EY's Financial Reporting Developments - IFRS reporting, Spring session

Jeff Glassford: [00:00:06] Hello everyone and welcome to our spring FRD session. This is our first spring session in our revamp series where we're planning to have more of these sessions which we've historically just done in the fall, to try and provide a little more timely information and keep everybody on top of all of the issues that are going on. Pardon me, I am losing my voice, so I will hope that it hangs on for the duration of this session. We'll go through our agenda just after I introduce everybody. So, for those who don't know me, I'm Jeff Glassford. I'm a partner of professional practice group. I am pleased to be joined on this webcast by Lara lob, Jeff Hodl and Juliana Mok, who are also members of our professional practice group. We have a pretty packed agenda, but I'll just remind everybody you're free to ask questions throughout. We will answer your questions, whether we can do it live or whether we have to send you a direct email. We will ensure that we can answer every question we can. The slides should have been included in an email that you would have received yesterday. And so that reminder email has the slides that you can print or download into your computer. And finally, I'll just highlight that CPD is available for those listening on replay. There will be a link at the end which you can click on to obtain that. And finally, we'll jump into our agenda. So, our agenda for today is, as I said, pretty packed but very relevant. There's a few things on here that you might be reading and thinking, oh gosh, not SPACs and IFRS 17 insurance contracts. We're not going to talk about that, are we? But you'll find that they're very relevant. These aren't narrow topics. And the reason they're on the agenda is that they're very broad. So, I'll kick it off quickly with some climate discussion. We won't hit on that very long. We are going to cover that in more detail in the fall. We'll talk about the war in Ukraine, but again, just at a very high level. Get into some of those issues, IFRIC agenda decisions, and things of that nature that are ongoing. And then we'll end with Juliana doing a practice issue discussion on principal versus agent in revenue contracts. So, jumping right into climate and sustainability reporting. I think everybody is aware this is a very hot button issue. Lots going on. The reason we're not going to talk about it in detail today is because there is so much going on. We will get into detail in the fall on some of these things, but there are many consultations out there. You have the CSA consultation that happened earlier this year, the SEC that's more recent, and the ISSIB, which is the sister of the IASB and has also issued some exposure drafts as they try to ramp up their board and issue more sustainability information. In Canada, beyond the CSA proposals, the CPA Canada has put out a proposal that we should create a Canadian Sustainability Board, similar to the Accounting Standards Board that would adopt ISSB standards as they are issued. This slide, I won't go into detail. There's lots of information. You should take a look at it for yourself, but this highlights some of the differences that currently exist between those consultations. And if those differences continue to exist when we get to the fall, we will go into those in more detail. But the hope, I think, is that there will be some level of convergence globally that brings some more global standards that can be viewed across the globe. So, with that, I'll just say stay tuned for sure. A hot button topic as things work their way through the consultation phase. We will have a more in-depth session in the fall. So, jumping into the war in Ukraine, I'll pass it off to Jeff to take us through this section.

Jeff Hodl: [00:05:01] Thanks, Jeff. So, we'll spend a few minutes touching on financial reporting considerations related to the war in Ukraine. So, it's likely that many North American companies have limited direct exposure to the Russian, Belarusian and Ukrainian economies. However, the indirect effects of the war in Ukraine and the effect of sanctions and other actions on Russian entities and their affiliates are likely to have a meaningful impact on accounting reporting and auditing matters. Key areas of impact may include increases in certain commodity prices, including oil and gas and agricultural commodities, as well as supply disruptions for certain raw materials and component parts as a result of sanctions. Further, there could be additional strains on supply chains and possible slowdowns in global economies, as well as an increase in cybersecurity risk that could have both direct and indirect impacts throughout various business processes. Given the wide range of known and unknown economic impacts of the war, the implications to account and disclosure may be significant. The company's exposure to these economic impacts may result in impacts to a broad range of accounting requirements which are listed here on the slide. Today, we'll just touch on a couple of key areas and entities. Revenue recognition may be subject to various implications in both the timing and amount of recognition, including estimates of variable consideration, contract modifications and implications on customers’ ability and intent to pay. For example, changes in expectations about the return of goods or expectations of contract volumes may require estimates of variable consideration, including any constraints to be reassessed. With respect to impairment of non-financial assets, the sanctions on Russia and Belarus may impact whether an entity is able to recover the carrying value of assets held in those countries. Entities in Russia that are owned and or controlled outside of Russia may face retaliatory measures, including nationalization of assets. Even for those entities not directly operating in these countries, companies will need to consider cost increases due to supply chain disruption, increases to input pricing for commodities, as well as increases in interest rates in indirectly affected countries. So overall, there's a broad range of potential impacts. The situation in Ukraine is fluid and companies will need to continually monitor developments and their potential impacts on financial reporting. So, in terms of disclosures, a reminder that an entity is required to disclose judgments that management has made in the process of applying its accounting policies that have the most significant effect on the amounts recognized in the financial statements. Entities need to consider the magnitude of the impact caused to their businesses and adequately disclose the information about those assets and liabilities that are subject to significant estimation uncertainty. Entities should use sensitivity analysis for financial statement items that are impacted by volatility in commodity prices or currency fluctuations. As for interim reporting considerations, IS34 requires an entity to include an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period. Although not specifically required under IS34, updates to sensitivity analysis may be required if the range of reasonably possible changes in key assumptions has changed significantly since the end of the last annual reporting period. So, that was a pretty brief overview of the potential implications of the war in Ukraine, but we would like to refer you to our publication issued in March as a further resource. The publication provides a more detailed dive into each of the areas of potential implication mentioned on the previous slides.

