EY’s annual Financial Reporting Developments series | IFRS Reporting

Guy Jones: Welcome everyone to our webcast today on Financial Reporting Developments. I would like to start by introducing both our agenda and our speakers today. First off, my name is Guy Jones. I'm a partner in EY's Professional Practice Group and I'm based in our Toronto office. It's a pleasure to be speaking to you today. On your slide, you can see the main topics we will be covering. Our first item on the agenda is a topic that's dominating many discussions today related to both financial and non-financial reporting, and that is ESG or Environmental, Social and Governance reporting. Kent Kaufield, our ESG Markets Leader, and Francis Claude, who is from our ESG Advisory practice in Calgary, will each take us through a discussion of the current and future state of ESG reporting. So very pleased to have Kent and Francis with us today.

We're also pleased to have with us today Ritika Rohailla and Alex Fisher from the Ontario Securities Commission. Ritika and Alex will provide us with a regulatory update, including a discussion of the now effective new non-GAAP measures rules from the CSA. And they'll also provide us with some comments and observations related to the recently proposed National Instrument 51-107 on disclosure of climate-related matters, which will build on some of the topics that Kent and Francis will be taking us through as well.

In turn, we’ll look at some of our other more traditional IFRS-related Financial Reporting Developments, both from the International Accounting Standards Board and the IFRS Interpretations Committee. And we'll also discuss some recent topics that our Canadian accounting standards board’s IFRS Discussion Group has addressed in some of their meetings over the course of this past year. Both Jeff Glassford and Juliana Mok, along with myself and Jeff and Juliana, are also from our professional practice group in Toronto. We'll be taking you through those topics collectively.

Lastly, given the amount of activity in this space, we wanted to spend a few minutes discussing some recording and other considerations related to SPAC transactions, again, given the amount of capital markets activity and in that space. And Lara Iob from our Montreal office in our professional practice group will take us through that topic.

Before we dive into the content today, I wanted to give you a few quick administrative reminders. First, you will receive CPE credit for attending today, provided you're online for at least 50 minutes of the webcast, and you will receive a CPE certificate by email at some point after the webcast, based on the name and email address you used when registering for today's event.

If you're watching the event via a replay, there will be an instruction slide at the end of the replay, explaining how you can obtain your CPE credit. For those who are watching live today, you are able to ask questions through the webcast technology. There's a Q&A box that you can see on screen, and you can use that to submit your questions. We will try our best to answer as many as we can as we progress through the material today. But for those that we don't get to, we will try and reply to those subsequent to the webcast by email.

Lastly, at some point following the webcast today, you will also receive an email with a couple of things in that email. First, a link to a financial reporting development's website, where you'll be able to find a host of EY technical publications on, not only the topics we'll be discussing today, but many other topics that we would encourage you to explore the content of that link. And that email will also provide you with a downloadable version of today's presentation material, i.e., the slides from today's event. With those administrative matters dealt with, I would like to turn it over to Kent and Francis to take us through our first agenda.

Kent Kaufield: Thank you very much Guy, and it's a pleasure to be here. I'm happy to welcome Francis with me as well. Francis and I are both part of our ESG team on a national basis. I'm actually in Ottawa today, I'm based out of Calgary. Francis is in Calgary. I'm in Ottawa in an all-day ESG session with a client. I was in Montreal yesterday with Lara, with a client as well, and I will tell you, I took the train this morning between Montreal and Ottawa because it's a lower carbon footprint and plus it's kind of relaxing to travel on the train.

Thank you for joining us. We're going to cover in the next 15 minutes, just the current and future state of ESG reporting. Really pleased that we have folks from the OSC afterwards because they can really get into some of the granularity. But we'll talk a little bit about the market factors and the current state of the ESG ecosystem. Francis, do you want to say hi?

Francis Claude: Hi everybody. Thanks Kent, and thanks everybody for having me. I’m working out of the Calgary office with the rest of the team, we're now around 60, 65 nationally. There’s a lot of movement in that area and looking forward for the next changes and how it will drive the businesses. Back to you Kent.

Kent Kaufield: Why is it important? ESG is on everyone's mind. It's predominantly, right now, it's certainly in the media, it's more focused on the “E” portion of it, and some of that's directly coming out of COP26, but also coming out a little bit what we're hearing from some of the regulators is climate is going to be something they'll think about, certainly from a disclosure perspective on a much more acute basis over the next year or two. And what we would continue to kind of emphasize around ESG is that we wanted organizations to think about it less as a compliance exercise and more of how can you use it to drive the strategy of the business. We look at some of the common or core stakeholders being investors, employees, customers or regulators. And if I leave the regulators aside, increasingly we're seeing that investors have expectations on certain ESG performance criteria, and they're looking to understand how an organization responds to those, how they benchmark themselves, and they’re starting to look more towards forward-looking targets. We know that customers are paying attention to it, and there's lots of examples of large retailers who are looking to listen to the customer needs and trying to drive products that have a lower carbon footprint. Trying to sell products that they know didn't use child labour to make them, and thinking about how those are showing up on shelves and how customers are responding to it.

Last but certainly not least, and we certainly feel this within EY globally, is that our people are really looking at how we're doing from an ESG perspective. They want to understand, not only our commitment to the planet and our commitment as we will be Net Zero by 2025, but also our commitment to doing everything from commitment to indigenous communities, to gender equity, moving across all the spectrums of social and governance. For how we respond to ESG reporting and how each of you respond to ESG reporting, we'll have different stakeholders in mind as you begin to build out your own report. Knowing that for sure, until some of the standards, which we'll talk about next, have solidified, it's kind of a difficult chicken and egg scenario. You don't want to build something that may or may not be a standard. But we do want you to start, and you'll hear the message is getting started now with understanding what you do as an organization and understanding how to move forward with that inventory of activity is going to be important.

Francis Claude: Thank you, Kent. Why is this topic important? Looking at one of our recent survey results that were conducted with 320 companies, there's three main topics I want to talk about. The fact that it's been a tipping point recently, i.e., how the COVID-19 pandemic acts as a powerful ESG catalyst where we see more than 90 percent of investors attaching a greater importance to corporate ESG performance, as far as a strategic priority when they do in their decision-making process.

The second point is the future of ESG investing that's really centred around two main points — the performance transparency and the analysis capability. What is needed for that? Again, investors recognize and are asking for more standardized sets of criteria for disclosure and metrics.

And the final point is their race to Net Zero. Again, a topic that's been a bit more politicized, a bit more on social media recently as well, but also where we see that investors pay more and more attention in their strategy focusing on companies that have more decarbonization-aggressive targets.

Kent Kaufield: Maybe Francis, just before you leave that slide, I'll add one thing to the Net Zero. For those of you that are out there and your company or someone has declared what your targets are –  or that you expect to reduce by certain year and Net Zero by a certain year –  now that reliance is being placed on by stakeholders, we're starting to really feel and see the need to ensure that those are reasonable targets, that your benchmark, your opening data is reasonable. Those are starting to feel a lot more like forward-looking statements. They're not quite there yet, but the investors are starting to think about them in a different way.

Francis Claude: Thanks, Kent. In the next two slides, we're just going to get a quick overview of the outputs and what happened during COP26 early here in November, a few weeks back. There are a few highlights here. There was a commitment on the end of deforestation by 2030, where over 100 leaders committed, which captures around 86% of the world's forest, Canada being part of it. This will be a big push in terms of biodiversity, water management, et cetera. It’s a good push overall on the ESG agenda.

The second one is the deal on the international carbon markets. This is where we see large opportunity for unlocking billions of dollars of investment in carbon reduction projects globally. There was some dispute around Article 6 of the Paris Agreement that now to some extent has been resolved, which would encourage more transaction. That being said, it's still a work in progress in terms of the fact that the different frameworks are still very fragmented globally. And even if you think of Canada – there's still a lot of dysfunctional aspects to make it more of a commodity-efficient and mature market. More to come on that.

