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Canada | December 18, 2015
Stay on top of financial reporting

This month, we are exploring the potential impact of market volatility on the impairment testing of various assets held by Canadian entities. Alexia Donoghue, a senior manager who specializes in securities reviews, explores how current economic trends may impact your financial reporting process and discusses some of the related disclosure requirements.

Our editorial team joins me in wishing you all the best for the holiday season. We will return in February.
Warm regards,



Chantal Rassart
Partner | Audit Knowledge Management Officer

Recent volatility in markets could lead to impairment charges this year

Volatility in the Canadian and global economic environment can have a significant impact on the financial position and financial performance of entities. Generally speaking, across all accounting frameworks, impairment testing is required whenever events or circumstances indicate that an individual asset or group of assets will not be able to generate a sufficient level of future economic benefit to support its carrying amount. While the specific details of impairment tests do, in fact, vary by framework, entities need to consider whether existing internal or external factors will reduce the entity’s ability to generate future cash flows from its asset(s).

In 2015, we have seen some significant adverse changes in the market environment in which many Canadian entities operate. They range from fluctuations in commodity prices to a declining Canadian dollar and both actual and anticipated changes to interest rates. These factors, among many others, are potential indicators of impairment and may trigger an assessment as to whether the underlying value of an entity’s assets is recoverable. The outcome of such tests may result in an impairment loss being recorded in an entity’s financial statements. Conversely, favourable economic changes help support the carrying value of an entity’s assets. Lower interest rates may result in calculations of higher recoverable amounts. Commodity prices, foreign exchange rates and interest rates are often significant inputs into valuation models used to assess whether an asset or groups of assets are impaired.

Assets subject to impairment testing generally include inventories, property, plant and equipment, intangible assets, financial assets (other than those measured at fair value through profit or loss) and, of course, goodwill. So, given that year-end reviews for indicators of impairment and/or annual impairment testing are already underway, we have compiled a list of some economic trends for your consideration.

Fluctuating commodity prices

In the last 12 months, we have seen various peaks and valleys in many commodity prices. For example, the price of crude oil has dropped from approximately US$70/barrel to less than US$40/barrel1, and other commodities that have experienced significant price swings in the same period include natural gas, gold, silver, and copper. Many of you may be thinking, “I’m not a commodity producer, so do I really need to monitor commodity prices?”

Well, the answer is yes! Volatile commodity prices have a direct impact on entities producing commodities, but can also have a significant impact on entities whose activities are dependent on those commodities as a key input in their cost structure. Certainly, the movement in commodity prices may have a positive impact on your financial performance in one reporting period, but what about three months from now? Entities need to understand the significant inputs used in their valuation models, including those tied to commodity prices, and how changes in those inputs may result in an impairment of the underlying value of their assets. Monitoring is key.

Declining Canadian dollar

Another key input we have all witnessed in Canada is the continued depreciation of the Canadian dollar. In the past year, the 12-month average U.S.-Canadian dollar exchange rate declined from US$0.914 in November 2014 to US$0.797 in November 20152 – that is, a 13% devaluation! I expect that this decline will result in some significant foreign currency gains and/or losses for many entities. As a reminder, a decline in the local currency relative to one’s functional currency is a potential indicator of impairment under the various frameworks, so when this sort of market change occurs, further analysis is often required.

To the extent that underlying cash inflows and outflows are denominated in a foreign currency, management will need to determine their impact on their valuation calculations.

Changing interest rates

In an effort to balance slower growth and the depreciation of the Canadian dollar with inflation targets, the Bank of Canada revised its target for the overnight rate to 0.5% (July 2015)3. Conversely, our friends to the south at the U.S. Federal Reserve are expected to increase U.S. interest rates as a result of improved employment statistics4.

So what does this mean? First, entities using the risk-free interest rate as a basis for developing their discount rate for impairment purposes need to ensure that they have captured the above changes. And second, anyone with variable interest-bearing assets and/or borrowings should continue to monitor whether subsequent changes to interest rates result in new and/or increased interest rate risk exposure and how any such changes might impact impairment calculations.