Jeff Glassford: [00:09:00] Thanks for that, Jeff. I think that's a good summary, given most Canadian entities are probably indirectly impacted. I think the key here is disclosure. I think it's reassessing assumptions related to impairment, certainly. And if you have more direct impacts, this certainly could be a bigger, bigger deal. But the publication that Jeff has on the slide right now, I think it's a good one, reminds me of the COVID publications that we had issued at the beginning of COVID and certainly worth a read. So, with that, we'll carry on our agenda and start going into some of the IFRIC and other current IFRS items. And the first one is an IFRIC update. This is an agenda decision. So, maybe I'll just quickly remind everyone, an IFRIC agenda decision means the IFRIC has concluded on the matter and believes that IFRS provides enough detail to answer the question that was raised to them. A tentative agenda decision and I do believe we have a couple of those today, means that they have tentatively concluded but that's now open for comment, and they will rediscuss it at a future IFRIC meeting. So with that, Jeff, I think you're taking on the first one, which is demand deposits with restrictions on use.

Jeff Hodl: [00:10:35] Yeah. Thanks, Jeff. So, the IFRS Interpretations Committee received a request about whether an entity includes a demand deposit as a component of cash and cash equivalents in its statement of cash flows and financial position when the demand deposit is subject to contractual restrictions on use agreed with a separate third party. So, in the fact pattern described in the request, the entity holds a demand deposit whose terms and conditions do not prevent the entity from accessing the amounts held in it. That is where the entity to request any amount from the deposit, it would receive that amount on demand. And the entity has a contractual obligation with a separate third party to keep a specified amount of cash in that separate demand deposit and to use the cash only for specified purposes. If the entity were to use the amounts held in the demand deposit for purposes other than those agreed with the third party, the entity would be in breach of its contractual obligation. So, in this specific fact pattern submitted, the entity was to keep the cash held in the demand deposit for the purpose of indemnifying a third-party buyer of the business for potential future warranty claims. However, similar fact patterns can also exist. For example, a loan from one bank may require for covenant purposes maintaining minimum cash balances, and that cash may be held at a different bank. Therefore, the restrictions do not relate to the financial institution that sets the terms and conditions of the deposit itself. So, the committee concluded that restrictions on use of a demand deposit arising from a contract with a third party do not result in the deposit no longer being cash. Unless those restrictions change the nature of the deposit in a way that it would no longer meet the definition of cash in IAS 7 state cash flows. In the fact pattern described, the contractual restrictions on use of the amounts held in the demand deposit do not change the nature of the deposit itself since the entity can still access those amounts on demand. The committee therefore concluded that the entity should include the demand deposit as a component of cash and cash equivalents, both in its statement of cash flows and its statement of financial position. That being said, when relevant to an understanding of its financial position, the entity would disaggregate the cash and cash equivalents line item and present the demand deposit subject to contractual restrictions on use separately as an additional line item. So, applying the requirements of IAS 7, the entity would be required to disclose the demand deposit, subject to contractual restrictions on use as a component of cash and cash equivalents in the context of the disclosure requirements in IAS 7 and IFRS 7, the entity also considers whether to disclose additional information sufficient to enable users of financial statements to understand the impact of the restrictions on the entity's financial position, as well as on liquidity risk, financial instruments and how the entity manages that risk. And so this agenda decision was finalized, and the committee concluded that the principles and requirements in IFRS standards currently provide an adequate basis for the entity to account for this issue.

Jeff Glassford: [00:13:52] Thanks for that, Jeff. This is a pretty common item that I see, at least in Canadian reporting entities. I think it's quite common for entities to call cash that might be in a bank account but is restricted from using that cash as restricted cash and not including it in the cash flow statement. I think certainly entities will need to assess whether this agenda decision impacts those conclusions historically as if the cash is something that can be accessed, but it's just a separate contractual restriction, perhaps with other entities, with customers, etc. then maybe it could still be called and should be called restricted cash on the balance sheet. But we need to reassess whether that needs to now be included in the statement of cash flows. So, I do think it's a pretty common item for many Canadian entities. Maybe in the interest of time, we'll carry on and move to our first of our tentative agenda decisions. So again, this is just a tentative decision and this one relates to cash received via electronic transfer as settlement for a financial asset. That is a mouthful. Lara, maybe you can try and decipher what all of that means for us.