The third point is the pledge to phase out coal. There's a big movement where 40 countries commit to ending investment in new coal power generation. Unfortunately, China and the U.S. did not sign up into it. And as of 2019, China and U.S. combined for about 60 percent of coal power generation and there’s more progress to be done on this.

In terms of the greening the financial system, there was a network that agreed between around 100 central banks to adopt the TCFD recommendation and assessing climate-related risk in the financial system. Quite a bit of movement there to align to the Paris Agreement and objectives.

On this slide we see up on the left, that this is obviously a large impact announcement here in terms of the IFRS announcing the launch of the ISSB that will act as a sister board to the IASB. There'll be two main components to them — the first one being centred around climate change disclosure, while the second one will be a bit more focused on the broader ESG topics. More details to come on the ISSB on the following slides. Now the second piece I want to look into is the private and the public climate funding. There's two aspects to that. There's the Climate Finance Delivery Plan, where it does a commitment to mobilize 100 billion per year for climate change initiative for the developing world. And then the second main point being the Glasgow Financial Alliance for Net Zero, which is basically a group of private sector investors having a commitment to achieve Net Zero emissions by 2050. And as of now, has secured over $130 trillion. Again, I think on this, what would be interesting to follow is what will be those criteria that will meet those kind of private capital commitments. They are going to be aligned with the objective of decarbonization and Net Zero. There’s probably more to come on that in terms of the details.

And then finally, what's happening in Canada, U.S. and other large economies? As many of you know, by now, I'm sure that the announcement of the carbon price going to $170 by 2030 by the federal government. I think that shook a lot of things in businesses in terms of how do we think about our emissions or carbon footprint? What's our strategy? How are we going to meet our objectives? There's the other announcement of achieving Net Zero emissions in the electricity grid by 2035. And during the COP26 conference, Trudeau announced also a cap on emission on the oil and gas sector. On the U.S. side that announcement was the announcement of the plan to reduce methane emission by about 70% that will be focused on the oil and gas sector. Some more stringent regulations to come on that. There’s a lot to think on the different businesses on how to address that. And then finally, the commitments of China targeting Net Zero by 2060 and India by 2070. Looking at all those announcements, from your point of view, Kent, what do you see as the most impactful and why?

Kent Kaufield: It's going to be about climate for the next 18 to 24 months and it's going to start with climate disclosures. We won't have the scopes that go 1, 2 and 3, and how those are going to be captured and disclosed, really clarified, I think, until ISSB gets done. Maybe we can do a little bit of a look forward. Francis?

Francis Claude: Yeah. This one I'm not going to spend too much time on it, but it's really talking about how rapidly the regulatory bodies and frameworks have evolved. As you look from the SEC in 2020, asking to put some requirements on ESG factors, having a task force in place, now issuing a comment letter on climate disclosure. If you think of Canada, you have the request by top Canada pension funds asking for more ESG disclosures. And then again, recently the CSA announcement are somehow somewhat aligned with the mandatory climate reporting in the U.K., focusing on adopting the main pillars of the TCFB recommendation.

What do we expect from the SEC? There's two different pillars here, there's a climate pillar where the proposal's expected early 2022 in the first quarter. There'll be a range of disclosure options. but at the minimum, Scope 1 and Scope 2 GHG with the possibility of Scope 3, which would be kind of a head scratcher, a little bit. There's a lot more question around Scope 3 and how to manage it. There will be assurance requirement. There's been talk about limited insurance, kind of similar to what the EU proposed for their CSRD framework. And then the second pillar being the human capital pillars. It's already required in annual reports, but the rules are kind of to the discretion of the companies. The proposal may be issued before the climate and are expected to be a little less complex. I want to bring the attention to the last point here where we have the topic is expected to be covered, one of them being human rights commitments. That's probably one of the points that we see will have an impact on businesses’ policies. If you think of your vendor management, think of your supply chain, there’s a lot more to consider on this. And then lastly, on the SEC, you kind of see this as a wild card a little bit, directions will come and kind of what we saw – businesses will put processes and controls together to try to meet the requirements. Then we'll see how fast the SEC will push and will be detailed on the different requirements, and how is that going to look like over the next few years?

Here’s something we talked a little bit about it earlier. European Union proposing the CSRD in April 2021 this year. That's basically just reaching out to more companies. You're going to have from 11 to 50 thousand companies reporting and disclosing overall driving standardization that will allow financial firms and investors to compare apples to apples and more standardized, more visibility, more transparency. There will be an assurance required as well, and they're talking about being effective for the years ending December 2023.

In terms of consideration, so what does that standard mean along with the other standards? It's really now more questions within the finance function business overall about how are we going to manage our ESG risk? Where are we going to get the data? What kind of KPIs do we put in place? What does it mean for our governance structure in terms of policy processes, controls, standards, etc. A lot of considerations to get through certain rigour of reporting that needs to happen within the business processes in the way of operating.

On the IFRS, big announcement again, the creation of the ISSB. The office will be in Montreal, they made their announcement. There's two big components of this. The first one being the standard on climate disclosure, and the second one being the standard on more broader ESG topics. Within those two prototypes, the good news is that there will be a unified set of recommendations that consolidate the key content aspects of multiple different frameworks. That's something that we've been asking, or the market has been asking for a while, to allow comparison and transparency, where we'll see the IASB, TCFD, VRF, the World Economic Forum and the International Organization of Securities merging some of their key contacts.

One other announcement was that the VRF, which includes SASB and IIRC, will merge with the ISSB in 2022. So will the Climate Disclosure Standards Board, while the Carbon Disclosure Project (CDP), well-known within the industry, will remain as a separate standard. Finally, on the CSA, big announcement again in October of this year in alignment, the TCFD’s four core elements. I'm not going to say more on that, as Alex from the OSC will talk about it in more detail.

Finally, on here we have closing thoughts. Where do we start? What does that mean? Yes, we're going to have more technical details to address and how to do disclosure reporting standards, data assurance requirements, but the broader picture is that there will be more attention paid to the ESG and financial performance of companies. How do you make sure that you position yourself in a good place? Thinking of having a stakeholder-driven corporate strategy that's based on what's material to them. How do we draft the outcomes of this? How do we identify that the right objectives are in alignment to those material topics? How do we measure them? What are the KPIs? What do we report to the market and how do we report it? And finally, how do we demonstrate that we communicate those long-term value to stakeholders as we move the needles towards our goals and the ESG agenda overall in the financial performance? Back to you Guy.

Guy Jones: That's great Kent and Francis, thanks, thanks very much for that. I wonder, maybe before we move to our next agenda topic, I wonder if I could maybe ask you to just provide our audience with a few observations on how you see the role of the finance function in organizations evolving relative to the increasing demand for more and more ESG-related reporting. Just given the nature of our audience, I wonder if you could make a few comments about that.

Kent Kaufield: It's a great question, Guy. I'll start, and Francis, you can kind of finish. We are seeing a number of different models right now. I mean, the more historical model for corporate responsibility was that it was all funnelled up through generally the Chief Marketing Officer of the marketing department. We've seen more legal groups get involved in that, especially if you're doing any kind of disclosures around GHG verifications and you've done that historically. But I think the role of the finance and the finance team is going to become more predominant in the next two to three years. Ingrained in that finance is the ability to put controls in place to understand how to collect data, to understand how to aggregate it and report it. And even for non-financial data, that same control framework will eventually exist and be required. You're going to be disclosing information that will be relied on in the most traditional sense. And at the moment, we would feel that the finance group is in the best position to making sure that what they're disclosing is accurate. There is an onus on finance groups to start rolling up their sleeves and paying attention to ESG reporting, to start getting ahead of what they need to report and what's important for the organization. Francis?

Francis Claude: Yeah, I would just add to that. I think one of the biggest lessons learned that we've had working with clients on that topic is doing the whole assessment of the data and the processes and how the IT infrastructure will look like, rather than being run by IT and the sustainability team, making sure that the finance folks are involved right from the get go in those early task forces and early initiatives, to make sure that there's that robustness and rigour to financial data as they would expect on other financial reporting aspects.

