NIN 97/23 - Use of Non-U.S. Foreign Accounting Principles and Non-U.S. Foreign Auditing Standards [NIN - Rescinded]
| Published Date: | 1997-06-27 |
|---|---|
| Effective Date: | 1997-06-25 |
The purpose of this Notice is to outline
- criteria applied in assessing the acceptability of specific non-U.S. foreign GAAP and non-U.S. foreign GAAS;
- information to be provided by an issuer when requesting consent to the use of non-U.S. foreign GAAP and non-U.S. foreign GAAS;
- standard conditions generally applicable to consent to the use of non-U.S. foreign GAAP and non-U.S. foreign GAAS.
Requirements of Securities Rules
On February 28, 1997, the Commission published NIN#97/8 announcing that it had made a Commission rule concerning definitions (National Instrument 14-101) and related consequential amendments to sections 1 and 2 of the Securities Rules, all effective April 1, 1997. The consequential amendments did not result in substantive changes to the requirements previously set out in sections 1 and 2 of the Securities Rules.
The terms "foreign auditor's report", "foreign GAAP", "foreign GAAS" and "foreign public accountant's report" are defined in section 1(2) of the Securities Rules. The definitions refer, as appropriate, to the report, generally accepted accounting principles and generally accepted auditing standards required in the incorporating or organizing jurisdiction of the issuer under applicable legislation and, subject to the requirements dealing with these reports, principles and standards in such legislation, if a recommendation has been made by an association in the incorporating or organizing jurisdiction that is the equivalent of the Canadian Institute of Chartered Accountants (the "CICA"), the report, principles or standards recommended by that equivalent association.
Section 2(1) of the Securities Rules requires that, except for an issuer incorporated or organized under the laws of the United States of America or of a political division of the United States of America, an issuer that is incorporated or organized in a jurisdiction other than Canada or a province of Canada must, before filing any of the following, obtain the written consent of the Executive Director and comply with any conditions the Executive Director may impose:
(a) financial statements prepared in accordance with foreign GAAP;
(b) financial statements accompanied by a(i) foreign auditor's report, or
(ii) foreign public accountant's report.
Section 2(2) of the Securities Rules says that if financial statements are prepared in accordance with foreign GAAP, the notes to the financial statements must state which accounting principles have been applied and explain and quantify any significant differences between the foreign GAAP and Canadian GAAP (defined in section 1(2) of the Securities Rules).
Section 2(3) of the Securities Rules says that if an audit is performed on an issuer's financial statements and the auditor's report on those financial statements is prepared in accordance with foreign GAAS, the auditor's report must explain any significant differences between the foreign GAAS and Canadian GAAS (defined in section 1(2) of the Securities Rules). Section 2(4) of the Securities Rules says that if a public accountant performs the procedures necessary to issue a foreign public accountant's report on an issuer's financial statements, the public accountant's report must explain any significant differences between the procedures performed to issue the foreign public accountant's report ("foreign procedures") and the procedures necessary to prepare a Canadian public accountant's report (defined in section 1(2) of the Securities Rules).
The requirements for reconciliation and explanations set out in sections 2(2), (3) and (4) of the Securities Rules (formerly sections 2(5), (6) and (7) of the Securities Rules) apply to all financial statements required to be filed (including those filed pursuant to continuous disclosure requirements) whether the foreign GAAP, foreign GAAS or foreign procedures used are that of the U.S. or of another foreign jurisdiction. However, the consent of the Executive Director is only required under section 2(1) of the Securities Rules before filing financial statements prepared in accordance with non-U.S. foreign GAAP and/or financial statements accompanied by a non-U.S auditor's report or a non-U.S. foreign public accountant's report. Most of the standard conditions of consent set out in this Notice pertain to the form and content of the requirements set out in sections 2(2), (3), and (4) of the Securities Rules.
Executive Director's Consent
1. Acceptability
In assessing whether foreign GAAP of a specific foreign jurisdiction is acceptable, the primary consideration is whether the specific foreign GAAP comprises a comprehensive body of accounting principles. This is often indicated by the formality and status of the accounting profession in the foreign jurisdiction.
Foreign GAAS of a specific jurisdiction will be considered acceptable only where the foreign GAAS is equivalent in all material respects to Canadian GAAS, except for differences that may exist in reporting standards. A similar test applies to the acceptability of foreign procedures.
2. Application for Consent
When requesting the consent of the Executive Director, the issuer's application should be directed to the attention of the Chief Accountant. The application must include the following:
(a) financial statements, for which the application for consent is initially being made, prepared in accordance with foreign GAAP and, if applicable, audited in accordance with foreign GAAS or accompanied by a foreign public accountant's report prepared in accordance with foreign procedures. The financial statements may be in draft form;
(b) Canadian GAAP and, if applicable, a draft explanation of differences between the foreign GAAS and Canadian GAAS and differences between the foreign procedures and Canadian procedures;
(c) a letter provided by the auditor or public accountant outlining their competence and experience in providing audit opinions and/or public accountant's reports on reconciliation between the specific foreign GAAP and Canadian GAAP and providing explanations of differences between the specific foreign GAAS and Canadian GAAS; and
(d) The prescribed fee (at present generally $750, unless the decision is required on an expedited basis or is considered complex, in which case the fee is currently $2000).
