EY’s annual Financial Reporting Developments series | Energy Sector

Daniela Carcasole:

Welcome to EY's 2021 Financial Reporting Developments event. My name is Daniela Carcasole and I am the Canada Energy Assurance Leader. I sit in Toronto and it's snowing today, so for those of you across the country, hopefully you have better weather than we do. For the second time, our annual event has gone virtual and we welcome a wider audience this year. But with going virtual means we tend to fall into some technical difficulties. Apologies for the delay in the start of this event. Normally I would have a number of logistical matters to point out, but for this year, the only detail that I want to share with you is on how you're able to get your CPE credit for your participation today. For those attending the live session, your CPE certification will be sent to you after the event based on your login and your continued attendance.

With that, welcome everyone. Today's presenters are, again, you've met me. I'm really excited to share this panel today. We've got Lance who's our Canadian Energy Market Segment Leader who will provide a lot of good background. I love listening to Lance. We've got Meghan who is a partner and our ESG leader — and this is very topical, you'll see ESG is kind of a number one on almost everyone's agenda. Kerry is here, joining us from our FAAS practice. We've got Janice, who's a partner in our professional practice, and who I'm lucky enough to work closely with. And Patrick, who's also a partner in professional practice. And then our guests, Cheryl and Anne from the ASC.

With that, welcome everyone. We'll move along quickly as I know, we're trying to make up some time. There are a ton of external sources. There's one link — it's very important, that single link, as it contains all sorts of background material that we have authored covering the topics we will cover today. It also has information on topics we chose for the sake of time. Some (topics) that we might speed through it today as well, that we chose not to elaborate on with you today. For those of you who attended our events in prior years, this link replaces that USB key and the printed materials that we used to hand out before. Also, as a reminder, you see that at the bottom of this slide, there is a webcast we prepared on the change in National Instrument Standard 52-112, and you can see the attached link for that as well. With that, I won't delay any longer. Let's hand it over to Lance.

Lance Mortlock:

Hey, good morning and good afternoon to everyone that's joining. I'm really pleased to be here today with such a group. I wanted to give you a little bit about my background — I've spent the last 20 years, 20 plus years, working in the energy space, and I wanted to kind of share some upfront perspectives on what I'm seeing during a very exciting time in our respective industries. I wanted to talk you through three things today, and let me start by setting a little bit of a context in terms of our respective industries.

The power utilities, mining and metals, and the oil and gas companies across the country are facing a number of common challenges. How do you, for example, marry short-term commercial pressures with needs to reshape businesses for the future? I think it's probably clear to most of the people on the call that disruption is sweeping the energy and the resources industry, and it's bringing a number of risks and opportunities for our different organizations. The things that I wanted to talk you through today is really a bit of a scan in terms of the high-level trends, the risks and opportunities that we see, and a bit of a focus slide around what are the questions that we should be asking ourselves as finance professionals, as business professionals in the energy market segment.  (Also) what should we be doing in terms of how we act and how we build, importantly, business resilience in the future. So, those are the three things that I'm going to talk about.

I'll start with the scan. In terms of the scan, it's interesting when you look at different energy companies in Canada — and I get in my role, the opportunity to talk to a number of different leadership teams in different parts of Canada — there's a common theme. The common theme is around the risks and opportunities that exist for our sector at a time where there is a huge amount of volatility, uncertainty, complexity and ambiguity. We surveyed a number of organizations, both in Canada and across the globe, and in priority order, these are the kinds of risks and opportunities that we see, starting with ESG and de-carbonization, which my colleague Meghan will talk about next. We see a lot of risk and opportunity around licensed to operate, geopolitics, consumption patterns. For example, in the utility space, I know that a number of parent utility companies are very interested in the changes in the rise of the prosumer, what that means in terms of bi-directional integration. Capital is also emerging as a risk and an opportunity. How do we as organizations raise support and deploy capital in the future? What kinds of projects should we be funding as we go forward? I also think that as the global economy somewhat recovers and we'll see what this latest variant does to the global economy in the next week. But demand is starting to recover, and as demand recovers the needs for the products and the energy that different organizations provide is going to increase as well. Digital and innovation is a huge area, and we're seeing billions of dollars, nationally and globally, being spent in the energy industry to drive efficiency and effectiveness from a digital and an innovation perspective. Workforce has also another interesting risk and trend that we see, and the benefits of automation, remote operation centres, hybrid workforce models, is really disrupting how traditional business was done, but also creates an opportunity for the future in terms of new ways of working. That drives quite nicely into number nine, which is around new business models. And then finally, productivity and costs. There's always going to be a need for our respective organizations to kind of drive cost reduction, cost efficiency and productivity improvements, and a number of initiatives I know are underway in many of your organizations.

A set of risks, a set of opportunities, and that drives a set of critical questions that we need to be asking ourselves. On this frame, what I wanted to do is really think about those important strategic questions that we should be asking. Along the Y axis, you see the opportunity and the risk, two sides of the coin, and along the X axis there you see timeframe. These are the types of questions that I think many management teams are asking themselves in terms of the future. For example — I won't touch on all of these in the interest of time — in the short term, from a risk perspective, how does your business prepare for accelerating risk and uncertainty? And in the long-term, how do you protect your business from assaults that you can't quite see now? Have you stretched your strategic thinking to think beyond what's in front of you, but that worst-case scenario. From an opportunity perspective, in the short-term, do you understand the ESG measures that will be most impactful to your business, and perhaps in the long-term, what technologies can you be investing in that might take one or two years to implement that really can help scale your de-carbonization efforts? A number of different questions there that I think energy organizations and natural resources organizations should kind of reflect on.

And that really brings me to what's the responsibility and the role that finance plays? And I think that that kind of tees up the conversation that we want to have from an FRD perspective today. I see this sort of confluence of the Chief Financial Officer really playing a critical role in terms of measuring, reporting and advising the organization as it relates to financial reporting compliance; ESG integration, which Meghan will talk about in a moment; working capital performance; and really how you allocate capital. And being that connection point between what we're doing in an organization from a risk perspective and the role of the Chief Risk Officer to kind of detect, monitor and control risk, the Chief Digital Officer in terms of connecting, integrating and transforming the organization from a digital perspective, and the Strategy Officer in terms of anticipating, navigating and translating the organization. There has never been a more important time for the Chief Financial Officer and the respective finance team to play a critical role in dealing with risk and uncertainty in energy organizations. I think it's a very exciting time for many of you that are on the call.

