ASPE VS IFRS THE BASICS Presenters Leanne Mongiat

ASPE VS. IFRS: THE BASICS Presenters: Leanne Mongiat, CA Trudy Snooks, CA Adams & Miles LLP

A disclaimer before we begin. . . Although the presentation and related materials have been carefully prepared, neither the presentation authors, firm, nor any persons involved in the preparation and/or instruction of the materials accepts any legal responsibility for its contents or for any consequences arising from its use.

Session Overview �Crash course in ASPE: The Basics �Crash course in IFRS: The Very Basics �Key differences: � Property, Plant and Equipment � Leases � Related party transactions � Income taxes payable � Financial Instruments �Example disclosures �Transition differences �The Right Option for Your Company �Closing and Questions

Crash Course in ASPE �For year-ends beginning on or after January 1, 2011 �Reminder re: effective date vs. transition date �Handbook – located in Part II �Retrospective - is applying a new accounting policy to transactions, other events and conditions as if that policy had always been applied

ASPE Affects: • • • • Fair value Prepaids Asset retirement obligations (ARO) Election for Property, Plant & Equipment Intangibles Employee future benefits Stock-based compensation Business combinations and Joint Ventures Goodwill Government payables Income taxes Opening balance sheet Cash flow statements

IFRS Affects � Revenue recognition � Asset impairment � Property, Plant and Equipment � Financial Instruments � Investment property � Foreign Exchange � Provisions � Leases � Intangible Assets � Related Party Transactions � Business Combinations � Employee future benefits � Income taxes � Stock based compensation � Hedging � Mining, Oil & Gas Companies � Joint Ventures � Consolidations � Earnings Per Share � Opening balance sheet

Crash Course in IFRS �For year-ends beginning on or after January 1, 2011 �Reminder re: effective date vs. transition date �Entities with rate regulated activities have the option to defer changeover to January 1, 2012 �Handbook – located in Part I �Both private companies and Not-For-Profit organizations have the option to adopt IFRS �There is significantly more note disclosure required under IFRS in almost every area including accounting policies

Crash Course in IFRS - Terms �IFRS – International Financial Reporting Standards (issued post April 2001) �IAS – International Accounting Standards (issued pre April 2001) �IASB – International Accounting Standards Board �IFRIC – International Financial Reporting Interpretations Committee �SIC – Standing Interpretations Committee

Crash Course in IFRS Cont’d �When transitioning to IFRS most standards and policies will need to be applied retrospectively �Optional exemptions to retrospective application: � Business combinations � Employee benefits � Leases � Borrowing costs, etc. �Mandatory exemptions to retrospective application: �Derecognition of financial assets and financial liabilities �Hedge accounting �Non-controlling interests, and �Estimates

IFRS and Presentation Items �IFRS permits departures from standards if they would make the F/S misleading �IFRS does not allow comparative information to be omitted in the rare circumstances when it is not meaningful �When applying an accounting policy retrospectively, IFRS requires a financial position for the earliest comparative period possible

IFRS and Presentation Items Cont’d �Complete set of F/S under IFRS include: �A statement of financial position �A statement of comprehensive income �A statement of change in equity �A statement of cash flows �Note disclosure �An entity may choose different titles for these statements

IFRS and Presentation Items – Cont’d �The I/S section under IFRS is less specific as to the items that need to be shown on the I/S �IFRS (IAS 1) does not allow for disclosure on “extraordinary items” �Disclosure of authorization for issue – an entity is to disclose the date the F/S were authorized and by whom �Current assets and current liabilities must be in order of liquidity (IAS 1) �Concept of OCI (Other Comprehensive Income)

Property, Plant and Equipment (PPE) � Relevant sections IAS 16 and ASPE 3061 � IFRS deals with the following outside the scope of IAS 16 � Investment Property - IAS 40 and � Biological assets (Agriculture) - IAS 41 � PPE (def’n) – are tangible items that (a) Are held for use in production or supply of goods or services, for rental to others, or for administrative purposes; and (b) Are expected to be used for more than one period Cost comprises: (a) Purchase price, including import duties, non-refundable taxes, less discounts (b) Amounts for bringing the asset to the location and making it operational (c) The initial estimate of dismantling and removing an item and restoring the site.