Income taxes

The recording of an impairment may result in the recognition of a deferred tax asset or a reduction in a deferred tax liability, depending on the tax base of the asset. Management is reminded that deferred tax balances are measured using the tax rates that are expected to apply when the temporary differences reverse, based on tax rates enacted or substantively enacted at the end of the reporting period. Recent losses and changes in economic conditions are just some of the criteria that need to be assessed prior to the recognition of deferred tax assets, including those arising from impairment. In addition, an assessment should be made, at each subsequent reporting period, as to whether an entity will be able to generate sufficient future taxable profit such that its recognized deferred tax assets remain recoverable. Tax assets should be reduced to the extent that recoverability is no longer probable.

Disclosure and other considerations

If you have identified an indicator of impairment as a result of the changes in the economic environment in which you operate, regardless of whether an impairment needs to be recognized, your financial reporting disclosures may need updating to reflect current facts and circumstances faced by your entity, including, but not limited to, your impairment test methodology and key inputs applied. Refer to disclosure requirements as set out in your respective accounting frameworks. Remember that the basis on which the recoverable and carrying amount of assets is determined is a matter of judgment and, as such, your accounting policy and significant judgment disclosures should reflect these considerations.

Entities may also need to update their financial statement disclosures when market changes occur in order to identify any new and/or increased risks associated with such exposures. In addition, consider disclosures in your other communications. For example, continuous disclosure documents such as your Management Discussion and Analysis will need updating to describe how your financial performance was impacted by changes in the economic environment and your exposure to such financial risks, including any changes to your risk management strategy. Disclosures need to be entity-specific and should contain relevant information for financial statement users.

A number of entities have entered into hedges to mitigate their exposure to currency, interest rate and/or pricing fluctuations. It is also important to understand how the accounting for your risk mitigation strategy may impact your impairment tests and vice versa.

Other considerations with regards to how economic volatility may impact your financial reporting include a reassessment of your methodology and the basis on which assets are depreciated or amortized, and how economic trends may impact the fair value measurement of assets acquired in a business combination.

Final thoughts

The key, as noted above, is monitoring and disclosure. When markets are changing, preparers of financial statements need to be well versed on how economic fluctuations can impact their financial reporting and, in turn, ensure that their disclosures reflect how the entity was affected and how it has responded to those fluctuations.

As always, please don’t hesitate to reach out to your Deloitte Business Advisor to discuss this article further or for more information.

Alexia Donoghue, CPA, CA
Senior Manager | National Services

1 http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=1y 
2 http://www.bankofcanada.ca/rates/exchange/10-year-lookup/
3 http://www.bankofcanada.ca/2015/07/fad-press-release-2015-07-15/
4 http://www.federalreserve.gov/newsevents/testimony/yellen20151203a.htm

 

Standard-setting activities & insights

International Financial Reporting Standards
Accounting Standards for Private Enterprises
Public Sector Accounting Standards
US GAAP
Securities regulatory matters
Assurance

Webcasts & learning resources

Upcoming events
Past events

Publications & tools

Clearly IFRS - Industry insights for IFRS 15 (Mining Sector)
Deloitte Canadian tax alert: Stock option amendments – prospectivity promised
Heads Up — Highlights of the 2015 AICPA Conference on Current SEC and PCAOB Developments
2015 ASPE alert
Clearly IFRS — IASB issues exposure draft: Annual improvements to IFRSs 2014-2016 cycle
“CAQ Profession in Focus” Features Deloitte & Touche LLP CEO Ucuzoglu

Business news highlights

Canadian news
U.S. news
International news
 

Standard-setting activities & insights

International Financial Reporting Standards

Hans Hoogervorst outlines the progress of improvements to the IFRS Standards and further changes that are on-the-horizon developments
On December 10, 2015, during the 2015 annual AICPA Conference, International Accounting Standards Board (IASB) Chairman Hans Hoogervorst spoke about the IFRS developments during 2015 and what to expect in the upcoming year. Mr. Hoogervorst talked about the near-completion of the decade-long program of convergence with the Financial Accounting Standards Board (FASB), which has delivered improved standards for revenue recognition and leases. Read more

 

IASB proposes amendments to address concerns about the different effective dates of IFRS 9 and the new insurance contracts standard
On December 9, 2015, the International Accounting Standards Board (IASB) published an exposure draft (ED/2015/11) with proposed amendments to IFRS 4, Insurance Contracts that are intended to address concerns about the different effective dates of IFRS 9, Financial Instruments and the forthcoming new insurance contracts standard. Comments are requested by February 8, 2016. Read more

 

