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2. By GUNDI JEFFREY
D
escribing it as “a phenom-
enal opportunity,” Elio
Luongo has agreed to
become the next CEO of KPMG
Canada. As of Oct. 1, he replaces
Bill Thomas, who will move on to
focus on his role in the global firm
as chair of the Americas region.
Thomas feels he is leaving the
Canadian firm in capable hands.
“Elio is a strong and accomplished
leader, and I’ve had the great for-
tune of witnessing his passion,
dedication and drive over the many
y e a r s w e ’ v e w o r k e d
together. He has the vision neces-
sary to grow our organization and
the proven ability to champion our
culture and inspire our people.”
As part of that vision, Luongo
aims “to promote Canada’s com-
petitive advantage as an important
guiding principle for my tenure. We
are fortunate that Canada is such a
great place to do business. Our
country has incredible potential,
and I’m confident that KPMG’s
entrepreneurial and purpose-driven
people will lead the way as we
work to better serve the evolving
needs of our clients and commun-
ities.”
Luongo has had a roughly
30-year career with KPMG. After
joining the firm in Vancouver in
1987, Luongo took on progres-
sively more responsibility, ultim-
ately being promoted to managing
partner for the Greater Vancouver
Area in 2007. Most recently, he was
the Canadian managing partner of
KPMG’s tax practice, where he was
Mark that up
as a mark to
market tax win
By Luis Millan
T
axpayers are entitled to use
t h e m a r k - t o - m a r k e t
method to compute income
for federal tax purposes if it pro-
vides a more accurate picture of a
taxpayer’s income, the Federal
Court of Appeal has recently
ruled.
The decision bolsters the pos-
sibility for taxpayers to use
methods to compute income that
are not forbidden by the Income
Tax Act, affirms a Canada Rev-
enue Agency administrative pos-
ition that allows regulated finan-
cial institutions to tax derivatives
on a mark-to-market basis. It may
open the door to allow financial
accounting to become more
influential in determining what
constitutes an acceptable method
of computing income from busi-
ness, according to tax experts.
“The case confirms that tax-
payers are to determine profit for
tax purposes on the basis that
reflects an accurate picture of the
taxpayer’s income,” said James
Morand, a Toronto tax lawyer
with Cassels Brock & Blackwell
LLP. “If mark-to-market presents
a truer picture of a taxpayer’s
income than realization or some
other method of computation, it
is preferable.”
Kruger Inc., a Montreal news-
print and paper products manu-
facturing company that generated
approximately 80 per cent of its
sales in the U.S., started a busi-
ness during the 1980s that pur-
chased and sold foreign currency
option contracts in order to
reduce its exposure to foreign
currencies. That line of business
became so successful that it
eventually became an industry
leader in the Quebec options
market, ranking among the top
three or four non-banking enter-
prises in Quebec. Beginning in
1997, Kruger began to account
for its foreign exchange oper-
ations using mark-to-market
accounting. In 1998, Kruger’s
KPMG taps Elio Luongo
to drive business forward
With so much more data now available to accountants, the challenge is not only understand it, but also
to ‘recognize the various disrupters that will affect our clients,’ says Elio Luongo, the new CEO of KPMG
Canada. He is seen above at the firm’s Toronto office.
www.thebottomlinenews.ca Vol. 32 No. 12 October 2016
The Independent Voice for Canada’s Accounting and Financial Professionals
The Independent Voice for Canada’s Accounting and Financial Professionals
Mid-October
Employment
November
StartingYourOwnFirm
Mid-November
GivingBack
PUBLICATIONSAGREEMENTNO.40065517
See Accounting on page 8
See Decision on page 8
Photo courtesy KPMG Canada
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3. 2 The Bottom Line October 2016
NEWS
By Donalee Moulton
B
ritain’s announcement this
summer that it would exit
the European Union after
43 years caused a global eco-
nomic furor and dire warnings
the country would falter. Those
predictions have yet to come
true, and new research out of
Britain suggests that business
confidence is buoyant. That same
research also indicates increasing
opportunities for accountants
may result from going solo.
According to a new survey of
investors and entrepreneurs from
London-based Seedrs Limited,
one of the largest equity crowd-
funding platforms in Europe,
over half of those polled believe
that London will retain its pos-
ition as a global centre for innov-
ative new businesses post-Brexit.
Only 16 per cent said they feel
London will lose out to other
international business hubs.
“Our research supports the
view that London will continue
to be one of the top destinations
for entrepreneurs looking to set
up a business,” said Jeff Lynn,
CEO and co-founder of Seedrs in
London, noting that, “We haven’t
seen any slowdown in investment
activity since the referendum,
and we believe strongly that the
U.K. remains highly attractive
for inward investment.”
“Rome wasn’t built in a day,
and London won’t stop being a
major f inancial hub in one
either,” said Jaime Watt, execu-
tive chair of Navigator Ltd., a
public strategy and communica-
tions firm in Toronto.
“London has a long history of
being a hub of the global
economy and has been a remark-
ably stable place in spite of tur-
moil elsewhere,” he added. “I
suspect that the stability and
friendly business environment
the U.K. offers will allow London
to remain an important hub.”
However, Pierre Cléroux,
vice-president of research and
chief economist with the Busi-
ness Development Bank of
Canada (BDC) in Montreal,
sounded a cautionary note.
“There is a risk London will lose
its position as a central hub,” he
said. “There is a lot of competi-
tion … Paris is already lobbying
companies to do business there.”
He points out that leaving the
European Union would require
that Britain renegotiate all the
regulations in place regarding
trade and business. “It won’t be
as easy to do business in
London.”
The city has been an attractive
location for companies, espe-
cially from Canada and the U.S.,
looking to set up operations in
Europe or expand to that con-
tinent. The language of business
is English and the country’s
regulations have been flexible
for new and growing f irms.
“ T h a t ’s why L o n d o n wa s
important for dealing with
Europe,” Cléroux said. “But if
you’re no longer part of Europe,
London may not be the best
place to do business.”
Certainly business owners
and executives have concerns
about the future of London post-
Brexit. However, according to
the Seedrs survey, these are not
focused on funding and capital.
“Entrepreneurs’ biggest con-
cerns post-Brexit are dominated
by uncertainty about the future
rather than by potential lack of
access to business finance,”
Lynn said.
Fo r t y - o n e p e r c e n t o f
respondents said their major
worry was regulatory change
and the same percentage said it
was losing European trade.
Other issues identif ied by
respondents included low growth
levels (35 per cent) and loss of
foreign direct investment (33 per
cent). Only 15 per cent identi-
fied lack of access to business
finance as causing them sleep-
less nights.
The emphasis on constancy is
understandable, said Watt. “A
stable and pro-business eco-
nomic situation is a major asset
for any company.”
Ensuring such steadiness in
the London marketplace is also
good for Canadian companies,
he added. “This, of course, is
helpful for Canada as our rela-
tionship is terrific and we have
spent several years moving down
a path of greater economic co-
operation and expanded trade.”
In the short term, however,
uncertainty will predominate as
the terms of Brexit are negoti-
ated, but this will be a temporary
hit, Navigator’s CEO believes,
and he credits the British gov-
ernment with doing a good job
of showing the business com-
munity that it is focused on
maintaining a low-tax, reliable
economy that will enhance trade
opportunities. “As the negotia-
t i o n s a d va n c e , i t w i l l b e
important for the government to
continue to express its prefer-
ence for expanding trade oppor-
tunities and maintaining a pro-
business environment within the
country,” Watt said.
As well, quelling concerns
will be necessary to boost busi-
ness confidence in what lies
ahead. “Uncertainty is the worst
scenario,” said Cléroux. “This is
not good for investment.”
The Seedrs survey also high-
lights opportunities for growth,
and the sector predicted by both
investors and entrepreneurs to
see the strongest growth over the
next 12 months is professional
services such as accountancy
and law, cited by 29 per cent of
respondents. The finding makes
sense given the current land-
scape, said Cléroux. “Now we
are in a phase where nobody
knows what is going to happen,
but there is two years to exit.
Finance and accounting services
will be in demand to assess
impact and negotiate a good
deal.”
Anyone with the skill to help
negotiate a new deal will be in
demand, said Watt. “Much of the
U.K.’s trade negotiation had been
outsourced over the years of
integration with the EU, and they
are facing a very real shortage as
they renegotiate one of the most
major trade relationships in the
world,” he noted.
Finance and other profes-
sionals now on the ground in
London, or looking to move
there for permanent work, may
face a waiting period for the job
market to rebound. “In terms of
accounting and legal profes-
sionals, there may be a pause in
growth while companies take
stock of what Brexit means,” but
the situation “should return to
equilibrium in the near future,”
Watt said.
Of course, destiny is not
determined exclusively by the
British government and the busi-
ness community. Expect push-
back from the European Union,
said Cléroux. “Europe wants to
send the message that you cannot
leave the union and have it be
business as usual. There will be
restrictions. Everybody will try
to protect their interests.”