Guy Jones: That's great. That's great, guys, appreciate those observations. Thanks for that. I think I'm going to hand things over now to Ritika and to Alex to provide some regulatory perspectives from the Ontario Securities Commission.

Ritika Rohailla: Right, thank you so much, Guy. Can you guys hear me?

Guy Jones: Yes, we can read Ritika.

Ritika Rohailla: Perfect, thank you. It is a pleasure to be here today and to be included in your annual updates. I'm Ritika Rohailla and presenting with me today is my colleague, Alex Fisher. Alex and I both work in the Office of the Chief Accountant at the OSC. We'll cover a few topics that have been areas of focus in the regulatory space over the past year or so. First, and probably not surprising, is COVID-19 and some financial reporting issues. We'll also provide an overview and share some insights on the publication of our new National Instrument 52-112 on Non-GAAP and Other Financial Measures. And lastly, as it's been alluded to, we will talk a little bit about the CSA's proposals on climate-related disclosure that were just published for comment in October. And as always, the views that Alex and I express today are our own, and they do not necessarily reflect those of the commission or its staff.

Starting with the COVID-19 topic. Very early on in the pandemic, we started looking at financial reporting issues and communicating with stakeholders. And really, one of the key pieces of regulatory communication that we issued on this topic is Staff Notice 51-362 on COVID-19 disclosure guidance. This Staff Notice was published in February of this year, and what this notice does is it summarizes our key observations and it provides disclosure considerations both for the MD&A and the financial statements. It does have a lot of good information, including what we saw. It has examples and I would strongly encourage you to take a closer look at that as you prepare for your year-end filings. It does cover a number of financial reporting topics, and I will spend a few minutes now highlighting some of those.

The first one being the need to develop significant judgments and estimates in these times. We're clearly still in an environment that's continually evolving when it comes to the pandemic. Many issuers have gone through multiple shutdowns and reopenings, along with other restrictions and impacts on their operations. More than ever before, issuers are having to use information that's not perfect and that's constantly changing to come up with their estimates. But this is precisely what makes it more important than ever to let investors know what's going on. For example, how did you come up with your cash flow projections for fair value and impairment assessments? What were the underlying judgments that were made? How did you determine the discount rates and the impacts that COVID-19 had? From a bigger picture perspective, we really have two broad messages, which we're trying to stress, and the first is that there's no one-size-fits-all approach. It is important for companies to use the best available information they have at the time and to make good, well-reasoned judgments. And the second is disclosure of those judgments and more than ever before, the disclosures will need to be entity-specific. And, of course, as new information comes in, you'll need to obviously update those judgments. Other areas of financial reporting focus that the notice talks about are going-concern assessments, and in particular, the need for good robust disclosure of judgments when that determination of going concern and the existence of material uncertainties was the close call. Expected credit losses is another one, especially with key judgments around the forward-looking factors in the use of management overlays. Impairments as well, I mentioned before. Many issuers did not specifically identify reasons for impairments, or they just noted the negative economic impacts of COVID-19 as an indicator for all their CGUs, but didn't really elaborate on what those impacts were. And of course, there are new areas as well that may not have been as prevalent before, such as government grants and assistance. The notice also has some tips and considerations for those as well.

The staff notice also touches upon non-GAAP financial measures, which has been another area of interest for us. We have been monitoring these metrics, and in particular, the use of any new COVID-related adjustments that may crop up within the composition of the non-GAAP measures. There are a couple of things in this area that we've been messaging about. First is the concern around labelling COVID-19 items as non-recurring if they're likely to recur in the next two years. I think by now, it's evident that COVID-19 impacts could still go on for quite some time. And given the uncertainty in the current environment, there's probably a limited basis to conclude that a loss or expense related to COVID-19 is non-recurring. And the second message that we've been communicating on this topic is that it would be misleading to describe an adjustment as being COVID-19-related if you don't really explain how that adjustment was specifically associated with COVID-19.

The staff notice also focuses on some of the hot button issues for MD&A disclosure content as it pertains to COVID-19. And again, the messages here aren't new. The key here really is that we are looking for companies to provide real, entity-specific reasons to explain why certain variances have occurred. I won't get into details here, but I do encourage you to again review the staff notice for guidance on the MD&A as it pertains to the discussion of operations, liquidity and forward-looking information in advance of your annual filings. I'll pass it on to Alex now for a discussion on our new national instrument.

Alex Fisher: Great, thank you Ritika. And I'm assuming you can hear me, well, Ritika?

Ritika Rohailla: I can, thanks.

Alex Fisher: Fantastic. Well, thank you very much. Again, thank you for inviting me to chat with you today about a topic that's very much dear to my heart, a new securities law on Non-GAAP and Other Financial Measures. Non-GAAP Financial Measures is a topic frequently discussed by securities regulators, not only in Canada, but globally. And in Canada, such measures have grown in popularity with approximately, I would say, 95% of the TSX-60 reporting non-GAAP financial measures. That's all industry sizes and sectors. Our original staff notice on the topic, Non-GAAP Financial Measures was issued approximately 20 years ago, and subsequently we've updated it several times to address new or evolving circumstances. And during this time, we issued reports, notices, publications, webinars, speeches, presentations on the topic of non-GAAP and throughout this time, we've cited, unfortunately, disclosure deficiencies as it relates to our expectations. But interestingly, we often also found that other financial measures that don't neatly meet the definition of non-GAAP, at least in the staff notice, those measures could be equally problematic if not accompanied by appropriate disclosure. Such measures are often included in the notes to the financial statements. But when taken outside of the notes, to the financial statements, they lack context. And at this period, a few years ago, investors were literally knocking on our doors. There were several major publications, news articles on non-GAAP and how investors are not receiving the information that they really needed. These findings called for some action, which led to the issuance of this brand-new securities law on the topic of non-GAAP, which will be replacing our staff notice. This rule was issued in spring of this year, and I'll chat with you a little bit more about the effective date shortly. The one thing I really want people to focus on is that this instrument is all about disclosure requirements outside of the financial statements. When you are disclosing things outside of the financial statements that relate to Non-GAAP or Other Financial Measures, this rule or law kicks in and these disclosures substantially incorporate our expectation and our Staff Notice 52-506, but cover a broader range of measures, which is covered in the other financial measures section. You could see that it's broader because we have a kind of a second bucket here. And these measures, again, are often disclosed in the financial statements, but lack context when taken outside of the financial statements. The example would be something we call total of segment measures, and I'll chat a little bit more about that.

From an effective date perspective, the effective date has been staggered. For reporting issuers, it applies to disclosures for financial years, ending on or after October 15. For example, if you are a December 31 calendar year-end company, you're going to be applying these requirements to your annual filings, i.e., your December 31 filings. Your Q3 filings are still under our staff notice expectations. And non-reporting issuers that are in scope of this instrument will apply it as of or after December 31, 2021. If you file a long-form prospectus after that, this rule would be relevant to you.

You could see a summary of some of our disclosure requirements. I'm not intending to go through all of this, but what I do want to point out is that this national instrument, again, was based on or substantially incorporates the disclosures expectations in 52-306. If you are familiar with non-GAAP and our non-GAAP disclosures expectations, you could see on the left hand side, these attributes summarized. The requirements for non-GAAP is substantially the same but have been clarified and simplified, even in some cases, for example, to include the ability to incorporate information by reference, i.e., cross-referencing in certain instances. The requirements for forward-looking information again have been simplified, and as for ratios as well have been simplified. They're not as extensive as the full requirements for non-GAAP financial measures historical. And the requirements for other financial measures, things that we call capital management measure, total segment, et cetera, have been scaled to address the risk. What do I mean by that? Well, since at least two of these measures are found in the body of the financial statements, we recognize that some disclosure already exists. The level of additional disclosure required outside of the financial statement has been scaled to address the risk or the need that investors have explicitly stated. I'm going to pause here to let people look at this slide. I know it could seem a little bit overwhelming, but what we've tried to do is that we've tried to summarize it a very general way, these disclosure requirements. And of course, to really understand what those specific disclosure requirements are, you would need to reference the national instrument, which provides kind of a very specific list of those disclosure requirements.

