Navigating annual reporting 2017 review guide

Transcription

1 Navigating annual reporting 2017 review guide

2 Navigating annual reporting The most effective boards create value by asking the right questions. 2

3 Navigating annual reporting An organization s financial story is told when management puts in place the controls and systems to tell that story, the auditor assesses whether the story s told in accordance with Generally Accepted Accounting Principles (GAAP), and the board of directors generally through the audit committee approves it. The board s primary responsibility is to oversee the financial reporting process, including compliance with laws and regulations. However, in today s ever-changing business environment, demands on boards are expanding. Boards must also stay abreast of emerging issues such as cybersecurity, proposed regulatory changes, and risk management. Effective boards ask the right questions to identify the organization s strengths and challenges, and to prepare the organization for the future. This Annual Review Guide is provided to help boards of public companies ask effective questions in their oversight role. Directors of other organizations may also find this guide to be helpful in their oversight roles. We welcome any comments or suggestions you have regarding the content in this guide and we look forward to the opportunity to assist you in executing your critical financial reporting oversight role. Richard Olfert Managing Partner, Regulatory, Quality and Risk Note: References to the board or directors could equally be a reference to the audit committee and its members, where the responsibility for oversight of the financial reporting process is delegated. 3

4 Brochure / report title goes here Year-end checklist Key issues in the spotlight 6 Year-end planning considerations 8 New and revised auditor reporting standards 12 Women on boards and in executive officer positions 16 Cyber security risks and incidents 18 Non-GAAP financial measures 20 Transparency 22 Significant accounting policies 24 Management s significant judgments and estimate uncertainty 30 Significant or unusual transactions 34 Challenges arising from volatile economic conditions 36 Clarity and completeness of disclosures in financial statements 40 The board s due diligence 42 Related information in addition to the financial statements 44 Management Discussion and Analysis (MD&A) 46 Annual Information Form (AIF) 50 Next steps 56 4

5 Navigating annual reporting To be successful in meeting your financial reporting oversight obligations, you need to ask the right questions. At Deloitte, we are not only committed to fulfilling our role to deliver audits grounded in quality and innovation, but also to offer support and advice to both management and directors as you fulfill your responsibilities and tell your financial story. 5

6 Navigating annual reporting Key issues in the spotlight Key issues in the spotlight As boards navigate the challenges and opportunities this year, there are some key issues they need to watch closely. Significant accounting policies The adoption of the new accounting standards continues to be a top priority for preparers, auditors, and regulators. This year, recently issued IFRS standards that will be the focus of much attention include IFRS 9, Financial Instruments; IFRS 15, Revenue from Contracts with Customers; and IFRS 16, Leases. 6

7 Navigating annual reporting Key issues in the spotlight Women on boards and in executive officer positions from diversity to inclusion While the world has become highly diverse, many companies have not, especially when it comes to combining diversity with an inclusive culture to drive value. Canadian securities regulators have made the representation of women on boards and in leadership roles a priority. They are closely monitoring the progress and the disclosure requirements they implemented to increase transparency for investors. Cyber security risks and incidents Cyber security threats and attacks are becoming more prevalent, putting all companies at risk. The Canadian Securities Administrators have issued Staff Notice , Disclosure of cyber security risks and incidents to help ensure that investors are provided with information on the potential impact of a cyber attack. Non-GAAP financial measures As more and more companies include non-gaap financial measures in their annual reporting, many stakeholders and regulators are concerned that these measures may be confusing or misleading. The CSA has issued disclosure expectations and guidance on when such measures can be used and how they should be disclosed. New and Revised Auditor Reporting Standards The new and revised auditor reporting standards will result in major changes, the most significant of which relate to revised CAS 700, Forming an Opinion and Reporting on Financial Statements, new CAS 701, Communicating Key Audit Matters in the Independent Auditor s Report, revised CAS 720, The Auditor s Responsibilities Relating to Other Information and revised CAS 570, Going Concern. New issues will undoubtedly arise during the year that will also require the board s careful attention. To keep apprised of these developments, together with updates on the above issues, visit Canada s Centre for Financial Reporting. 7

8 Navigating annual reporting Year-end planning considerations Year-end planning considerations All organizations should have a rigorous process for assuring their directors of the quality and integrity of the organization s financial reports including their relevance, reliability, comparability, and timeliness. 8