That pushback and the uncer-
tainty that looms over London,
at least for the next two years,
has convinced Cléroux that the
best place for business is not
Britain. “If I were the CFO of a
company looking to expand, I
wouldn’t go to the U.K.,” he said,
“but there would be no problem
going to Europe. The market is
coming out of the downturn.”
Business still bullish on U.K., survey says
NEWS
KPMG taps Elio Luongo to drive
business forward . . . . . . . . . . . . . 1
Mark that up as a mark to market
tax win . . . . . . . . . . . . . . . . . . . . . 1
Business still bullish on U.K.,
survey says . . . . . . . . . . . . . . . . . . 2
Accounting board tries innovative
approach . . . . . . . . . . . . . . . . . . . . 3
States’ disclosure rules mirror
Canada’s . . . . . . . . . . . . . . . . . . . . 4
U.S. banks join push for shell
company transparency . . . . . . . . . 5
More clarity wanted, but fear is of
more clutter . . . . . . . . . . . . . . . . . 6
Ill trade winds may pose threat to
Canada . . . . . . . . . . . . . . . . . . . . . 7
IOSCO survey reveals vital role of
audit committee . . . . . . . . . . . . . . 9
B.C. boom a bust . . . . . . . . . . . .10
More talk than walk in some
quarters over risk . . . . . . . . . . . . 16
FOCUS
Energy & Mining . . . . . . . . . . 11-15
COLUMNISTS
Peter Merrick: Wrong strategy, big
headache . . . . . . . . . . . . . . . . . . . 16
Mort Shapiro: ‘Lite’ is alright, but
understand value . . . . . . . . . . . . . 17
Janet Spence: Simple steps to a pain
free audit . . . . . . . . . . . . . . . . . . . 18
Vern Krishna: Nominal tax rates
don’t tell whole story . . . . . . . . . 19
Saam Nainifard: Similar circum-
stances, differing motivations . . 21
c on t e n t s
Departments
Financial Planning . . . . . . . . . . . . . 16
Management . . . . . . . . . . . . . . . . . . 17
Payroll . . . . . . . . . . . . . . . . . . . . . . . . 18
Tax Practice . . . . . . . . . . . . . . . . . . . 19
Tax Digest . . . . . . . . . . . . . . . . . . . . . 20
Legal . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cléroux
“There is a risk London will lose its position as a central
hub. There is a lot of competition ... Paris is already
lobbying companies to do business there.”
Pierre Cléroux, Business Development Bank of Canada
4. The Bottom Line October 2016 3
NEWS
By JEFF BUCKSTEIN
T
he Indiana Board of
Accountancy has taken a
historic step in continuing
professional education (CPE) by
giving its members an alternative
to the traditional hours based pro-
cess. Certified public accountants
in Indiana now have the option of
passing the ethics component of
their licence renewal through
hands-on competency based
learning.
They are the first CPAs in the
United States to be afforded this
choice.
“A one-size-fits-all model of
CPE is no longer appropriate to
encourage and allow a profes-
sional accountant to maintain and
enhance their competence,” said
Gary Bolinger, president and chief
executive officer of the Indiana
CPA Society in Indianapolis.
He noted that the traditional
approach to licence renewal for
CPAs in the United States is now
50 years old.
“The system really needs to
change — not only to accommo-
date and recognize advances in
technology and recognize differ-
ences in learning styles. But as
complexity in business increases,
we’re seeing increased specializa-
tion — deep specialization — and
I’m not sure that the continuing
education system as it exists rec-
ognizes all of those changes,”
Bolinger said.
Indiana CPAs need to earn an
ethics credit that counts four hours
toward the 120 total hours of CPE
required to renew their licence
every third year. The rule that was
recently adopted by the Indiana
Board of Accountancy allows a
licensee to continue to use the
traditional method of earning
those four hours of CPE, or they
can use a competency based
approach to fulfil that ethics
course requirement, said Bolinger.
Alternatively, they could serve
in a voluntary ethics position in a
trade or professional organization
verified to fulfil their ethics
requirement toward licence
renewal. One example of that
would be if a member were to sit
on the American Institute of Certi-
fied Public Accountants’ (AICPA)
professional ethics executive com-
mittee, he noted.
“If that individual is actively
engaged in that activity in terms of
writing rules and writing interpret-
ations, and then hearing cases
about various ethics issues, they
have to apply the code of conduct
ethics on an ongoing basis. What
better learning is there than
serving in that kind of a capacity?”
asked Bolinger.
Competency based learning
opportunities do not apply to Indi-
ana’s other course components for
l i c e n c e r e n ewa l , s u c h a s
accounting and auditing.
Bolinger said the competency
based approach offers several
advantages.
“The individual is required to
be a bit more engaged. They can’t
just sit in a classroom and be dis-
tracted and let their mind wander.
They have to engage in the
course,” he said.
“There are social learning ele-
ments [and] gamification elements
of the course that we’ve developed.
One must participate in the learning
experience in order to complete the
course. They must express opinions
on case studies. There are both
technical and behavioural aspects
of our course. So the individual
who opts for the competency based
learning has to demonstrate some
competence in order to successfully
complete the course, or else they
don’t get the credit.”
The Bottom Line asked the
AICPA for its reaction to Indiana’s
groundbreaking approach to con-
tinuing education.
“The AICPA believes in uni-
formity in CPE requirements
across all jurisdictions, as demon-
strated by our support of the Uni-
form Accountancy Act. However,
following our issuance of the
Future of Learning report [in
2014], we have encouraged stra-
tegic pilot programs by state
boards of accountancy that would
move the CPE compliance model
from time-based to more compe-
tency-based measurements,” said
Clar Rosso, the organization’s
vice-president of member learning
and competency, who is based in
Durham, N.C.
“As we continue to study the
issue, pilot programs like Indiana’s
will further the collection of data
on the effectiveness of different
methods. Our goal is to preserve
the high degree of public confi-
dence that CPAs are honing the
skills they need to keep their
learning and licences up to date,”
Rosso added.
Tashia Batstone, senior vice-
president of external relations and
business development at CPA
Canada in Toronto, said officials
in charge of continuing profes-
sional development (CPD) for
accountants need to consider sev-
eral factors when deciding whether
to use an output-based measure,
such as competency-based
learning, or an input-based
measure like hours of study.
“If your objective is to demon-
strate skills that are up to date, all
the research shows that an output
based measure is preferred. But it
does present some challenges. It
takes a signif icantly higher
amount of resources to manage
that. It’s often difficult to try to
measure it accurately. You’ve got
Accounting board tries innovative approach
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6. The Bottom Line October 2016 5
NEWS
By Donalee Moulton
T
he global crackdown on
anonymous shell com-
panies has gotten a thumb’s
up from the world’s largest com-
mercial banks. In August, the
C l e a r i n g H o u s e , w h i c h
includes Bank of America,
Citibank and Wells Fargo among
its members, wrote to the U.S.
Congress in support of the Incor-
poration Transparency and Law
Enforcement Assistance Act.
The proposed U.S. legislation
is intended to “help law enforce-
ment crack down on human traf-
ficking, terrorism financing,
money laundering, Medicare
fraud, the narcotics trade, tax eva-
sion, public corruption and a
litany of other crimes in the
United States and around the
world,” according to Rhode Island
Sen. Sheldon Whitehouse, who is
helping to spearhead the legisla-
tion, in a speech he gave to the
U.S. Senate.
At present, financial institu-
tions in the U.S. are required by
federal law to know their cus-
tomers and monitor account infor-
mation. However, there is no
requirement that benef icial
ownership information, data about
those who own, control and profit
from companies, be provided to a
state at the time of incorporation.
The proposed legislation would
change this — a move banks in
the U.S. are publicly applauding
for the first time. “Financial insti-
tutions are wholly committed to
combating money laundering and
terrorist financing activities,”
New York-based Gregory Baer,
president of The Clearing House,
stated in his two-page letter.
That support, however, is not
unconditional. The Clearing House
is asking congressional lawmakers
to go a step further and give banks
access to information states collect
on beneficial owners. “Under the
current regime, many if not most
of the resources devoted to identi-
fying money laundering and ter-
rorist financing are provided by
financial institutions; denying
them access to this important
information would significantly
undermine the goals of the bill,”
Baer said.
Financial institutions in the
United States are bearing the
burden of compliance. The new
transparency legislation, still
being hotly debated, coincides
with the introduction by the U.S.
Department of the Treasury of a
customer due diligence rule that
requires financial institutions,
including banks, securities brokers
and mutual fund dealers, to collect
and verify the personal informa-
tion of beneficial owners when
companies open accounts.
Transparency in business
ownership is not a new idea, but
pressure on governments to crack
down on tax evaders, money laun-
derers and others is growing in the
wake of the Panama Papers
scandal. “Every member of the
European Union will be trans-
parent by 2017. The United
Kingdom and the Netherlands
have even announced plans to
make their corporate ownership
registries available to the public,”
Whitehouse noted. “With the light
of transparency about to shine on
criminal assets hidden in Europe,
America should take swift action
to make sure that these assets
don’t find a new hidden home in
opaque American shell corpora-
tions.”