Lara lob: [00:15:21] Sure. Of course, Jeff. And good afternoon to everyone. Or perhaps good morning depending on where you're calling in from. So, as Jeff mentioned, this is a tentative agenda decision. It was released from its meeting last September. And if we go through, right now, the fact pattern that was presented, you essentially have an entity that has a trade receivable with a customer. And at the entities reporting date, which in this case, if we use an example of December 31st, the customer has initiated a cash transfer via a type of electronic automated transfer system to settle the trade receivable. And in this case, the electronic transfer system takes a couple of days to be able to settle the cash transfer. And so the entity receives the cash in its bank account roughly two days after its reporting date. So, therefore, let's say January 2nd. So, the question that was posed to the IFRIC is can the entity recognize the trade receivable and recognize the cash on the date that the transfer was initiated on December 31st rather than on the date that the cash transfer is settled on January 2nd. And so, moving to the next slide, if we look at the way the committee looked at this and the applicable guidance that they considered, you essentially have derecognition of a trade receivable and recognition of cash, both which are financial instruments that are in the scope of IFRS 9. And so, I'm looking at if we take first the derecognition of the trade receivable on the left-hand side of the slide, paragraph 3.2.3 of IFRS 9 states that an entity would derecognize a financial asset when and only when the contractual rights to the cash flows from the financial asset expire. And so, determining the date on which the entity's contractual right to those cash flows expire is really a matter of a legal nature. It's a legal matter. And therefore, facts and circumstances will need to be considered, perhaps laws and regulations in a jurisdiction or terms and conditions of your agreement with your with your customer, and just how the electronic transfer system that is being used works. And what are the terms with respect to that? And so, if when we consider this fact pattern that was described, if the entity's contractual right to receive cash flows expired at the point in time when the cash is received in the bank account, well, then at this point you will be recognizing on a settlement date, which is January 2nd and then, next if we look at the recognition of cash. So, let's see on the right-hand side of the screen right now, paragraph 3.1.1 of IFRS 9 requires an entity to recognize a financial asset when and only when the entity becomes party to the contractual provisions of the instrument. And so, therefore, this would be only when cash is deposited in its bank account that the entity will then have the right to actually obtain the cash from the bank. And so consequently, in this case, the entity will recognize cash as a financial asset on the transfer settlement date being January 2nd, and not before. So, if we look to the conclusions that were reached, the committee tentatively concluded in this case that when applying the paragraphs in IFRS 9, the entity would derecognize the trade receivable on the date in which its contractual rights to the cash flows expire. And we'll recognize cash on that same date. An observation that was made was considering if when you consider facts and circumstances if you were to consider that the contractual rights to the cash flows from the trade receivable would expire prior to the settlement date and prior to receiving cash, you would recognize the cash on the same date, which would be earlier. However, the opposite would not occur. So, you would not ever be recording cash prior to the derecognition of your trade receivable. So, what does that mean for financial reporting issuers? If we consider the fact that this is a tentative agenda decision, we should continue to monitor the developments relating to this TAD. We do expect potentially a final agenda decision to come out shortly. But in the meantime, entities should perhaps begin an assessment of potential impacts if you feel that you would be impacted by this and this would mean, considering the terms and conditions of any agreements with counterparties, applicable laws and regulations, and just the characteristics of any payment processing systems that are used. One other item that I would want to mention on this slide is really the fact that we do believe that the TAD may also be relevant to other scenarios potentially. Also, for example, the recognition of financial liabilities such as accounts payable. So, oftentimes check payments or even wire transfers are often deducted from cash and from your accounts payable when the check is issued or dispatched. And so, entities here may need to revisit this practice as well if the TAD gets finalized. This may mean also if there is changes in any accounting, there could be changes to your processes, your internal controls, etc. If you think about just your typical bank reconciliation process with respect to this may also be impacted. So, we should continue to monitor the developments of this. Jeff, I don't know if you had anything else to add here before I move on to the next topic.

Jeff Glassford: [00:21:27] Maybe just reiterate the last part of that, there's a lot of IFRS 9 references and such in your slides, but the last part certainly does seem like a change in practice for some entities. Maybe I'll take myself back to my school days and my earlier days at EY. I think standing checks was a pretty common reconciling item in a bank [INAUDIBLE]. And you know, I'm sure for some entities, this will be a change from what they're currently doing. And so, I would suggest that people continue to monitor that for sure.

Lara lob: [00:22:02] Yeah, that's correct, Jeff. And it could be a change. I think maybe the one additional factor that has been raised in discussions is I think here in Canada and probably North America in general, a lot of the transfers or wire transfers will take place within the same day or within 24 hours. So, maybe this lag of having a couple of days won't come into play, however, it can potentially more often from an international perspective. So, if you do have customers or any other processing systems that are being used on an international basis that may have a couple of days lag, this will impact you then in that case. And so, that's where entities may have to look to see whether this would impact them and what basis.

Jeff Glassford: [00:22:52] Yeah, that makes sense to me. Maybe we should carry on to the next section. And Lara, I know you're going to take us through the SPAC discussion from the IFRIC. Maybe for those listening, it's a pretty detailed fact pattern, it's a very long, tentative agenda decision, and Lara will do an amazing job of trying to summarize that, but it is technical. I would suggest you hang on, try to follow through, because the broader implications, which we'll get to near the end, will become pretty apparent from this tentative agenda decision. So with that, Lara, I'll let you take it away.