9 Navigating annual reporting Year-end planning considerations In addition, organizations need to appoint skilled staff, implement appropriate processes and controls, and undertake careful planning to achieve high quality financial reporting. Here are some questions for directors to consider as they prepare for the year-end reporting process: Has the board received a timetable for the completion of the yearend reporting? Does the timetable provide adequate time for the board and management to properly review and address issues that might arise? Has adequate time been provided for the board and the independent auditor to review the financial information, including any press releases? Have the accounting policies been reviewed and updated, as required, where there have been changes to the accounting standards or when new accounting policies have been adopted during the period? Have the management s estimates and judgments been adjusted for changes arising from current economic conditions and events? Should pro-forma financial statements be drafted so new disclosures can be vetted before the year-end? Does the finance or accounting function need additional specialized skills, experience, or resources to prepare the annual report and supporting information for the board? If additional resources are required, has a plan to develop those resources been implemented? Should the board engage specialist advisers to help it meet its responsibilities? If so, have specialists been engaged? Has the board reviewed the business risks identified by management? Are the risks consistent with those in the audit plan that was presented by the independent auditor? Have any new risks arisen as a result of transactions or events occurred during the year? Are there plans in place to make a sound assessment about the appropriateness of the going concern assumption to prepare the financial statements? Where material uncertainties exist, do the disclosures included in the financial statements and in the MD&A provide sufficient information about the uncertainties relating to operations, funding, cash flows, and how these uncertainties are mitigated? Where there are strong indicators of financial difficulty, do the disclosures include significant judgments made in concluding that there were no material uncertainties? 9

10 Navigating annual reporting Year-end planning considerations Has the board considered whether the internal audit function should undertake any additional work in anticipation of the yearend? If so, is this work scheduled to be completed in time for the board to consider the outputs prior to approving the year-end financial statements? Has a recent review been performed of the disclosure controls and procedures and internal control over financial reporting to ensure that high quality and timely data is available? Did that review conclude that additional resources, controls or procedures were necessary and, if so, have these been provided or implemented? Has the board defined materiality for financial information disclosures in the context of the users of the continuous disclosure documents and has that definition been communicated to management to assist in determining the financial statement presentation and disclosure? Does management have a plan in place to address any findings raised by the securities commissions? Has management reviewed the releases from the relevant securities commissions to identify areas of focus? Has management reviewed the relevant aspects of the organization s continuous disclosure documents to ensure that these areas of focus have been addressed appropriately? 10

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12 Navigating annual reporting New and revised auditor reporting standards New and revised auditor reporting standards After much deliberation, the Canadian Auditing and Assurance Standards Board (AASB) issued new and revised auditor reporting standards effective for the audits of financial statements for periods ending on or after December 15,

13 Navigating annual reporting New and revised auditor reporting standards The most significant changes relate to the following four standards: Revised CAS 700, Forming an Opinion and Reporting on Financial Statements New CAS 701, Communicating Key Audit Matters in the Independent Auditor s Report Revised CAS 720, The Auditor s Responsibilities Relating to Other Information Revised CAS 570, Going Concern These CASs are based on the International Standards of Auditing (ISAs) with two significant differences: 1. The AASB deferred the application of the new and revised auditor reporting standards by two years to December 15, The AASB amended the scope of reporting Key Audit Matters (KAM). In Canada, they only need to be communicated in the auditor s report when required by law or regulation or if the auditor decides to do so. Some questions boards may wish to ask: Will the auditors provide a mockup of the new auditor s report under the new standards? How does the auditor determine the KAMs under CAS 701? What matters could potentially be KAMs? How do the auditor s statements regarding KAMs compare to management s disclosures regarding the same matters? Do the disclosures include all information relevant to users? How will management and the audit committee engage with the auditor as KAMs are identified and the auditor s description of the KAMs are developed and finalized? How will the timing of auditor communications with management and the audit committee accommodate the discussion of KAMs? Are there common topics raised as KAMs for similar entities in the organization s industry and how do they compare to KAMs reported in other countries reporting under the ISAs? 13

