IFRS Implications for the Public Sector

1. IFRS Implications for the Public Sector Andrew Newman, Audit Partner, Public Sector

2. Agenda • Canada’s Plan to Adopt IFRS • IFRS-Canadian GAAP Similarities and Differences • Key Success Factors • Q & A

3. Canada’s Plan to Adopt IFRS

4. Canada’s plan to adopt IFRS – who and when? • Canadian GAAP will cease for publicly accountable enterprises • Change-over date to IFRS now confirmed as fiscal years beginning on or after January 1, 2011 • Currently “publicly accountable enterprises” defined to be entities that: • Issued any class of instruments in a public market; and • Hold assets in a fudiciary capacity for a broad group of outsiders. • Publicly accountable enterprises include Government Business Enterprises and Government Business Type Organizations

5. Private Enterprises • AcSB has announced intention to develop unique set of standards for private enterprises • Two key premises: • The majority of the recognition and measurement standards in the existing Handbook are relevant to Canada’s private business and will be retained with few, if any, modifications • Financial statement disclosure requirements will be considerably fewer than in the existing Handbook. • Moving quickly—anticipated to be completed by end of 2008. • Proposed approach and working drafts of some sections published on August 28th.

6. Not-for-Profit Organizations • AcSB has not mandated adoption of IFRS by NPOs • AcSB actively discussing the future direction of accounting standards for NPOs • Possible options include: • Providing a set of over-arching standards (liks S4400) that address unique aspects of NPOs • Allowing NPO’s to select between IFRS and private business GAAP, under the umbrellas of the over-arching NPO standards • Allowing, or requiring, the “SUCH” sector (schools, universities, colleges, hospitals) to adopt PSAB standards

7. Governments • PSAB has not signalled that governments or government NPOs will be required to adopt IFRS • International Public Sector Accounting Standards Board: • Currently no plan to implement international Public Sector standards in Canada • IPSASB relocated to Toronto • Canada has two members on IPSASB (Rick Neville & Sheila Fraser)

8. IFRS - Canadian GAAP Similarities and Differences

9. Timeline for adoption of IFRS Disclosureof plan for convergenceand anticipated effects Update convergence planand standards which may have material effect in greater detail Changeover date announced Jan 1/08 Jan 1/10 Dec 31/08 Jan 1/11 Calendar year periods beginning IFRSComparative figures IFRSgo-live IFRS Opening Balance Sheet Last reportingunderCanadian GAAP

10. IFRS versus Canadian GAAP – Similarities • Comprehensive set of principles-based standards • Similar to Canadian GAAP in structure and form • Similar basic concepts and recognition / measurement principles • Similar structure and content of financial statements • Many standards in IFRS provide similar approach as Canadian GAAP

11. IFRS versus Canadian GAAP – Differences • Fewer bright lines and rules • Some standards in IFRS differ considerably from Canadian GAAP – e.g. impairments, provisions • More accounting policy choices and less interpretative guidance Applying IFRS requires more professional judgement and results in greater volume of disclosures • Many differences in application/interpretation BE CAREFUL– The devil is in the detail!

12. IFRS versus Canadian GAAP:Areas with more significant differences • Impairment of assets • Provisions (incl. assetretirement obligations) • Financial instruments & hedging • Leases • Property, plant and equipment • Employee benefits • Securitizations  • Stock-based compensation • Accounting for tax uncertainties • Consolidations, SPEs, investments, JVs • Rate-regulated operations  • Industry-specific issues – insurance, extractive industries  Fundamentally different from Canadian GAAP

13. Impairment of Assets(IAS 36)

14. Impairment – Summary of approach IFRS has one general impairment standard • Recoverable amount is higher of • fair value less cost to sell • value in use (discounted CF) IFRS – “1-step process” Canadian GAAP – “2-step process” For an asset in use, undiscounted future cash flows from use establish recoverability and fair value used for the impairment calculation • Discounting required in • Evaluation stage Discounting occurs only in the valuation stage Impairments more likely under IFRS!!