SEC speeches on IFRSs at the annual AICPA conference
On December 9, 2015, representatives of the Securities and Exchange Commission (SEC) spoke at surprising length about IFRS in the United States at the 2015 American Institute of Certified Public Accountants (AICPA) Conference on Current SEC and PCAOB Developments. Read more

 

Should the IASB extend its current focus beyond that of the organization and develop standards for entities in the private, not-for-profit sector?
On November 27, 2015, the IASB released comment letters received when the Trustees launched the 2015 Constitution review on July 27, 2015. One of the questions asked was whether the IASB should extend its current focus on private sector, for-profit entities and develop standards for entities in the private, not-for-profit sector. With the comment letter deadline approaching, two major positions emerge. Read more

 

Accounting Standards for Private Enterprises

AcSB Decision Summary – November 24, 2015 - Redeemable Preferred Shares
At its meeting on November 24, 2015, the AcSB continued its deliberations and, in particular, discussed next steps in response to the comment letters and roundtable discussions on the Exposure Draft, Redeemable Preferred Shares Issued in a Tax Planning Arrangement. The AcSB agreed that alternatives to the manner in which the classification exception is described in Financial Instruments, paragraph 3856.23, should be explored. To facilitate the development of alternatives, the AcSB directed the staff to further analyze the scope of the exception and the characteristics of inter-generational transfers. Read more

 

AcSB Decision Summary – November 24, 2015 - 2017 annual improvements
At its meeting on November 24, 2015, the AcSB considered the recommendations of its Private Enterprise Advisory Committee and decided to include proposals in the 2017 annual improvements to remove the requirements for an enterprise to disclose: (i) its accounting policies “as the first note to the financial statements” as described in Section 1505, Disclosure of Accounting Policies; and (ii) the carrying amount of impaired operating lease receivables set out in Section 3065, Leases. Read more

 

FYI Article – Clarifying the Cost Method: Subsidiaries and Investments
On November 17, 2015, the AcSB released an article that provides an overview of the AcSB’s recent Exposure Draft on this topic. Read more

 

Public Sector Accounting Standards

PSAB Matters Article – Partnerships with Common Goals
On November 17, 2015, the Public Sector Accounting Board (PSAB) released an article that provides an overview of Section PS 3060, Government Partnerships, which establishes how an entity should account for its interest in partnerships. Read more

 

US GAAP

PCAOB Adopts Rules Requiring Disclosure of the Engagement Partner and Other Accounting Firms Participating in an Audit
On December 15, 2015, the Public Company Accounting Oversight Board (PCAOB) adopted new rules to provide investors with more information about who is participating in public company audits. Under the final rules, auditors will be required to file a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing: (i) the name of the engagement partner; (ii) the names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours; and (iii) the number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5 percent of the total audit hours. Read more

 

FASB proposes amendments to the disclosure requirements for fair value measurements
On December 3, 2015, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, that would amend the requirements in ASC 820 for disclosing fair value measurements. Refer to the Heads Up article. Read more

 

FASB proposes to clarify the definition of a business
On November 23, 2015, the FASB issued a proposed Accounting Standards Update, Clarifying the Definition of a Business, which is intended to help entities evaluate whether to account for transactions as acquisitions (or disposals) of assets or as businesses. Refer to the Heads Up article. Read more

 

FASB issues ASU simplifying balance sheet classification of deferred taxes
On November 20, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-17, Balance Sheet Classification of Deferred Taxes, as part of its simplification initiative (i.e., the Board’s effort to reduce the cost and complexity of certain aspects of U.S. GAAP). Under the ASU, organizations that present a classified balance sheet are required to classify all deferred taxes as non-current assets or non-current liabilities. Read more

 

Securities regulatory matters

Regulators Release Detailed Data on Women on Boards and in Executive Officer Positions
On November 12, 2015, several Canadian securities regulatory authorities published the underlying data used to prepare CSA Multilateral Staff Notice 58-307, Staff Review of Women on Boards and in Executive Officer Positions – Compliance with NI 58-101 Disclosure of Corporate Governance Practices. Read more

 

Canadian securities regulators issue additional guidance related to oil and gas disclosure
On November 5, 2015, the Canadian Securities Administrators (CSA) published CSA Staff Notice 51-345, Disclosure of Abandonment and Reclamation Costs in National Instrument 51 101, Standards of Disclosure for Oil and Gas Activities and Related Forms, which summarizes certain information and requirements in recently amended NI 51-101 and related forms. Read more