If we go to the final slide before I hand over to the next speaker, I wanted to leave the group with this thought around resilience. I think at a time when we've got a huge amount of volatility, uncertainty, complexity and ambiguity, there has never been a more important time to drive business resilience. This was a model I developed a few years ago that really speaks to these six aspects in the pie chart of business resilience. This model was based on some research that I did with a team here in EY Canada and there are 25 sub-segments. I think the important thing for the finance group here today is really to kind of dwell and think on the portfolio resilience and the capital and financial resilience, and what you can be doing in terms of advising and supporting the organization, as it relates to those two segments of the pie. How do you, from a portfolio resilience perspective, support reallocation of capital to optimize returns? Think about divestments, think about opportunistic transactions and how you can support that from a finance perspective, but also around capital and financial resilience. How do you support flexible long-term financing? Achieve those debt covenants, support robust cash flows, drive a strong working capital performance and also help finally manage those legacy liabilities. I think the future for finance is pretty interesting. There's a lot of excitement, but also a lot of risk in the energy segment. And with that, I think that that kind of ties nicely into the next conversation and our next speaker, who is Meghan, and she's going to talk about ESG. So Meghan, over to you,

Meghan Harris-Ngae:

Thanks Lance, and apologies to everybody for not being on video today, due to the technical difficulties at the outset of the session. I’m just going to talk a little bit about ESG, which stands for Environmental, Social and Governance. Then my colleague, Kerry Clark, is going to talk in a little bit more detail about what's happening from a reporting perspective in the regulatory space.

When we think about ESG and why it matters, it's becoming a strategic business issue. And I would say that a few years ago when I presented at the same FRD, we saw a significant acceleration in the importance of ESG really driven by the investors, and that hasn't shown any signs of slowing down. If anything, we've seen a significant acceleration over the last two years in terms of the importance of ESG, and the recognition of why it's a strategic business issue. The reason for that is that we're seeing investors continue to drive the need for more ESG information. They're making decisions based on ESG performance with a significant focus on climate change. If you just look at the top left-hand side, you can see that we do a survey every year and we're closing in on almost hundred percent of investors who are evaluating ESG performance on an annual basis, and we expect that that's going to continue. We're also seeing significant focus on climate-related shareholder proposals. You'll see that there were at least 140 in the 2020 proxy season in the US, but it's not just investors that are driving the focus on ESG. We're seeing millennials really focus in on seeking employment with companies because of their stance on social and environmental issues and it's playing a part in employee attraction and retention. Customers are changing the way that they procure. And with regulators, which we're going to talk about today in terms of what's happening in the regulatory space, we've seen the SEC and the CSA start to consider regulatory initiatives around ESG disclosure, specifically focused on climate change. You're going to hear more about that this morning from my colleagues.

In terms of just defining ESG, for those of you not familiar with the topic, I'll say that it's often used interchangeably with the term sustainability and corporate responsibility, but you can see some examples of the issues across the “E”, the “S” and the “G” that are considered to be important by the investor community.

Just want to show some examples of results from a survey that we do. This is our 2021 global institutional investor survey, and we do a survey every year, but these are just some statistics that came out of that survey. The first being that the COVID-19 pandemic really acted as a powerful ESG catalyst, but 90% of investors that were surveyed demonstrated they attach greater importance to ESG performance in their investment decision making. And what was interesting about that is that, you know, as an ESG professional, I would say that I expected the opposite during the COVID-19 pandemic. But what we saw is that there was significant acceleration of focus on ESG, especially the “S” of ESG. We saw that as a result of some of the social movements during the COVID-19 pandemic, as well as the focus on people, and we expect to see that those numbers are going to continue to accelerate. We're starting to see acceleration on the future of ESG investing. 89% of investors surveyed said they would like to see reporting of ESG performance measures against a set of globally consistent standards. What I'll say is that we're moving in that direction to have globally consistent standards, which is very important for all of you coming from a finance background, because as Lance said, we're going to start to see significant focus by CFOs and the finance function on ESG because of the movement towards standardized disclosure.

And then last but not least, as Lance covered a little bit earlier around the race to net zero or decarbonization, 86% of investors surveyed said that climate change and climate risk disclosure is an important factor in their decision-making. I can say that with the investors in Canada, having spent quite a bit of time with the large institutional investors, they are placing significant attention on climate change and decarbonization, and they're expected to accelerate that focus going forward.

I just want to highlight a few things. I won't go through this in detail just in the interest of time, but it was difficult to avoid any media and to not hear anything about COP26, which recently happened in Glasgow, which is the UN conference on climate change. I'll just highlight a few things that came out of COP26. One that's relevant to our oil and gas sector is the commitment to slash methane emissions by 30% by 2030. Methane is essentially the greenhouse gas that has the largest global warming potential, and so that's the reason that there was significant focus on that. There was a pledge to phase out coal. The central banks, a hundred of the central banks, are focused on greening the financial system. We're seeing a significant focus globally by the financial community making commitments to net-zero by 2050, and targets in advance of 2050. They're very much focused on ensuring that issuers adopt the TCFD, also known as the Task Force on Climate-related Financial Disclosures recommendations, which essentially is, I won't go into it in detail today, but the TCFD is essentially those recommendations that are informing a lot of what's happening in the regulatory space, which Cheryl and Kerry will highlight shortly.

Not going to go through this in detail in the interest of time, but if you look at just since 2020, the amount of developments that we've seen globally in terms of the regulatory acceleration of ESG, some of this is happening as a result of what the SEC has committed to. We've seen mandatory climate reporting in the UK. We're starting to see the SEC issue comment letters on climate disclosure, and the CSA has proposed climate-related disclosure requirements as well, which we're going to talk about shortly. These are just some examples, and I would say that if you were to look at the acceleration from 2018 to 2020, you would not have seen these many developments. The key message here is just that ESG is something that is absolutely critical to performance. It's going to be recognized by investors. It's going to be critical in disclosure going forward. I do get asked a lot, is this just a fad and is it going away? I can tell you that it's not. When we look at the stability of the financial system, ESG is actually going to continue to be a critical factor. For those of you in a reporting role, this is going to likely become part of your responsibilities going forward. I'll hand it over here to Kerry to talk a little bit more about the regulatory updates.