15. Impairment – Long-lived assets and finite-life intangible assets • Timing of impairment tests same as Canadian GAAP • Estimate recoverable amount for • individual asset or, if not possible • the asset’s cash-generating unit • Apply CGU concept when asset does not generate cash inflows which are independent from other assets • similar to “asset group” but could have differences • Presume future cash flows beyond initial 5 years not reliable • extrapolation based on steady or declining rate of growth • Reverse impairment charges if circumstances change

16. Property, Plant & Equipment and Investment Property(IAS 16, IAS 40)

17. PP&E – Recognition and measurement • Components approach – more rigorously applied and broader than under Canadian • allocate cost to significant parts of the asset (including non-physical components such as major overhaul/inspection) • Borrowing costs directly attributable to construction of “qualifying” assets – must be capitalized • Subsequent measurement options are cost or revaluation model; apply to all items in a category of PP&E

18. Fair value model Initially measure at cost Adjust carrying value to fair value Do not deduct disposal costs in arriving at FV Recognize changes in FV in P&L, not equity No depreciation or impairment losses Cost model Initially measure at cost Depreciate Impairment losses Determine and disclose fair value Investment property – Two options Property held for rental or capital appreciation Apply accounting policy choice to all investment properties

19. Pension and Post Employment Benefits(IAS 19)

20. Defined benefit pension plans and OPEBs – Actuarial gains and losses • Can choose to recognize: • immediately in equity (with no amounts ever recognized in P&L); or • using corridor method; or • another systematic approach to recognize faster • Required to apply accounting policy choice consistently to all plans

21. Defined benefit pension plans and OPEBs – Past service costs • Accelerated recognition of past service costs relative to Canadian GAAP • Recognize past year service cost on straight-line basis over average remaining vesting period • To the extent that benefits are already vested at time of amendment, recognize past service costs immediately

22. Provisions(IAS 37)

23. EIC-60, 134, 135, 159 HB 1000 IAS 37(IFRIC I, 5, 6) HB 3290 HB 3110 Scope of IAS 37 – Provisions • Applies to all enterprises in accounting for provisions, contingent liabilities and contingent assets, except • those covered by another IFRS (e.g. financial instruments, insurance contracts, employee benefit obligations) Provisions – liabilities of uncertain timing or amount

24. Provisions – Recognition and measurement • Recognize if probable a liability has been incurred • Recognize on basis of legal OR constructive obligation • Probable = “More likely than not” rather than “likely” • Measure at “best estimate” – may be one of • most likely outcome – single best estimate • expected value – probability weighted expected value • midpoint – where a range of probable estimates • Discounting required when effect is material More items to be recognized…measurement may differ

25. Measurement

26. Other Potential Differences

27. Related Parties • No special rules – RPTs accounted for in accordance with requirements of relevant IFRSs • Should take into account substance over form • Consider transactions with shareholder, particularly non-reciprocal amounts received in the form of cash or non-monetary assets • If any possibility of having to repay, then recognize liability • If no requirement to repay under any circumstance, then normally will be an equity contribution and not income • potential issue for GBE/GBTOs—applicability of PS3800

28. Other Potential Differences • Revenue recognition • Don’t blindly assume that your revenue recognition policies are consistent with IFRS • Accounting for Investments • No VIE standard; consolidate controlled SPEs • No exemption from consolidation of subsidiaries; no AcG-18 equivalent standard

29. Implementation Key Success Factors

30. Two Sources • IFRS Implementation Experience from Europe and Australia • The Canadian Experience with Significant Accounting Changes in the Public Sector

31. Experiences from Europe and Australia Companies found that they • Underestimated the effort needed to convert • Lacked early support from senior management • Waited too long to get started • Suffered from poor project management • Failed to fully embed IFRS into their primary systems

32. More experiences from Europe and Australia Companies found that they • Invested heavily in training finance & accounting staff • Required systems upgrades / adjustments (IT and management reporting systems) • Needed to renegotiate contracts (e.g. bank and compensation agreements) • Spent considerable time communicating with stakeholders

33. Key Success Factors • Support from highest levels of management • Corporate Priority • A robust & flexible project plan • Accounting & Financial Reporting • Systems • People/Training • Operations/Business/External • A multi-functional implementation team • An energetic and dedicated team leader committed to successful completion • Prioritization of tasks (Complexity, Time & Resource Requirements, Risk, Momentum)

34. Key Success Factors • Resources (financial, human, technical) • Engaging non-financial managers and staff • Communications / Managing Expectations • Engaging external stakeholders consistently (Audit Committee, Board, TBS, OAG) • Seek value-added benefits: • enhance skill / knowledge of financial and non-financial staff • streamline and standardize processes • enhance your control environment • improve knowledge of organization • cross-functional interaction

35. Andrew C. Newman Partner andrewnewman@kpmg.ca 613-212-2877 Questions?