 

Regulators Publish Crowdfunding Exemption and Registration Framework for Funding Portals
On November 5, 2015, the securities regulatory authorities in Manitoba, Ontario, Quebec, New Brunswick and Nova Scotia (collectively, the participating jurisdictions) published in final form Multilateral Instrument 45-108, Crowdfunding, which introduces a crowdfunding prospectus exemption for issuers as well as a registration framework for funding portals. Read more

 

Assurance

Canada’s audit regulator releases annual public report on Big Four accounting firm inspections
On November 30, 2015, the Canadian Public Accountability Board (CPAB) released its public report on the 2015 inspections of Canada’s four largest accounting firms (the Big Four ― Deloitte LLP, EY LLP, KPMG LLP, PwC LLP). Its findings indicate that audit quality across the four firms was inconsistent. Read more

 

AASB Exposure Draft – The Auditor’s Responsibilities Relating to Other Information: Canadian Amendments
On November 24, 2015, the Auditing and Assurance Standards Board (AASB) issued an Exposure Draft of proposed Canadian amendments to ISA 720. Stakeholders are encouraged to submit their comments by February 12, 2016. Read more

 

The Future Relevance of Audit
On November 19, 2015, the International Auditing and Assurance Standards Board (IAASB) released a speech where Arnold Schilder, IAASB Chairman, discussed the future relevance of audit. Read more

 

For a complete review of recent news by financial reporting framework, visit our Centre for Financial Reporting:

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ASNPO

 

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Securities

 
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Webcasts & learning resources

Upcoming events

Date Title
January 7, 2016 Focus on the audit committee
This session of the Directors’ Series will focus on the top-of-mind risks for audit committees, a review of financial reporting trends, a regulatory update on the Ontario Securities Commission’s (OSC) priorities for 2016, and much more.
 
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Date Title
January 12, 2016 IFRS Insurance Webcast
The IASB published a document Insurance Contracts: Exposure Draft & Comment letters on December 9, 2015 to seek public comments on the proposed amendments to IFRS 4. This is to address the temporary consequences of the different effective dates of IFRS 9, Financial Instruments and the new insurance contracts Standards. The Board proposed two amendments to IFRS 4 to supplement existing options within the Standards that could be used to address any accounting volatility that may arise: the overlay approach and the deferral approach.
 
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Date Title
January 13, 2016 Public Sector Accounting Standards update webcast
Join our experts for a 90-minute informative session where our Deloitte professionals will share their insights on potential challenges arising from recently-issued standards and projects in progress. Please note that this webcast will be pre-recorded and available to view on and after this date.
 
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Date Title
January 19, 2016 AcSB Webinar – Explore the AcSB’s Discussion Paper on Agriculture
Join us for this AcSB webinar to learn about the approaches that the AcSB is considering in how private enterprises should account for: (i) unharvested crops; (ii) agricultural produce; (iii) animals held for sale; (iv) bearer plants; and (v) bearer animals. Learn about the AcSB’s discussion paper so you can share your views and help shape the future accounting for biological assets and agricultural produce. Understand the AcSB’s thinking around the options for recognition, measurement, impairment, presentation and disclosure.
 
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Past events

Date Title
December 9, 2015 ASPE annual technical update - Where are we now? Where are we going?
During this webcast, our Deloitte presenters discussed ASPE accounting changes and other key areas for consideration.
December 4, 2015 AcSB Webinar – Accounting Standards Are Evolving for NPOs in the Private Sector: Stay Up to Date!
The AcSB approved three projects that will improve the standards followed by not-for-profit organizations in the private sector. During this session, the AcSB discussed the status of these projects that were in response to the feedback from private sector stakeholders to the April 2013 AcSB/PSAB joint Statement of Principles, “Improvements to Not-for-Profit Standards.”
November 25, 2015 Q4 2015 IFRS quarterly technical update - Bringing clarity to an IFRS world
In this Q4 update, our Deloitte presenters provided updates on year-end reminders, financial reporting implications of market conditions, upcoming changes to the standards, and the IASB work plan.
November 24, 2015 Diversity in the boardroom – Moving beyond the “Why”
In this special live Directors’ Series webcast, a panel of experts discussed the results of the CSA report and considered pragmatic measures for moving organizations’ diversity agendas forward.
 
