Vol. 138, No. 48 — November 27, 2004

Regulations Amending the Canada Business Corporations Regulations, 2001

Statutory authority

Canada Business Corporations Act

Sponsoring department

Department of Industry

REGULATORY IMPACT
ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

Amendments are proposed to sections 70 and 71 of the Canada Business Corporations Regulations, 2001 (the Regulations).

Section 70 of the Regulations currently stipulates that the financial statements referred to in section 155 of the Canada Business Corporations Act (CBCA) must be prepared in accordance with generally accepted accounting principles (GAAP), as set out in the Handbook of the Canadian Institute of Chartered Accountants. Section 71 of the Regulations provides that the auditor's report referred to in section 169 of the CBCA must be prepared in accordance with generally accepted auditing standards (GAAS), as set out in the Handbook of the Canadian Institute of Chartered Accountants.

On January 16, 2004, the Canadian Securities Administrators (CSA) released the National Instrument 52-107: Acceptable Accounting Principles, Auditing Standards and Reporting Currencies (NI 52-107). The proposed regulatory amendments are designed to harmonize sections 70 and 71 of the Regulations with the rules established by N1 52-107. NI 52-107 allows corporations registered with the U.S Securities and Exchange Commission (SEC) to use standards recognized in the United States, i.e. GAAP and GAAS, for the preparation and audit of their annual and interim financial statements. NI 52-107 applies to financial years starting January 1, 2003, and later.

The proposed amendments would allow CBCA corporations registered with the SEC to prepare financial statements according to GAAP, as established by the Financial Accounting Standards Board of the United States.

CBCA corporations registered with the SEC changing from Canadian GAAP to U.S. GAAP would have to set relevant information in the notes of the financial statements for two years following the change. The notes would indicate significant differences between Canadian and U.S. GAAP concerning accounting, measurement and presentation. Also, these notes would include an assessment of the impact resulting from any significant difference between both countries' accounting principles, as well as information consistent with the requirements of the Canadian GAAP.

Corporations registered with the SEC that have produced financial statements according to both Canadian and American GAAP for at least two years before changing to only U.S. GAAP would be required to include a note explaining the significant differences between the Canadian and U.S. GAAP regarding recognition, measurement and presentation, as well as quantifying these differences.

The proposed amendments would also allow CBCA corporations registered with the SEC to prepare the auditor's report mentioned in section 169 of the CBCA according to the GAAS established by the Public Company Accounting Oversight Board of the United States.

Alternatives

The status quo is not appropriate since it creates a duplication of rules for some corporations. Provincial securities administrators allow corporations registered with the SEC to use the U.S. standards, while the CBCA still requires the use of Canadian standards only. CBCA corporations are disadvantaged since they have to prepare financial statements and the auditor's report in accordance with Canadian accounting and auditing standards, in addition to preparing them according to the U.S. standards.

There is no alternative to the proposed regulatory amendments. The only way to allow CBCA corporations registered with the SEC to prepare both the financial statements and the auditor's report in accordance with the U.S. standards is through a regulatory amendment.

Benefits and costs

The proposed amendments to sections 70 and 71 of the Regulations would not result in additional costs for corporations. The harmonization of the Regulations with provincial securities rules would give CBCA corporations registered with the SEC greater flexibility in the preparation of their financial statements and auditor's report and reduce costs for the preparation of financial statements, as these corporations would have to prepare only one set of statements.

Without these amendments to the Regulations, CBCA corporations registered with the SEC would be required to continue to prepare financial statements using Canadian GAAP as well as U.S. GAAP.

Consultation

Corporations Canada undertook consultations during the winter of 2003–2004 regarding the proposed amendments to the Regulations by posting consultation documents on its Web site and by sending a letter inviting comments to approximately 170 potential respondents, including CBCA corporations registered with the SEC, lawyers, accountants, associations of accountants, legal societies and provincial securities commissions.

Eleven responses were received, with seven of those respondents in favour of the amendments. According to them, the proposed amendments would improve the competitive position of CBCA corporations by facilitating access to American financial markets at a lower cost since preparing two sets of financial statements and related disclosures would no longer be necessary. Some also suggested technical amendments to the wording of the proposal, which have been taken into consideration.

Two respondents did not take a stand, but did suggest technical amendments to the wording of the proposal, which have been taken into consideration.