Canada may also want to step
into the light. Although the Finan-
cial Transactions and Reports
Analysis Centre of Canada
(FINTRAC), the country’s finan-
cial intelligence unit, has regula-
tions in place that require banks to
collect customer information,
check beneficial ownership and
report suspicious transactions,
comprehensive information is not
required, nor is updating. As a
result, many consider this country
a haven for shell companies.
“Canada is probably worse than
the U.S. in terms of how easily it is
to set up a shell company,” said
Dennis Howlett, executive director
of Canadians for Tax Fairness in
Ottawa.
According to a letter sent to the
country’s premiers by Canadians
for Tax Fairness and four other
national advocacy organizations,
the “complex and opaque system”
that exists here is one of the key
reasons why the country was mar-
keted by Mossack Fonseca, the law
firm at the centre of the Panama
Papers, as a good place to incor-
porate an anonymous shell com-
pany and why a risk assessment
conducted by the Department of
Finance Canada identified Can-
adian corporations and trusts as
highly vulnerable to money laun-
dering and terrorist financing.
Only three provinces, Alberta,
Manitoba and Quebec, come close
to meeting international standards
for transparency of beneficial
ownership, Howlett said. “There
needs to be some due diligence.”
In the open letter to premiers
sent this summer, Canadians for
Tax Fairness, Transparency
International Canada, the Can-
adian Labour Congress and
others stressed the cost of shell
companies on citizens’ quality of
life and the national economy.
Vancouver and Toronto are
feeling the direct effects of cor-
porate secrecy as numbered shell
companies “snatch up real
estate, turning neighbourhoods
where Canadians used to raise
their families into vacant areas
used to park offshore cash,” the
letter stated.
The problem is significant, the
authors added. “In 2013, Global
Financial Integrity estimates that
over $1 trillion in illicit funds
crossed borders, while Canadians
for Tax Fairness estimates that
provincial and federal govern-
ments in Canada lose $8 billion a
year to tax havens.”
The solution to shell com-
panies is a public registry, said
Howlett. Provinces could regulate
the registry in their jurisdiction,
but there would be national stan-
dards that everyone had to meet.
“This enables the public to hold
companies accountable,” he noted.
“It would make it easier for com-
panies to get reliable data on other
companies they are dealing with.”
The request will not be easily
dismissed. Thanks to the Panama
Papers and other tax scandals, the
public is better informed — and
angry — about loopholes that
allow individuals and corporations
to avoid paying their fair share of
tax as well as other illegal activ-
ities. The issue is also on the inter-
national policy agenda, and now
banks around the world are step-
ping up to support greater trans-
parency. CIBC, for example, sent
a note to some customers with
accounts in the Caribbean
requesting proof the account
holders had informed tax author-
ities about the money, noted
Howlett. As many as one-third of
these accounts were subsequently
frozen or closed, he said. “The
tide has turned.”
U.S. banks join push for shell company transparency
Small state, big tax breaks
L
ooser regulations in cer-
tain jurisdictions unfurl a
welcome mat for shell
companies.
The state of Delaware is one
of the most well-known havens.
According to U.K. media outlet
The Guardian, the Delaware
loophole, which allows firms to
move money from other states
and receive big tax breaks in
return, has enabled tens of thou-
sands of companies, including
those registered by Hillary
Clinton and Donald Trump, to
avoid hundreds of millions of
dollars in tax.
Among the details reported:
• The North Orange Street
office of the Corporation Trust
Centre in Wilmington is the
legally registered address of
more than 285,000 companies
• The number of companies,
including 378 registered to
Trump, is the single greatest
registry on the planet
• According to official rec-
ords, the Wilmington office is
home to Apple, American Air-
lines, Coca-Cola and Walmart
among dozens of other Fortune
500 companies
• It is estimated Delaware’s
relaxed taxation rules have cost
other states US$9 billion in lost
taxes over the last 10 years.
• Donalee Moulton
Howlett
“Under the current regime, many if not most of the
resources devoted to identifying money laundering and
terrorist financing are provided by financial institutions;
denying them access to this important information would
significantly undermine the goals of the bill.”
Gregory Baer, The Clearing House
It would make it easier for companies
to get reliable data on other
companies they are dealing with.
Dennis Howlett, Canadians for Tax Fairness
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7. 6 The Bottom Line October 2016
N E W S
By GUNDI JEFFREY
T
o help it write better
accounting standards, the
U.S. Financial Accounting
Standards Board wants to change
the part of its conceptual frame-
work that deals with how items are
presented in financial statements.
Meanwhile, the International
Accounting Standards Board is
working on a similar project, but
with a somewhat different slant.
Hans Hoogervorst launched his
second term as IASB chair —
which began July 1 — with a pro-
ject aimed at improving the effect-
iveness of financial statement
communication overall.
“Valuable information gets
drowned out by ‘tick the box’ dis-
closures and voluminous, but
poorly organized and presented,
financial statements,” Hoogervorst
said in a recent speech in Zurich.
“For the investor, it is often diffi-
cult to see the woods through the
multitude of information trees.”
For his part, FASB chair Rus-
sell Golden said, in a statement,
“The conceptual framework is the
f o u n d a t i o n f o r r e s o l v i n g
accounting and reporting ques-
tions. These proposals are
intended to provide direction,
structure and a basis for consistent
board conclusions when making
standard-setting decisions related
to presentation.”
According to Linda Mezon,
chair of Canada’s Accounting
Standards Board: “Both standard
setters are pondering how to make
financial statements more rel-
evant. The problem, as everyone
sees it, is disclosure overload —
there’s too much disclosure in
financial reporting. But, if you sit
down with users and ask them
about a specific disclosure, they’ll
say ‘no, you can’t take that away.’
If you suggest a new type of dis-
closure, they say ‘oh, that would
be great.’ So what do you do?
That’s what both the IASB and
FASB are thinking about, but how
they choose to think about it may
not necessarily be the same.”
And the difference may be
moot. Sandy Peters, head of finan-
cial reporting at the New York-
based CFA Institute, points out
that the FASB proposals are part
of its conceptual framework pro-
ject. “It’s to help them in the way
they think about things. It won’t
really change anything in the
immediate future. It’s only about
how it helps them make decisions.
It’s not like companies are going
to change classifications based on
this.”
Neil Robertson, chair of FEI
Canada’s committee on corporate
reporting, believes that, in any
case, Hoogervorst’s effort may not
have a huge impact in Canada.
“He is dealing with a global audi-
ence, where the regulatory
environment is not standard across
the IASB’s various jurisdictions.
While there is always room for
improvement, there is a pretty
strong backbone to the regulatory
environment in Canada for
investors and other financial
reporting stakeholders. I believe
that the securities regulators
would be of the same opinion.”
The FASB exposure draft,
Conceptual Framework for Finan-
cial Reporting: Chapter 7: Pres-
entation, describes proposed con-
cepts for presenting information
about items that have been recog-
nized in a financial statement. The
proposal is intended to provide the
FASB with a framework for
developing standards that sum-
marize and communicate informa-
tion on financial statements in a
way that best meets the objective
of financial reporting. Ultimately,
it will underpin the board’s efforts
when creating presentation
requirements in future accounting
standards.
The current proposals follow
on the heels of Concepts State-
ment 5, Recognition and Measure-
ment in Financial Statements of
Business Enterprises, which
addresses the recognition, meas-
urement and certain concepts for
presentation of information on the
face of financial statements. The
FASB concluded the discussion of
presentation could be further
improved with the objective of
providing a foundation for future
standards that enhance financial
statement users’ abilities to assess
prospects for future cash flows by
addressing how to group indi-
vidual recognized items into line
items and subtotals and clarify the
relationships among an entity’s
assets, liabilities and equity, and
the effects of related changes of
those assets and liabilities on
comprehensive income and cash
flows.
The proposal, says the FASB,
will help it make consistent deci-
sions when determining how to
present information in financial
statements. In particular, it would
give the FASB a framework for
developing standards that sum-
marize and communicate informa-
tion in financial statements in a
way that enhances the relevance of
the information and helps ensure
it is faithfully represented.
In his speech, Hoogervorst
said, “We must recognize that pre-
parers sometimes experience
financial reporting as too much of
a compliance exercise and
investors sometimes believe that
the financial statements depict
performance in an insufficiently
clear manner.” Worse, he added,
“increasingly, preparers present
their investors alternative per-
formance measures which are not
based on IFRS standards. This
information is easier to consume
by users, but it almost always
paints a rosier picture than reality
and can be highly misleading. In
addition, many companies present
non-financial information on, for
example, sustainability issues.”
He feels, therefore, the IASB
needs to do more work to increase
the communication effectiveness
of financial statements. “For this
reason we have decided that
‘better communication’ will be a
central theme of our work in the
coming years. To make sure finan-
cial statements communicate as
clearly as possible, we will take a
fresh look at how financial infor-
mation is presented, how it is
grouped together and in what
form it is made available.”
