Canada’s accounting standard-setting body has issued two new draft guidelines as part of its program of improving Canadian generally approved accounting principles as a result of lessons learned from the failure of Enron in the United States.
The two guidelines, issued by the Accounting Standards Board for public comment, will result in more transparent financial statements. The first guideline addresses certain structures, often called Special Purpose Entities, or “SPEs,” while the second guideline includes new requirements for disclosure of guarantees, including loan guarantees.
Where there is a nominal owner and another entity that is the primary beneficiary of the SPE’s activities, the new guideline takes the position that the primary beneficiary controls the SPE and should consolidate the entity on its balance sheet. The assets, liabilities and the results of the activities of the SPE would, therefore, be included in the consolidated financial statements of the primary beneficiary of the SPE.
“This represents a significant change from the current practice whereby most SPEs are not consolidated, or are ‘off balance sheet’,” said Paul Cherry, chair of the AcSB. “In many cases, control and hence the requirement to consolidate will reside with a ‘primary beneficiary’ who may not be the nominal owners of the entity and the guideline explains how this determination is to be made.”
The new guideline Disclosure of Guarantees would require entities to disclose key information about types of guarantees that require payment contingent on specified types of future events. The new guideline would also require that disclosures about guarantees be provided in interim statements where a change has occurred since the most recently completed fiscal year.
“The additional disclosures form the first part of the response to develop greater transparency of ‘off balance sheet’ transactions and events,” said Cherry. “Our research and discussion identified two standards that played a role in the demise of Enron, and the loss of millions of dollars for shareholders and employees. The Board was determined to act carefully, deliberately but swiftly to ensure better and clearer disclosure of these types of transactions. These new guidelines will ensure more transparent and accurate information for investors, analysts and regulators about the financial position and assumed risk described in financial statements.”
Both guidelines are available on the AcSB’s Web site at www.acsbcanada.org. Comment periods will run through the remainder of the summer.
The SPE guideline becomes effective for annual and interim fiscal periods beginning on or after April 2003, but certain disclosure requirements become effective on issuance. The guarantee guideline becomes effective for fiscal periods ending on or after Dec. 31, 2002.