Lara lob: [00:23:29] Thanks, Jeff. And it is actually quite technical. So, the question that was posed, and this also again, it's a tentative agenda decision that came from a recent meeting in March before I get into this one, I'll probably highlight the fact that there were actually two submission papers that were given to the IFRIC and two tentative agenda decisions that were published from this meeting. And again, as a small reminder, they both dealt with SPACs, but a small reminder on what a SPAC is a special purpose acquisition company. It is a publicly listed shell company that doesn't really have operations, but its sole purpose is to identify a target, to acquire and to merge with. And so, the first paper, which we will not cover today, dealt with shares that were issued by a SPAC and the classification of those shares as either financial liabilities or as equity when looking at some very particular characteristics that they had. And for this one, the committee ultimately concluded that the issue was too narrow and that it should be considered in the context of the ISBs vice project. And therefore, we're not going to spend much time in deliberating on what the submission paper was. But the second one, which is what we have here and which I'll spend a few minutes on, is with regards to how an entity accounts for warrants on the acquisition of a SPAC. And so, if we go through the fact pattern and I think it's important to do so, just to set the stage and understanding for the rest of it, is we have a scenario that was given where an entity acquires a SPAC to obtain its cash, a lot of cash that it probably raised in its IPO and is really its only asset. And to also obtain the SPACs listing on a stock exchange and the SPAC obviously does not meet the definition of a business under IFRS 3. Before the acquisition, the SPAC had ordinary shares issued to shareholders and at the same time, it had also issued warrants. The entity acquires the SPAC by issuing new shares and new warrants to the SPACs shareholders in exchange for the SPACs shares and for the legal cancellation of the SPAC warrants. And the final point to note is that the fair value when looking at the fair value of the instruments that the entity issues to acquire the SPAC, it exceeds the fair value of the identifiable net assets that it's acquiring of the SPAC. And so, going on then the question that was posed, if I pause for a second, the question that was posed to the committee is how does an entity account for the warrants on acquisition of the SPAC? And I guess to keep in mind the importance of this question is depending on what standard is used or what standard is considered, you may end up having very different answers because if one were to consider that these warrants should be accounted for under IS 32, oftentimes the characteristics of the warrants would lead to liability accounting for them, whereas if you were to consider that they are issued with respect to an IFRS 2 transaction, a share-based payment transaction for the acquisition of a SPAC, you may very well end up with equity classification and that's the underlying importance of this question. So, as Jeff mentioned before, the tentative agenda decision is actually quite long and it discusses a variety of different accounting matters in analyzing this question. And some of them are summarized on this current slide. And so, some of the questions that you need to address prior to figuring out how to account for the warrants are things like, well, who is the acquirer? And in this fact pattern submitted, the entity was both the legal and the accounting acquirer. Therefore, we're not dealing with a reverse acquisition. We're not dealing with an RTO, which tends to be a pretty common scenario that we would usually look at, but this is a different structure. Another question that is posed is, well what accounting standard do I use to account for the SPAC acquisition? As mentioned, the SPAC doesn't constitute a business. Therefore IFRS 3 would not apply and therefore you would treat it as and follow guidance for an asset acquisition and you would look to identify and recognize individual assets and any liabilities assumed as part of this acquisition. So, then you would stop and consider, well, what are the identifiable assets acquired and liabilities assumed? One fairly easy answer to this is yes, the entity acquires cash, so that's one of your assets. But it will also have to consider whether it has assumed any liabilities. And so, are there any liabilities related to the SPAC warrants that I'm assuming, and we'll park that question for a moment. We'll get to that on the next slide. But prior to that, there's one other element that comes into play, which is essentially the exchange listing. So, does the entity also acquire a stock exchange listing? The answer to that is yes. And the committee also observed that a stock exchange listing does not meet the definition of an intangible asset, so therefore it may not technically be part of your assets acquired. However, when you apply IFRS 2 and the guidance that is in IFRS 2 for share-based payment, the entity does receive a service, which is a stock exchange listing for which it has issued equity instruments and exchange as part of a share-based payment transaction. And you're going to measure this as the difference between the fair value of the instruments that you've issued and the fair value of the identifiable [INAUDIBLE] assets acquired. So, in other words, the difference between the consideration you've given and the net assets that you're acquiring, you end up with a we'll call it a plug, and we don't like that word, but we end up with a debit that goes to your P&L as a charge for the service listing. So, now onwards to the main or the key question is, does the entity assume the SPAC warrants as part of the acquisition? And