14 Navigating annual reporting New and revised auditor reporting standards Are there any significant matters that the organization has not publicly disclosed? If so, how will the auditor deal with them? How do the new going concern disclosures impact management s financial reporting role and the audit committee s oversight role? Has the board considered what would constitute other information? When will the other information be available to the auditor? Is the other information consistent with the financial statements? Auditors of public companies listed on the TSX will be required to report significant new information in audit reports, likely as of December Read this article for an update on the new information auditors will need to include in audit reports. Darrell Jensen, AASB Chair, talks about key audit matters, next steps, and what Canadian stakeholders had to say. Also, keep up to date with the latest developents on the new auditor s report, visit Canada s Centre for Financial Reporting. Looking for more guidance? Julie Corden National Assurance Services Leader jcorden@deloitte.ca

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16 Navigating annual reporting Women on boards and in executive officer positions Women on boards and in executive officer positions Since December 31, 2014, non-venture issuers have been required to disclose information about the number of women serving on their boards and in executive officer positions, and also disclose information about their organizations policies around women in these roles. Regulators have also conducted annual surveys of these disclosures to measure progress. Some questions that boards may wish to ask: What is the number and percentage of women serving on the board of directors? If there are no women serving on the board, why is that? 16

17 Navigating annual reporting Women on boards and in executive officer positions What is the number and percentage of women serving in executive officer positions? If there are no women in executive officer positions, why is that? Does the organization have a written policy relating to the identification and nomination of women directors? If it does not have such a written policy, what are the reasons for not having one? Has the organization set targets for the number and/or percentage of women on the board and in executive officer positions? If there are no targets for the number and/or percentage of women on the board and/or in executive officer positions, why not? What consideration is given to the representation of women candidates when identifying and selecting directors to serve on the board and/or for executive officer positions? If the representation of women candidates when identifying and selecting directors and/or executive officers is not a consideration, why not? Does the board have limits on directors terms? Are there other mechanisms in place for board renewal? Has the board and management reviewed the regulator s surveys of the disclosures organizations have made about the representation of women in director or executive officer positions? How does the organization compare to those findings? How does it compare to other organizations in its industry? What feedback has the organization and/or board received from stakeholders regarding the representation of women on the board and in executive officer positions? Inclusion is a critical element in organizations business strategies. To learn more about inclusion and the requirements around them, visit Canada s Centre for Financial Reporting. Looking for more guidance? Jacqueline Bukaluk Smith Partner, Strategic and Regulatory Risk jbukaluk@deloitte.ca

18 Navigating annual reporting Cyber security risks and incidents Cyber security risks and incidents Cyber security is a priority for Canadian securities regulators, who have examined the disclosure provided by larger issuers with respect to cyber security risk and cyber attacks. In Staff Notice , Disclosure of cyber security risks and incidents, regulators stated that their review of risk factor disclosure had focused on whether organizations had disclosed potential impacts of a cyber attack on the issuer s business, what kind of material information could be exposed as a result, and who was responsible for the issuer s cyber security strategy. Some questions that boards may wish to ask: How secure is the organization s information technology systems? What is the organization doing to protect them from a cyber attack? 18

19 Navigating annual reporting Cyber security risks and incidents Is there any aspect of the organization s operations (e.g., its industry sector, ownership of specific assets, nature of its operations, etc.) that make it particularly vulnerable to a cyber attack? Is the organization associated with any third parties that might expose it to cyber risks? If so, what are those risks? What steps has the organization taken to mitigate those risks? What controls has the organization put in place to protect it from a cyber attack? Are there protocols to limit unauthorized access to sensitive data? Has the organization put in place a disaster recovery plan? Do the organization s insurance policies provide protection against a cyber security attack? If so, to what extent would that insurance cover the damages caused by a cyber attack? What information has the organization disclosed about its vulnerability to cyber attack and its mitigation plans? Do the disclosures focus on information that is material and specific to the organization? Are the disclosures presented in plain language that avoids the use of boilerplate? Has the organization ever been a target of a cyber attack? How serious was that attack? Did any attack individually or in aggregate have a material impact? What information was disclosed about material attacks in accordance with securities legislation? While not compromising the organization s future cyber security, was that disclosure as detailed and specific as possible? Did the disclosure discuss the expected impact and costs of the incident? When the organization has assessed the materiality of cyber incidents, does it consider its impact on the organization s operations and reputation, customers, employees, investors and other stakeholders? Does your organization have a proper communication plan in place if a cyber incident was to hit it? For insights into cyber risk and steps organizations can take to protect themselves, visit Canada s Centre for Financial Reporting. Looking for more guidance? Nick Galletto Global & Canada Cyber Risk Services Leader ngalletto@deloitte.ca