The project, he said, will bring
together a number of work
streams, including one on
improving the organization of
financial statements — statements
of financial position, financial
performance and cash flows; the
IASB’s disclosure initiative —
improving the quality and useful-
ness of financial disclosures
through amendments; clarifying
the definition, presentation and
disclosure requirements for finan-
cial instruments with the charac-
teristics of equity; further
developing the IFRS taxonomy to
ensure it meets electronic
reporting needs and remains fit
for purpose; and assessing the
strategic challenges and exploring
any potential future role that the
board may play in the area non-
financial reporting.
“Better communication” as a
theme for the board’s work,
responds to much of the feedback
received through the 2015 Agenda
Consultation, said Hoogervorst,
and should deliver material
improvements to users’ ability to
make economic decisions from
financial information.
Duane Kennedy, an associate
accounting professor at the
Ontario’s University of Waterloo,
says both boards have conceptual
framework projects on the go. In
fact, he says, “the FASB and IASB
conducted a project from 2004 to
2010 to revise and converge their
conceptual frameworks. In 2010,
the boards decided to focus on
other joint projects and subse-
quently agreed to discontinue
work on their conceptual frame-
works on a joint basis. Each board
is continuing to work on revisions
to its individual conceptual frame-
works and each sets its own prior-
ities but there is communication
with a goal of avoiding inconsis-
tent outcomes.” The FASB, he
notes, reactivated its conceptual
framework project with a focus on
presentation and measurement,
which resulted in the current
exposure draft. “The exposure
draft contains more detailed dis-
cussion of presentation issues than
appear in the IASB’s conceptual
framework but it does not go
against the principles of IFRS.”
He adds the proposed concepts
do not relate to what should or
should not be recognized in finan-
cial statements, rather the pro-
posed concepts focus on how the
information should be presented.
“The FASB proposals will not
have a direct, immediate impact
on financial statement presenta-
tion; rather the impact will be
through their influence on the
FASB as the board sets future
standards. I think that the pro-
posed factors are quite basic so we
will not see significant changes in
financial statement presentation.
Instead, I think that the impact
will arise from obtaining greater
consistency in presentation rec-
ommendations in future stan-
dards.”
One area the FASB project is
not focusing on is non-GAAP
measures, which seem to worry
Hoogervorst a great deal because
their use, he feels, almost always
gives a better picture to investors.
That shouldn’t happen in Canada,
says Robertson. “The securities
regulators have given us some
very strong rules around the use
of non-GAAP measures — we are
even ahead of the U.S. in this
area.” And, he points out, “at the
end of the day, non-GAAP meas-
ures are an effective way of com-
municating with stakeholders as
long as they are used properly —
as required by the securities regu-
lators. They are an effective way
to give information to stake-
holders in balance with general
purpose financial statements.”
Mezon says: “Everybody is
worried about the fact that pre-
parers will use measures that
make their numbers look better.
As a preparer, I had a tendency
not to use a lot of non-GAAP
information. If I did use it, I made
sure that it was consistent and
computed the same way over
every period.” And that, she adds,
is required by Canadian securities
laws in any case.
As for the two projects, she
points out, the two boards are
clearly thinking about the same
issues. “What they are talking
about is the presentation of infor-
mation in the financial state-
ments.”
Push on for clarity but fear is of more clutter
Mezon
“Valuable information gets drowned out by ‘tick the box’
disclosures and voluminous, but poorly organized
and presented, financial statements.
For the investor, it is often difficult to see the woods
through the multitude of information trees.”
Hans Hoogervorst, IASB
Hoogervorst
“Everybody is worried about the fact that preparers
will use measures that make their numbers look better.
As a preparer, I had a tendency not to use a lot
of non-GAAP information.”
Linda Mezon, Accounting Standards Board
8. The Bottom Line October 2016 7
NEWS
By JEFF BUCKSTEIN
W
hether Hillary Clinton or
Donald Trump emerges
triumphant in November
to become the 45th president of the
United States, there appear to be
clear signs the next U.S. administra-
tion will be less amenable, if not
downright hostile, toward inter-
national free trade deals.
Not only would that represent a
sharp break from White House
policy over the past 30 years, there
could be a significant negative
impact on Canada, as America’s lar-
gest trading partner.
“Even people who have been
reliable pro free traders and inter-
nationalists have become demon-
strably more protectionist, and that’s
disturbing,” said John Baird, a
Toronto-based senior adviser at the
law firm Bennett Jones LLP.
Baird, Canada’s minister of
external affairs under former prime
minister Stephen Harper, said there
has been a growing protectionist
attitude in the U.S. emanating from
both the left and right wings of the
political spectrum.
“Regardless who becomes
president, it’s going to be a lot
harder to solve the bilateral trade
irritants, because the president
won’t either have the inclination or
the capacity, let alone the ability to
be able to address them,” he said.
Republican candidate Trump, in
particular, has attacked recent trade
deals as being bad for the U.S., and
is arguably most critical of the
12-nation Trans-Pacific Partner-
ship (TPP), drafted in October
2015 by the trade team of President
Barack Obama.
The TPP requires ratification by
countries representing at least 85
per cent of the 12 participating
nations’ collective GDP, com-
prising the United States, Canada
and Mexico, Chile, Peru, Australia,
New Zealand, Japan, Malaysia,
Singapore, Vietnam and Brunei.
The U.S. produces more than half
of that group’s GDP, so failure of
the U.S. to sign on would kill the
deal as currently constituted.
Trump has also been highly
critical of the North American Free
Trade Agreement (NAFTA),
signed in 1994 by President Bill
Clinton, husband of the Demo-
cratic candidate.
Keith Head, a professor of eco-
nomics at the University of British
Columbia’s Sauder School of Busi-
ness in Vancouver, noted that Hil-
lary Clinton was involved in nego-
tiating the TPP agreement during
her term as secretary of state. (She
served in the first Obama adminis-
tration between 2009 and 2013).
Head noted that Clinton
appeared to change her position as
the TPP became unpopular with
some grassroots members of her
party during the Democrat presi-
dential primaries.
“She has to sort of disavow it, I
think,” said Head, who considers it
unlikely that Clinton could turn
around and implement the TPP if
elected.
However, Head does not expect
Clinton to backtrack on previous
agreements such as NAFTA.
Paul Ferley, the Toronto-based
assistant chief economist for Royal
Bank of Canada, said another big
unknown affecting free trade will
be the composition of the new
Congress, and whether members of
the Senate or House are going to be
sympathetic toward or philosophic-
ally opposed to free trade agree-
ments such as the TPP.
Cyndee Todgham Cherniak,
founder of LexSage Professional
Corporation, an international trade
law and sales tax firm in Toronto,
doesn’t expect the U.S. will ratify
the TPP before the election. But
she pointed out that the best chance
of doing so might be right now
while President Obama, who nego-
tiated the agreement, remains in
office facing a Congress controlled
by Republicans, a party that has
historically supported free trade.
If that happened, the newly
elected president would be backed
into a corner because they would be
bound by the agreement unless they
took steps to undo it, she noted.
Moreover, once ratified by
enough countries with the requi-
site percentage of GDP to put the
TPP in force, Canada and the other
participating countries would get
the benefit of the TPP and reduce
the likelihood of the United States
withdrawing and being the odd
country out, Todgham Cherniak
added.
The fate of NAFTA, which has
been in force for more than two dec-
ades, could be more complicated.
“I don’t believe that either
Trump or Clinton is going to rip up
NAFTA,” said Todgham Cherniak.
“I think that both will ultimately
realize what’s in the best interests
of the U.S. economy and U.S. busi-
nesses is to ensure that goods flow
freely across the border, and to
expand the free movement of busi-
ness persons across the border,”
she added.
But Todgham Cherniak also
noted how the U.S. has been
making adjustments to NAFTA for
many years, citing the example of
softwood lumber.
“The Softwood Lumber Agree-
ment that Canada signed (in 2006)
i s n o t c o n s i s t e n t w i t h
NAFTA. Article 309 of NAFTA
prohibits restrictions on exports.
Article 314 prohibits export taxes
and charges on exports of any good
to the territory of another party.
Canada was forced to restrict
exports of lumber, impose export
charges on softwood lumber and
allow the U.S. to keep a lot of
money that should have been
refunded when we won the anti-
dumping/countervailing duty
cases,” she said.
Head doesn’t believe there are
any obvious tweaks for NAFTA that
would be open for renegotiation
unless the U.S. was no longer inter-
ested in free trade with Canada or
Mexico. He noted that NAFTA is
basically the Canada-United States
Free Trade Agreement, which was
signed in 1989, extended to Mexico.
Many lawyers are asking
whether, if the U.S. backed out of
NAFTA, it could revert back to
the Canada-United States Free
Trade Agreement, said Todgham
Cherniak.
Should that occur, “I believe
that Canada and the U.S. would be
well served to interpret the
Canada-U.S. free trade agreement
provisions as reviving … and the
duty-free treatment and the bene-
fits continue,” she said.
The issues that have turned many
Americans away from supporting
free trade are complex, say experts.
“There are very significant
communities that have been pretty
hard hit by the decline of manufac-
turing. The huge growth of Chi-
nese exports to the U.S. does
appear to be strongly implicated in
the decline of manufacturers in the
U.S. And that decline has hurt
some communities much worse
than others. There are people that
are really suffering,” said Head.
