Accounting for retractable or mandatorily redeemable shares and other financial instruments: Significant changes published in December 2018
Retractable or redeemable shares and other changes published in December 2018 – ASPE and ASNPO
In December 2018, significant changes, expected by some and dreaded by others, were made to accounting standards for private enterprises (ASPE) and accounting standards for not-for-profit organizations (ASNPO). These amendments are in response to two 2017 exposure drafts related to ASPE Section 3856, Financial Instruments. While these changes are extensive, it’s reassuring to know that they only concern the three topics below.
Retractable or redeemable shares
Section 3856 was amended to revise the guidance on the classification of retractable or mandatorily redeemable shares issued in a tax planning arrangement (retractable or redeemable shares). The exception allowing classification of these shares as equity is now based on three conditions being met, rather than on sections of the Income Tax Act: control is retained by the shareholder receiving the shares in the arrangement; no consideration is received other than shares; and no redemption arrangement exists (3856.23). Approximately 10 paragraphs were added to the Section in connection with this amendment.
Fewer shares are expected to fall under this exception, including those issued as part of a tax rollover. If you benefited from the previous exception, you have some homework to do, sooner rather than later. Think of the impact on debt covenants, and give yourself time to renegotiate.
Be sure to read our upcoming article on the modified exception for retractable or redeemable shares.
Financial instruments in a related party transaction
Many requirements were also added to Section 3856 on the accounting for financial instruments in a related party transaction by private enterprises and not-for-profit organizations (NFPOs). The measurement, recognition and derecognition of a financial asset originated or acquired, or a financial liability issued or assumed in a related party transaction are now excluded from ASPE Section 3840, Related Party Transactions, and included in Section 3856.
Be sure to read our upcoming article on financial instruments in a related party transaction.
Disclosure of significant risks arising from financial instruments
The disclosure requirements for significant risks arising from financial instruments in Section 3856 were not removed, as some would have liked. The ball is clearly in the court of financial statement preparers to provide information that is useful to financial statement users, as it is stated that “An enterprise shall disclose relevant enterprise-specific information (…)” (3856.37) […] “that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the enterprise is exposed at the end of the reporting period.” (3856.53A). The onus to “get it right” is on preparers.
Effective date and transitional provisions
The amendments are effective for annual financial statements relating to fiscal years beginning on or after January 1, 2020. Earlier application is permitted. The transitional provisions include a number of relief measures to facilitate first-time application. The good news is, you have been heard: some redeemable or retractable shares issued before January 1, 2018 which meet certain conditions can still be classified as equity, even if they do not meet all the amended exception conditions in paragraph 3856.23 (for example, some redeemable or retractable shares issued as part of a tax rollover).
Be sure to read our upcoming article on the transitional provisions.
Warning regarding the current requirements
These changes were made to the CPA Canada Handbook – Accounting in December 2018. Some 40 paragraphs were added to the Section (which now has around 100), while 20 or so paragraphs were added to Appendix A (which now contains 90, plus illustrative examples). Around 30 paragraphs were also amended.
When you access the electronic version of the Handbook, you see the amended requirements. Be careful not to apply them before the transition, unless you’re adopting the changes early. A note, such as [Former paragraph X retained in Archived Pronouncements.] has been added at the end of amended paragraphs. Former paragraphs are retained in the Archived Pronouncements of ASPE and ASNPO.
Accounting Standards Board webinar: Amendments to Section 3856, Financial Instruments (December 2018)
Sophie Bureau, CPA auditor, CA
Advisor, Professional Practice, Assurance and Financial Accounting
ORDRE DES COMPTABLES PROFESSIONNELS AGRÉÉS DU QUÉBEC