20 Navigating annual reporting Non-GAAP financial measures Non-GAAP financial measures The widespread use of non-gaap financial measures has led to increased scrutiny because stakeholders (including business commentators) and regulators have concerns that these measures may be confusing or misleading. The CSA has issued disclosure expectations and guidance on when such measures can be used and how they should be disclosed (See Staff Notice , Non-GAAP Financial Measures (Revised)). The board should carefully consider the reasons for using non-gaap financial measures and ensure that appropriate disclosures are made to ensure that the users of the organization s corporate reporting are not misled. Some questions that boards may wish to ask: Where a non-gaap financial measure has been used, does it correspond to the way management actively measures performance and is it clear which measure is being talked about and why? Have management and the board undertaken a review of all non-gaap measures being used to ensure they are not prominent and, therefore, do not create confusion and/or obscure material information? What non-gaap measures do competitors use? Are the adjustments consistent with other industry players? If not, why? Are measures consistent with industry norms or measures defined by industry organizations? 20

21 Navigating annual reporting Non-GAAP financial measures Is a non-gaap measure used to determine executive remuneration measures? Are the adjustments made from GAAP profit to underlying profit as defined by the compensation plan(s) appropriate? Has the CSA s guidance on disclosure for non-gaap measures been applied for all such measures, including those in press releases, the MD&A, prospectus filings, websites, and marketing materials: What is the purpose of reporting the selected non-gaap measure and has this purpose been sufficiently explained (e.g., how do management and investors use the measure)? Does the disclosure explicitly state that since non-gaap measures do not have a standardized definition under GAAP, they may differ from similar measures presented by other issuers? For each non-gaap measure, is there a reconciliation to the most directly comparable GAAP measure? Is the approach to reporting adjustments transparent and comparable between reporting periods? Are GAAP measures disclosed equally or more prominently than non-gaap measures? Are non-gaap measures labelled as such the first time they appear? Since non-gaap financial measures often show how the board and management view the business, these measures should be consistent with the profit measure used in the segment note in the financial statements (which is based on internal reporting). Are they consistent? Does your organization use non-gaap measures in its corporate reporting? If so, to help ensure it meets regulators expectations, review the resources at Canada s Centre for Financial Reporting. Looking for more guidance? Deanne Kennedy Partner, National Securities Services deakennedy@deloitte.ca

22 Navigating annual reporting Transparency Transparency The purpose of an organization s financial reports is to help users understand the financial position and performance of the business. Using standardized boiler plate wording should be avoided; instead, narratives should be specific and relevant to the organization. Since financial reporting is a dynamic process, the need for particular disclosures can change. It is imperative that issuers keep up to date with financial reporting standard developments and ensure their business activities are disclosed in a coherent and transparent manner. 22

23 Navigating annual reporting Transparency Some questions that boards may wish to ask: Is the information presented in the financial reporting and continuous disclosure documents consistent with the board s knowledge of the organization and its overall performance for the year? Based on the board s knowledge, are risk disclosures and segment reporting consistent with internal reporting? Have boilerplate disclosures been removed and are the disclosures tailored to discuss the organization s circumstances? Do the disclosures truly tell the organization s story? Are the financial statements logically structured and easy to navigate? Are critical note disclosures, including accounting policies, prioritized? Have all of the disclosure requirements contained in the relevant GAAP and securities regulations been considered? For a review of best practices and insights from several business leaders into how they transformed the way their organizations tell their stories to their stakeholders, visit our corporate reporting series. Looking for more guidance? Richard Olfert Managing Partner, Regulatory, Quality and Risk rolfert@deloitte.ca

24 Navigating annual reporting Significant accounting policies Significant accounting policies The board should consider whether the accounting policies adopted by the organization are in accordance with International Financial Reporting Standards (IFRS) or another appropriate framework. The board should also consider whether the accounting policies that have been adopted are appropriate, given the specific facts and circumstances that relate to the organization and whether an alternate policy would be more appropriate. 24