Growing isolationism “cer-
tainly doesn’t bode well for those
of us who extol the virtues of free
trade,” said Baird, who noted that
while some Americans believe
globalization may be virtuous for
the U.S. overall, they worry about
things like stagnant wages and loss
of manufacturing jobs affecting
them directly.
“The same sort of sentiment that
you see among the supporters of
Brexit in the United Kingdom, you
see in the United States,” he said.
Baird said the challenge is not
exclusively globalization, but also
advances in technology and
robotics, which have come at the
same time as free trade and contrib-
uted to the reduction of jobs.
Political statements about
altering or discarding agreements
such as NAFTA, or refusing to
ratify the TPP raise concerns
about increased wariness among
the U.S. electorate who are not
seeing the benefits of free trade.
That is resulting in pushback and
support for candidates who are
inclined to pull away from free
trade, said Ferley.
“Free trade agreements are, on
net, a positive for an economy, with
the benefits of greater access to
foreign markets outweighing the
costs of greater domestic competi-
tion from foreign imports. How-
ever, it is important that policies
are put in place that counter these
costs, with workers being provided
with the means to transition to
those areas of the economy that
benefit from free trade,” he added.
It is hard to predict now how vul-
nerable Canada might be under a
new U.S. administration that is less
supportive of free trade, say experts.
However, clear concerns have been
expressed. In the Chartered Profes-
sional Accountants of Canada’s
Business Monitor Q2 2016 survey,
69 per cent of respondents holding
senior positions in industry said
they were worried that the new U.S.
president, whoever is elected, will
enact more restrictive trade policies
with Canada.
“We are hopeful that after the
U.S. election, the new leadership
will become more pragmatic and
focus on how to strengthen that
trading relationship rather than
weakening or threatening it.
Working together can lead to more
jobs and greater prosperity on both
sides of the border,” said Nicholas
Cheung, CPA Canada’s Toronto-
based vice-president of member
services.
Head noted that Trump has also
spoken about potentially pulling the
U.S. out of the World Trade Organ-
ization (WTO), which should be
concerning for Canada because the
WTO constitutes the framework for
all international trade.
“If the U.S. were to drop out of
that, and therefore not to have to
live by any of its WTO obligations,
Canadians would be in a much
weaker [position] in terms of any
kinds of negotiations between the
U.S. and Canada,” said Head.
“I don’t believe that either
Trump or Clinton are going to take
irrational, illogical actions,” said
Todgham Cherniak. “During elec-
tions, a lot of things are said. Once
someone has power, and has smart
advisers looking carefully at the
issues, saner heads prevail.”
Todgham Cherniak stressed
that the U.S. needs to participate in
world markets and the country is
not an island onto itself that is
capable of manufacturing every-
thing Americans need within its
own borders.
“I believe that regardless of
whether it’s Clinton or Trump they
will take action that is in the best
interests of the U.S. economy and
the U.S. workers, and those actions
will be to stay in NAFTA and to
stay in the WTO,” she said.
Ill trade winds may pose threat to Canada
Republican U.S. presidential candidate Donald Trump, left, and his Democratic opponent Hilary Clinton,
right, are worrying Canadian business observers because they are both displaying a hostility to, and
mistrust of international trade deals.
“The same sort of sentiment that you see among
the supporters of Brexit in the United Kingdom,
you see in the United States.”
John Baird, Bennett Jones LLP
9. 8 The Bottom Line October 2016
N E W S
foreign exchange operations
claimed a loss of approximately
$91 million, which the CRA
denied. In Kruger Inc. v. Canada
2016 TCC 14, Tax Court Chief
Justice Gerald Rip denied the
mark-to-market losses on option
contracts written by Kruger.
Although he found that the mark-
to-market method was consistent
with well accepted business prin-
ciples and generally accepted
accounting principles (GAAP),
Chief Justice Rip (now in private
practice) held that “a general
principle of taxation is that nei-
ther profits nor losses are recog-
nized under the [Income Tax] act
until realized except if the act
provides an exception to the real-
ization principle.”
Mark-to-market accounting is
an accrual method of accounting
where the option is valued at
market value as at the balance
sheet date, and any change in the
market value from the beginning
to the end of the period is recog-
nized as a gain or loss in the
income statement for the period.
In contrast, under the realization
method of accounting, a trans-
action is recognized as complete
when an entity has a claim to be
paid in cash or an obligation to
pay cash. The realized value is
certain, and not subject to any
estimate of value.
But the appeal court, in over-
turning Chief Justice Rip’s deci-
sion, rejected the notion the real-
i z a t i o n p r i n c i p l e i s a n
“overarching” one that applies in
the absence of a provision author-
izing or requiring the application
of a different method. Such an
approach flies in the face of
established case law and runs
counter to decisions by the
Supreme Court of Canada, said
Chief Justice Marc Nöel in a
unanimous 34-page ruling in
Kruger Inc. v. Canada 2016 FCA
186.
The Supreme Court held, in
Canderel Ltd. v. Canada [1998] 1
S.C.R. 147 and in Ikea Ltd. v.
Canada[1998] 1 S.C.R. 196, that
the realization principle can give
way to other methods of com-
puting income (pursuant to s. 9 of
the act) “where these can be
shown to provide a more accurate
picture” of the taxpayer’s income
for the year. In another decision
issued some 50 years ago, the
SCC held in Canadian General
Electric Co. v. M.N.R. [1962]
S.C.R. 3 that gains and losses on
income account resulting from
foreign currency fluctuation may
be recorded on an accrual basis
for tax purposes.
“The decision reinforces the
possibility for a taxpayer to use
any method that is not forbidden
by the act or rules of law,” noted
Louis Tassé, a tax lawyer with EY
Law LLP, who successfully
pleaded the case. “Our position
from the beginning was that
Kruger was allowed to use mark-
to-market as it gave a clearer pic-
ture of its income and was not
otherwise forbidden by the act or
by case law. The decision is a
simple application of the princi-
ples outlined by the SCC in Can-
derel. It might serve as a healthy
reminder of such principles.”
The appeal court also noted
there is “broad recognition” of
mark-to-market accounting for the
purpose of computing income
from dealing in foreign exchange
options. Uncontested evidence
revealed that banks, financial
institutions and mutual funds
which deal with foreign exchange
options have been given the green
light by the CRA to report their
income using the mark-to-market
method, pointed out the appeal
court. It is also a method that is
“consistent” with well-accepted
business principles, GAAP and
international accounting, added
the appeal court.
“This is an important case
because it significantly extends
the SCC decision in the Canadian
General Electric case,” said Neal
Armstrong, a Toronto tax lawyer
with Davies Ward Phillips & Vine-
berg LLP. “Until the Kruger case
people thought that Canadian
General Electric was restricted to
the foreign exchange situation.
Kruger extends mark-to-market
accounting to a broader range of
matters where the instruments are
held in an income account.”
The appeal court decision
seems to suggest that a taxpayer
who has derivatives, other prop-
erty or obligations acquired or
incurred on income has the option
to report gains or losses on those
holdings on a mark-to-market
rather realization basis for tax
purposes if, under GAAP, the tax-
payer prepares financial state-
ments on a mark-to-market basis,
added Armstrong.
But taxpayers cannot switch
between mark-to-market and real-
ization tax accounting methods
depending on whether they have
accrued losses, said Paul Ryan, a
Montreal tax lawyer with
Ravinsky Ryan Lemoine LLP. The
courts and the CRA require that
taxpayers use a consistent method
of computation from year to year,
added Ryan. “There has to be con-
sistency as the federal appeal
court decision points out,” said
Ryan. “A taxpayer cannot choose
one method when he has suffered
losses, and another method when
he’s making gains. That is very
important.”
Some have suggested the
appeal court decision may have
wider implications. In a bulletin
PwC said it is possible the Kruger
decision “will start a trend” in
which f inancial accounting
becomes more influential in deter-
mining what constitutes an accept-
able method of computing income
from a business.
Tassé says only time will tell.
Morand believes the courts will
continue to rely on the guidance
set out by the Supreme Court in
Canderel and Ikea — which is,
determining profit for tax pur-
poses on a basis that reflects the
most accurate picture. “This may
be consistent with f inancial
accounting but the fact that it is
will not be determinative of
whether it should be used for tax
profit computation,” said Morand.
In a similar vein, Armstrong said
that while accounting principles
do have some relevance, they are
certainly not binding. “And the
Kruger case hasn’t changed that,”
added Armstrong.
Decision will not be ‘determinative’ result
Continued from page 1
Accounting first analytics business, says new CEO
responsible for leading more than
1,000 tax professionals across the
country. He has, according to
Thomas, “an innate ability to recog-
nize trends and guide clients
adapting to changing landscapes.”
“This is a people business in all
respects, and I love helping people
succeed in their careers and in their
business,” Luongo says. Job one
will be “to talk to all of my partners
and listen to what their concerns are
and, more importantly, what their
clients’ concerns are. To learn what
we can do in a collaborative way to
help our business, help our clients
and also help create a phenomenal
career for our people.”