PPE Cont’d �Measurement subsequent to initial recognition: - There are 2 options: �(a) Cost Model – PPE shall be carried at its costs less any accumulated depreciation and accumulated impairment losses �(b) Revaluation Model – PPE whose FV can be reliably measured shall be carried at fair value (on the date of revaluation) less any subsequent accumulated depreciation and accumulated impairment losses. Revaluations should be done regularly

PPE - Cont’d �The method chosen must be applied to an entire class of asset � If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognized in OCI and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognized in P&L to the extent that it reverses a revaluation decrease of the same asset previously recognized in P&L.

PPE – Amortization vs. Depreciation �ASPE and IFRS– amortization method chosen has to be rational and systematic �IFRS – Includes above, however, there is a direct relationship between the depreciation method chosen and the pattern or expectation that the future economic benefits are to be consumed by a company over the life of the PPE

PPE – Amortization Cont’d Amortization vs. Depreciation ASPE IFRS Amortization charged is the greater of: -The cost less salvage value (estimated net realizable value at the end of its life) over the estimated life - The cost less residual value over the useful life of the asset. Depreciation charged is: - The cost less residual value over the useful life of the asset Estimates on the useful life, method of amortization are reviewed periodically and residual value only when an event occurs Estimates of useful life, method of depreciation and residual values are reviewed at each reporting date (at least) or when expectations deviated from previous estimates

PPE – Component accounting �Component accounting exists under ASPE and IFRS �Example of component accounting: �A ship and that is separate into the following with the following estimated useful lives: �The body of the ship – 30 years �Engine – 15 years �Furniture and fixtures on the ship – 10 years

PPE – Disclosure �For each Class of PPE the following should be disclosed: �the measurement basis �the depreciation methods �the useful life or depreciation rates �gross carrying amt and accumulated depreciation

PPE – Disclosure Cont’d �A reconciliation of the carrying amt at the beginning and end of the period showing: �additions �assets classified as held for sale or included in disposal group classified as held for sale �acquisition through business combinations �increases /decreases resulting from revaluations and from impairment losses �impairment losses recognized in P&L �impairment losses reversed in P&L �depreciation �net exchange difference arising on translation of F/S �other changes

PPE – Disclosure Cont’d �Additional disclosure: �the existence and amounts of restrictions on title and PPE pledged as security �the amount of expenditures recognized in the carrying amount of an item of PPE in the course of its construction �the amount of contractual commitments related to PPE � if not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of PPE that were impaired, lost or given up that is included in profit or loss

PPE – Disclosure Cont’d � If items of property, plant and equipment are revalued, the following disclosure is needed: �the effective date of the revaluation �whether an independent valuer was used �the methods and significant assumptions in estimating the FV �the extent to which the FV was determined directly by reference to observable prices in an active market �the carrying amount that would have been recognized had the assets been carried under the cost model �the revaluation surplus, indicating the change for the year and any restrictions on distributions to shareholders

PPE – Final Thoughts �Topics related to PPE not covered include asset retirement obligations, PPE impairments and non -monetary transactions involving PPE �ASPE 3063 and IAS 36 – Impairment of Long- lived Assets

Leases � IAS 17 and ASPE 3065 � IAS 17 – apply to all leases except equipment used to explore for or use minerals, oil, natural gas and nonregenerative resources and certain licensing agreements � Both IFRS and ASPE consider whether the benefits and risks of ownership have transferred when classifying leases. � New definitions and terminology under IFRS � FINANCE LEASE – a lease that transfers substantially all the risks and rewards of ownership. Title transfer is not mandatory.