Now we move on to the companion policy. For the preparers on this call, for years, and especially through the consultation period, preparers have really been asking us to provide more guidance, to give them examples, to give illustrations, interpretations and specific fact patterns, to bring in some of those similar examples that the SEC has. They said, the SEC talks about this, what are your thoughts on that? We've done that. We have now developed a robust companion policy, which includes guidance and interpretations, examples, illustrations, and also a flowchart that preparers really asked us to include about scope. What type of measure is that? How do we bucket these measures? And that flowchart was included in the companion policy in response to requests from preparers. We encourage all attendees on this call to please download our national instrument and companion policy. Take a look at it, study it and remember that it is effective for the dates that have been specified on the slide. I'm going to pause here and I'm going to turn it over to Guy to see if there's any questions or anything that you'd like me to clarify before we go onto to climate-related disclosure.

Guy Jones: Thanks, Alex. Maybe two things. One, is come in as a question and the other is just a general question from myself. I think the first question that's come through our Q&A is, will there be any additional guidance for 52-112 coming from the OSC in the next couple of months?

Alex Fisher: Great question. In the next couple of months, I don't foresee that because we're in the midst of implementation. If someone does have a specific question that they feel is not answered in the companion policy or the rule, we obviously encourage you to reach out to your primary regulator, be that Ontario, B.C., Quebec, whatever that is. And if it is a unique fact pattern, we can obviously work with you on that. But I don't foresee it in the next couple of months, no.

Guy Jones: Ok thanks, Alex. Maybe a general question from me on just the sort of near-term landscape from an enforcement perspective. I was wondering if we can get some observations from you on that? I suspect it's appropriate to assume and to expect that compliance with 52-112 will be a focus in the near term via continuous disclosure reviews that are being performed by the Ontario Securities Commission and other provincial regulators. I'm just wondering, in the early days, wondering how you expect to deal with findings that may come from those reviews. They expect in the early days of application of 52-112, there will be requests for perhaps prospective change in filings where you have some findings or do you think even in the early days, we may see requests or demands for retrospective change and refiling of continuous disclosure documents. Wondering if you could just provide some observations for our audience of those sort of enforcement type matters in the near term?

Alex Fisher: Sure, that's a great question. Very fair. We don't have a specific concrete plan as it relates to non-GAAP. What I would say that it is different from anything else we do. I think it's very fair to say that this is a new securities law that has received a lot of attention. Investors are very interested in this topic. It is a hot topic in almost every single year. Yes, Guy, I would think it's very fair to assume this will be top of mind as reviews begin, and maybe in the future, even an issue-specific review just on non-GAAP. Yes, this is an important topic for us, although we don't have any specific plans for an issue specifically with you right now, I can say that would be reasonable to expect in the future, and it will be on top of mind of people's reviews as they begin the year now and going forward.

I think your question was really also focused on early days. Alex, early days people are trying to apply it if they've done a good effort and you see something that's not perfect to the rule because this is a new securities law that carries the weight of law with it and the ramifications associated with it is no longer staff guidance. I would say, Guy, it really is on a case-by-case basis. I do believe that we look at every single situation individually, and we do understand if someone has put in a good faith effort that, like we do with all of our reviews, if it's not extremely material, we would ask for prospective changes.

The next question, I think, Guy, naturally, well Alex, what in your mind would be extremely material in the early days? Well, I think if you fail to identify something as non-GAAP and therefore you haven't disclosed anything and that is something that you are persuasively or it's been a persistent measure that you disclose in your document, yeah, I could see that being as a refiling, I can definitely see that because there's no disclosure associated with it. It hasn't been flagged. There are no items in there. A measure that is what I would call, what's the word I want to use — disclose more prominently throughout the document on non-GAAP, because remember, even though the law is new, many of these expectations have been around for a very long time, especially as it relates to non-GAAP financial measures. Those are two cases I could foresee that may be retrospective, but on the whole, we want to be supportive of our issuers and help people along the way in their journey in the early days. But those are the two examples in my mind anyway.

Guy Jones: I appreciate that, Alex. That's helpful commentary and perspective, so thanks for that. Ritika, I think it's back to you.

Ritika Rohailla: Thanks, Guy. As was discussed by the previous presenters, the focus on climate-related issues in Canada has really accelerated, and internationally rather, has really accelerated in recent years. But climate-related risks, they're inherently hard for companies to assess and quantify, and that's just because they're subject to a greater degree of uncertainty. It's this uncertainty that can make it difficult for companies to meet their disclosure obligations in this space. If we consider securities regulation as it exists today, there are three key requirements that are currently driving disclosure of certain climate-related information and a reporting issuer’s regulatory filings.

First, is that public companies have to disclose any material commitments, events, risks or uncertainties that they reasonably believe will materially affect their company's future performance. They're also required to disclose all material risk factors. And the third is that if a company has implemented environmental policies that are fundamental to its operations, then it must describe those policies in their corporate filings.

Then in October, the CSA published for comment proposed National Instrument 51-107 on climate-related disclosure. There were many drivers that led to the publication of this, one being the increased investor interest. Investors have told us that they want access to enhanced climate information as they become more focused on these types of risks in making their investment decisions. Some investors have also expressed concern that the disclosure that they're currently getting is insufficient. Certainly as the CSA, we've observed this insufficient data as well.

Our most recent review in 2021 looked at about 48 issuers, and we did find when we compared it with the review we did back in 2017, we did find that issuers are providing increasingly more climate-related information, but the disclosure is often still fragmented or vague and boilerplate. There clearly continues to be room for further improvement.

Global developments is another driver. There's growing convergence amongst regulators to align disclosure requirements with the recommendations made by the TCFD. And then separately in March of this year, the Ontario government included in the provincial budget direction that the OSC mandate companies to provide ESG disclosure that complies with the approach adopted by the TCFD.

As I mentioned, our proposals generally align with the four core disclosure elements of the TCFD recommendations. The first being governance. The proposals would require issuers to disclose how its board and executive officers oversee, assess and manage climate-related risks and opportunities. Issuers would also be required to disclose their climate-related risks and opportunities over the short-, medium- and long-term, and the impacts that those risks and opportunities have on business strategy and financial planning. Companies would also be required to provide information on risk management and specifically to disclose how they identify, assess and manage climate-related risks. And lastly, under the proposals, an issuer would need to disclose the metrics and targets used to assess and manage climate-related risks and opportunities.

While the proposed rules do incorporate many of the TCFD recommendations, there's probably two modifications in there that are noteworthy. The first is that under the proposed rules, Canadian recording issuers would not be required to do a scenario analysis describing the resilience of their organization’s strategies under different climate scenarios. The reason for that is really two-fold. First, we acknowledge that scenario analysis may be more costly to do, and also that the methodologies to do that analysis may not yet be mature enough. The second modification in our proposals would allow reporting issuers to omit GHG emissions reporting. While the TCFD recommends disclosure of all GHG emissions that fall within Scope 1, 2 and 3, the proposed rules would instead allow an issuer to publish reasons for omitting emissions information. Having said that, as part of the consultation, we're also soliciting comments on whether the proposed rules should make the disclosure of Scope 1 emissions mandatory for all reporting issuers. And then, just quickly, in terms of timing, these proposals are not expected to come into force before December 31, 2022, and there would be a phase-in period such that they would apply for non-venture issuers, beginning with their annual filings that are due in 2024, which would be for their December 31, 2023 year-ends, and to venture issuers in 2026 for their December 31, 2025 year-ends.

Earlier we talked about what was driving the proposals, but I do just want to briefly highlight the overall objectives that they're trying to achieve as well. We think that they will reduce costs for issuers associated with reporting across multiple disclosure frameworks. As well, they're meant to improve access to global markets and facilitate an equal playing field. And, of course, to provide investors with the comparable and consistent information that they're looking for.