Two respondents were against the proposed amendments. In their opinion, these amendments do not consider the interest of Canadian investors in light of recent financial scandals in the United States. They claim that there are major differences between American and Canadian GAAP. In their view, in order to protect the public, there must be a reconciliation between U.S. GAAP and Canadian GAAP. Furthermore, they suggest that a study is necessary to determine if the savings from the elimination of duplication are that significant. Finally, they recommended that International Accounting Standards (IAS) be considered.

Both the Canadian and U.S. GAAP are of the highest standard. The use of U.S. GAAP by CBCA corporations should not be detrimental for investors. U.S. GAAP are more rules-based and detailed and are drafted towards specific types of transactions. Therefore, the interpretation of U.S. GAAP may be more difficult for CBCA shareholders. Canadian GAAP are based on general principles. In order to ensure that Canadian shareholders become familiar with the U.S. GAAP, the proposed amendments would require that, for a period of two years, notes to the financial statements provide the relevant information concerning the material difference between Canadian GAAP and U.S. GAAP that relate to recognition, measurement and presentation and quantify the effect of the material differences between both sets of accounting principles.

Canadian investors should not be disadvantaged with the use of U.S. GAAP. According to some empirical studies that have looked at the effect of discretionary change in accounting standards, the adoption of U.S. GAAP by CBCA corporations should have no impact on the movement of liquid assets, nor should it impact the stock market value of corporations.

The proposed Regulations would give CBCA corporations registered with the SEC a choice to use only the U.S. GAAP or prepare their financial statements according to both standards.

Regarding the use of IAS, they are not commonly used by the industry and the adoption of those standards by CBCA corporations registered with SEC would provide no competitive advantage at this time.

Compliance and enforcement

Corporations Canada is responsible for ensuring compliance of the Regulations. According to section 160 of the CBCA, corporations must file financial statements with the Director under the CBCA (Director). However, Corporations Canada's policy 11.28.1, Exemption from the Filing of Certain Documents, provides that filing financial statements normally required by CBCA is not required when similar documents have been filed with a participating provincial or territorial securities commission. Without the proposed amendment, a corporation would not be able to take advantage of policy 11.28.1 when financial statements are prepared according to U.S. GAAP and instead would still be required to file Canadian GAAP statements with the Director. The proposed amendments would allow CBCA corporations registered with the SEC to use the exemption granted by the Director from filing financial statements which are already filed with a participating provincial or territorial securities commission.

Contact

Isabelle Breault, Corporations Canada, Jean Edmonds South Tower, 10th Floor, 365 Laurier Avenue W, Ottawa, Ontario K1A 0C8, (613) 941-5753 (telephone), (613) 941-5781 (facsimile), breault.isabelle@ic.gc.ca (electronic mail).

PROPOSED REGULATORY TEXT

Notice is hereby given that the Governor in Council, pursuant to subsection 261(1) (see footnote a) of the Canada Business Corporations Act (see footnote b), proposes to make the annexed Regulations Amending the Canada Business Corporations Regulations, 2001.

Interested persons may make representations with respect to the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Coleen Kirby, Department of Industry, Corporations Canada, Jean Edmonds Tower South, 10th Floor, 365 Laurier Avenue West, Ottawa, Ontario K1A 0C8 (tel.: 1 (866) 333-5556 or (613) 941-5720; fax: (613) 941-5781; e-mail: kirby.coleen@ic.gc.ca).

Persons making representations should identify any of those representations the disclosure of which should be refused under the Access to Information Act, in particular under sections 19 and 20 of that Act, and should indicate the reasons why and the period during which the representations should not be disclosed. They should also identify any representations for which there is consent to disclosure for the purposes of that Act.

Ottawa, November 22, 2004

EILEEN BOYD
Assistant Clerk of the Privy Council

REGULATIONS AMENDING THE CANADA
BUSINESS CORPORATIONS REGULATIONS, 2001

AMENDMENT

1. The heading "General" before section 70 and sections 70 and 71 of the Canada Business Corporations Regulations, 2001 (see footnote 1) are replaced by the following:

Interpretation

70. The following definitions apply in this Part.

"Canadian GAAP" means generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants, as amended from time to time. (PCGR canadiens)

"Canadian GAAS" means generally accepted auditing standards as set out in the Handbook of the Canadian Institute of Chartered Accountants, as amended from time to time. (PVGR canadiens)