There’s no doubt the accounting
profession has changed dramatic-
ally over the 30 years he has been
part of it. “We were the original
data and analytics profession,” he
says. “We look at information to see
what it tells us. We look at a balance
sheet or income statement to under-
stand the story it tells. But the
amount of information now avail-
able to help people understand their
business has increased exponen-
tially — and continues to do so at
an ever-increasing velocity. The
new data tells a lot more of the
story not only about their business,
but also about trends affecting it.
That helps business owners and
everyone else who is interested in
their business.”
The amount of data and the
accuracy of that information are
reshaping what accountants do,
Luongo adds. “It’s no longer recon-
ciling debits and credits: it’s helping
our clients interpret data, to see
trends, to give them the tools and
services to extract that data in a way
they can understand. Our profes-
sion is changing in the way we
respond and do our work. We have
to become much more tech savvy,
more innovative and much more
agile as our clients’ businesses
evolve.”
More and more, he says: “We
have to adapt and recognize the
various disrupters that will affect
our clients and adjust our service
offerings to help them deal with the
changing and evolving business
platforms that are out there. If you
look at technology risk — just think
about the impact of cyberattacks on
one’s business and what that can do.
The reliance on IT systems and
what happens if they go down. That
can really impede a business and its
operations going forward. It is up to
us to help our clients understand all
the business risks and protect their
systems from outside attacks.”
Luongo also points to changing
political and economic dynamics
and how that can affect business
operations. “We are seeing that
business is very much global now,
and any geopolitical change in
another country can have a dra-
matic impact on business here at
home.”
He’s also seeing a trend to
increasing corporate reporting and
the rise of greater transparency.
“Both domestic and foreign
reporting requirements continue to
grow — especially for companies
operating internationally. We have
to make sure that we can help our
clients identify how to be in com-
pliance with all the global require-
ments.” And that is where being a
part of the KPMG family is such a
big advantage, he says, “we have a
global footprint and can help clients
all around the world.”
Career development for
KPMG’s people is another big
focus for Luongo. “Giving our
people experiences in a way that
they can develop their passions is
absolutely critical.The best learning
is experiential — trying out dif-
ferent things. We focus on giving
our people the opportunity to taste
all the different disciplines in our
firm, whether it’s in audit, tax,
advisory or private company ser-
vices. This helps our people grow
and become more well-rounded
business advisers. I want us to be
known for helping our clients be the
best they can be and one sure way
to achieve that is to be the best busi-
ness advisers possible to help them
achieve their goals, not only in
Canada but around the world.”
Part of that is continuing the
vision Thomas laid out during his
tenure as CEO. “Over the past two
years we have adopted a new global
vision: to be the clear choice. All
KPMG member firms have adopted
this vision — to be the clear choice
for our people, for our clients and
for the communities we work in.
This is something that Bill started
and is something we worked on
together when I was on his execu-
tive team. It’s a natural evolution of
our strategy and culture.
Clearly, says Brian Rogers,
chairman of KPMG’s board, “We
have selected a strong and accom-
plished leader and we are confident
in his ability to lead KPMG into a
new chapter of growth and evolu-
tion for both our profession and the
business community as a whole.”
Continued from page 1
Tassé Morand
Thomas
10. The Bottom Line October 2016 9
NEWS
By GUNDI JEFFREY
T
he audit committee plays a
crucial role in overseeing
the audits of public com-
panies almost all over the world,
says a recent report from the Inter-
national Organization of Securities
Commissions (IOSCO). The report
comes 10 years after IOSCO last
took stock of what was happening
in this area and confirms the value
of audit committees for investors
and other stakeholders in the
world’s capital markets.
Auditors should be subject to
appropriate oversight, stresses the
report in its conclusions. “Effective
oversight of those performing audit
services is critical to the reliability
and integrity of the financial
reporting process and helps reduce
the risks of financial reporting and
auditing failures in the public
securities market. The ultimate
purpose of such oversight is to pro-
tect the interests of investors and
further the public interest in the
preparation of informative, true,
fair and independent audit reports.”
The findings and conclusions
are described in the Survey Report
on Audit Committee Oversight of
Auditors, released earlier this
summer, which also aims to iden-
tify what audit committee practices
might help improve audit quality at
listed companies.
“In Canada, we already have in
place many elements that were
subject to the IOSCO survey,” says
Hélène Marcil, the chief accountant
of the Autorité des marchés finan-
ciers (the Quebec securities com-
mission). “We are pursuing our
reflection of these elements in light
of this survey to ensure that the
regulatory framework in Canada
reflects IOSCO world-class princi-
ples.”
The report summarizes the
results of a survey of IOSCO mem-
bers on the existing legal, regula-
tory and other requirements related
to audit committee oversight. The
report also tells interested stake-
holders and IOSCO members what
kind of audit committee require-
ments are in force in different
w o r l d j u r i s d i c t i o n s .
In many countries, says the report,
the audit committee of a publicly
listed entity plays a key role in
appointing external auditors and
overseeing the financial reporting
process and external audits. The
survey results indicate that 96 per
cent of the 47 responding jurisdic-
tions require public companies to
establish an audit committee or
similar governance body that is
separate from executive manage-
ment and acts in the interest of
investors.
According to the report, at least
one member of the audit com-
mittee has to be independent of
both management and the auditor
in 100 per cent of responding juris-
dictions, and 76 per cent of the
respondents require a majority of
audit committee members or all
audit committee members to be
independent.
As businesses become more
complex, globalized and increas-
ingly face new risks, the skills
needed by audit committee mem-
bers have also increased. At least
one audit committee member is,
therefore, required to have special
skills or experience in 87 per cent
of responding jurisdictions. Some
respondents require expertise in
accounting or finance, while others
require that audit committee mem-
bers have only an ability to read
and understand basic financial
statements. A small number of
respondents also indicated that
audit committee members need
some knowledge of auditing in
addition to accounting and finance.
More than 90 per cent of the
respondents require that the audit
committee be explicitly respon-
sible for assessing the auditor’s
independence. Considered in this
assessment is auditor provision of
non-audit services to public com-
pany clients. Although there are
restrictions on the types of non-
audit services that auditors may
provide to such clients in 94 per
cent of the responding jurisdic-
tions, the methodology for deter-
mining which services are pro-
hibited varies. Some regulators
provide specific lists of prohibited
non-audit services, whereas others
use a more qualitative assessment
of the likelihood that provision of a
specific service could affect the
auditor’s independence.
Audit committees are also asked
to make periodic assessment of
auditor performance by 71 per cent
of the respondents, although the
guidance provided to audit com-
mittees for assessing auditor per-
formance varies significantly from
country to country.
Communications from the aud-
itor to the audit committee are
mandated by 80 per cent of
respondents. The content and fre-
quency of these communications
are generally specified in a juris-
diction’s auditing standards. In a
number of countries — mainly
within the European Union — aud-
itor communications to audit com-
mittees are also regulated by stat-
utes or other regulations. The
communications usually cover a
wide variety of matters, from audit
planning through audit execution,
to key auditor findings and conclu-
sions made.
Requirements that audit firms
provide transparency reporting
exist in 61 per cent of countries
with developed capital markets,
while 15 per cent of growth and
emerging market jurisdictions have
this requirement.
The survey also highlighted a
notable increase in the role and
responsibility of the audit com-
mittee related to auditor oversight
since 2004, when IOSCO last
looked at audit committee require-
ments. There have been changes in
the composition of the audit com-
mittee; increases in the number of
members who are required to be
independent of the entity and the
auditor; and enhancements made in
the specific skills or experience of
audit committee members.
Audit committees have also
increased their role in assessing
auditor independence since the
2004 survey, as well as being more
involved in initial selection and
subsequent reappointment of the
auditor and the determination of
the audit fee.
According to Hugh Bolton,
chair of the WestJet Airlines Ltd.
audit committee, “These findings
are consistent with the Canadian
experience. In fact, I would ven-
ture that we are ahead of the curve
in these matters as we now have
suggested best practice of one-
year annual reviews of audit firms
by the audit committee and a
detailed, comprehensive review of
those firms every five years. In
addition we have an agreement
wherein the Canadian Public
Accountability Board has
developed a protocol which will
enable them to share information
gathered from their inspections
with specific audit firms and their
audit committees. Previously,
CPAB only published a rather
generic public report, which
frankly was not much help to audit
committees in specific situations.”
Brian Hunt, CPAB’s CEO,
agrees that, in Canada, the annual
assessment and five-year compre-
hensive review of the external aud-
itor “are increasingly becoming
important tools to assist the audit
committee in performing its over-
sight role, and we are seeing more
audit committees undertaking this
work.” As well, CPAB’s Protocol
for Audit Firm Communications of
CPAB Inspection findings with
Audit Committees “has helped to
improve transparency between
audit firms and audit committees
regarding CPAB inspection find-
ings, which we believe also assists
audit committees in the perform-
ance of their oversight role.”
But, he adds, “CPAB believes
audit committees could further
enhance their oversight of the
external auditor by moving along a
continuum from pure compliance
— approval of financial state-
ments, periodic/quarterly meetings
with the auditor, etc. — to a
stronger governance role — under-
standing key audit risks, oversight
of management and the auditor,
etc.”