Kerry Clark:

Thanks, Megan. Obviously, there's also IT issues for me, and that's the reason why you can't see me, but I'm very happy that you can at least hear me. Seems like someone doesn't want us to speak about ESG, right, Meghan? But as Megan said, this is not going away. And as you can see from the next few slides, the regulators moving into this area quite quickly and quite heavily.

Starting with what's going on in the US and what is happening with the SEC. We're expecting to see a proposal on climate change disclosure early next year. Obviously, there's existing guidance that came out in 2010, but it's quite high level. The disclosure guidance that is expected to come in 2022 would provide a range of options possible from Scope 1 and 2 as a minimum to Scope 3 as a maximum. For those of you who are not familiar with this, there is some guidance around how you classify your remissions. Scope 1, 2 and 3 kind of breaks them down between what energy you use in your business, your supply chain, those are the kinds of things it breaks down into categories. Then it's also going to require disclosures in the annual reports, which is a little different. It's not necessarily in your separate sustainability report or in annual reports and they have said they're not going to rely outright on any existing framework with respect to these standards that they are coming up with but they [the SEC] have been on the speaking circuit quite recently, has explicitly referenced the TCFD, which Meghan referred to as an external standard that the SEC staff would learn from in developing their own disclosure requirements. You'll see when Cheryl speaks to what is happening here in Canada, that's consistent with what we see our own regulators looking at for at least guidance. And when I speak about what's happening with the international sustainability standards board, similarly, they're starting with the TCFD framework. The SEC staff has actually been quite aggressive, they've already started issuing comment letters on the existing disclosures under the 2010 guidance. They have an example comment letter out there that goes as far as saying why are disclosures more expansive in your corporate social responsibility report rather than what was provided in your filings to the SEC. You see there, the trend towards moving these disclosures more into your annual report and other filings that are provided to the regulator.

They're also not ignoring the S in ESG, so they are also focusing on human capital disclosures. They had some requirements that came out in 2020. They're very principles-based, those disclosures. They really just did require a bit of a description around new human capital resources, the number of employees, et cetera. EY did take a look at the actual disclosures that have been a result of these requirements, and what's been happening in the US and out of the sample that we took, we found that the average length of disclosures was only about a page, ranging from one to three paragraphs, but about two-thirds of those disclosures did provide at least one quantitative metric in addition to a number of employees and that's quite good. The most frequent topics that were discussed are diversity and inclusion, employee learning and development, COVID-19 obviously, and employee benefits. That's the training that we're seeing in the US. Definitely. I think watch this space.

If we go to the next slide, we'll see what's happening in the EU. This is probably the most aggressive, well, not even probably, definitely the most aggressive proposals out there. The European Commission, back in April this year, published a very ambitious legislative package, comprising a proposal for a corporate sustainability reporting directive – so CSRD and an EU Taxonomy Climate Delegated Act. This is quite a significant proposal and because of the scope of it — the scope is quite broad and it doesn't just cover companies that are listed in the EU and that are EU-based — it can also deal with unlisted companies and large subsidiaries of foreign entities that are operating in the EU. The estimate is that it would increase the number of companies required to disclose sustainability information from 11,000 to about 50,000. That's very significant. The other significant proposal here is that assurance would be required. And if agreed to by parliament, it would be effective for years ending December, 2023. I'm not going to go through what's on the right-hand side of this slide, I’ll leave it for your consideration, but I believe this kind of advice is just as relevant for our Canadian corporations, given what's coming down the track from both an international standards-setting perspective and our local regulator. This disclosure that the EU is proposing would require quite sensitive information about these companies’ business models, their strategy and their supply chains. It's not a piece of fluff, it's quite significant.

If we go to the next slide, we can see what's happening from an international standards-setting perspective. Back last year in September, we saw the IFRS Foundation issue a consultation paper for comment that proposed a number of things, most notably the establishment of an International Sustainability Standards Board. And since being announced, it is going ahead at COP26, which Meghan also refer to. It has been formed. There is actually already a Technical Readiness Working Group that was set up before the announcement of the IASB. It was set up to lay the groundwork for this new standard-setting board and it comprised reps from the TCFD, the family reporting framework, the Climate Disclosure Standards Board, and the World Economic Forum, as well as being supported by the IASB and IOSCO. As such, there are quite a lot of global standard-setting and leading thinkers involved in this. They've come up with what is essentially a prototype for the standards that the IASB they can issue, and it's really to give them a fast-running start. You can actually find the prototype proposals on the IFRS Foundation website. It's not to say that what the IASB comes out with will be the same as these, but it's likely to form the skeleton for what they do eventually issue. And we're expected to start seeing the first draft of standards for comment in Q1 next year. It’s quite an aggressive timeline, and I'm sure many of you have already heard that one of the offices for the IASB will be here in Canada, in Montreal – it’s great news for Canada to be so heavily involved in this. The IOSCO is actually the chair of the IFRS Foundations Monitoring Board, and they'll oversee the standard-setting activity by this new sustainability standards board. And they will act as a bridge to our regulators, which then takes us to our regulator who is joining us today, Cheryl, to talk about what's going on here in Canada. We could skip this slide actually, and go straight to Cheryl's content. I'm going to hand over to Cheryl to tell us what's going on here in Canada with respect to the CSA proposals

Cheryl McGillivray:

Thanks so much, Carrie. Hello, everyone. I first like to thank EY for inviting us today. We really appreciate the opportunity to speak to as many capital market participants as possible when there are important regulatory matters, and Kerry and Meghan both gave you the background to why we're here today. I'm going to skip quickly over to the history and timeline. I'm not going to go through the history but just to highlight to you that climate change, environment and governance are not really new to any of us here in Canada. We actually did start working on environment back in 2019, but the momentum towards climate change really started evolving in 2015 with the formation of the TCFD. We did a project in 2017, but that project really led us to putting out guidance in 2019, which at that time was two years ago. The reason we did not put out mandatory rules in 2019 was based on the observations of our 2017 work, and that was primarily the fact that climate change was still very nascent at the time in terms of disclosures. There was still a lot of complexity.