if I say it in other words, is, are we assuming the warrants as part of liabilities assumed as part of my net assets acquired, or are the warrants that I issued, are they really consideration for acquiring the SPAC and the warrants the SPAC warrants get cancelled, in this case, they did. And the fact pattern, and is it really part of the consideration I'm giving for the SPAC acquisition? And so, what the committee discussed and put into the attentive agenda decision is that the entity would consider specific facts and circumstances of the transaction. They, unfortunately, do not go into a lot of detail as to what this entails, which is one of the reasons why there's a lot of discussion still happening right now. But it does say that you should be considering the legal structure and you should be considering terms and conditions of the SPAC warrants versus the warrants that you have issued in replacement in the transaction. And if those facts and circumstances are such that you conclude that the entity assumes the SPAC warrants as part of the acquisition, so assumes that as a liability will in this case the entity only issued shares to acquire the SPAC. They did not issue the warrants to acquire the SPAC and you will treat these as part of your net assets acquired, which then brings you to using IS 32 as the accounting standard for the warrants and therefore you're going to apply IS 32 to determine whether the warrants are financial liabilities or equity instruments. However, if the facts and circumstances lead the entity to conclude that you did not assume the SPAC warrants, then in this case it means that the entity has issued both shares and warrants for the acquisition, and it's part of your consideration for the acquisition. Therefore, you do not assume them as part of your net assets acquired. And so, when we think about what that means and then what accounting standard do we use? The committee here tentatively concluded that when they considered the scoping guidance of IS 32 and IFRS 2, they've concluded that the entity would apply IFRS 2 for accounting for any instruments issued to acquire the Stock Exchange Listing Service and apply IS 32 in accounting for any instruments issued to acquire the cash and assume any liability. So, what this introduces is, in effect, an allocation approach or a splitting approach, if you will, if you want to describe it that way, where the entity has to determine which shares and which warrants that I issue for the stock exchange listing, under IFRS 2. And which shares and which warrants did I issue for the cash which would be under IS 32. And the TAD does go on to explain that there is currently no IFRS standard that would explain how to do this or tell us or provide guidance on how to do this and therefore the entity would need to use IS 8, in developing an accounting policy for this, an entity could allocate the shares and warrants on a relative fair value basis or can also use other allocation methods that would be considered acceptable as long as they meet the requirements of IS 8. And so, in this case, the committee ended up tentatively concluding that the principles currently in IFRS provide an adequate basis for the entity to determine how to account for these warrants on acquiring a SPAC. Again, in the specific fact pattern that was provided and therefore they did not add any standard setting projects to the workplan. So, what does this mean for reporting issuers in Canada? As a reminder, again, it is a sensitive agenda decision and one that has sparked quite a bit of discussion. It was discussed at the IFRS discussion group or the IVG meeting that took place last week. There were also comment letters that have now been received. They were due just a few days ago on Monday. And so, the committee will need to consider all the comment letters received. In a Canadian capital markets perspective, SPACS are perhaps a little less common than in other markets, such as the US, however, there are questions being raised from this tentative decision on potential implications for other structures, such as reverse takeover transactions. Those are a lot more common in Canada, especially with CPCs. Capital pool companies that are in existence. We also envision that there could be different challenges that will come to play with the fact of having to split the consideration. As I was mentioning before, having some warrants that are going to be accounted for under IFRS 2 and some under IS 32. And so, things like splitting transaction costs appropriately will need to be considered and also subsequent accounting. So, for example, I think an entity may be very challenged on trying to determine, as these warrants get exercised over time, well, which warrants that are being exercised, which ones are they? Are they the ones that are liability accounted for or are they the ones that are equity accounted for? And so there might be some challenges there just in terms of coming up with a policy for that or even keeping track of them. And lastly, I would say that there's also potential implications in other scenarios, not SPAC related, but other scenarios or transactions which involves the issuance of shares or warrants. For example, if you think about other asset acquisitions where financial assets or liabilities are acquired through the issuances of equity or warrants, they may be impacted as well. I don't believe that in the past we would have split those into different standards and entities may have used judgment and accounted for the whole transaction as being under IFRS 2 in the past. And so it does raise questions on how to account for those as well. So, with that, I think I will pass it back to you, Jeff. I don't think I will say any more on this topic, but other than to say stay tuned and we will see once the IFRIC has had a chance to review all the comment letters.