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Publications & tools

Clearly IFRS - Industry insights for IFRS 15 (Mining Sector)

Publication date: December 2015
This publication discusses the impacts of IFRS 15, Revenue from Contracts with Customers on the mining sector.

Read more
 

Deloitte Canadian tax alert: Stock option amendments – prospectivity promised

Publication date: December 2015
On November 20, 2015, Finance Minister Bill Morneau released the Update of 2015 Economic and Fiscal Projections. In response to a question after the presentation, he indicated that the stock option amendments will not be enacted retroactively and that the current tax provisions will continue to apply to options issued prior to the date on which the details of the changes are released.

Read more
 

Heads Up — Highlights of the 2015 AICPA Conference on Current SEC and PCAOB Developments

Publication date: December 2015
Against the backdrop of the headline-grabbing U.S. presidential race, financial statement regulators, preparers, and auditors converged on the nation’s capital and epicentre of American politics to discuss topics that are highly unlikely to be the subjects of any election debate. Nevertheless, last week’s three-day conference generated its own brand of accountant and auditor energy, inspired in part by the #AuditorProud social media blitz that was spearheaded by the CAQ and mentioned in conference remarks by the CAQ’s Executive Director Cynthia Fornelli.

Read more
 

2015 ASPE alert

Publication date: November 2015
This alert addresses recent changes made to ASPE and future changes we can expect. The alert also highlights points for consideration as entities prepare for their upcoming year-ends.

Read more
 

Clearly IFRS — IASB issues exposure draft: Annual improvements to IFRSs 2014-2016 cycle

Publication date: November 2015
This newsletter outlines the proposals set out in the recent exposure draft ED/2015/10 Annual Improvements to IFRSs 2014-2016 Cycle, which was published by the IASB in November 2015 for public comment.

Read more
 

“CAQ Profession in Focus” Features Deloitte & Touche LLP CEO Ucuzoglu

Publication date: November 2015
This edition of “CAQ Profession in Focus” features Joseph Ucuzoglu, Chairman and Chief Executive Officer of our U.S. member firm Deloitte & Touche LLP. Ucuzoglu discusses the impact of regulation on public company auditors, top issues facing the profession, and his career advice.

Read more
 
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Business news highlights

We continuously review relevant business e-publications and publish a selection of newsworthy items below that we believe you will find interesting and relevant.

Canadian news

Date Publication Article
2015/12/11 Financial Post Joe Oliver: Bring the national securities regulator across the finish line
2015/11/20 Torys LLP Crowdfunding in Canada and the United States
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U.S. news

Date Publication Article
2015/12/11 Deloitte US FAST Act makes changes to the JOBS Act and SEC disclosure requirements
2015/12/10 Accounting Today FASB and IASB Ready Rollout of New Standards
2015/12/10 Journal of Accountancy Revenue recognition: SEC looking ahead for comparability
2015/12/10 FASB FASB’s Golden gives spirited defense of impairment project
2015/12/09 Journal of Accountancy PCAOB to vote on naming engagement partner
2015/11/30 SEC Commissioner Aguilar's (Hopefully) Helpful Tips for New SEC Commissioners
2015/11/10 FEI Magazine A Deeper Look at the Financial Impact of Cyber Attacks
2015/11/20 Bloomberg 14 Predictions for 2016 From the Brightest Minds in Finance
2015/11/20 FASB For the Investor: Market Volatility—Implications for Financial Reporting
2015/11/18 FEI Daily SEC’s Piwowar Calls for CPA Commissioner, Focus on Materiality
2015/11/17 PCAOB PCAOB Impact on Financial Executives: Standards and Inspections, Remarks by Jay D. Hanson, Board Member
2015/11/16 Accounting Today FASB Getting Closer to Finalizing Major Standards
2015/11/16 SEC SEC Chief Accountant: Auditors Need to Keep Improving
2015/11/10 Dow Jones Market Watch Study suggests executives will hesitate to restate when bonuses are at risk
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International news

Date Publication Article
2015/12/03 Accountancy Age Extended auditor reports restoring trust in audit in post-HBOS world
2015/11/28 The Economist The rise and fall of the unicorns
2015/11/17 IFAC The “Sharing Economy” Presents Challenges and Opportunities for the Profession
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Chantal Rassart Chantal Rassart, CPA, CA
Partner | Audit Knowledge Management Officer

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