The consent given by the Executive Director will usually apply to the specific financial statements submitted with the application and to any financial statements subsequently filed by the issuer whether in a prospectus, under continuous disclosure requirements or otherwise if these statements are prepared on the same basis as those for which consent has been given.
3. Standard Conditions
The following is a list of conditions the Executive Director normally imposes when providing consent. The Executive Director may impose additional or different conditions in specific circumstances.
(a) GAAP Reconciliation
The reconciliation of significant differences between foreign GAAP and Canadian GAAP required by section 2(2) of the Securities Rules must be provided either in
(i) the notes to the financial statements, or
(ii) a separate schedule of financial information for which a cross-reference is not provided in the financial statements (see BOR#97/6 published concurrently with this Notice).If the reconciliation is provided in a separate schedule and relates to audited financial statements, the reconciliation must be accompanied by an audit report. Similarly, if the reconciliation is provided in a separate schedule and relates to financial statements that are accompanied by a public accountant's report, then the reconciliation must be accompanied by a public accountant's report. Note that if the reconciliation is provided in the notes to the financial statements, the notes would be covered by the audit report or public accountant's report on the financial statements where such reports are required.
In addition, if the reconciliation is provided in a separate schedule and relates to financial statements that are required to be approved by the directors, including financial statements contained in a Form 61 - Quarterly Report filed by an exchange issuer, the schedule must be approved by the directors and the approval evidenced by the signatures, or facsimile of the signatures, of two directors authorized to evidence the approval.
In combination, the foreign GAAP financial statements and GAAP reconciliation information must provide the level of detail and the disclosure items normally provided under Canadian GAAP. For example, both the required and desirable disclosure items set out in section 1520 of the CICA Handbook — "Income Statement" should be provided. Where the form or extent of presentation for financial statements under the foreign GAAP is significantly different than that under Canadian GAAP, the Executive Director may require the issuer to provide restated financial statements prepared in accordance with Canadian GAAP.
For an issuer that is in the development stage, the foreign GAAP financial statements and GAAP reconciliation information in combination must also provide the information required by section 3(9)(b) of the Securities Rules. This includes an analysis of each of exploration, research, development and administration costs, whether expensed or deferred, and, where the issuer is a natural resource issuer, that analysis for each material property for each period presented.
For an issuer that is, or will be, an exchange issuer, the foreign GAAP financial statements and GAAP reconciliation information in combination must also provide a breakdown, by major category, of those expenditures and costs that are included in the deferred costs, exploration and development expenses, cost of sales, and general administrative expenses set out in the financial statements. This information is consistent with the requirements of item 1 of Schedule B of Form 61 - Quarterly Report.
The GAAP reconciliation information outlined above must be provided for both annual and interim financial statements filed pursuant to continuous disclosure requirements. Thus, an issuer will be required to provide a GAAP reconciliation including, where appropriate, presentation of restated financial statements prepared in accordance with Canadian GAAP, for interim as well as annual financial statements filed pursuant to continuous disclosure requirements. While there is no audit requirement for interim financial statements, it is the issuer's responsibility to ensure it is able to provide the required level of financial information. This may necessitate that the issuer involve its public accountant in preparing the GAAP reconciliation information.(b) Other Financial Information
Where financial information, other than the financial statements and GAAP reconciliation information required under item (a), is included in material filed for the purpose of a direct listing with the VSE, in a prospectus, in continuous disclosure documents or other documents filed under securities legislation (e.g., selected financial information, management's discussion, etc.), that financial information must be provided in accordance with, or reconciled to, Canadian GAAP. Where appropriate, a cross-reference should be made to the GAAP reconciliation information otherwise provided by the issuer in accordance with item (a).
(c) Explanation of GAAS Differences
The explanation of significant differences between the foreign GAAS and Canadian GAAS as required by section 2(3) of the Securities Rules must be presented either as
(i) an extra paragraph within the audit report on the financial statements, or
(ii) a separate statement signed by the auditor of the foreign GAAP and foreign GAAS financial statements (see BOR#97/6 published concurrently with this Notice).If there are no significant differences between the foreign GAAS and Canadian GAAS, a statement to this effect must be made in either the audit report on the financial statements or in a separate statement signed by the auditor.
Where the financial statements are accompanied by a public accountant's report, a similar approach is appropriate with respect to the explanation of differences between the foreign procedures and Canadian procedures required by section 2(4) of the Securities Rules (see BOR#97/6 published concurrently with this Notice).
