The Office of the Superintendent of Financial Institutions has issued an advisory regarding financial industry accounting practices no longer permitted under GAAP. In most cases, regulatory reporting will follow GAAP, but there are a couple of exceptions.

OSFI said Thursday that CICA Handbook Section 1100, which establishes standards for financial reporting in accordance with GAAP and describes what constitutes Canadian GAAP and its sources, is effective for fiscal years beginning after Oct. 1, 2003.

The adoption of this section means certain industry accounting practices are no longer permitted. Some significant areas affected include the accounting treatment of the currency translation account, mortgage prepayment fees, software development costs, securities transactions (trade-date vs. settlement-date), transit balances, and trading of own shares.

OSFI’s requirements for regulatory reporting generally follow GAAP, but allow some exceptions. For mortgage prepayment fees, software development costs, and trade-date vs. settlement-date accounting OSFI expects regulatory financial statements to follow GAAP, it says. OSFI has also amended its regulatory reporting forms to reflect changes that now require CTA to be disclosed as a separate component of shareholders equity and will continue to include CTA in the definition of Tier 1 capital.

It also says it plans to amend regulatory reporting in the future to be consistent with GAAP for transit items due to the Bank of Canada’s reporting needs. “However, for the time being, these items should continue to be temporarily recorded in accordance with existing regulatory reporting requirements.”

For trading in long and short positions of own shares, OSFI expects regulatory financial statements to follow GAAP. “However, for capital adequacy reporting purposes OSFI expects that gross short positions of own shares recorded in accounting equity be deducted from regulatory capital where the accounting treatment results in an increase to accounting equity,” it adds. “Where trades in short positions of own shares are not recorded in accounting equity, OSFI does not require any regulatory capital adjustment to be made.”