AcSB Decision Summary – March 6-7, 2019

This summary of Accounting Standards Board (AcSB) decisions has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussion on projects, which may change after further deliberations by the Board. Decisions to publish Handbook material are final only after a formal ballot process.

Connecting with our stakeholders is important to us. We held our meeting in Vancouver, in conjunction with a reception for local stakeholders.

Financial Statement Concepts

The AcSB discussed a financial statement concepts project proposal for Parts II and III of the CPA Canada Handbook – Accounting . The Board approved the project to include:

• elements (definition of an asset, liability, revenue and net assets);
• recognition;
• measurement;
• presentation and disclosure; and
• unit of account.

 The Board directed the staff to prioritize work on the definitions of an asset and liability in conjunction with its ongoing domestic projects.

Revenue

The AcSB continued its discussion on the proposed amendments to Section 3400, Revenue, in Part II of the Handbook. The Board considered the feedback from its Private Enterprise Advisory Committee on the proposed transitional provisions and effective date of the amendments. Based on the Committee’s feedback, the Board decided to propose transitional relief for the amendments relating to the percentage of completion method and multiple element arrangements. The Board also decided that the proposed effective date for the amendments will be for fiscal years beginning on or after January 1, 2021.

The AcSB also considered Committee members’ comments arising from their fatal flaw review of the proposed amendments. Based on the feedback, the Board proposes to:

• clarify the proposed guidance for using input and output measures to determine the degree of completion of a contract when using the percentage of completion method;
• include proposed guidance on the accounting for expected losses when it is probable that total contract costs will exceed total contract revenue when using the percentage of completion method; and
• simplify the proposed guidance for determining the stand-alone selling price of a good or service when accounting for multi-element arrangements.

The Board plans to issue the exposure draft no later than the second quarter of 2019.

Agriculture

The AcSB continued its discussion on the Exposure Draft, “Agriculture.” The Board considered advice from its Agriculture Advisory Group to address stakeholder feedback. The Board considered this feedback and decided to reflect the following changes from the Exposure Draft in the final standard:

• Replace the condition that costs of disposal be “relatively insignificant” to measure agricultural inventories using the net realizable value model, with the condition that costs of disposal be “predictable and reliably measurable.”
• Permit the accounting policy choice to determine cost using only input costs to be applied consistently to agricultural inventories measured using the cost model “of a similar nature and use,” rather than to “all” such agricultural inventories.
• Permit a retrospective change to the accounting policy for the determination of cost from using full cost to only input costs.

The AcSB considered forestry industry concerns regarding the inclusion of the forestry industry’s activities within the scope of the proposed guidance. The Board decided to exclude forestry from the scope of the proposed standard on the following bases:

• In Canada, the vast majority of managed forestry activities occur on publicly owned lands and as a result:
  • overy few private enterprises engage in forestry activities on private industrial lands; and
  • well-established practices in this industry stem from public policy and regulation.
• There is a weak relationship between patterns of cost incurrence and expected future economic benefits due to the long-term nature of biological transformation in the forestry industry.

The AcSB also decided to make several clarifications to the final standard and to develop illustrative examples. In May 2019, it plans to consider outstanding issues and review a draft of the final standard reflecting its decisions to date.

The Board plans to issue the final standard no later than the fourth quarter of 2019.

Employee Future Benefits

Quebec Stabilization Provision

The AcSB continued its discussion regarding changes to pension legislation. The Board considered the use of a funding valuation for registered defined benefit plans in Quebec, which includes the Stabilization Provision as established in 2016 by Quebec’s pension regulator for private sector plans. The Board is concerned with the diversity arising in practice as to whether the Stabilization Provision is included in the measurement of the defined benefit obligation when an enterprise elects to use a funding valuation in accordance with Section 3462, Employee Future Benefits. The Board was advised that the diversity arises from the view of some stakeholders that the inclusion of the Stabilization Provision results in a measurement akin to a solvency valuation.

The AcSB decided to undertake standard-setting action by developing an exposure draft to propose changes to Section 3462 to clarify its intent that the Stabilization Provision should be included in the measurement of the defined benefit obligation when the funding valuation is chosen. Given the reported diversity in practice, the Board will also consider transitional provisions in developing its exposure draft.

The Board plans to issue the exposure draft no later than the third quarter of 2019.

Defined benefit plans without a funding valuation requirement

The AcSB considered the use of the funding valuation for defined benefit plans for which there is no legislative, regulatory, or contractual requirement to prepare a funding valuation. An example of such a plan is an unfunded defined benefit supplemental executive retirement plan offering pension benefits. The Board is concerned with the diversity arising in practice as to whether an assumed Provision for Adverse Deviation (PfAD) based on that required by Ontario’s pension regulator and the Quebec Stabilization Provision should be included in the measurement of the defined benefit obligation when an enterprise elects to use a funding valuation for these defined benefit plans.