25 Navigating annual reporting Significant accounting policies Some questions that boards may wish to ask: Are the accounting policies clear, concise, and complete? Are the organization s accounting policies appropriate for its specific needs? Are they consistent with industry practice? Why does management believe the set of adopted accounting policies fairly presents the organization s financial position, financial performance, and cash flows? Do the accounting policies disclose areas of significant judgments and estimates that are consistent with the board s understanding of them? Have those judgments and estimates been appropriately articulated? Has the independent auditor discussed significant accounting matters with the board? What matters has the auditor raised, if any? What was the outcome of any matters raised? Were there any disagreements with the independent auditor about the appropriate accounting treatment to be applied and, if so, how were they resolved? Regarding the adoption of new accounting standards in the current year: What, if any, changes in accounting policies or disclosures were required in the current fiscal year as a result of the standards adopted by the Canadian Accounting Standards Board (AcSB) or issued by the International Accounting Standards Board (IASB)? What overall impact did the adoption of new accounting standards have on the financial information? Were alternatives considered when adopting new accounting standards and, if so, what impact would these alternatives have had on the financial statement results and/or disclosures? Were there other available accounting policies? If so, why were the selected accounting policies adopted over the alternatives? How did management ensure that subsidiaries, joint ventures, and associated companies properly adopted the new accounting policies in their own financial information used for consolidation purposes? Have all of the specific accounting framework disclosure requirements related to changes in accounting policies been addressed? 25

26 Navigating annual reporting Significant accounting policies Has the board queried management about whether any new judgments, estimates or disclosure requirements caused difficulties and, if so, what were the causes of those difficulties? Are there changes that must be implemented to assist with the adoption of future standards? Regarding accounting standards that have been issued but are not yet effective: Has the organization developed a detailed project plan to implement the new standards, including an assessment of responsibilities and the identification of key deadlines? Does the organization have enough people with the experience and a sufficient level of knowledge to implement the new standards effectively? Has management completed a preliminary assessment of the impact that the new standards will have on the organization? What is the result of this preliminary assessment? Are the independent auditor and external advisors involved in the process? If so, what are their roles? What is the planned transition method to the new standards (e.g., full retrospective or modified retrospective) and why has that method been selected? Has the organization benchmarked its preliminary assessment and implementation plan against its competitors? How will the standards be adopted? Have practical expedients been considered? What is the anticipated effect of the new standards on the organization s systems, processes, and internal controls? How will any gaps and new requirements be addressed? What new processes, controls, and IT systems are required? What are the expected changes to accounting policies? Has management assessed the effect these changes would have on existing financial statement disclosures? Has management considered the broader business impacts of the new standards on matters such as tax, sales and legal (commercial business practices), human resources (employee compensation and training), key operating and performance indicators, treasury (debt covenants) and other areas? What processes has the organization implemented to monitor and consider emerging interpretations, such as IFRIC agenda decisions? 26

27 Navigating annual reporting Significant accounting policies What are the areas of risk, significant judgments, and estimation uncertainty? What plans does management have to mitigate these risks? How will the implementation of the new standards be monitored and how will management update the audit committee on the progress of that implementation? When are the new standards expected to be implemented? When might pro-forma financial statements and disclosures be ready for the audit committee s review, including disclosures of new judgments and estimate uncertainties? What is the organization s plan for making the required disclosures on the effect that the new accounting standards will have in the periods leading up to the change? Has the organization considered the guidance from securities regulators? What are the organization s plans for communicating with stakeholders? What needs to be stated in the continuous disclosure documents leading up the effective date? Review these recent SEC speeches and PCAOB Alerts: Remarks before the Financial Executives International 36th Annual Current Financial Reporting Issues Conference: Effective Financial Reporting in a Period of Change (November 2017) PCAOB Staff Audit Practice Alert on Auditing the New Accounting Standard for Revenue (October 2017) Addressing Implementation Matters to Improve Financial Reporting (September 2017) Regarding the voluntary adoption of new accounting policies: What voluntary changes in accounting policies, presentations, or disclosures were made this year that were not related to the issuance of new accounting recommendations? What was the rationale for any voluntary changes in accounting policies, presentations, or disclosures? Is that rationale consistent with the requirements of the relevant accounting standards? What overall impact did the changes in the organization s accounting policy, presentation or disclosures have on the financial information? 27

