Standard & Poor’s Ratings Services says that it continues to believe that accounting and disclosure issues are of utmost importance to the income trust sector and are in no way diminished by last year’s proposal to tax income trust distributions.

In a new report, S&P notes that the quality of Canadian income trust reporting was a key issue on the radar screens of many capital market participants until it was trumped by federal Minister of Finance Jim Flaherty’s announcement that income trust distributions will be taxed come 2011. Despite the fact that accounting issues now play second fiddle to the notion of tax in the minds of many, S&P reminds investors of the critical importance of accounting and disclosure policies to their decision-making process.

The rating agency indicates that it is miffed by the lack of response to the Canadian Securities Administrators’ proposed amendments to income trust reporting standards. It suggests that this creates the perception that accounting issues are no longer relevant in the expectation of the demise of the income trust structure. However, it indicates that this is a naïve view.

“Our views remain unchanged. The surprise Halloween night decision to tax trusts is evidence that there are very few certainties in our capital markets from which to take comfort, including the presumed certainty of a quick and efficient wind-up of the income trust structure. In addition, throughout the transition period, investors are still exposed to significant information risks until new standards are formalized, or until their trust is acquired or taken private in response to the tax announcement,” S&P stresses.

“For Canadian income trust investors, the topic of accounting used to be analogous to car insurance: few appreciated the importance of the details until there was an accident. It used to take a restatement, qualified auditors opinion, or surprise suspension of distributions to spark attention to the seemingly benign topic,” said Kevin Hibbert, Canadian director of financial reporting.

Hibbert acknowledges that several market participants, as well as the CSA have gone to great lengths to improve the quality of reporting in the income trust space. Still, Ron Charbon, director and head of stability ratings, cautions investors to be vigilant. “We continue to encourage investors to maintain the same level of vigilance and financial reporting awareness that they had before Oct. 31, 2006, since they are still exposed to significant information risks until new reporting rules are formalized during the transition period.”

S&P concludes that the proposed CSA amendments are a positive step in the reform of income trust reporting. It adds that the proposed amendments will clarify the existing guidelines by adding a slightly more prescriptive tone to the standards without being overly rules based, and that they also go a long way to consolidating the CSA’s views on income trust reporting under one authoritative document. “The principles-based approach taken by the CSA, while susceptible to liberal interpretations by some in the income trust market, is our preferred approach, as opposed to a heavily rules-based one that tends to stymie investors and issuers alike,” it says.