And lastly, just touching on some international developments. One of the earlier presenters already noted that the IFRS Foundation is establishing the International Sustainability Standards Board. Related to that, I will just highlight that IOSCO or the International Organization of Securities Regulators has also been actively involved. A technical experts group was formed, which staff at the OSC are part of, and this group has been providing input to the IFRS Foundation as it develops a draft prototype of the sustainability-related disclosure standards. Again, if you do have any questions, our contact information is on this slide. Please do feel free to reach out, but for now, I will pass it back to the EY presenters. Thank you very much.

Guy Jones: Great. Thanks, Ritika and Alex, appreciate those comments. We have a couple of very specific non-GAAP questions that have come through. I will ask you to just respond to one briefly here. The others we'll deal with by email following the webcast. There's just one general comment about, I think it relates to prominence more generally, and it's just the comparison with SEC requirements. It just says in respect to 52-112, is the OSC view aligned with the SEC that GAAP measures must be sequenced first before the non-GAAP or supplementary financial measure? I wonder, Alex, please comment briefly on that.

Alex Fisher: Sure. When I was reading this question, I thought they meant in the terms of a reconciliation, and our companion policy does talk about that, the reconciliation can be done in either way, we don't have a particular preference. You can begin with a GAAP, reconcile to the non-GAAP or begin with the non-GAAP, reconcile back to the GAAP. But I think this question is broader than that. No, I don't believe, I have to go back to the companion policy, I don't believe we're that prescriptive. We just talk about prominence in general. I think one of the examples we give is a news release or a headline in the news release. I would say I have to go back to the companion policy, but I don't believe we're that prescriptive. I think we look at prominence holistically and we do give some very good examples as it relates to that. My personal preference would be obviously, you lead with your GAAP number because I do think that's the bedrock of your information. But I understand that's not always the case. It depends on how your verbiage begins. And typically what I've seen is people talk about the non-GAAP and then the GAAP in brackets. That's fine too. Just use a good common sense approach to prominence and I will reconcile back to the CP to make sure I didn't contradict myself, which I don't think I did.

Guy Jones: Okay, super. Thanks, Alex. Appreciate those comments. Ok, I'm going to turn it over now to, I believe I'm turning it over to Juliana to take us through our first IASB development, Juliana.

Juliana Mok: Thanks, Guy. We are going to be covering a couple of financial reporting updates now, and in particular, we are going to be talking about some recent amendments to IFRSs. The first one we're going to be speaking to is the amendments to IAS 12 on Deferred Taxes Relating to Assets and Liabilities Arising From a Single Transaction. Now, these amendments are meant to address the accounting treatment for deferred taxes on transactions that lead to the initial recognition of both an asset and a liability. For example, the recording of an ROU asset and a lease liability or the recognition of a decommissioning obligation and the related debit to the asset. And the goal of the amendment really is to narrow the scope of the initial recognition exception in IAS 12 so that it's clear that it does not apply to these types of transactions. Now, quick reminder — the IRE sets out that entities do not normally recognize deferred taxes on initial recognition of an asset or a liability, except for in certain specific defined situations. The guidance, as it was originally designed, however, wasn't exactly clear on how to account for transactions where an equal and opposite asset and liability are recognized. And so in practice, there had been some mixed views on whether the IRE was supposed to apply to these transactions, and importantly, some mixed approaches resulted where there would potentially be significant fluctuations in the effective tax rate being reported over the life of the asset and the liability. We're going to go through a couple of slides where we illustrate how the accounting changes with the new amendment, but we're only going to go through them at a high level because of our time constraints. What we really want to drive home, however, is that this amendment to IAS 12 does have the potential to affect most entities as every company has leases on books. Some companies will have decommissioning liabilities, and so most entities will need to at least think about how they were previously accounting for deferred taxes on these transactions, and whether the amendment means that they now need to change. On a timing perspective, the amendment is effective for annual periods on or after January 1, 2023, and it is going to be retrospective for existing leases and decommissioning obligations, so definitely something that we should be thinking about in the coming year.

As I mentioned, the next couple of slides are going to present an example, it comes directly from the scenario in IAS 12's illustrative examples. The facts are on the slide. The situation involves recording in ROU asset and the lease liability for a building lease. There are some added complications in the example related to advance payments and initial direct costs that I'm not going to speak to today. But what's really important in applying the amendment to IAS 12 and figuring out how to record the deferred taxes is that we need to determine what the tax base of ROU asset and the liability is, and this is an area where some judgment may be required.

When we're figuring out tax bases, this does depend on applicable tax law and management judgment. In situations when a company receives tax deductions for actual cash lease payments, which is common, the lessee is going to need to figure out if those tax deductions should be attributed to the ROU asset because they relate to the asset and the depreciation, or to the lease liability because they relate to the repayment of the lease liability. If we decide that the tax deductions are attributable to the ROU asset, this will lead to a conclusion that the tax base of the asset and the liability, equal their carrying value, respectively. There are no temporary differences and no different taxes to record. On the other hand, if we conclude that the deductions are attributable to the lease liability, then the tax basis for both the asset and the liability would equal zero and that would lead to equal and opposite temporary differences.

In terms of how to decide whether the tax deductions should be attributed to the lease asset or the lease liability, the standard doesn't provide additional judgment. But we do expect that entities in Canada in our Canadian tax regime will likely determine that those tax deductions should be attributed to the lease liability and that makes the most sense, but this is something that we want to be monitoring as we progress towards the adoption of the amendment, and obviously in other tax jurisdictions, we might come to a different conclusion.

Again, the next couple of slides are going to work through the details of this example. I'm not going to work through the math of that, but ultimately if we determine that the tax deductions are attributable to lease liability, what we end up with is a consistent, effective tax rate through the life of the lease.

This next slide, again is showing the math behind that conclusion, and the most important part here to show is that because we calculate an equal tax and deductible temporary difference, the amendments to IAS 12 make it clear that the IRE does not apply. And the outcome here, when we attribute the tax structures to lease liability, is that a deferred tax liability and an offsetting deferred tax asset will be reported, assuming we meet the other criteria for recognizing a DTA.

And then going forward, as the lease liability is accreted up to interest expense going down through payments, the DTA is going to unwind and as the ROU asset is depreciated, the DTL will also unwind, and that movement in the DTA and the DTL will result in the net P&L impact. We're going to show that net P&L impact on this next slide here, basically the five years of the lease. Again, not going to go into this slide in any detail, you will have it for your reference when you receive the copy of these slides. What we really want to highlight is that when we conclude that the tax deductions are attributable to the lease asset, after the amendment IAS 12 and concluding that we do recognize the DTA and the DTL, ending outcome is an effective tax rate that is steady at 20% growth the length of the lease matching the statutory rate.

Just to contrast that, the next slide illustrates before the amendment to IAS 12, if we had applied the IRE and concluded that we are not recognizing an initial deferred tax asset or liability. This is what I had mentioned before, which would have led to sort of a fluctuating, effective tax rate that started moving between 22, 23 all the way down to 8%. And that doesn't really make sense, doesn't reflect statutory tax rate. And after the adoption of the amendment to IAS 12, the steady effective tax rate outcome is one that is more useful to users. Just for completeness sake, we include in our illustration as well, what would happen if we allocated the tax deductions to the ROU assets? You will see on this slide that if you allocate the tax deductions to the ROU assets, you also get to an effective tax rate that is consistent to the life of the lease. This probably isn't the most intuitive determination, however, and again, we do think that entities in Canada will tend to decide that the tax deduction should be allocated to the lease liability rather than the asset.

As a final wrap up on the amendments to IAS 12, again, what we really want our audience to take away is to remember that the amendment is going to be effective in 2023. It is going to potentially impact taxes for anyone who has leases and decommissioning liabilities, and it is certainly prudent to start looking now at how taxes have been treated for these transactions currently and whether the amendment to IAS 12 means that accounting will need to change.