Jeff Glassford: [00:36:49] Thanks for that. That was a very difficult topic to get through, very technical, as you suggested. But I'll just reiterate, I do think this has broader implications. The asset acquisitions where shares are issued to acquire assets is very common. And certainly the transactions I've largely seen, IFRS 2 or share-based payments has been the standard applied rather than a potential splitting approach as suggested by this tentative agenda decision. So for sure, stay tuned. One quick question that has come in on the previous tentative agenda decision on a cash received. The electronic transfer is when will that be finalized? I'm not aware that's currently been published, when that will be finalized or if it will be finalized. But given it was a September topic, I would expect in the very near term we should be hearing more about whether that tentative agenda decision will be finalized or other standard setting will be undertaken. With that, we will carry on. And I will turn it on to Julianna to take us through a very exciting topic of our IFRS 17 and insurance contracts. This, again, is not going to be a technical IFRS 17 discussion but focused on corporate entities and whether they might have insurance contracts in scope. And maybe I won't steal too much of Juliana's thunder, but I would suggest this is a bit of a sleeper issue. And certainly, you should try and follow along here.

Juliana Mok: [00:38:33] Great. Thanks, Jeff. So, yes, we did want to spend a couple of minutes just touching on IFRS 17. The new standard is effective Jan, 1 2023. And you might be thinking my company isn't and isn't an insurance company. This isn't relevant to me. But the reason why we want to touch on it today is because while IFRS 17 is of course going to be primarily relevant for actual insurance companies, there are certain instances where corporate companies could be impacted too, based on how the scoping of IFRS 17 works, and that scoping is not based on what the company itself does, it's based on individual contracts and whether a contract has significant insurance risk, where the entity is accepting that risk by promising to compensate the other party if an uncertain event occurs. So, we've got a couple of different examples on the slide here of arrangements that we wouldn't normally think of as insurance but might get scoped into IFRS 17. In the interest of time, the one I'll focus on is the one that we think might be a bit of a sleeper issue, as Jeff mentioned, and that is fixed fee service contracts. So, to try to illustrate that with an example, take a manufacturing company that sells a customer a piece of customized equipment, and they separately enter into a contract with the customer to provide maintenance services for a fixed fee, say for three years it's fixed fee each year. And the company prices that contract with an understanding of how the customer plans on using that machinery and how that specific usage might impact wear and tear and therefore the repairs that will be needed. It's possible, however, despite thinking about all of that, that the cost to actually maintain or repair the machine might exceed the fixed versus fixed service fee. And so this could create significant insurance risk and meet the definition of an insurance contract. Now. IFRS 17 does have an exemption, which would allow entities to choose to apply IFRS 15 revenue recognition versus IFRS 17 for certain fixed fee service contracts. But there are three specific criteria that have to be met in order to use that exemption. And in this simple example that I've described because the contract was priced with the customer's specific risks in mind, the first criterion for that exception wouldn't be met. And so, we think that this type of contract would be need to be accounted for under IFRS 17. And this could be a big deal for companies providing maintenance services on a fixed fee that historically would have always thought of these as revenue contracts. And we understand that from recent discussions in the IBG, the discussion groups meeting last week, there are also other concerns about the other criterion in the fixed fee service contract that again might mean that more scoped into IFRS 17 that we expected. So really, you know, this might not be an area that corporates are really currently thinking about, but hopefully, this example goes to show that the standard could have significant impacts on certain corporate entities.  Notwithstanding that there might be some arrangements that do get pulled into IFRS 17 that you might not have thought of as insurance contracts. There are several other scope outs to the standard. I'm not going to speak to those examples, really. We have them on the slide, but what we really want to get across is that it's key to understand the definition of insurance risk and the scoping guidance of IFRS 17 so that you at least know what you are potentially looking for and you aren't caught unawares when the new standard comes into play next year.

Jeff Glassford: [00:41:58] Thanks for that brief summary Juliana, I think it highlights that I think many people could be scoped into this and certainly need to start looking at their contracts and doing an analysis. Carrying on from IFRS 17, we're going to jump to another topic that people love to hear about, it's income taxes and income tax accounting. This won't be a highly technical discussion, but this is a very broad topic, globally. And I think Juliana will take us through this. There are no current clear answers from an accounting perspective, but we thought we'd raise the issues and we will continue to keep you informed as things evolve. Juliana?

Juliana Mok: [00:42:45] All right. So again, it's going to be high level. Over the past couple of years, the Organization for Economic Co-operation and Development or the OECD has been working on various projects to address taxation and globalization under two main pillars. And late last year they did release the Global Anti-Based Erosion or GloBE model rules, which fall under their pillar Two addressing concerns about tax rate competition and profit shifting between countries. And so, at a very high level, the GloBE rules are aiming to introduce a minimum global tax rate for multinational entities that hit a revenue threshold of €750 million or about a billion Canadian. So, at a consolidated level, these multinationals are required to pay a minimum effective tax rate of at least 15%. So, really what they're trying to get at here is to do away with organizational structures that shift taxable income to low tax rate countries. In terms of what this means for Canadian entities, the impact of these GloBE rules will definitely hit multinationals headquartered in Canada, which exceed that revenue threshold. But it could also have impacts for Canadian domiciled subsidiaries of multinationals headquartered elsewhere. And now, in terms of how this is going to work, in terms of timing and actually how it comes into play, the GloBE rules do still need to be incorporated by each member country through domestic legislation. The OECD pronouncements themselves have no enforceability, but the Canadian Department of Finance did announce their commitment to implement the GloBE rules during the federal budget announcement earlier this year, and they are planning on following the proposed timelines. So, we are expecting to see draft legislation made available sometime this year, perhaps late this year and coming into effect sometime in 2023, although again, there's no date set yet. So, how does GloBE rules work? In short, for multinational and the ultimate parent company is going to be the one charged with paying a top-up cash tax for any subsidiaries operating and paying taxes in a country that has an effective tax rate below 15%. And we'll use a very simple example in the slide here. We have a multinational with subsidiaries that operate in different countries, countries A, B and C. So, in this example, we assume the ultimate parent and all of the subsidiaries that operate in country, A, have an effective tax rate over 15%. So far, so good. But under the global rules, we do need to figure out the effective tax rate in country B, and in country C. And we do that by calculating what we'll call the GloBE income and the covered taxes for each of the subsidiaries in, let's say, country C, country B. Now, the rules explain in detail how we do that calculation. But what I really want to highlight here is that for each subsidiary, they need to calculate their GloBE income following their parents accounting framework, which likely would be IFRS or maybe US GAAP. And this is the case, even if the legal subsidiary hasn't and has never prepared their own statutory financial statements under IFRS or US GAAP. But that's the way the calculation works. And once we figure out the effective tax rate for the subsidiaries in that country, country B, in this example, that calculation comes out to a 10% effective tax rate. That's less than 15%. That means that a top-up tax is necessary and specifically a 5% top-up tax on all of the income being earned by the subsidiaries in Country B, and that is a cash tax payment by the ultimate parent. So, that's in very broad strokes how things work from a cash tax perspective. There are lots of detailed rules, the releases, pages and pages long. But what about financial reporting? There are lots of questions coming up surrounding the GloBE rules. And those questions are not just limited to the tax side of things. There's been lots of questions being raised globally by the large accounting firms on financial reporting as well. And as Jeff said, we don't have all the answers to the questions coming up, to be honest. And we probably don't even know if we have all the right questions to ask. But we did want to highlight a couple of thoughts that have been percolating, to begin with, from a scoping perspective, it's not 100% clear whether all of the components of the global minimum tax are even in the scope of IAS 12. Certainly, the proposed rules will have an impact on how we look at separate versus consolidated financial statements, because, as I said, under the GloBE rules, each legal entity subsidiary needs to calculate their separate income using the ultimate parents GAAP. That's something they may never have had to do before if they didn't have reporting requirements. And there may have been things that companies might have ignored, like measurement of intercompany transactions because they got all got eliminated in the consolidated level. We can't ignore that anymore because now we have to build IFRS-compliant statements at every legal entity level. Deferred taxes can also become quite complex under the global rules. Thinking about what the effective tax rate is going to be for temporary differences as they reverse might be more challenging now that we have to layer on top this top up tax. So, in short, again, this is awareness raising. And these proposed rules are very complex. And our EY tax specialists and our accounting technical experts are still working through all the considerations. But it will really be important for financial reporting and tax planning teams to keep an eye out on future developments, including what's going to ultimately come into legislation in Canada.