The issuer or its auditor will be required to advise staff on a pre-filing basis of any differences between foreign GAAS and Canadian GAAS that were not identified at the time of the application for consent but are identified after the date of the consent and during the course of the issuer's preparation of any financial statements required to be filed. In these circumstances, the Executive Director may impose additional or different conditions in specific circumstances.(d) Change of Auditor
Any consent granted by the Executive Director will terminate if there is a change in the auditor of the GAAP reconciliation information. In that case, the issuer must re-apply for the consent of the Executive Director.
(e) Change of Business or Reverse Take-over
Any consent granted by the Executive Director will terminate if the issuer undergoes a change of business or a reverse take-over. In that case, the issuer must re-apply for the consent of the Executive Director.
4. Related Requirement
Issuers should refer to National Policy Statement No. 14 (and any successor instrument) for additional disclosure requirements where financial statements are presented in a currency other than the Canadian dollar or the U.S. dollar.
Issuers should also refer to NIN#96/12 and BOR#96/10 for further guidance on circumstances when approval of financial statements by directors is required.
Finally, issuers should refer to section 153 of the Securities Rules for requirements on the filing of material sent to securityholders or filed in other jurisdictions, if the materials contain information that is not already filed with the Commission and is material to investors.
5. Related BORs
(a) Prompt Offering Qualification System ("POP System")
The relief provided in BOR#97/6 does not apply to a foreign issuer that has securities registered with the United States Securities and Exchange Commission (the "SEC") and that satisfies the requirement to file an annual information form under National Policy Statement No. 47 ("NP 47") on the POP System by filing a current annual report on Form 10-K or on Form 20-F filed with the SEC pursuant to the Securities Exchange Act of 1934 ("POP Filing SEC Registrant"). BOR#93/1 implementing the POP System and BOR#96/16 provide relief that is more specifically tailored to foreign issuers under the POP System than the relief contemplated in BOR#97/6.
Under BOR#93/1, issuers required to reconcile their financial statements to Canadian GAAP under section 2(2) of the Securities Rules are exempt from providing the reconciliation in the notes to the financial statements that are incorporated by reference into a preliminary short form prospectus, short form prospectus or securities exchange take-over bid circular, if the reconciliation is included in the relevant document as required by NP 47.
Under BOR#96/16, POP Filing SEC Registrants are exempt from the requirements of sections 2(2), (3) and (4) of the Securities Rules for financial statements filed under Part 10 of the Securities Rules. However, when these issuers incorporate these financial statements by reference into a preliminary short form prospectus, short form prospectus or take-over bid circular, the necessary explanations must be included in those documents. In that case, a POP Filing SEC Registrant should include in its prospectus or other document the reconciliation of financial statements to Canadian GAAP under section 2(2) as a separate schedule of financial information that should be audited when it relates to annual financial statements. The explanation of the differences between foreign GAAS and Canadian GAAS under section 2(3) should be presented as a separate statement signed by the auditor immediately preceding or following the audited schedule of financial information. The explanation of the differences between the foreign procedures and Canadian procedures under section 2(4) should be presented as a separate statement signed by the public accountant immediately preceding or following the schedule of financial information. In addition, the POP Filing SEC Registrant should include the information and discussion required by NP 47 on selected consolidated financial information and management's discussion and analysis. Reference is made to footnote 24 of NP 47 for further guidance on the additional information and discussion required in a short form prospectus if the issuer does not include a reconciliation of its financial statements to Canadian GAAP in the notes to its financial statements.
Under BOR#93/1, a foreign issuer that files an annual information form under the POP System (i.e. not a POP Filing SEC Registrant) is not exempt from the requirements of sections 2(2), 2(3) and 2(4) of the Securities Rules in respect of the financial statements it files under Part 10 of the Securities Rules. In that case, however, the issuer may rely on the relief provided in BOR#97/6.(b) Multijurisdictional Disclosure System ("MJDS")
Similarly, the relief provided in BOR#97/6 does not apply to an eligible U.S. issuer under MJDS. Again, the reason for this is that BOR#91/7 provides relief that is specifically tailored to eligible U.S. issuers under MJDS. BOR#91/7 provides exemptions from the requirements of sections 2(2), (3) and (4) of the Securities Rules that would otherwise apply to a distribution under a prospectus or under a securities exchange bid or to the filing of financial statements under continuous disclosure requirements on the condition that eligible U.S. issuers comply with MJDS. In particular, eligible U.S. issuers distributing securities under section 3.3 of National Policy Statement No. 45 are required to comply with the reconciliation requirements of section 3.10 of that policy (see NIN#96/32 for further guidance).
DATED at Vancouver, British Columbia, on June 25, 1997
Paul C. Bourque
Executive Director
REF: BOR#97/6