"NI 52-107" means National Instrument 52-107 of the Canadian Securities Administrators, entitled Acceptable Accounting Principles, Auditing Standards and Reporting Currency and published January 16, 2004, as amended from time to time. (Règlement 52-107)

"SEC" means the United States Securities and Exchange Commission. (SEC)

"SEC registrant" means a distributing corporation that

"US GAAP" means the generally accepted accounting principles established by the Financial Accounting Standards Board of the United States, as amended from time to time. (PCGR américains)

"US GAAS" means the generally accepted auditing standards established by the Public Company Accounting Oversight Board of the United States, as amended from time to time. (PVGR américains)

Financial Statements

71. (1) Subject to subsection (2), the annual financial statements referred to in paragraph 155(1)(a) of the Act shall be prepared in accordance with Canadian GAAP.

(2) For an SEC registrant, the financial statements may be prepared in accordance with US GAAP.

(3) For the first financial year in which the change from Canadian GAAP to US GAAP takes place, and for the following financial year, the notes to the financial statements shall

(a) explain the material differences between Canadian GAAP and US GAAP that relate to recognition, measurement and presentation;

(b) quantify the effect of the material differences between Canadian GAAP and US GAAP that relate to recognition, measurement and presentation, including a tabular reconciliation between the net income reported in the financial statements and the net income computed in accordance with Canadian GAAP; and

(c) provide information consistent with disclosure requirements of Canadian GAAP to the extent not already reflected in the financial statements.

(4) If the financial statements of an SEC registrant were prepared in accordance with both Canadian GAAP and US GAAP for two years or more before the first financial year in which the statements were prepared in accordance with US GAAP only, for the first financial year in which the change from Canadian GAAP to US GAAP takes place, a note shall accompany the financial statements that

(a) explains the material differences between Canadian GAAP and US GAAP that relate to recognition, measurement and presentation; and

(b) quantifies the effect of the material differences between Canadian GAAP and US GAAP that relate to recognition, measurement and presentation, including a tabular reconciliation between the net income as previously reported in the most recent financial statements, annual or otherwise, prepared in accordance with Canadian GAAP and the net income as restated and presented in accordance with US GAAP.

(5) If the financial statements of an SEC registrant were prepared in accordance with both Canadian GAAP and US GAAP for less than two years before the first financial year in which the statements were prepared in accordance with US GAAP only, for the first financial year in which the change from Canadian GAAP to US GAAP takes place, the following shall be presented with the financial statements:

(a) the financial information as previously reported under provincial securities legislation in the most recent financial statements, annual or otherwise, in accordance with Canadian GAAP;

(b) the financial information referred to in paragraph (a) as restated and presented in accordance with US GAAP; and

(c) an accompanying note supporting the comparative information required under paragraphs (a) and (b) that

(6) The comparative information required under paragraphs (5)(a) and (b) shall be presented either on the face of the financial statements or in the note to those statements referred to in paragraph (5)(c).

(7) The financial statements shall contain a note stating whether the statements have been prepared in accordance with Canadian GAAP or US GAAP.

(8) For greater certainty, subsections (3) to (6) do not apply to the financial statements of an SEC registrant that was incorporated after August 31, 2004, and that, since that date, has prepared its financial statements in accordance with US GAAP only.

Auditor's Report

71.1 (1) Subject to subsection (2), the auditor's report referred to in section 169 of the Act shall be prepared in accordance with Canadian GAAS.

(2) For an SEC registrant that has prepared its financial statements in accordance with US GAAP and subsections 71(3) to (6), and whose auditors are in compliance with the professional practice standards established or adopted by the Public Company Accounting Oversight Board of the United States, the auditor's report may be prepared in accordance with US GAAS.

(3) If the auditor's report referred to in subsection (2) is prepared in accordance with US GAAS, it shall comply with section 4.2 of NI 52-107, but for the purpose of applying that section,

(a) the expression "US GAAS" has the meaning assigned to that expression by section 70 of these Regulations; and

(b) the expression "SEC issuer" has the meaning assigned to the expression "SEC registrant" by section 70 of these Regulations.

COMING INTO FORCE

2. These Regulations come into force on the day on which they are registered.

[48-1-o]

Footnote a

S.C. 2001, c. 14, s. 125

Footnote b

S.C. 1994, c. 24, s. 1

Footnote 1

SOR/2001-512

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