Canada’s Accounting Standards Board on Monday released three new draft standards intended to dramatically improve how financial instruments are reported in the financial statements.

The standards could mean significant changes in accounting for derivatives and equity investments. The new standards propose that all derivatives and most equity investments, such as common shares, be recognized and measured at fair value.

“Our aim is transparent and reliable financial statements for the users,” said Paul Cherry, chair of the AcSB. “Without measuring derivatives at fair value they are invisible, and gains and losses — sometimes disproportionate to changes in market conditions — would not be reported. Currently, you may not see the potential exposures these instruments create until it’s too late. This is essential information for users, who need to know the rights and obligations inherent in derivatives.”

The new proposals comprise three new sections to the Accounting Standards Handbook, and changes to other sections. The new standards are based on the U.S. Financial Accounting Standards Board’s (FASB) Statement 133, Accounting for Derivative Instruments and Hedging Activities, and also the International Accounting Standards Board’s improved new draft standard, IAS 39.

The comment period for the proposals runs until July 31, 2003, and the board will be inviting feedback from all constituencies. The proposed standards can be viewed in their entirety at www.acsbcanada.org.

“The new standards are in line with what FASB has already done and match to where the IASB is moving,” said Cherry. “What we are doing is attempting to bring about more transparent financial reporting and at the same time closing a gap in GAAP. The AcSB has developed standards that we believe alleviate any conflict with US GAAP, address unique Canadian circumstances and incorporate how the standards will interact with other aspects of Canadian GAAP.”

The first proposals requires that all financial instruments, including derivatives, are to be included on a company’s balance sheet and measured, either at their fair values or, in limited circumstances when fair value may not be considered most relevant, at cost or amortized cost. It also specifies when gains and losses as a result of changes in fair values are to be recognized in the income statement.

The second proposal extends existing requirements for hedge accounting. To date the AcSB has requirements in place that specify the circumstances under which hedge accounting is permissible, but do not comprehensively specify how hedge accounting should be performed.

The third proposal introduces a new statement — comprehensive income. This provides an ability for certain gains and losses arising from changes in fair value to be temporarily recorded outside the income statement, but in a transparent manner.

AcSB Web site
www.acsbcanada.org