We were also seeing through our consultations that even the largest financial institutions were still solidifying what information they felt they needed. The real drive for the guidance in 2019 was threefold. One was to bring attention to this very important matter, but also to highlight for issuers who weren't even turning their mind to climate change, that this was very much a risk that was emerging very quickly. Our survey told us back then that there were a number of industries that felt climate change only related to the emitting type industries, such as oil and gas. Even within the oil and gas sector, we saw that a significant number of issuers were either just starting or not even considering it based on their materiality assessment, which was really a very short-term perspective. The highlight of the guidance that's of course was focused on governance, which I argue is the first place to start if you're just looking at ESG now. And we also pointed out though that the regulatory requirements do require disclosure of any material risk along with some qualitative and quantitative information. The guidance also set out the assessment of materiality, which really formed what we are doing today. And I do want to maybe step back on that. We are seeing that at the time when we published our guidance in July of 2019, the federal government had a panel on sustainable finance, and they put out recommendations around the same time, and that was on sustainable finance. That at really propelled much of the momentum for even more climate change disclosure. We started seeing a lot more pressure on that, and that certainly has accelerated since 2020. Meghan highlighted that and Kerry spoke to it — investors now are looking for more data and in particular, they want to see targets and metrics. In large part, this is because now they have to inform their own resiliency plans and respond to their stakeholders as to what their climate footprint looks like. When we looked at the next steps, we also considered the broader ESG, and I would say that some of the challenge with ESG is the term itself. It has been one that's been used very, very broadly, and it does mean different things to different investors.

Meghan outlined the three components — environment, social and governance. However, we do need to get more clarity, specifically, what are the key elements within each of those three components that investors are interested in? Also, since 2020, we saw a huge emergence of investment funds claiming their ESG, as well as ETFs. As such, it's also important we have more transparency and disclosure around what exactly are the components and elements within those components that are contained in those investments and what are the asset managers assessing? The regulator is looking at that aspect of the capital. And then thirdly, I would say the third-party rating agencies for ESG is an area that we are really pushing for more transparency. We think it's important that those rating agencies have more information on what exactly they're rating within each of those three components and how are they weighting each of those elements? In particular, is on the S as well as the G, but also the E, which has very much been primarily a focus on climate change. We do feel that that is a critical component of environment; however, it's not discreet. Climate change really does need to be considered within the broader environmental context, and by that I mean not just limit it to those matters that are directly or indirectly impacted by climate change, but the much broader environment, as well as the other “S” and “G”. There are very significant investment decisions being made today, and it is important that there be clarity and transparency as to how those decisions are being made so that there are no unintended consequences as we go through this transition.

I would also say we need better clarification on terminology. We hear a lot of terms these days about sustainable finance, about transition — what does that mean? And there are some developments happening here in Canada on taxonomy in terms of transition funding. There's also further work being developed in terms of what net zero means in the Canadian context. Stay tuned for that, I'm sure that's going to be coming out very soon.

In 2021, the CSA opened another project. The intention of that was to really help inform what our next step should be. Part of it was, as we continue to monitor what was happening globally, and that work continued from our 2017 project, we did see that there were many, many regulators outside of Canada that were moving towards or already were there, aligned to the TCFD framework. I won't go over that as Kerry did a fairly extensive job on talking about those standards. We think that what we are putting out for proposed rule is fit-for-purpose. It does position Canada on a competitive basis while at the same time, recognizing our very unique resources. Part of our work also was to look at the current state of disclosures here in Canada. We certainly did see progress since 2017, although there's still work to go on this area.

That led us to our proposed role and on the next slide, it’s just highlight for you. We put that out for comment on October 18 for a 90-day period, and that will end on January 17. We are really encouraging everyone that may be affected by this to please submit your written comment, and that includes reporting issuers. The notice itself does contain some very specific questions that, for the oil and gas industries specifically, we are looking for your comments on one area in particular, which is GHG emissions disclosure. Please review it and please submit your comments to us. We do value a very broad perspective of comments coming in, as we expect we're going to get very varied viewpoints on this.

Turning to the role itself, the rule that's out for proposal does look at a transition time period here. What we're proposing is one year from the effective date for what we call the non-ventures. Those would be those listed on the mainboard, the TSX, and the third year following the effective date for venture issuers. What that means in application, given the time it takes for us to form a final rule and publish it, would be that for the non-ventures, this rule would come into effect for their annual filings for the financial year ending December 31, 2023, with a 90-day period. That means those annual filings would be due March of 2024. For venture issuers that would apply to their annual filings for their financial year ending December 31, 2025, and with 120 days to file, that would be the end of April of 2026.

Just to highlight to you, the rules themselves have been aligned substantially to the TCFD framework, which contains the four main pillars as strategy, risk management, governance, metrics and targets. I'll just highlight very briefly what that means — for governance, this is an area when we spoke to issuers back in 2017, and again, more recently before we put these proposed rules out for publication, we did talk a lot to Alberta issuers to really get a sense. What we've seen is Canada does have some very strong governance practices, those came about in the early 2000's. What we were noticing back a couple of years ago is that the practices were there, but the disclosures were not there, and our requirements currently do require disclosure of the mandate as well as consideration of the material risks, but it doesn't go a lot further. What this governance disclosure does is to give more on setting out that the Board's responsibility is the oversight of climate change risks and opportunities, as well as management's role in assessing and managing climate-related risks and opportunities. On governance, just to point out that there is no materiality assessment here. In other words, no threshold means all issuers will be expected to provide these disclosures.

Now strategy is the next pillar, and that's an important pillar in that it really gets underneath what the risks and opportunities are. What an issuer will be expected to do is go through their operations and look at what risks applied to them and consider materiality. That means when you look at the TCFD framework, that is the physical risks, as well as the transition risk. One thing we did observe through our recent disclosure review is that regulatory and policy risk is the number one risk being noted. Lance talked a little bit about the geopolitical, and this is an area that's continuing to evolve. As regulators, we are very mindful that there needs to be more certainty in the capital market.

Now, one of the areas here that we're also looking for is how those risks apply on a medium-, on a short-term, and a long-term basis, and how it impacts the business. Not just a qualitative discussion, but also your quantitative. This does require material assessments, so after you go through it, you may see that some of these risks and opportunities are not material. On opportunities, I do want to point out that you'll hear that term greenwashing — there will be a lot of focus on greenwashing, but with opportunities come risks. What we'll be looking for is a lot of disclosure on what the risks to those opportunities are? What are the timelines, and also what are the material assumptions behind these opportunities, particularly when they're based on yet undeveloped technologies?