Hunt acknowledges “this evolu-
tion must be anchored in a
common understanding of current
responsibilities. Many of the audit
committees we have spoken to are
interested in receiving information
and tools that will assist them as
they move along the continuum
and CPAB continues to support
this effort.”
He adds that “an expanded aud-
itor’s report may also enhance
communications regarding a com-
pany’s financial statements among
the audit firm, management and
audit committees.” This type of
report, “which could come to
Canada by 2018, is expected to
have additional commentary on
key audit matters, providing aud-
itors with an opportunity to better
communicate the audit issues they
confront and the work they per-
form to address them.”
Marcil concludes that “audit
committees play a key role in the
financial reporting supply chain
and are in a position to influence
audit quality. We embrace the
Canadian and international audit
quality initiatives as we recognize
that auditors are the gatekeepers
to identify material misstatements
in reporting issuers’ financial
statements.”
IOSCO survey underscores vital role of audit committee
MarcilBoltonHunt
“In Canada, we already have in place many elements
that were subject to the IOSCO survey. We are pursuing
our reflection of these elements in light of this survey
to ensure that the regulatory framework in Canada
reflects IOSCO world-class principles.”
Hélène Marcil, Autorité des marchés financiers
“These findings are consistent with the Canadian
experience. In fact, I would venture that we are ahead
of the curve in these matters as we now have suggested
best practice of one-year annual reviews of audit firms
by the audit committee and a detailed, comprehensive
review of those firms every five years.’’
Hugh Bolton, WestJet Airlines Ltd.
11. 10 The Bottom Line October 2016
N E W S
By JEFF BUCKSTEIN
V
ancouver’s position as a
prominent Canadian global
financial centre helps to
attract skilled jobs, foreign direct
investment, venture capital and
other economic perks, says a Con-
ference Board of Canada report.
But could there also be a dark side
of unintended consequences
attached to this success?
The British Columbia govern-
ment recently slapped a 15 per cent
property transfer tax premium on
foreign purchasers of residential
real estate in Vancouver to make
real estate less attractive to foreign
investors. This measure is also
designed to make home ownership
more affordable as booming house
prices have created a serious
shortage of affordable housing.
“While investment from outside
Canada is only one factor driving
price increases, it represents an
additional source of pressure on a
market struggling to build enough
new homes to keep up. This addi-
tional tax on foreign purchases will
help manage foreign demand while
new homes are built to meet local
needs,” said B.C. Finance Minister
Michael de Jong.
At the same time as the govern-
ment announced the 15 per cent tax,
it also introduced a Housing Priority
Initiatives Fund. An initial invest-
ment of $75 million will be pro-
vided for provincial housing and
rental programs, toward which a
portion of revenues from the new
tax on foreign buyers will be ear-
marked.
Alex Hemingway, public finance
policy analyst for the Canadian
Centre for Policy Alternatives
(CCPA) in Vancouver, said housing
shortages exist across the province.
“In B.C. we have almost 150,000
people in core housing need,
meaning that 30 per cent or more of
their income is going to housing, or
they’re living in overcrowded or
substandard housing. That’s a major
backlog in terms of affordable
housing. And that’s a consequence
in part, of the major run-up in
housing prices,” he said.
There is both a foreign and
domestic element to that, with a lot
of speculative investment chasing
homes, added Hemingway.
According to the Real Estate
Board of Greater Vancouver, the
Multiple Listing Service home price
index composite benchmark price
for all residential properties in
Metro Vancouver was $930,400 in
July 2016. That was up 32.6 per
cent compared to July 2015.
Although Hemingway views the
new foreign buyer’s tax in Van-
couver, using the property transfer
tax system, as a positive step, he
doesn’t believe it goes far enough.
“We’ve been saying at CCPA
that we ought to be using the tools
of taxation to cool that high end of
the overheated housing market, and
put those revenues straight into
building affordable housing on a
large scale. We can do a lot on the
property tax side,” he said.
“Take the property taxes that we
have now, and design them so
they’re progressive, so you pay
more on higher value properties.
You can shield a lot of folks from
that by having it kick in at the $2
million [or] $3 million level,” Hem-
ingway said.
Dan Baxter, policy development
director at the B.C. Chamber of
Commerce in Vancouver, said that
in addition to the value provided by
being an important Canadian finan-
cial centre, the city’s prosperity is
also enhanced by the presence of
engineering services needed to sup-
port the development of abundant
natural resource wealth in the B.C.
interior.
He also recognizes that some
residents are struggling just trying
to find a place to live.
“From the B.C. Chamber of
Commerce’s point of view, housing
affordability is very much an issue.
Our members are saying that to us
… and asking us to talk to govern-
ment on this issue. We just had our
(annual meeting) in Kelowna, and
passed two resolutions — one
dealing with ‘how do we increase
supply for market housing’ as well
as ‘how do we increase the rental
stock,’” Baxter added.
However, he believes it is too
early to assess any potential correl-
ation between strong economic
growth in some sectors, and
housing affordability in Vancouver,
the nation’s third largest urban area
behind only Toronto and Montreal,
respectively.
“There is probably an impact,”
said Baxter. “But in terms of how
that’s driving the market, from the
B.C. Chamber’s point of view it
really does come down to data. We
need to get more data around who’s
buying and what’s being bought.
From there we can start to really
assess what the impacts are, and
then [determine] the right policy
tools we should be pulling to help
maintain housing affordability,” he
explained.
Colin Hansen, president and
chief executive officer of Advan-
tage BC, a not-for-profit society
with a mandate to promote British
Columbia as a favourable location
for international business, said Van-
couver’s position makes it as a key
magnet for wealthy investors,
mostly from Asia and particularly
China.
Advantage BC helped fund the
Conference Board of Canada report
titled Stronger Together: The
Strengths of Canada’s Four Global
Financial Centres. “The report
overall stresses the fact that Canada
has a real global strength when it
comes to financial services,” said
Hansen, a former provincial cabinet
minister.
“The purpose of this research
was so that we could better under-
stand the makeup of that strength,
city by city. Previously we had lots
of excellent national data on the
Canadian financial services sector.
But this is the first time that we’ve
actually tried to look at the relative
strengths of the four financial cen-
tres in Canada,” he added.
Hansen said although it is too
early to draw any definitive conclu-
sions about the effectiveness of the
new foreign buyer tax, he believes
there have been some early results.
“I think that it has already been
successful in taking out some of the
hyper energy that was there. We
saw that housing prices were going
up because buyers had this firm
belief that the prices were just
going to continue to go through the
ceiling, and therefore [felt] that
they’d better buy today, no matter
what they had to pay to get into the
market.”
A B.C. Ministry of Finance
spokesperson, speaking on back-
ground, said the ministry expects
that some transactions will proceed,
with foreign residents paying the
new tax, but that other transactions
will be deterred in future as a result.
The government will collect data
through property transfer tax
returns in order to monitor this
activity and assess its effect.
B.C. boom a bust for homebuyers
OSFI warns of rising lending risks
T
he affordable housing
shortage in Vancouver
might be part of a larger
problem with rising housing
prices and a potentially over-
heated market.
The Office of the Superintendent
of Financial Institutions (OSFI) has
responded to the current situation by
issuing an open letter to all federally
regulated financial institutions,
emphasizing the need to reinforce
prudent residential mortgage risk
management and warning about the
rising risks and vulnerabilities asso-
ciated with household lending.
“Persistently low interest rates,
record levels of household indebted-
ness and rapid increases in house
prices in certain areas of Canada
[such as Greater Vancouver and
Toronto], could generate significant
loan losses if economic conditions
deteriorate,” said the letter, signed by
superintendent Jeremy Rudin.
The Bank of Canada’s overnight
interestrateremainsat0.5percent(it
has been at or under 1 per cent since
2010). According to Statistics
Canada, Canadian household debt
was at just over 165 per cent (meas-
uring debt to disposable income,
excluding pension entitlements) after
the first quarter of 2016.
Michael Dolega, a senior econo-
mist at TD Economics in Toronto,
agreed that with the price of access
to the housing market rising so
rapidly, particularly in Vancouver
and Toronto, the situation merits
attention.
“Many people or households
have increasingly leveraged them-
selves, and the levels of indebtedness
have been rising … to the point
where it is definitely a concern.
Things are obviously being helped
by low interest rates, because the
carrying cost of this debt is relatively
low,” he said.
However, a future increase in the
interest rate would put significant
pressure on some of the households
that have leveraged themselves sig-
nificantly, Dolega added.
The OSFI letter reiterates that it
expects all financial institutions to
exhibit rigour in the verification of a
borrower’s income, noting that it is
aware of incidents where institutions
have encountered misrepresentations
of either income or employment, or
both. It also stressed that a thorough
due diligence needs to be conducted
whenborrowersrelyonincomefrom
sources outside Canada.
OSFI said, in regard to debt ser-
vice ratios, that relying on the pre-
vailing posted five-year mortgage
rate to test a borrower’s ability to ser-
vice their obligations will not repre-
sent a sufficiently conservative stress
test when interest rates start to rise.