Moving on to the next amendment to IFRS that I want to talk about, and this is an amendment to IAS 37 on the guidance on Onerous Contracts. As a reminder, IAS 37 provides guidance that a provision is recorded when unavoidable costs of a contract exceed the economic benefits expected to be received from that contract, and the standard does further define unavoidable cost as the least net cost of exiting the contract, which is the lower of the cost of fulfilling and any penalties from failure to fulfil.

Now, there's been some diversity in the past on how entities determine the unavoidable cost in fulfilling a contract. This amendment was trying to clarify that unavoidable costs are those that are directly related to the contract, and this includes both incremental costs, i.e., they're rare materials, as well as an allocation of other costs directly related to the facility in the contract, i.e., things like directly related overhead, depreciation management and supervision costs. These amendments are to be applied prospectively for annual periods beginning on or after January 1, 2022, which is the coming fiscal year.

What do these amendments mean? The impact is really that for entities that were previously applying a purely incremental cost approach, they're going to be seeing their provisions increasing to reflect the need to include other directly relatable costs. On the other hand, for entities that were recognizing provisions using the old IAS 11 guidance as more of an all-in provision, their provisions will likely be reduced because they're going to need to pull out things that were indirect, like indirect overhead. Now of course, judgments are still going to be necessary to determine which costs are directly related to contracts, but we'd expect that the classification of these costs is going to be broadly consistent with how an entity measures cost of goods when it holds them. We might be looking at standards like IAS 2 inventories, IAS 16 and IAS 38, when figuring out which costs should be included or excluded. IAS 15 provides guidance on how cost of the contract might also be relevant. That's it on the amendments.

Sorry, so before we move on - maybe a quick example just to illustrate the impact of IAS 37 amendments, both on the measurement of onerous contracts, as well as determining potentially whether a contract is onerous or not. In this example, we've got a contract transaction price of $110,000. We're told that direct labour costs for the contract are $60,000, direct materials are $45,000, and direct allocatable costs are an additional $10,000 made up of contract management salaries, depreciation of directly related tools, equipment, REA assets, ROU assets. And then finally, the cost of terminating the contract is $120,000. If we had been applying a purely incremental cost approach, the cost to fulfil the contracts would be $105,000 made up of only the direct labor and the materials cost. Compared to the economic benefit of the contract of $110,000, we would have concluded the contract is not onerous. However, after the amendment to IAS 37, where we now know we need to use a direct cost approach, the cost of the sale should actually be $115,000 made up of direct labor, direct materials and the directly relatable allocated for overhead costs. This does mean that the contract is in fact onerous and a provision should be recorded. Therefore, this amendment does impact both the measurement and potentially the identification of onerous contracts.

Now, the last amendment to IFRS that I'm going to touch on briefly is the amendment to IFRS 9, the fees and the 10% test. As a quick reminder, under IFRS, when determining how to account for a financial liability that's been modified or exchange, an entity needs to assess whether the terms of that modified financial liability are substantially different. A modified financial liability that's substantially different is accounted for as if the old debt was extinguished and a new debt was recognized. There is a difference between extinguishment accounting and modification accounting, which is why it's important to figure out if the modification is substantially different. In determining whether something is substantially different, IFRS 9 provides a quantitative test, where if the net present value of the cash flows under the new terms, including any fees paid less fees received, discounted at the original effective interest rate is at least 10% different from the discounted present value of the remaining cash flows and the original debt, then the modified instrument is considered to be substantially different. This is normally what we call the 10% test. Now, it wasn't originally explicitly clear in the standard whether the cash flows under the new terms should include only fees paid or payable to the lender, or whether they should also include other fees and costs to third parties like legal fees or advisory fees. And the amendment to IFRS 9 clarifies that it is in fact only fees paid or received between the borrower and the lender that should be included in the 10% test. Now, these amendments are to be adopted prospectively on or after January 1, 2022. What prospectively means is that it only applies to debt modifications on or after that date.

Straightforward example here — we have an entity that modifies the terms of its loan with a lender. We're told the present value of the cash flows of the original debt discounted using the original EIR is $110,000. The present value under the new terms discounted again using the original EIR is $100,000, and that's before costs or fees. And then we're told that fees of $5,000 are paid to the lender and $2,000 of cost are paid to legal counsel. Clearly, after the amendment to IFRS 9, we understand that in doing the 10% test, only the $5,000 of lender fees should be included. When we run through the math of that, the old debt PV of $110,000, the new debt PV of $105,000, leads to a $5,000 difference, or a 4.5% difference. That doesn't hit our threshold and this modification would not be accounted for under extinguishment accounting.

That's it for IFRS amendments. Before I pass it on to Guy to discuss IFRIC updates, I will note that we have included as an appendix for your reference later on, slides listing all of the IASB’s work plan, projects and the timelines for everything else that's on their plan on a go-forward basis.

Guy Jones: Great. Thanks, Juliana. I'll pick it up from here with a couple of IFRS Interpretations Committee matters. The first matter we wanted to highlight is an update on developments related to the recent IASB amendments that were made to IAS 1 one addressing the classification of debt that is subject to covenants as either current or non-current. We discussed this issue along with the associated IFRS Interpretations Committee discussions and also Canadian IFRS Discussion Group discussions on this matter at last year's FRD. I'll just give you a quick reminder of what the original amendments were about and focus today on the updates that have occurred since that time.

But in terms of the original amendments, in January of 2020, the IASB made certain amendments to IAS 1, that impacted liabilities with covenants and how they were classified. These amendments were supposed to have been effective for periods beginning on or after January 1, 2022, independent of the updates we're going to discuss. Those amendments were deferred by one year as a result of the COVID-19 pandemic, just to give people more time to assess and adopt those amendments. The amendments had clarified four key points being — what is meant by right to the defer settlement? That such a right to defer settlement had to exist at the end of the reporting period in order to classify a liability as non-current. That classification as current or non-current is unaffected by the likelihood that an entity would exercise its right to defer. And then lastly, there were specific features of those amendments related to compound financial instruments, convertible financial instruments, which are unaffected by the updates that have transpired since. I won't get into those again, those stand.

Subsequent to those amendments that have been issued, the matter was taken to the IFRS Interpretations Committee to discuss how the amendments would apply to particular fact patterns. The IFRS Interpretation Committee had issued a tentative agenda decision following their discussion of this topic. The committee had discussed how an entity determines whether it has the right to defer settlement for at least 12 months after the reporting period, when that right is subject to the NE complying with specified conditions, and compliance with those conditions is tested at a date that's after the balance sheet date.

On the slide here, the three cases the IFRIC discussed are summarized. I'm not going to take you through those in any detail but suffice it to say in the fact patterns the IFRIC discussed, the conclusion was the application of the amendments to those fact patterns would have resulted in current liability classification in each case. That resulted in a host of comment letters from stakeholders raising concerns with the amendments. Although I think most commenters felt that what the interpretations committee had said was technically correct in light of the wording of the amendments. Those comment letters did challenge the usefulness of the amendments that had been made to IAS 1. The Canadian IFRS Discussion Group had also discussed this and had written a lengthy letter on this particular agenda decision to the IFRIC as well, challenging the usefulness of the financial reporting outcomes of these amendments. In light of that, the IASB has responded by proposing further amendments to the amendments we just described and discussed that our FRD last year. Just a few weeks ago, on November 19, 2021, the IASB issued an exposure draft with some further amendments to the amendments. If these proposals are finalized, they will be effective for periods ending on or after January 1, 2024. The comment period, with respect to these latest proposals, goes until late March of 2022. But these further amendments are proposing to specify that if the right to defer settlement for at least 12 months is subject to complying with conditions after the reporting period-end, after the balance sheet date, then those conditions would not affect whether the right to defer settlement exists at the end of the reporting period for purposes of determining whether the liability is current or non-current.

