In March 2003 the Accounting Standa...

In March 2003 the Accounting Standards Board (AcSB) published proposals for three modern CICA Handbook sections: Sections 3855 3865 and 1530 The propos strange standards are essentially an adoption of equivalent standards generally being practised in the US and internationally. The main proposal, Section 3855 addresses the recognition and measurement of financial instruments; Section 3865 focuses onward hedge accounting; and Section 1530 advocates the introduction of a US conception known as "comprehensive income" into Canadian practice.

The chiefly significant development in these propos standards is the introduction of fair value-based accounting for many financial instruments. Another is that, combined with Sections 3865 and 1530 Section 3855 upon financial instruments would also eliminate individual of the last remaining major differences between Canadian and US GAAP.

Section 3855 - Recognition and Measurement

The existing financial instrument standards single provide guidance on disclosure and presentation. Section 3855 would whole the financial instrument framework by means of providing guidance on recognition and measurement.

Recognition of financial instruments is swayed by some fairly simple principles:

Financial instruments should sole be recognized when the entity becomes a party to the contract related to the financial instrument, and financial liabilities should solely be de-recognized when they are legally extinguished. There is no specific guidance upon de-recognition of financial assets, therefore we would continue to rely onward the definition of assets in Section 1000 and, when applicable, the guidance in Accounting Guideline 12 "Transfers of Receivables."

Measurement of financial instruments is more webwork This proposal creates the following four categories of financial assets, each with slightly different measurement and presentation standards:

1 Held-for-trading

"Held-for-trading" financial assets include financial assets bought and sold regularly for short-term profit, and derivatives. Importantly, any financial instrument, whether asset or liability, may be designated as "held-for-trading" at the time of acquisition, calm if the item would not otherwise fall into this category. Held-for-trading financial instruments-including designated items-would be accounted for at fair value, with the two realized and unrealized gains or losse included in gin income.

2. Held-to-maturity

"Held-to-maturity" financial assets are generally misdoing instruments an entity is able to confine and intends to hold, to maturity. This is a complicated category, as detailed anti-abuse conducts can "close" this category based forward an entity's past behaviour. Held-to-maturity financial assets would be accounted for at amortized outlay using the effective interest method; this way is a present value universal that holds the yield to maturity constant throughout the life of the financial asset.

3 Loans and receivables

As the title indicates, this category captures regular loans and accounts receivable, still it excludes securitized amounts. Also exclud are loans or receivables quot in an active market. Loans and receivables would be accounted for at amortized sumptuousness using the effective interest method

4 Available-for-sale

"Available-for-sale" financial assets include all financial assets not classified in common of the other three categories. These would be accounted for at fair value, unless unrealized gains and losses would be included in comprehensive income, not in pure income. Realized gains and losse forward available-for-sale financial assets would be included in gin income, with a compensating "reclassification adjustment." This adjustment would muse amounts previously recorded in comprehensive income to avoid duplication.

Relief from the fresh requirements

Many significant financial instruments would not be affected by the agency of Section 3855 and may continue at their carrying amount. These include investments a) not quot in an active market; b) in subsidiaries; c) in entities enslave to significant influence; and d) in joint haps They also include operating leases and equity instruments issued by way of the reporting entity. Note that an item exclud from the recently made known recognition and measurement proposals would remain make subordinate to the existing presentation and disclosure requirements.

Ravisions to presentation and disclosure

The existing presentation and disclosure guidance would also be modified. The proposals in Sections 3855 include requiring disclosure of financial risk management objectives and policies, as well as accounting policy disclosure of the criteria applied to recognize and de-recognize financial assets and liabilities. Also to be disclosed are the bases of measurement applied to financial instruments forward the balance sheet, and the bases forward which income and expenses arising from financial instruments are recognized and disclosed.

Section 3865 - Hedge accounting

Hedge accounting would remain optional subject to the proposals.

Section 1530 - Comprehensive income

A practical issue with comprehensive income is simply where to near the disclosure. US practice in this area appears to be mixed, further most American companies present a fourth financial statement-the statement of shareholders' equity. a certain number of US companies include other comprehensive income in the income statement below trap income, and present the changes in retained earnings in the statement of shareholders' equity; about present other comprehensive income solitary in the statement of shareholders' equity, if it be not that usually also include the changes in retained earnings in that statement.