Now, risk management is the next pillar, which is somewhat akin to the governance in that the disclosure would be on what processes there are in place to identify, assess and manage climate change risks, as well as opportunities, and how that process is integrated within the business. What we saw in 2017 was certainly climate change; ESG was there, but not to the same extent. It was very much in a silo and what we've seen over the last few years is that it's now getting integrated into the business operations themselves, which is very, very positive. Now, risk management also has no materiality threshold, which means, again, all issuers will be expected to disclose risk management.

Leaving me with the fourth pillar, which is metrics and targets, and this really speaks to a lot of the focus investors are having right now, and that is that they're wanting more data, metrics and targets. Within this, we're looking at GHD emissions, Scope 1, 2 and 3, and how those risks explain how they work for the entity itself. Targets are definitely going to be a focus of many investors, not just on the emissions, but other targets as well as what metrics you're using to measure the progress.

The next slide really just sets out the mechanics of the rule. When you read the rule, you will not see any reference to TCFD, but rather there is a companion policy, which accompanies the rule that really sets out the expectations that issuers are to consider the TCFD framework in order to inform their disclosure so that they do comply with the rules. You'll find the governance disclosure requirements in Form 51-107A, and the disclosures would be required in the management circular if it's sent to security holders. If it isn't, then you would put it in your annual information form (AIF). For those issuers that are not required and do not file an AIF, then it would go in the annual MD&A.

The other three pillars’ disclosure requirements are found in Form 51-107B, and all of these disclosures would be required in the AIF. Again, if there isn't a requirement to file an AIF, or one is not filed, then it would be the annual MD&A. And that really covers the main mechanics of the rule.

We did make some modifications, and that's why we say we're substantially aligned. There were two modifications made. The first one is under the strategy pillar, and that's where our rules are proposing not to require scenario analysis. And the reason we came to this decision is because we do believe there's still a lot of complexity here. Certainly, the financial institutions are moving ahead on this and we think that this eventually will evolve. We know many issuers are currently doing scenario analysis in their voluntary disclosures, through either ESG reports or sustainability reports. And the second modification we made was to the actual GHG emissions disclosure, and that's in the targets and metrics pillar. What the proposed rules are putting forward is that this would be on a comply-or-explain basis. And so, if an issuer chooses not to disclose Scope 1, 2 or 3, or all of them, then they need to disclose and state the reasons for not doing so. However, when there is disclosure, then there is a further requirement that the entity disclose the standard they use in order to calculate those GHG emissions. If the standard is not the GHG protocol, then there's further disclosure required on how whatever methodology used compares to the TCFD framework. This is an area that we think we're going to get comments on. We hope we get comments on this because we've already met with a few issuers here in Alberta, and we know that there might be some differences here, particularly on Scope 2.

The next slide shows you an alternative we're putting out for comment. This alternative is instead of a comply-or-explain approach for Scope 1, that rather perhaps we should make it mandatory. If so, then we're asking, should it be when it's just material or should it be in all cases?

That really leads me to the last slide, which is just encouraging you to please review these and submit your comments in writing. We're also doing a number of consultations in the 90-day period, but certainly the more you put in writing, the better it is to influence the decision. Again, there are a number of questions in the notice for you to look at. I would suggest to read the TCFD framework first so that you understand where these are going. And I would just mention, as Kerry had said about the SEC, that we are going to watch, and we have been watching very closely what the SEC is doing. We'll consider that when we inform from not only the comments we get, but what direction the SEC is going to go. I'm now going to turn it over to Ann Marie, who's going to briefly give you two points of view on the Non-GAAP rule. Ann Marie?

Anne Marie Landry:

Thanks, Cheryl. I'll walk through some key dates on the Non-GAAP and Other Financial Measures Disclosure rule today. Essentially, this rule was published on May 27, 2021. This was after the publication of the first and second proposals back in 2018 and 2020. After our review of the feedback received on these first and second proposals where we listened, we heard, and we made changes to the final rule, and published this final rule and its related companion policy in 2021. Issuers should continue to refer to Staff Notice 52-306 until such time they have transitioned to the final rule or have adopted the final 52-112 rule. Staff Notice 52-306 will be withdrawn when transitioning to the final rule is complete.

That brings us to transition — an area where we've been getting numerous questions on, and I'll walk through a couple examples here. Although the new rule is effective starting on August 25, 2021, and an issuer can adopt the instrument any time after this effective date, Subsection 13 (3) and (4) set up transition provisions where a reporting issuer and a non-reporting issuer can delay adoption for a certain period of time. Starting off with the reporting issuer where the transition provisions are found in subsection 13 (3), the slide here shows three different year-ends. For the arrows in blue, these are periods where the reporting issuer can continue to apply the guidance and Staff Notice 52-306. The yellow arrows indicate where the 52-112 rule will apply under the subsection 13 (3) transition provision. For a reporting issuer with a September 30 year-end, its first filing applying the new rule will be for Q4 2022; for an October 31 year-end filer, the first filing will be for Q4 2021; and for December 31 year-end, the first filing will apply to Q4 2021. The reason why Q3 2021 is not captured, is that this document is an interim filing. As such, it is not specifically a document filed for a financial year ending on or after October 15, 2021. In this case, for a December year-end filer, this would be December 31, 2021. However, if a reporting issuer with the December 31 year-end files a document before its 2021 annual filings, such as an earnings release for Q4 2021, or for its 2021 annual period, then the 52-112 instrument will first apply to this earnings release and then to any other documents filed subsequent.

The other question we've been getting is on whether short-form perspectives filings that incorporate September 31, 2021 interims are subject to 52-112. The answer is no, as the prospectus does not incorporate by reference reporting issuers December 31 year-end filings.

For non-reporting issuers, the transition is much simpler. The instrument simply does not apply until after December 31, 2021. A reporting issuer that is filing an IPO on or before December 31, can continue to use the guidance and Staff Notice 52-306. For any IPO filed on or after January 1, 2022, 52-112 applies. One cautionary note is on any IPOs that will straddle 2021 and 2022, where a preliminary IPO is filed in 2021, and the final or an amendment is only filed in 2022. As I just mentioned, the 2021 IPO can continue to apply the guidance and Staff Notice 52-306, but for consistency of presentation, the issuer should consider applying 52-112 in its preliminary perspectives filed in 2021, as any perspectives filed in 2022 will need to comply with the new rule.