Jeff Glassford: [00:48:18] Thanks for that, Julianne. And we'll jump right into your final practice issue on principal versus agent. I'll just highlight quickly if the OECD GloBE rules do impact tax accounting, do impact deferred tax accounting, and that could be a 2022 issue if those come into law in 2022. And so, I think everybody is moving quickly globally to try and come to answers. And as stated, we'll try to keep you informed. Juliana, go ahead.

Juliana Mok: [00:48:49] Perfect. So, this last section is, again, a quick session on recent challenges we've seen working with our clients on principal versus agent considerations under IFRS 15. So, we'll start off with a quick reminder of the technical guidance and then cover some examples. Under IFRS 15, whenever more than one party is involved in providing goods or services to a customer, it raises the question about whether the entity, the reporting entity, is a principal or an agent. And that evaluation is premised on control. An entity is a principal if it controls the promised goods or services before those goods services are transferred to the customer. On the other hand, an agent and an entity is an agent if it is only arranging for those goods and services to be provided to the customer by another party. But it itself never controls those goods or services. Consistent with the broader iPhone 15 model. It's critical to figure out what goods and services we're performing our analysis on. Otherwise, it's possible we'll get that wrong. It's really a [INAUDIBLE] question. And that question can be sometimes difficult to evaluate when a party is involved in service arrangements. It can be difficult to identify what that specified promise is because it could be a right to a service, which isn't always an intuitive way of thinking of things. An example of this might be a ticket to a flight that you get through a travel agent or a ticket reseller. When we're doing the principal versus agent analysis for the reseller, obviously the ticket reseller doesn't have control over actually flying the plane, but that's not the service we're evaluating. Instead, we need to think about the right to a flight. And does the reseller have control of the rights to a flight? The physical versus agent analysis can be quite difficult when it comes to intangible goods or virtual platforms are involved, and we'll go through a couple of examples of those in the next slides. But ultimately, whether a principle, whether a promise is a good or right to a service, what really drives the principle versus analysis is control. When we think about control, we go back to the IFRS 15 definition, which is the ability to direct the use of and obtain substantially all the remaining benefits from that asset. That being said, it can be difficult sometimes just looking at the definition of control to conclude whether an entity is a principal or an agent. And so, the standard does have additional indicators to help support that analysis. And those indicators are listed on the slide. Does the entity have primary responsibility for fulfilling the promise? Do they have inventory risk and do they have discretion in pricing? Now, the standard is clear that these indicators are supposed to support the overall control assessment and should not override that assessment, and that an indicator may be more or less relevant depending on the nature of the goods or services and the contract. So, that's a very quick overview on the technical guidance. And I want to get into a couple of examples. And the one that we'll spend a little bit of time on today is a fact pattern that deals with an intangible good. And this was in fact, submitted to the IFRIC last November. And the fact that it is dealing with whether a software licensed reseller is a principal or an agent. Now, while the details of the [INAUDIBLE] are pretty fact-specific, the agenda decision is nonetheless quite helpful in demonstrating how one would walk through the principal versus agent analysis. And so, that's why we wanted to talk about it today and I will highlight this [INAUDIBLE] decision was finalized by the IFRIC last month and we're just waiting for it to be ratified by the ISB in their May meeting this week. So, in this fact pattern, we have a software reseller. They have a distribution agreement with a global software manufacturer, I think a Microsoft or an Adobe. That distribution agreement provides the reseller with the right to sell standard software licenses to end customers, and they do have discretion on pricing. As part of the distribution agreement, the reseller is required to provide certain pre-sales advice to the customer and that advice is really meant to help the customer determine what their software needs are to decide what type and quantity of software would best meet those needs. Now the in the submission, the reseller does not buy the licenses from manufacturer in advance. Instead, once the customer decides that they want to buy the software, the software is made available directly by the manufacturer via a software portal and an activation key. If the reseller incorrectly advised the customer, however, if they told them to get the wrong software or to get too many licenses, then the customer might reject the licenses and the reseller is on the hook and they can't return the licenses or sell them to another customer. They just have to pay for them. So, those are the critical facts. Let's go through now how the IFRIC performed the analysis. As I previously mentioned, getting the unit of account [INAUDIBLE] and maybe all I'll speak to here is the fact that there was some questions on what the promises were. The committee in their decision decided, concluded that in the contract that was an explicit promise to provide the customer with software licenses. And they also concluded that the pre-sales advice that the reseller was required to provide to the customer was not an implicit promise in the contract, because by the time the contract is struck that pre-sales advice has already been provided. So, in the context of IFRS 15, the only promise that we need to evaluate for principal versus agent is the software licenses. So, then the next step is to work through does the reseller control those