Leases Cont’d �Under IFRS leases have to be classified as either an operating lease or a finance lease �Guidance to determine if the risks and benefits of an asset have been transferred is provided including: �Ownership transfer by the end of the lease �The lessee has an option to purchase the asset for a price below FV �The term of the lease is for the majority of the life of the asset �At inception, the PV of the minimum lease pymts equals substantially all of the FV �The asset is of such a specialized nature

Leases Cont’d �Lease classifications can only be changed if the provisions of the lease have been changed �Changes in estimates related to economic life, residual value , etc do not give rise to a new lease classification �Under IFRS there is no specific guidance on how to account for the implications when lease terms are modified �There are specific standards for land building leases – IAS 17 – 15 A - 19

Capital/Finance Leases – Recording by Lessee �The basic process of recording a capital /finance lease is consistent under ASPE and IFRS �An asset and obligation is recorded and represents the lower of the PV of the minimum lease pymts or the FV of the asset �The asset is then amortized into operations similar to other assets in the same class and the obligation is reduced by payments

Capital/Finance Leases – Recording by Lessee Continues ASPE IFRS Discount rate: The discount rate equals the lower of: -lessee’s rate for incremental borrowing and -Implicit interest rate Discount rate: A Company is REQUIRED to use the implicit rate if it is practical to do so. If it is not practical a company can use incremental borrowing rate. Amortization period of asset: If there are no terms that make reference to legal ownership passing or no BPO then the asset is amortized over the lease term instead of the expected life of the asset Amortization period of asset: If the legal title is not expected to transfer, then the asset is amortized over the shorter of the lease term or the useful life of the asset. Direct initial costs: Not specifically addressed. Direct initial costs: Costs incurrent on initial set-up are capitalized as part of the asset.

Leases – Finance Lease Disclosure (Lessee) � For each class of asset, the net carrying amount at year-end � A reconciliation between the total of future minimum lease payments at year-end, and their present value (PV) for each of the following periods: � 1 year; 1 to 5 years; and later than 5 years � contingent rents recognized as an expense in the period. � the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period � a general description of the lessee's material leasing arrangements including, but not limited to, the following: �the basis on which contingent rent payable is determined; �the existence and terms of renewals or purchase options, escalation clauses; and �restrictions imposed by lease arrangements, such as dividends, additional debt and leases

Leases – Final Thoughts �Impairment – IAS 36 deals with impairment of lease assets �First time adoption issues are covered in IFRIC 4 and IFRS 1 �There is an optional exemption to retrospective application for leases �Transition date – a lessee or lessor determines the classification of a lease

SO. . . QUESTIONS? Anyone?

COFFEE TIME!

AND WE’RE BACK!

Related party transactions �ASPE 3840 and IAS 24 �Identification of related parties is the same, except that IFRS specifically identifies postemployment benefit plans as related �Measurement – IFRS provides no specific guidance on measurement whereas ASPE has a decision tree for carrying vs. exchange amounts �Disclosure – IFRS requires disclosure of all related parties irrespective of transactions or balances

Related Party Transactions – IFRS Disclosure �Transactions require separate disclosures by category: �The parent; �Entities with joint control/significant influence; �Subsidiaries; �Associates; �Joint ventures; �Key management personnel of the entity or its parent and; �Other related parties

Related Party Disclosures - IFRS � Similar to ASPE with a description of the nature of the transaction, amounts, terms of repayment etc. � Additional disclosures are required for the following: � Key management personnel compensation � Provision for doubtful debts related to outstanding balances with related parties � Expense recognised during the period in respect of bad or doubtful debts due from related parties � IFRS does provide some exemptions regarding government control � Additional disclosure requirements in: � IFRIC 17 – Distribution of Non-Cash Assets to Owners � IAS 27 – Consolidated financial statements � IAS 28 – Investments in Associates; and � IAS 31 – Interest in Joint Ventures

Income Taxes – Some Differences ASPE IFRS �Includes all taxes �No specific guidance �Including refundable, for refundable, AMT or AMT and rate regulated �Must record if �Probable is defined as probable (no specific greater than 50% definition indicated) �Classification – current �Classification – nonand non-current for all deferred future taxes �Includes all taxes