Along with that, though, the Exposure Draft proposes certain additional disclosure requirements for those non-current liabilities, and also would require that the company present those particular non-current liabilities that are subject to ongoing conditions in the next 12 months, separately on the face of the balance sheet. I'm happy to say that the initial reaction to these proposals so far seems largely positive. They do appear to address many of the concerns, significant concerns that had been raised with the original amendments. Again, initial feedback is largely positive. Comment period, as I said, goes till late March 2022, so stay tuned, but hopefully we're back on course with a classification regime for debt with covenants that people will find more sensible going forward.

Moving on to the next matter I wanted to highlight is another IFRS Interpretations Committee matter, this one related to IAS 2 on inventories. The IFRS Interpretations Committee had received the request about the costs an entity includes as the estimated costs necessary to make the sale when determining the net realizable value of inventories, and specifically the submission to the committee had asked whether an entity includes all costs necessary to make that sale, or only those costs that are incremental. Paragraph 6 of IAS 12 defines net realizable value as the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated cost necessary to make the sale. While IAS 2 includes further requirements about how an entity estimates the net realizable value of inventory, it does not identify which specific costs should be considered necessary to make the sale of those inventories.

In light of that, the committee, in addressing the submission, made reference to paragraph 28 of IAS 2 that describes the objective of writing inventories down to their net realizable value. That objective is to avoid inventories being carried in excess of amounts expected to be realized from their sale. And the committee observed that when determining the net realizable value of inventory, IAS 2 requires an entity to estimate the costs necessary to make their sale. And it does not allow an entity to arbitrarily limit such costs to only those that are incremental, which could potentially result in the exclusion of costs that the entity must incur to make the sale of those inventories. Hence, including only incremental costs could fail to achieve the objectives set out in the standard.

As a result, the committee concluded that when determining the NRV of inventory, an entity estimates the cost necessary to make the sale in the ordinary course of business, and that an entity would need to use judgment to determine which costs are necessary to make the sale in their specific facts and circumstances, and considering the nature of their inventory. Where does that agenda decision leave us? Although it was clear that an entity cannot use simply an incremental cost approach, the committee did not further specify what costs would have to be included in the costs necessary to make the sale. The Canadian IFRS Discussion Group at one of its recent meetings, I believe it was in September, had further discussion on this topic and worked through some fact patterns to try to discuss and debate what additional costs over and above incremental costs one might consider. In that definition in IAS 2, several different levels of additional costs were considered by the IFRS Discussion Group ranging from, you'll see on the slide on the left hand side, only the direct costs incurred at the point of sale to considering more on the right hand side of the circles on the slide, indirect costs leading up to and including the point of sale. I think the IDG in their discussions had indicated that without more detailed requirements or guidance within IAS 2 on which costs to include in cost necessary to make the sale, entities would still need to apply judgment considering the nature of their products, sales channels, industry, et cetera. Beyond ruling out simply a purely incremental cost approach, it wasn't really possible to limit which other approaches, as shown on the slide here, might be considered appropriate. We will likely continue to see approaches in practice that range across the spectrum that is shown on this slide. The far left hand side of that spectrum, although not limited absolutely to incremental costs only, may not be all that different in result from an incremental cost style of approach. Whereas the far right hand edge of the spectrum depicted on the slide is much more likely to include a host of additional costs in the definition. Importantly, given the judgment involved and the diversity that is likely to continue to persist in this area, the IDG highlighted the importance of entities disclosing their policy and significant judgments that they've made on this, provided this is a material matter in their financial statements. If you have inventory and NRV considerations, this is an agenda decision and IDG discussion that you'll want to take a close look at leading into your year-end. I'm going to hand it over to Jeff now to discuss our next item. Jeff?

Jeff Glassford: Thanks, Guy. I have two brief items that I'll run through and then pass it off to Lara because I'm sure we're all interested in learning a little bit about the specs given their prominence. The first is another IFRIC agenda decision on implementation costs and a cloud computing arrangement. We've talked about cloud computing on these webcasts for a number of years. I won't go into detail on this slide. We've shown the slide, I think in the past. At a high level, you need to think through, do you potentially have a lease in your cloud computing arrangement? Do you potentially have an intangible asset in your cloud computing arrangement? And if you don't have either of those, you almost certainly have a service arrangement that you need to account for. I would say most often the case is you would conclude that you have a service arrangement, but that would be very facts- and circumstances-based.

When you're implementing one of these cloud computing arrangements, there's a host of different types of costs that might be incurred, and this slide tries to go through some of the considerations, depending on whether you decided it was, or concluded that you had an intangible or whether you had a service contract. Most of them are probably pretty obvious answers. For example, research costs are expensed as normally they would be. Training costs, same thing. The one I'll focus on and what the IFRIC focused on is on cost to configure or customize, i.e., we can think about coding and customization that might happen at the start or generally at the start of a cloud computing arrangement. If you have an intangible, I would say most often the case, you might conclude that's a direct cost of the intangible and you could capitalize it. There are some exceptions, but if it's not and it's a service cost, the IFRIC was asked to think about how would you account for those costs in such an arrangement? Cutting to the chase, the IFRIC effectively said, well, there isn't clear guidance in IFRS or IAS 38 in the intangibles section. You need to look elsewhere in IFRS and potentially look to IFRS 15. For costs that you're paying to the supplier of the cloud computing arrangement, you need to decide are those customization costs distinct from the rest of the cloud computing arrangement? And you might think about revenue — we all are probably familiar with assessing whether a revenue contract is distinct in those services, or goods or services are distinct in a contract. And the IFRIC said you probably should look to that guidance in deciding whether it is distinct. If it is distinct, then you would expense those costs as you are provided those customization services. If it isn't, then you would account for those costs as an expense as the cloud computing service is provided to you, i.e., you'd expense it over the term of that cloud computing arrangement.

Somewhat awkward in that conclusion is that if it's paid to a third party on the same arrangement, you would have to expense it in all instances because it must be distinct in that your assessment is done at the contract level. And if you're paying a third party, that must be two separate contracts and would need to be accounted for as such, and it would result in a different answer if you pay a third party relative to paying the cloud computing provider.

The last issue I'll talk about very briefly is impairment tests of ROU assets, and all I will say is this was discussed by the IDG last year and the reason it was discussed is, in this environment, there are a lot of entities that are downsizing their corporate office space as an example. And the question was if that corporate office space was included in a CGU historically, could you shelter any potential impairment when you decide to downsize that office space? Could you shelter some impairment by leaving it in the CGU until the time you actually stop using the space? And what the next couple of slides and what the IDG said was no, you probably need to think through what is on this slide as a summary of paragraph 22 of the impairment standard and decide whether you can determine that ROU asset’s individual fair value and if so, does that fair value closely approximate its individual value and use. For a corporate office space as an example, if you're very close to ceasing use of that space, there's probably a very good chance you can do that, and as such, that asset would need to be pulled out and tested separate from the CGU, and hence, you could not shelter any, call it, economic impairment in that ROU asset.

The IDG discussion was largely on office space and ROU assets, but this is more broad than that, and I think maybe just a quick note that it's important to think through always before doing an impairment test or thinking through indicators. Do we have our CGU determination right? Are there assets that historically were in a CGU that should be pulled out? And as I said, IAS 36 paragraph 22 is the guide for determining that. Some of the factors to think through are on this slide, and we're discussed by the IDG. As I said, we've taken office space because it's easiest to visualize the closer we are to exiting, the more likely it is that you would pull out the ROU asset from the CGU. But there are other factors to think through, how committed you are, et cetera. With that said, I think I'll pass it off to Lara just to go through some SPAC considerations and end us off.

