755

Rebecca L. Vass, Director, PricewaterhouseCoopersEmail: [email protected]: 416 365 8197

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