Income Taxes - Methods ASPE IFRS �Choice of: �Must record both: �taxes payable method; �Current taxes - asset or �Future income taxes method or liability; and �Deferred taxes as noncurrent assets or liabilities

Income Taxes – Methods �The taxes payable method is a method of accounting under which an enterprise reports as an expense (income) of the period only the cost (benefit) of current income taxes for that period, determined in accordance with the rules established by taxation authorities �The future income taxes method is a method of accounting under which an enterprise reports as an expense (income) of the period the cost (benefit) of current income taxes and the cost (benefit) of future income taxes, determined in accordance with the rules established by taxation authorities

Income Taxes - Definitions �Temporary differences are differences between the tax basis of an asset or liability and its carrying amount in the balance sheet. Temporary differences may be either: � (i) Deductible temporary differences, which are temporary differences that will result in deductible amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled; or � (ii) Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled

Income Taxes – Disclosures - ASPE Taxes Payable � Current income tax exp (benefit) � Reconciliation � Amount and timing of capital gains reserves or similar reserves for 5 years � Unused income tax losses CF and unused credits � Portion of income tax related to transactions charged or credited to equity Future Taxes � Current income tax exp (benefit) � Future income tax exp (benefit) � Amount and timing of capital gains reserves or similar reserves for 5 years � Unused income tax losses CF and unused credits � Portion of income tax related to transactions charged or credited to equity

Income Taxes – Disclosures - IFRS �Disclose separately the major components of tax expense(income) included in the determination of the profit(loss) for the period, including: � Current tax expense(income); � Adjustments recognized in the year for current tax of prior periods; � Amount of deferred tax expense(income) relating to changes in tax rates or the imposition of new taxes; � Amount of benefit arising from previously unrecognized tax loss, tax credit or temp difference of a prior period that is used to reduce current tax expense; � Likewise for deferred tax expense; � Deferred tax expense arising from the write-down or reversal of a previous write-down of a deferred tax asset

Financial Instruments �ASPE 3856 and IFRS 7, IAS 32 and IAS 39 �Differences exist for: �Scope – IFRS includes many items outside of the scope for ASPE such as investment companies, certain types of contracts, and certain types of derivatives and insurance contracts �Classification – IFRS requires classification into loans and receivables, held-to-maturity, fair value through profit or available –for-sale, financial liabilities measured at amortized cost �Classification & presentation– equity vs. liability �Measurement – fair value, F/X, impairments

Financial Instruments - Classifications � Taken directly from IAS 39 paragraph 9 � Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market � Held-to-maturity investments (HTM) are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity � Available-for-sale (AFS) financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss. � Fair value through profit or loss is a financial asset (liability) that would otherwise be classified as AFS except that they are derivatives.

EXAMPLES Who’s on first? What’s on second? Where did third go?

Transition Implications �Impact on the bottom line �Subsequent impact on performance compensation, ratios and bank covenants, investor relations, dividend distributions �Potential for increased volatility of reported results (fair value accounting) �Volume and complexity of financial disclosures (ASPE vs. IFRS) �Transparency and comparability to other entities �Competitors, suppliers, customers etc.

Transition Steps ASPE �Identify, Analyze, IFRS �Identify, Analyze, Determine, Implement �Create opening balance sheet (retrospective treatment) � Recognize assets & �Recognize assets & liabilities required under ASPE �Re-measure and reclassify according to ASPE (as necessary) liabilities required under IFRS � Remove those balances not complying with IFRS � Re-measure and reclassify according to IFRS (as necessary)

The Right Option for Your Company: ASPE vs. IFRS �Most private entities are expected to transition from current generally accepted accounting standards (GAAP) to ASPE �Facts to consider �Current operations (your target markets); �Future plans (IPO); and �Users of the financial statements (investors, lenders, etc).

ARE WE THERE YET? www. adamsmiles. com Leanne Mongiat – lmongiat@adamsmiles. com Trudy Snooks – tsnooks@adamsmiles. com