That concludes the FAQs on 52-112. I only went through the transition provisions, but we'll be available to answer any questions on any application or scope questions you have.

Daniela Carcasole:

Thanks, Anne Marie. We do actually have one question that's come up in the Q&A, and I'm not sure who would want to answer it, but the question is — will these climate disclosures apply to foreign private issuers?

Cheryl McGillivray:

Yeah. Thank you for the question. The rules will not apply to what is called an SEC foreign issuer or a designated foreign issuer. Very much like the non-GAAP rule, if there is an SEC issuer that is domiciled here in Canada, the rules would apply. I hope that answers the question.

Daniela Carcasole:

Great. Thank you so much. I don't see any other questions here. Just as a reminder to everyone, if they've got more questions, please feel free to drop them in the Q&A, and with that, I'm really happy to see Pat's face on this video. So, I'll turn it over to Pat.

Patrick Cavanagh:

Thanks Daniela. First of all, thanks to Anne Marie and Cheryl for joining us today, your insights are always hugely helpful. Thanks for spending the time with us.

Janice and I are going to take you through a few IFRS developments in the years. Thankfully, no major standard adoption this year, but a number of amendments to keep in mind. I will also plug – from the onset Daniela's comment – in regards to the website that we have with a lot of EY material on it. Some of these topics today are very deep and some of those publications are very helpful in working through what are your issues and some of the literature that's applicable to dealing with them — just wanted to plug that again, as we're working through some of the different topics.

We flip to the next slide, starting with the IASB work plan and specifically their completed projects. I'll draw your attention to the effective date column. You'll notice there's a number of items that are effective for January 1, 2022. Things to keep in mind when you're thinking about year-end disclosures, as well as obviously moving into Q1 reporting. I'm just going to touch on a couple of them today. The onerous contract item in terms of costs to fulfil a contract, I think a topical item in our environment today. The question here deals with what costs we incorporate when measuring onerous contracts. We know an onerous contract is recognized when the costs exceed the economic benefits, and there's always been questions as to, well, what are the costs that we consider in making that determination? And the IASB has clarified for us, those costs are both incremental costs and other costs like overhead or management supervision costs, i.e., it's a more complete view of what the cost figure should be. It’s very important in figuring whether we have an onerous contract, and of course, how to measure it. The item on classification of liabilities as current or non-current, I'll get to in a minute. Both the IASB and IFRIC did comment on this topic in the year; there's been some developments in the past week on this topic and we have some slides coming on that.

The other item I wanted to speak to is property, plant and equipment (PPE) and proceeds before intended use. This is a topic of some relevance to those in the extractive industries. This topic deals with what do we do when we receive proceeds before an item of PPE is ready for its intended use. Historically there's been a practice of taking those proceeds, that income, and deducting it from the carrying amount of the PPE, which is more of a balance sheet effect to it. The IASB has clarified for us that that is not appropriate, that where income and an allocation of related costs is being incurred prior to PPE being ready for its intended use, that that should go through the income statement versus it being a balance sheet effect.

The other item they've clarified for us is that if the view is that income is not in the ordinary course of business, then that would also represent a separate line item that would be recorded outside of your ordinary course income. There would be an effect not only in the income statement but the classification in the income statement as well. Of course, only to the extent that this income is material. Those amendments are effective January 1, 2022, which is just something to keep in mind as we approach Q1.

If we move on to the next slide, we have our maintenance projects. There are a couple of items of note here — a lease liability and a sale-leaseback. Sale-leaseback transactions are not overly common, but if you do incur them, which do happen in our space every now and again, some very important clarifications on how to think about the recognition and the measurement of the related liability that comes through in those transactions.

The other item of note here on the slide under the standard-setting projects is of course our rate-regulated activities project that the IASB has now taken on. If we just flip to the next slide, this slide highlights the different components to the exposure draft. This was released last year and will now be a standard that will help define classification and measurement versus our current standard on rate-regulated accounting, which is just a disclosure-based standard. I'm not proposing to go through all the different elements today, just make note of the fact that the comment period did end on this, in the year, and perhaps not too surprisingly, there was a substantial amount of commentary on the topic. The IASB received over a hundred different comment letters on the topic. They're working through the deliberations of those comments and we'll see where the direction of the project goes from there.

A common question we get is whether this is aligned with ASC 980, which is the US GAAP standard on rate-regulated accounting. If you're applying that, the answer is no — they are different and there are proposed differences, certainly. We'll not be 100% aligned with the way that the US looks at regulated accounting.

Onto the next slide in terms of research projects. There are a couple of items here that, down the line, will be of interest to the group — extractive industries, goodwill and impairment. There has not been much of a development in the year on either of the topics. The one item that did move forward a little bit is business combinations under common control, which is important. We currently don't have an IFRS standard in relation to business combinations under common control. Working through a model here essentially, when do we make decisions to apply an IFRS 3-based acquisition model to a common controlled transaction, and when should we use a book value method? Again, a comment period on this closed in September. We'll see the direction of the project in the coming months and hopefully in Q1 of the coming year.

Moving on to the next slide, we have some IFRIC updates. IFRIC, of course, being our interpretations body of the IASB, we typically like to walk through their agenda items as there were a few substantive items in the year. I think none more important really than this IAS 1 discussion. Here’s a bit of a project background — the initial amendments on IAS 1 were proposed back in January of 2020. There were four key components to the proposal and they're noted here on the slide. As a result of issuing these amendments, there was a lot of discussion and feedback around one major topic — that topic being that, how do I determine if I have the right to defer settlement for a debt obligation if I'm subject to covenant compliance? But that covenant compliance test is at a date different than your reporting period. I'm at December 31 and that's my reporting date. My covenant compliant tests, let's say, are not until March or June. How do I factor that into my assessment at the December date?