28 Navigating annual reporting Significant accounting policies What changes needed to be made to prior years and interim periods financial statements because the change in accounting policies was applied retrospectively? How has management ensured that subsidiaries, joint ventures, and associated companies properly adopted the accounting policy, presentation or disclosure changes in their own financial statements that are used for consolidation purposes? Keep current with the latest developents in new accounting standards at Canada s Centre for Financial Reporting: IFRS 9, Financial Instruments IFRS 15, Revenue from Contracts with Customers IFRS 16, Leases Looking for more guidance? Karen Higgins Canadian IFRS Center of Excellence leader khiggins@deloitte.ca

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30 Navigating annual reporting Management s significant judgments and estimate uncertainty Management s significant judgments and estimate uncertainty The preparation of financial statements may require management to make estimates where the outcome of a particular matter is uncertain. Accounting estimates often require internal controls that differ from the internal control over financial reporting that is applied to systematically processed, recurring transactions and are, therefore, subject to increased risk of fraud due to the judgments 30

31 Navigating annual reporting Management s significant judgments and estimate uncertainty involved. Board members should carefully consider the information on accounting estimates and satisfy themselves that the judgments made by management are reasonable. Some questions that boards may wish to ask: Has management provided the board with information on the significant accounting judgments and estimates made in preparing the financial statements? Is there evidence that major judgments have been reached in an objective and neutral way? Has the board considered any triggers that might motivate the manipulation of the financial statements, such as management bonus schemes, covenants, etc.? Are there adequate internal controls over financial reporting in place to protect against manipulation? Are the assumptions applied to estimates made by management consistent with the board s understanding of the business and of the board s and management s intent? Have there been any impairments that have not been recognized in the financial statements? President Trump signed into law the tax legislation commonly known as the Tax Cuts and Jobs Act. Companies with US operations that report under IFRS are also impacted. The tax changes were substantively enacted on December 22, However, due to differences between US GAAP and IFRS, the accounting and financial reporting consequences will differ. Has management considered how they should account for the effects of the new tax legislation under IAS 12? Where the measurement of assets and liabilities are based on valuation models: Are management s assumptions consistent with the board s understanding of the business? Has management adequately considered the sensitivity of the estimates that have been made? Have procedures and controls been applied to the organization s use of models to generate cash flow and valuation information? Are key assumptions applied consistently across all asset and liability valuations? 31

32 Navigating annual reporting Management s significant judgments and estimate uncertainty Has the board considered whether key models should be subject to independent analysis and verification by internal audit or third party specialists? Has the board considered management s retrospective review of assumptions and determined the accuracy of management s assumptions in the past? Do the financial statements describe all significant judgments and major sources of estimation uncertainty? Consider: Have disclosures been made for all: Judgments with the most significant effect on the amounts recognized in the financial statements? Assumptions about the future and other major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year? Are significant judgments disclosed separately from major sources of estimation uncertainty? Are disclosures provided in one place, either in their entirety or with clear cross reference to where further information is provided? Financial reporting is not only a question of mathematics; it also involves several assumptions, estimates, and judgments that may have a significant impact on an organization s results. Learn more about the enhancements that standard-setters are considering to current standards to better equip auditors to assess management s estimates and judgments at Canada s Centre for Financial Reporting. Looking for more guidance? Kerry Danyluk National Director of Accounting Services kdanyluk@deloitte.ca

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34 Navigating annual reporting Significant or unusual transactions Significant or unusual transactions The board should consider the treatment and disclosure of significant or unusual items, which occurred during the year. Any material, nonrecurring items may be unusual and may require greater prominence in the financial statements. Examples of non-routine transactions could include business or asset acquisitions and disposals and contingent liabilities, such as litigation. 34