Lara Iob: Thanks, I appreciate it. And we are in the homestretch, this will be the final topic for today with considerations on SPAC transactions. I do intend to be brief and make sure that we end off on time. With that, let's dive right in. One of the very first questions really is — what exactly is a SPAC? It's an acronym, and it represents a Special Purpose Acquisition Company, and it's essentially a shell. A shell corporation that is formed to raise capital, have an IPO, raise capital from investors in the public market, and its sole business purpose is really to seek a target company to acquire for the shareholders. The target would normally be a private operating company, obviously in this case. While SPACs have been around for a while and I would probably say at least 10 years now, they've become quite popular in the recent few years, with many more transactions that we're seeing on the market. An acquisition by a SPAC offers private companies a different way of accessing capital and being able to go public without having to actually conduct the traditional IPO in that sense. It's usually done on a faster timeline than a traditional IPO, and terms with the SPAC founders or management are negotiated privately. However, with that as being a very good strategic option, SPAC transactions do also present several challenges. As usual, there are a variety of financial reporting and regulatory requirements that one has to consider, and this will also depend greatly on which jurisdiction the SPAC is currently listed. It may not be Canada, and it could be the U.S. market, for example. And obviously, there are also some complex accounting considerations that need to be considered. I will highlight a couple of those accounting considerations today. But as you see here on the slide, I would refer you to one of our publications on applying IFRS. There is one that was prepared for accounting for SPACs that would provide more detail.

Before highlighting a couple of accounting considerations, let's just at least go through quickly and spend a minute on the lifecycle of a SPAC and what typically happens. The first phase is very quick. It's the formation and IPO phase that typically lasts a couple of months. The SPAC is formed by a sponsor and by a management team who contribute a very nominal amount of capital in exchange for shares, and these are usually referred to as founder shares. While they do contribute a nominal amount of capital, the founder shares typically make up at least 20% of the shares of the company after it goes public. The SPAC then conducts its IPO, goes through an IPO process, and it is, as I mentioned, faster and simpler than for a typical operating company, given that this is a shell. Therefore, it doesn't take long to get through this stage.

The instruments that are sold in a SPAC IPO are typically consisting of units, so shares and warrants together, and these are commonly referred to as public shares and public warrants. After that, you enter into the target search phase, where the SPAC will typically have a very limited period of time, 18 to 24 months per their statutes as well, in order to find a target and to actually enclose an acquisition. Here, they will go through a stage of due diligence, negotiations, et cetera. If there is no successful acquisition that has occurred by the end of a predetermined period, then the SPAC will be liquidated. The IPO proceeds that they raised will be returned back to the public shareholders. The sponsors contribution is typically lost or has been incurred.

Then on the flip side, once a SPAC does reach an agreement with a target and is moving towards being able to have an acquisition, it will solicit shareholder approval from the public shareholders through a proxy circular, which gets filed, and they will then consummate and close the acquisition of the target. This is usually referred to as a De-SPAC.

There obviously are accounting considerations along the way for SPACs as well. They're listed and discussed a little bit in more detail in our publication, but I will focus a little bit more on things to consider when we actually close the merger and have a De-SPAC. One of the very first questions that comes up is, and that should be considered because this will really drive the accounting going forward is, who is the accounting acquirer? And it is a very important first question. While the public entity, being the SPAC, usually appears to be the one that is going to be the accounting acquirer because they are the ones that are issuing additional shares in order to acquire a controlling interest of an operating target, it is necessary to consider all the facts and circumstances. You see a bunch of them highlighted here on the slide that I won't go into too much detail, but essentially you should be giving consideration to the relative voting rights in the combined entity after the business combination. Which group is going to retain or receive the largest share here? And then other factors as well, such as the composition of the governing board, the composition of senior management, who has the ability to elect or remove a majority of the board? Which management team dominates the ongoing processes of the combined entity? And in terms of the exchange of equity interests, who is paying a premium?

Once this determination is made, i.e., if it's determined that the SPAC is the accounting and acquirer, then the transaction is accounted for as a business combination under IFRS 3. And you would be using the acquisition method of accounting, the SPAC would be the one preparing their PPA, et cetera. If the target is the accounting acquirer, which is usually the most common scenario in these transactions, then the transaction is not accounted for as a business combination, mainly because the SPAC is really not considered to meet the definition of a business under IFRS 3. And such a transaction was discussed by the IFRIC back in 2012, 2013, for which an agenda decision was released, and it would essentially be treated as a share-based payment transaction under IFRS 2. It would be accounted for in the consolidated statements of the SPAC going forward was the legal acquirer. And it's going to demonstrate a continuation of the business of the target, which was a legal subsidiary, together with a deemed issue of shares by the target and a recapitalization of the equity of the target. Essentially, the deemed issue of shares is, in effect, an equity-settled, share-based payment transaction whereby the target has acquired the net assets of the SPAC, mostly cash, together with the listing status of the SPAC. And then this listing status is going to be expensed in the P&L as a charge.

In terms of a final or important accounting consideration that I would mention today, it relates to accounting for the various financial instruments that are issued and there are a bunch that are also previously issued by the SPAC themselves. And how would we account for it going forward after you've had a De-SPAC? Again, it depends on who is identified as the accounting acquirer. If the SPAC is identified as an accounting acquirer, will then any financial instruments that they previously issued would typically continue to be accounted for in the same way that they were previously? However, you would need to be watching out for any features or any changes that may be warranted to be accounted for, such as features that would have been triggered upon the acquisition, for example, and whether any classification might occur between equity and liability.

But again, if the target is identified as the accounting acquirer, which is the most common scenario, then the key question that always arises in practice is how do we account for all the outstanding warrants that were previously issued by the SPAC? Do we continue IAS 32 or does IFRS 2 apply? Short answer here is there is no real specific guidance under IFRS unfortunately for this question. The IFRIC did not get into a big discussion, or any discussion, on how to treat warrants in their agenda decision. And like I said, there's no specific guidance under IFRS. In these situations, the accounting acquirer is going to have to evaluate whether the warrants should be considered as part of the deemed consideration that was given, or part of the net assets that they received from the SPAC. And to the extent that they're a part of the deemed consideration given, then the warrants may be considered instruments that were issued to acquire the listing service and the goods and services under IFRS 2 from their perspective. Or alternatively, if you're going to consider them to be part of the net assets that you've acquired, then these warrants would not be considered instruments that you would have issued to acquire the listing service, and therefore, other standards may continue to apply, such as IAS 32. The final important point that we have alluded here on the slide, but the important point to consider here also is, there may be diversity in practice with respect to this type of question, but there might also be diversity with respect to how a regulator may view it. We have been made aware that there is an informal SEC view on public warrants in general that are issued by a SPAC. And the SEC's view is, to our understanding, that if the issued warrants were previously classified as liabilities under IAS 32, then their expectation is that they would continue to be classified as a liability subsequent to the merger. And the alternative view of treating this as an IFRS 2 pathway may not be accepted by regulators for SPAC transactions that are filed in the U.S. market. With that, I will pass it, perhaps back to Guy for a wrap up.

Guy Jones: Great. Thanks, Lara. We're at the end of our agenda, and we're a few minutes past our allotted time. There's been a number of ESG-related questions that have come through, and as I said, the ones we've not gotten to, we'll reach out to you via email after the webcast to attempt to respond to your question. But in the interest of extending us another minute or so, I will pose one or two of these to Francis. I believe Francis is still on the line. But maybe one question that's come up is using a low-tax jurisdiction or a tax haven part of ESG discussions and disclosure or reporting proposals. Is that something you can respond to Francis?

I think we may have lost Francis. He’s texting me separately saying his internet just crashed. But he's also texting me to say in response to the question, the short answer is yes. Some regulators, the SEC, for example, are considering disclosure requirements on this topic, and there is some specific press regarding tax haven disclosure bills related to the SEC. Short answer to that tax haven question and whether it's part of ESG reporting or maybe part of ESG reporting down the road is simply — yes. There is there is some press on that topic that we can share with the person that has asked that question.

Ok, I think I'm going to leave it at that. As I said, there's a number of other ESG-related questions here that we don't have time to respond to on the webcast, but we'll reach out to you via email with responses to those questions. Thank you everyone for your attention today and enjoy the rest of your day.