As a result of that feedback in December of 2020, the IFRIC provided some examples to help walk through how to apply that principle against the proposed amendments. The result of that really was twofold. One, individuals began to appreciate better how to deal with the principal relative to these examples, but there still was a lot of concern and feedback that the outcome of the application of the proposed amendments might not result in the most meaningful information to use the financial statements. As a result of that, the Board, in June and July of this year, proposed further amendments, with a couple of key items relative to that initial amendment. The most important one of course being that now they've clarified that if you're subject to covenant compliance on a date subsequent to the reporting date, that does not affect the classification of the debt at the measurement date. However, they did introduce disclosure and presentation issues with respect to debt of that nature. They want the balance sheet to distinguish, even if both are non-current, items that are subject to future covenants and items that are not. There’s more disclosure, but perhaps still representing them as being non-current. Those proposed amendments were then actually issued last week in an exposure draft. The exposure draft was generally aligned with what was proposed back in June and July. The effective date is planned for January 1, 2024. I suspect there'll be a comment period as on this as well. This is something just to keep an eye on as it is a very important topic to the group.

The next topic I want to run through was the IFRIC's discussion on cloud computing. Cloud computing arrangements, of course, are becoming much more common with respect to access to software and access to data. The IFRIC took on a topic of working through what accounting components or standards are relevant to accounting for these types of arrangements. This slide represents a bit of a flow chart of how you might think through the different standards that are available to deal with the accounting.

The starting point is IFRS 16 — Do we have a lease? Do we have a right to substantiate all the economic benefits and the right to direct that software through the arrangement? If we don't believe that we have a lease, the next step might be an intangible. Do we have an IAS 38 intangible? Do we have a right to control that software, which is a key component to an intangible. To the extent you don't have an intangible, then you might just land in it being a basic phone executory service contract, where we would just account for the costs incurred through P&L as the cost is essentially spent. These are a few different alternatives, depending upon the nature of your contract, of course, and the applications certainly have some level of judgment.

If you flip to the next slide, it highlights some of the different costs you might routinely see in these arrangements and how we would deal with them depending upon whether you have an intangible or a service contract. I'm not suggesting here that it's impossible to get to lease accounting. I would say that it's less common, but certainly not impossible. In relation to some of the costs, I think the outcome here is a little bit straightforward. Research, training costs, data conversion, irrespective whether you have an intangible or service contract, you book those through P&L.

A couple of items involve a little bit more judgment in their application. The most notable item would be configuration and customization costs. If you're in the space where you believe you do have an intangible, then those customization and configuration costs are costs that are getting the asset ready for its use. We know that generally you'd be able to capitalize those under an IAS 38 model. If you're not in an intangible world and it's only a service contract, then the counting will vary depending upon whether it is the supplier of the cloud software that is also providing the service of customization and configuration, or is it done by a third party?

If we flip to the next slide, it goes into a bit more detail in terms of the accounting considerations specifically in relation to where that customization configuration is provided for by the supplier. They're giving us the service of access to the cloud, as well as providing us with implementation in relation to customization and configuration. The key question here is how do I deal with those different services? Do I have two services that I would look at distinctly or are they bundled together? The IFRIC, in discussing this issue, looked towards IFRS 15, which is our revenue model, as a framework to help identify whether we think the services are distinct or bundled, because IFRS 15 would talk through that concept in relation to performance obligations. Essentially in applying that model, you're going to come to one or two outcomes. They are individually distinct, or they're bundled. If they're distinct, then you would just take your fees and expense them as the distinct service is being performed. If they're bundled, however, then we might have to look at an expense recognition model that looks at the term of the contract. Potentially slightly different income statement recognition patterns, depending upon our view is whether they're distinct or they are not distinct. This definitely is one of those topics that has a lot of different facets to it, and we do have a pretty strong publication on the topics. We would highly encourage you to take a peek at that. If working through the considerations of how your arrangement works and the different models that might come into play and their relevant judgment, they need to think about arriving at one of those three different outcomes. With that, I'm going to pass it off to Janice who is going to take us through a few more developments, Janice.

Janice Rath:

The last IFRIC different decision that we wanted to highlight here today relates to the costs necessary to sell inventories when using net realizable value under IAS 2. The committee received a request this year regarding what constitutes the estimated costs necessary to complete the sale when you determine an RV of inventory. And in particular, the request asked whether an entity should be including all the costs necessary to make the sale, which would be View 1 shown here, or only those that are incremental, such as a special promotional campaign, for example. So that was View 2. Just as background, IAS 2 requires an entity to measure its inventory at the lower of cost, an NRV. An NRV is defined as the estimated selling price in the normal course of business, less the estimated cost of completion and the costs necessary to make the sale. The standard talks about how an entity estimates the NRV of inventory, but doesn't actually specify what costs are considered necessary. The committee observed that when determining the NRV, it requires an entity to make estimates of those costs, but it does not allow an entity to limit such costs to only those that are incremental — because that could potentially exclude costs that will be necessary to make the sale but may not be incremental to that particular sale. As a result, the committee concluded that there would be significant judgment used by entities. Where does that really leave us?

Since the agenda decision was clear that you can't just use incremental, but it left us with uncertainty, the Canadian IFRS Discussion Group considered the topic as well at its September meeting. And as you can see on this slide, it looked at a range of scenarios, ranging from direct costs incurred at the point of sale all the way through an allocation of indirect costs leading up to it, which is a wide range on that continuum of things beyond purely incremental. The IDG also agreed that without any detailed requirements or guidance on what costs need to be included, there's going to be considerable judgment applied, and companies are really going to have to consider what is the nature of their inventory? What is the sales channel they're using? Is it online? Is it in-person? How are they actually executing, and what is their industry? But the main thing that came out of that IDG discussion was that the policy applied should be disclosed, as well as the significant judgments that were made where it's material to the financial statements.

Next, we're going to move on to a popular topic of the last couple of years, which are SPAC transactions. First off, what is a SPAC? That's a special purpose acquisition company. Generally, it's a shell corporation that raises capital from investors in an IPO, but the sole business purpose of that entity is the future business acquisition of a target. That ultimate target usually hasn't been identified at the time of the SPAC IPO, but ultimately will likely be a private operating company. The reason these are really popular in the last few years is that they offer private companies a way to go public without having to conduct a traditional IPO. It gives access to growth capital in the public markets on a much faster timetable than a traditional IPO, with the terms of the acquisition being negotiated privately. They do represent some challenges to the SPAC, both pre-merger and post-merger, and they also will require that the post-merger combined company provide public company disclosures immediately after the acquisition.