35 Navigating annual reporting Significant or unusual transactions Some questions that boards may wish to ask: What significant or unusual transactions and events took place during the year? Do they correspond to those identified by the board and management? Are these items properly reflected in the financial statements? Were there any transactions with related parties and, if so, are they adequately disclosed? Has the organization made any commitments that require disclosure? Has the organization entered into any unusual financing arrangements such as securitizations, factoring, or the issuance of debt or shares with unusual terms and/or conversion options? Have these been disclosed in accordance with IFRS? Organizations regularly enter into broad transactions to support their business strategy, including: Business combinations Joint ventures Restructuring Discontinued operations Benefit plan curtailment and settlement Are these transactions properly reflected in your organization s financial statements? Looking for more guidance? David Dalziel National Accounting & Transaction Advisory Leader ddalziel@deloitte.ca

36 Navigating annual reporting Challenges arising from volatile economic conditions Challenges arising from volatile economic conditions Volatile economic conditions and significant adverse events affecting the organization may require additional consideration and disclosure in the financial statements. 36

37 Navigating annual reporting Challenges arising from volatile economic conditions Some questions that boards may wish to ask: Does the organization monitor its position in relation to financial market volatility? In particular, does it monitor its exposures to: liquidity risk (whether the organization can pay its debts when they are due) interest rate risk (the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates) currency risk (the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates), and credit risk (whether counterparties can make payments)? Has a cash flow forecast been prepared that covers at least 12 months from the balance sheet date? Does this forecast indicate that there is sufficient liquidity considering existing funding arrangements? Should the cash flow forecast be extended beyond 12 months to evaluate issues that may arise subsequent to this period? Has an analysis been performed to ensure that the terms of current funding arrangements are being met? If covenants have been breached, have discussions taken place with the lenders to secure waivers where possible? Have these arrangements or risks been appropriately presented (e.g., as current vs. long-term) and disclosed? If funding is due to expire within the year, has consideration been given to whether the organization will be able to secure new sources of financing or renew existing funding arrangements? Has consideration been given to whether the organization must honour guarantees, indemnities, or liquidity facilities provided to third parties? Does the organization have the resources to meet these obligations should they arise? 37

38 Navigating annual reporting Challenges arising from volatile economic conditions Does the organization have sufficient access to funding should contingent liabilities materialize? (The board should consider this in the context of the organization s ability to continue as going concern.) Are current market conditions an indicator of impairment or reversal of impairment? What impact have global events e.g., BREXIT, natural disasters, NAFTA renegotiations, etc. had on the organization or might have on the organization in future? Deloitte s quarterly surveys offer insights from its economists on global trends and events shaping the marketplace together with region-by-region economic outlooks. Looking for more guidance? Mike Goodfellow National Audit Advisory Finance Leader mgoodfellow@deloitte.ca

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40 Navigating annual reporting Clarity and completeness of disclosures in financial statements Clarity and completeness of disclosures in financial statements Board members should satisfy themselves that all items have been properly disclosed in the financial statements and that these disclosures are consistent with the MD&A. 40

41 Navigating annual reporting Clarity and completeness of disclosures in financial statements When reading the financial statements, does the board understand all of the disclosures, especially those relating to complex or nonroutine transactions entered into in the current year, or is the board left with further questions? Has the board satisfied itself that there is a process to ensure that all required disclosures have been included? Does the board know which disclosures management has omitted on the basis that they are not material? Is there a process to identify all related parties of the organization, and the transactions, balances, and commitments the organization has entered into with these parties? Has this process identified the transactions and considered whether these were undertaken on normal commercial terms or not? Has your finance team benchmarked its annual report with the winners of the CPA Canada awards? Review our model financial statements and disclosure checklist to ensure your financial statements are complete, transparent, and fairly balanced. Looking for more guidance? Allan Donald Partner, Audit & Assurance adonald@deloitte.ca

42 Navigating annual reporting The board s due diligence The board s due diligence Once the board has completed its analysis of the organization s financial statements, some suggested next steps the board may perform to ensure that it meets its due diligence responsibilities are listed below. If the board is not satisfied that the financial statements are compliant, relevant, and transparent, has it identified what needs to be done to ensure the financial statements become so? 42