The AcSB discussed the meaning of “on a basis consistent with” in paragraph 3462.029C. The Board’s intent was that “on a basis consistent with” is equivalent to “the same”. Accordingly, the Board agreed that the PfAD and Stabilization Provision should be included in the measurement of the defined benefit obligation for these defined benefit plans. The Board also noted that allowing the use of a funding valuation was an accommodation that eliminated the additional costs of preparing a separate accounting valuation, which would otherwise be required.

The AcSB understands that some enterprises, consistent with their approach for funded defined benefit plans, did not include the relevant provision in the measurement of the defined benefit obligation for unfunded defined benefit plans. Accordingly, the Board will consider including this issue, along with any transitional provisions, in developing the exposure draft on the first issue under “Quebec Stabilization Provision.”

Financial Instruments – Hedging

The AcSB considered advice from its advisory committees (the Private Enterprise Advisory Committee, the Not-for-Profit Advisory Committee, and the Agriculture Advisory Group) to expand the hedge accounting guidance in Section 3856, Financial Instruments. In addition, the Board considered outreach conducted with other stakeholders, some of whom apply the current hedge accounting guidance.

The AcSB deliberated the feedback and decided not to undertake a hedge accounting project because the current guidance meets stakeholders’ needs. The Board reached this decision based on the following:

• Preparers indicated that they do not intend to expand their use of hedge accounting, even if the Board permits additional relationships, given the added complexity of its application when compared to measuring a derivative at fair value.
• Users are not concerned about the impact of volatility in the financial statements, and did not request or require hedge accounting.
• Stakeholders said that the current hedge accounting guidance is clear.

Narrow-scope Amendments

The AcSB continued its discussion of the transitional provisions for the narrow-scope amendments to Section 3051, Investments. The Board decided that the amendments should be applied prospectively to years beginning on or after January 1, 2020. It also approved issuing the narrow-scope amendments, subject to final drafting and a written ballot.

The Board plans to issue the final amendments in June 2019.

Related Party Transactions

The AcSB discussed a project proposal to research related party combinations. The Board approved the project and decided that the research should include business combinations under common control, business combinations not under common control and combinations not considered a business (i.e., acquisitions of assets). It also decided that the research should focus on better understanding the types and purpose for different types of related party combinations, and the challenges with accounting for these transactions.

The AcSB directed the staff to form a working group of tax and assurance practitioners from across Canada that specialize in these transactions to assist in the research activities.

The AcSB also considered the interaction between this research project and its current combinations project for not-for-profit organizations. Accordingly, the Board directed the staff to include related party combinations that occur between not-for-profit organizations within the scope of this project’s research activities.

Combinations

The AcSB continued its discussion on the initial measurement of a combination between organizations within the scope of Part III of the Handbook. The Board discussed the criteria to determine whether a transaction would be considered an acquisition or a merger and provided feedback to the staff.

The AcSB tentatively agreed with the staff recommendations, subject to further deliberation:

• The accounting requirements will not include a default position on how to account for the combination transaction;
• The accounting requirements for transactions that will meet the criteria to be treated as a merger, including:
  • recognizing the assets, liabilities and funds of the combining organizations, as if they have always been part of the same organization from the effective date of the merger;
  • requiring disclosures of the consolidated comparative information;
  • recording the respective entities’ assets, liabilities, and funds at their carrying values, with changes only permitted to achieve uniform accounting policies; and
  • disclosing information on the transaction that will be helpful to users of the consolidated financial statements.
• Goodwill will not be recognized when the transaction is considered an acquisition as part of the initial measurement of the combination.
• Require prospective application for the proposed guidance.

The staff will provide the AcSB with draft guidance at its May 2019 meeting to refine the criteria for transactions to be treated as mergers, revisit whether a default position is needed and determine the timeline for issuance of the exposure draft for public comment.

CPA Canada’s Foresight Project

The AcSB received a presentation on CPA Canada’s Foresight Project from Tashia Batstone, Senior Vice President, External Relations and Business Development, CPA Canada. The Foresight Project’s aims to develop:

• a holistic view of the changing nature of business and the role of the accounting profession; and
• a strategy to identify the key projects the accounting profession must undertake to become future ready.

The Board will consider the presentation when developing its next strategic plan.

AcSB 2019-2020 Annual Plan

The AcSB approved its 2019-2020 Annual Plan for the operating year commencing April 1, 2019, after considering feedback from the Accounting Standards Oversight Council. The Board plans to issue the Annual Plan on April 1, 2019.

AcSB Member and Volunteer Self-Assessment Surveys

The AcSB discussed the results of a self-assessment of its members and surveys of other volunteers on the performance of the Board and its related committees in 2018-2019. The Board discussed ways of improving the efficiency and effectiveness of its operations.