Before going into some of the accounting considerations, we wanted to just provide an overview of the SPAC life cycle. The first phase generally doesn't last too long, but it is the formation and IPO phase. A sponsor and a management team will contribute nominal capital for founder shares in the SPAC. Then the SPAC will conduct its IPO and seek capital from investors in the public. And again, as mentioned, this is going to be a much faster process than a typical IPO because the SPAC is not an operating company.

The main phase of the SPAC life cycle then starts after that IPO, which is the target search process, and that can last 18 to 24 months. Usually, there are defined periods for this target search and approval process in the formation of the SPAC. The SPAC will look for potential targets and we'll do due diligence and try to negotiate with the target. When it finds a suitable target with suitable terms, it will go to the public shareholders for approval. If the shareholders approve, then we'll have an acquisition and you'll have a post-merger combined company. If the shareholders reject the proposed merger, then the SPAC will either return to a target search, or it could actually be wound up.

These are just some of the potential accounting considerations and reporting considerations related to SPACs. We won't go into detail on all of them, but we wanted to highlight things related to the pre-merger SPAC or earn-out provisions within the acquisitions; who is the accounting acquirer, which I will speak to; and various financial instruments in share-based payment considerations.

When the SPAC does find a target and you've reached an agreement and it's been approved, one of the key assessments that will have ongoing impact is — who is the accounting acquirer? The SPAC will legally acquire the target, but the actual accounting will depend on who is the accounting acquirer, and it can have significant impacts. As we see here, some of the factors that you'd consider are the relative voting rights of the shareholder group. With that, there's a large minority voting interest, and who can elect the majority of the board on a post-merger basis — we consider all of those factors.

Where the SPAC is the accounting acquirer, it's a traditional business combination under IFRS 3 with acquisition accounting applied. The SPAC financial statements would be the comparative period and you'd only include the results of the acquiree from the date of the acquisition.

However, a more common scenario in SPAC transactions is actually that the target is the accounting acquirer, akin to a reverse takeover. As a result, since the SPAC is not considered to be a business, you can't apply it by IFRS 3. There is no business combination accounting and the comparatives would be those of the historical operating company. Therefore, this is a little bit more complicated as noted here — it's accounted for under IFRS 2 with the deemed issuance of shares by the target and a recapitalization of their equity. It is definitely a very different outcome than if the SPAC was the accounting acquirer.

In terms of financial instruments, that is impacted as well by who the accounting acquirer is, the impact on warrants and the shares issued. Since we talked about the fact that deemed issuance and recapitalization would occur, there'd be significant IFRS 2 impacts for the target where it deemed to be the accounting acquirer. What we did want to point out here is that there is an Applying IFRS —Accounting for SPACs publication that we have, which goes into detail into many of these significant hot topic issues related to SPAC. We'd like to point you to that for some guidance, as well as additional resources.

The last item I wanted to highlight relates to some of the impairment considerations for right-of-use (ROU) assets, which were discussed at the IDG this year. An entity's decision to change the use of an ROU asset, or if they have no realistic alternative but to do so, could indicate that either an asset, a group of assets or a CGU may be impaired, and we're seeing a lot of this as people change their use of their facilities and their leases, there may be a change in use either by decision or as a result of things beyond the company's control. When there is an impairment indicator related to an ROU asset and an impairment test is required, an entity has to consider at what level they're going to perform that test. And on this slide, we've highlighted when it has to be done at the asset level. If the asset generates independent cash flows, very standard criterion, it would be done at the asset level as well. As well, you have to consider whether the fair value less costs to sell of the ROU asset itself exceeds the carrying amount. If you can determine that, and if the value in use can be estimated to be close to the fair value less costs to sell, and the fair value less costs to sell can be measured, in those instances, the impairment assessment under IAS 36 needs to be done at the asset level and not at the CGU level.

As part of the IDG discussion, they noted that one of the significant considerations when you're looking at this is the time period during which that ROU asset will be used within the original CGU, and that can help guide the assessment of whether your impairment assessment is done at the asset level, or if it's done at the CGU. The shorter, the period of time to either abandonment or sublease, the greater likelihood that the impairment assessment needs to be done at the ROU asset level itself. And that's discussed a little more detail on the first two bullets here. Whereas the longer time between the decision to abandon or sublease your asset and the actual change occurring, then it's less likely that the decision will immediately impact the level at which the impairment assessment should be performed. And that can have a significant impact on the overall result of your impairment calculation.

On this slide, we're just highlighting some of the other potential considerations with respect to the impact of a change in use of an ROU asset. These are beyond impairment, but we wanted to mention them. First, the reassessment of the useful life and residual value, and this would be required regardless of your conclusion about impairment indicators and the level at which you perform the impairment assessment. If the useful life or changing residual value results, then you have to follow IAS 8 accounting policy changes and changes in accounting, estimates and errors. As well, there are restrictions on use of the asset. So, when you're looking at fair value, less cost to sell, for purposes of an impairment test, the inputs and assumptions to reflect restrictions on the use of the asset, ignore the entity's own plans for the asset that you're looking at a market value. Some of the other items are lease reassessments and modification accounting, subleases, as well as considering the timing of the adjustment. Very high level on some of these items, but that does sum up the financial reporting items we wanted to talk to you about today, and now we'll turn it back to Daniela.

Daniela Carcasole:

Hi everyone, and thank you so much to all of our presenters and to all of you who have joined us. I'm just taking a quick look at our Q&A to see if there are comments. There are a few questions that I think have been responded to as we go along. And I'm just looking, bear with me, to see if there are any that any of our panellists would like to respond to if they haven't been answered already.

I think there's one question on National Instrument 51-112 where we disclose certain non-GAAP metrics on a segment basis. I don't know if Patrick or anyone wants to comment on that one. I think someone just did on the segment measures, and that is live for you.

Unless any of the other presenters think I've missed anything, if there were any other questions, I'll pause for a second to see if anyone else wants to ask anything. If not, then I think we are ending right on time. With that, I don't see any questions. Thank you, everyone. Happy holidays and stay warm. For those of you who are hopefully in warmer climates, I hope the sun keeps shining where you are. Thank you, everyone.