“I think it’s important to highlight
the fact there is a risk that interest
rates rise faster than we currently
anticipate, and banks and other
lenders should allow for that possi-
bility when making lending deci-
sions,” said Dolega. “I think this is a
welcome letter that shows the regu-
lator is looking at these issues pretty
closely, and wants to ensure that the
lenders that it regulates follow these
guidelines, and don’t sort of let things
slip,” he added.
• Jeff Buckstein
“From the B.C. Chamber of Commerce’s point of view,
housing affordability is very much an issue.
Our members are saying that to us … and asking
us to talk to government on this issue.”
Dan Baxter, B.C. Chamber of Commerce
12. The Bottom Line October 2016 11
focus
By JOHN GRIEVE
T
he halcyon days of profit
and expansion in the oil-
patch in Alberta are a fond
but distant memory.
How long the depressed market
will last is anyone’s guess and how
much damage it will do is equally
unpredictable. There are no doubt
bargains to be had for astute
investors, but staying the course in
the continued depressed market is
becoming more and more difficult.
From Calgary to Dallas to Wall
Street, lenders have lost their
patience and borrowers are feeling
the squeeze. With each passing day
it is becoming more obvious that
oilpatch borrowers will not likely
be able to simply wait out a return
to a buoyant energy market; they
will have to be creative, as will
their stakeholders.
I predict there will be more and
more protective filings under the
Companies’ Creditors Arrange-
ment Act, or perhaps the Canada
Business Corporations Act, as time
runs out for borrowers, patience
runs out for lenders and the market
continues to slump.
Buying runway may be a pos-
sible strategy, but if there are con-
tinued losses it simply will not
work in the long term. “Extend and
Pretend” is not working the way it
did a year or two ago.
At some point, even if lenders
are going to realize a significant
loss, their patience reaches an end
and they will take steps to recover
what they can and move on to
more profitable, stable business.
This is not something that is
unique to the oil market (it hap-
pened to the mining industry sev-
eral years ago and to the auto-
motive industry and the high tech
industry before that) and it will
have a continuing and significantly
detrimental effect on the oil and
gas market in Alberta until world
prices return to something
approaching their pre-slump prime
and stabilize there.
Why isAlberta’s oilpatch now a
briar patch? Primarily world mar-
kets. Overproduction and political
strife inAfrica, SouthAmerica, the
Middle East and Russia have ham-
mered oil prices. There continues
to be a glut on the market, and this
will continue to keep prices down.
The U.S. Energy Information
Administration estimates the price
of West Texas intermediate crude
oil at a benchmark $52.15 in 2017.
Oil hit that price several months
ago; and inAugust it dropped back
to below $40 a barrel. Many ana-
lysts see oil remaining below $70 a
barrel into 2018 and investors in
the oil and gas market would be
prudent to err on the side of cau-
tion. In addition, friction over get-
ting Alberta crude to market
through a series of as of yet
unapproved pipelines isn’t helping
things. Neither is the mayhem
caused by the Fort Mac fires and
now floods.
On the flip side, although the
industrialized world’s reliance on
oil and gas is slowly waning, it is
not likely to signifi-
cantly diminish
a n y t i m e
soon and
appetite is likely to continue to
grow in emerging economies. The
profitability of any given oil and
gas company depends on its
expenses in bringing crude to
market. However, $60 a barrel oil
is not generally thought of as being
profitable in Alberta. Formal oil
and gas company insolvencies in
Alberta abound and many of the
smaller companies have fallen
prey to receiverships or liquida-
tions where the lenders, perceiving
no end in sight, simply want to
move on. This appears to be the
case with Calmena Energy Ser-
vices, Spyglass Resources, Endur-
ance Energy, Parallel Energy, Pal-
liser Oil & Gas, Kinwest 2008
Energy and ATK Oilfield Ser-
vices to name but a few.
However, the larger players
are looking to reorganize, rec-
ognizing that value can be
Time not on the side
of struggling oilpatch
See Albertans’
on page 15
13. The Bottom Line October 201612
focus
ByWES PRIEBE
A
fter dealing with sus-
tained low oil and gas
prices, cancelled projects
and significant job losses, it’s
becoming increasingly clear that
the oil and gas industry cannot
rely on a return to the oil heydays
of years past any time soon.
According to the 2016 Ser-
vice and Supply Outlook Report,
(http://insights.grantthornton.
ca/i/651954-service-supply-
2016-outlook-report), an average
of 43 per cent of service and
supply companies considered
collaboration strategies to cut
costs in 2015 — and this may
just be the beginning. A funda-
mental change is on the horizon
for this resource-based industry
as companies find themselves
running out of cost cutting
options within their organiza-
tions. So what now?
Recently, a group of industry
thought leaders joined Grant
Thornton and JuneWarren-
Nickle’s energy group to discuss
exactly that. They explored how
the oil and gas sector could
innovate and redef ine the
industry in an effort to reach a
new, more sustainable, level of
success. The conclusions suggest
that collaboration may ultimately
be the key to a prosperous future,
for those willing to shift their
thinking and adapt to new real-
ities.
Remaining at the status quo is
not a viable option. So how can
service and supply companies
collaborate and innovate to
permanently lower costs and
increase profit margins? Here are
some key points taken from our
discussion
Consider strategic alliances
Combine fixed cost centres to
lower overhead costs. This can
range from offering unused shop
space to a complementary ser-
vice provider at a reduced rate,
to sharing resources or equip-
ment.
Team up with complementary
service providers to expand ser-
vice offerings and leverage each
other’s networks to gain access
to new markets and customers.
Consideration should be
given to joint bids to reduce bid-
ding wars and inefficiencies.
This adds significant value to
both the bidding company and
the end customer.
Consider giving a poorly per-
forming division of the company
to a strategically chosen com-
petitor in exchange for a per-
centage of the revenue they gain
from it.
This strategy can solve a cash
flow issue, reduce price compe-
tition and create goodwill.
Adopt an open, honest strategy
Strong relationships allow for
frank communication about price
and margins. Be clear about
expectations and be prepared to
either take a hit or walk away.
Connect often to get a full under-
standing of a customer’s busi-
ness. Use this insight to tailor
service offerings to their needs.
Always put customers first.
Innovate with their needs in mind
to create a win-win situation.
Ask customers if the current
service offering is still meeting
their needs, or whether there may
be an opportunity to provide
additional services to them. Con-
sider offering a bundled package,
possibly at a lower price, in
return for the additional busi-
ness.
Think beyond traditional
invoicing and payment struc-
tures. Consider offering credits
forward and applying them to
future projects, or set up a master
service agreement or subscrip-
tion type model where customers
have monthly access to services.
Avoid asking valued suppliers
for price reductions to increase
trust and willingness to collab-
orate.
Tackle challenges as united front
Be active in industry associa-
tions that regularly lobby for
change, whether political,
environmental or regulatory.
However, don’t rely on industry
associations alone. Contact local
provincial and federal govern-
ment representatives yourself, to
ensure your voice is heard.
Don’t underestimate the power
of idea-sharing with industry
peers.
Don’t wait for change. Focus
on doing business with companies
that value more than the lowest
price. Bidding wars only drive the
market down further.
Collaboration, communication
Stormy seas make better
sailors. Be open with employees
to address fears but don’t dwell
on the negative.
All departments should have
an understanding of the man-
dates of the organization, the
roles people play and how they
fit into the big picture — as well
as the overarching strategy and
vision for the organization.
Take advantage of idle time.
Train less experienced workers
so you can fill the knowledge
gap and be ready when the
market improves. Keep key
employees engaged during idle
times by considering job-shad-
owing and cross-department
learning opportunities. For
ex a m p l e , a n ex p e r i e n c e d
foreman could also be a know-
ledgeable salesperson that
“talks-the-talk and walks-the-
walk.”
Empower decision making at
all levels, not just in the board-
room. Shared leadership creates
an environment where everyone
is fully invested — resulting in
better decisions all around.
Seek input from those directly
affected by decisions to uncover
innovative ideas.
Consider a non-commission-
based sales environment to
encourage a collaborative
mindset that is focused on
serving customer needs versus
making the sale, resulting in
improved customer satisfaction.
Look at process and strategy
Simplify processes. It’s hard
for a team to adapt to a changing
environment when there are too
many processes — or if those pro-
cesses are too complicated.
Furthermore, opportunities are
lost when it takes too long to
react.
Restructure departments and
divisions to be collaborative and
productive.
Overhead costs can be lowered
by considering outsourcing such
services as logistics, marketing or
accounting. Consider hiring an
outside project management com-
pany to optimize efficiency. The
cost to outsource this function
may be less than the cost of the
Moment right to embrace innovation
A fundamental change is on the horizon for this resource-
based industry as companies find themselves running out
of cost cutting options within their organizations.
Wes Priebe, Grant Thornton Corporate Finance Inc.
Priebe
Strong relationships allow for frank
communication about price and
margins. Be clear about expectations
and be prepared to either take a hit
or walk away. Connect often
to get a full understanding
of a customer’s business.
Wes Priebe, Grant Thornton Corporate Finance Inc.
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