licenses before they're transferred to the customer? And in this case, the agenda decision highlights that we should look to the principle of control, but that can be challenging, and so they further looked at the three indicators for control, and that analysis is summarized on the table in the slide. We're not going to go through that in detail, but you can see that there were some facts that were supportive of a principal conclusion and others that were supportive of an agent conclusion. And that committee did highlight that, depending on the fact pattern, some indicators may be more or less relevant. So, for example, price discretion might exist, might have existed in theory, but it might not practically be as compelling for supporting a principal versus agent conclusion if the market itself wouldn't actually provide the reseller with much flexibility. If you think about it, would you pay more for a copy of Windows from one reseller versus another? The agenda decision ultimately did not come to a conclusion on whether in this particular fact pattern that we sell, it was a principal or an agent. The committee indicated that the reseller, they have to apply judgment in making that assessment. They need to consider the facts and circumstances and the contract-specific terms and conditions. Overall, while this was very specific fact pattern, it certainly does illustrate that it can be challenging to work through principal versus agent scenarios and that oftentimes we do end up having to look to the indicators. And judgment, sometimes significant judgment needs to be applied in determining how to weigh those different indicators and the features of the arrangement. So, maybe just two other quick examples we want to get through before the end of this session. Another example where it can be difficult to determine if an entity is a principal or agent is where the entity never has physical possession. And that might happen with Drop shipment arrangements, where goods are shipped directly from the vendor to the end customer. Now, I think everyone's familiar with Amazon's business model. They've got a couple of different revenue streams. In some cases, when you buy a product on Amazon, it's marked as sold and fulfilled directly by Amazon. The stock comes from that warehouse. Amazon controls that inventory before it's purchased by the customer. However, there are other products sold by Amazon that are clearly marked as from other third-party vendors. And in those cases, Amazon is providing an online marketplace and facilitating delivery, but the inventory sits with the vendor and is shipped directly to the customer. And in these drop shipment arrangements, Amazon has concluded in their financial statements that they are only acting as an agent. There does seem to be an increase in these types of sales on other traditional retailers’ websites and Best Buy does it, Hudson's Bay does it, Bed Bath and Beyond does it. And it's not always clear to the customer looking at the website who really is the seller. And that sort of view of the customer who the customer thinks is being primarily responsible for selling the product can really impact the analysis of whether an entity is a principal. An example of this is during an AICPA conference, sec staff commented on a fact pattern where they did not object to a principal conclusion when products were directly shipped to the end customer. And that conclusion was based on the entity's analysis, really focusing on the indicators of the fact that the entity had primary responsibility. They were the primary point of contact for the customer. They had contractual responsibilities for addressing issues related to acceptance, delivery and product spoilage. And the industry also had discretion in pricing. So, even though they didn't really have inventory risk, this fact pattern helped illustrate that the indicators do need to be weighed and physical possession doesn't always necessarily coincide with control. The last maybe brief principle versus agent concept that we want to touch on is just a reminder about sales tax and other amounts collected on behalf of other parties. If an entity is collecting amounts only on behalf of other parties and that agency is acting as an agent, obviously, but to determine whether a tax is being collected on behalf of a third party, the entity really need to think about who the tax is being levied on. Is it the entity or is it the customer? For us retail consumers, it's easy to think about sales tax. That is a tax that we know is being levied on consumers and entities are just collecting that and remitting that directly to the government. It's a flow-through. And so that tax sales tax portion of the price should be excluded from top line revenue. There might be scenarios, however, where an entity is charged tax on its production and that they choose to push that down to the customer. And even though they're recovering that cost through the price, the end consumer, it might show up on your invoice. The tax itself is being levied on the entity and so that total cash price to the customer should be recorded as revenue, with the production tax being accounted for as cost of sales. So overall, we talked about a couple of examples. Principal versus agent is definitely a challenging area under IFRS 15, especially as business models continue to evolve. We see lots of comment letter questions about this. We worked with lots of our clients to try to understand and test the robust robustness of their analysis. But if this is an area where you have questions or if your business model is shifting in a way that brings other parties into the mix, do reach out to your EY representatives and they can definitely help.

Jeff Glassford: [00:59:25] Thanks for that. Juliana It was a good summary, and it is certainly a complicated issue and one we deal with quite regularly. I think we're coming up on the hour mark. And so maybe we'll end it here. There should be a survey that pops up. Please do fill it out. We are open to any suggestions. You can reach out to any of us directly as well if you'd like. And if you have any questions, please feel free to reach out. With that said, I'll look forward to chatting again next time. Thanks, everyone.