January 27, 2005 by Canadian Underwriter
New standards for reporting financial instruments in corporate financial results have been officially released by Canada’s Accounting Standards Board (AcSB).
The board says the standards are “a hybrid of U.S. GAAP and international standards”. “The new standards close a lot of the gaps in Canadian GAAP and bring Canadian standards for financial instruments in line with best international practice,” says AcSB chair Paul Cherry.
“One of the key impacts of the new standards is that all derivatives and
most equity investments, such as common shares, will need to be recognized and
measured at fair value,” he explains. “When financial instruments are not measured at fair value, they don’t show the gains and losses — sometimes disproportionate gains and losses due to changes in market conditions. Currently, a user can not see the potential exposures these instruments create until it’s too late.”
The AcSB says the new standards are lengthy and “may seem somewhat daunting to some”, but stresses most entities will only see a modest impact, with many parts of existing accounting practices remaining the same. The new standards must be adopted by October 1, 2006, i.e. for most companies this will mean they being begin with January 1, 2007 results.
Aspects of the new standards include: inclusion of all financial instruments, including derivatives, on balance sheets at fair value whenever possible; extension of hedge accounting requirements; and a new location at which certain gains and losses to be temporarily recorded so they remain transparent.
The standards can be found at www.acbscanada.org.