43 Navigating annual reporting The board s due diligence Has the board met with the independent auditor to review their assessment of the financial statements? Has the board inquired as to the processes put in place to enable the CEO and CFO to fulfill their certification obligations? Do the board s minutes document the board s review process and conclusions regarding the financial statements and other financial filings? Has the board ensured that the audit committee and management understand the independent auditor s summary of unadjusted misstatements both quantitative and those related to disclosures and the impact on controls? Document your review using the notes pages at the end of this guide. Looking for more guidance? André Vincent Chief Ethics Officer avincent@deloitte.ca

44 Navigating annual reporting Related information in addition to the financial statements Related information in addition to the financial statements Related information in addition to the financial statements might include summary financial statements, continuous disclosure documents released to the market, public announcements, significant regulatory filings, and offering documents, such as prospectuses. 44

45 Navigating annual reporting Related information in addition to the financial statements Some questions that boards may wish to ask: Are the disclosures in the financial statements and other documents consistent? Do the financial statements reflect all the information previously released in other announcements? Has the board considered whether there is a need for additional disclosures about the business environment under the continuous disclosure requirements? (For example, early warning disclosures may need to be considered when directors first conclude that significant doubt exists about going concern, or issues arising regarding compliance with debt covenants.) Does the board regularly consider whether information, if known to the investor, would affect an investor s decision to purchase, sell, or hold shares? Should this information be disclosed? If preliminary financial information is to be released, is it clearly marked as unaudited where an audit opinion has not yet been issued on the financial statements? Where financial information is included in public announcements, is the presentation of figures or measures consistent with the way they are discussed in the financial statements (e.g., labelling and measurement) or with the way they will be reported in the subsequent financial statements? Has the board satisfied itself that there is a process to ensure that all regulatory filings are being prepared, approved, and filed appropriately? Has the board received a schedule of all regulatory filings required to be filed during the year with a clear description of the purpose and content of each? Have disclosures of forward looking information been reviewed to determine whether revised disclosures are required? For additional resources, see the navigating annual reporting section in Canada s Centre for Financial Reporting. Looking for more guidance? Allan Donald Partner, Audit & Assurance adonald@deloitte.ca

46 Navigating annual reporting Management Discussion and Analysis (MD&A) Management Discussion and Analysis (MD&A) The MD&A is an important disclosure document meant to tell the organization s story. CSA Form F1, Management s Discussion and Analysis, states: The MD&A is a narrative explanation, through the eyes of management, of how your enterprise performed during the period covered by the financial statements, and of your enterprise s financial condition and future prospects. The MD&A complements and supplements your financial statements, but does not form part of your financial statements. 46

47 Navigating annual reporting Management Discussion and Analysis (MD&A) The objective when preparing the MD&A should be to improve your enterprise s overall financial disclosure by giving a balanced discussion of your enterprise s financial performance and financial condition including, without limitation, such considerations as liquidity and capital resources openly reporting bad news as well as good news. Your MD&A should: Help current and prospective investors understand what the financial statements show and do not show. Discuss material information that may not be fully reflected in the financial statements, such as contingent liabilities, defaults under debt, off-balance sheet financing arrangements, or other contractual obligations. Discuss important trends and risks that have affected the financial statements, and trends and risks that are reasonably likely to affect them in the future, and Provide information about the quality, and potential variability, of your enterprise s profit or loss and cash flow, to assist investors in determining if past performance is indicative of future performance. After reading the full MD&A, questions that the board may wish to ask include: Is the board up to date on any new or amended disclosure requirements issued by the CSA for the current year? Are these new requirements fully understood by the board? For venture issuers, has management elected to provide quarterly highlights disclosure? Does the MD&A include any information that contradicts what the board knows about the organization or information included in other documents? Based on the board s knowledge are there any significant omissions in the MD&A? Is the discussion well balanced between positive and negative news? Does the document include any future oriented information? Has the board considered whether these comments are reasonable and supportable? Does this commentary alert the user to the uncertainty attached to these prospects and to the fact that actual results may differ? Has management appropriately updated previously disclosed future oriented information to take into account actual results and the reason for any variances? Is the discussion between GAAP and non-gaap measures balanced and does it meet regulatory requirements? 47

48 Navigating annual reporting Management Discussion and Analysis (MD&A) Is the document written in plain language? Does the document avoid the use of boilerplate text? Does the document focus on material information? Does the document improve the organization s overall financial disclosure by providing a balanced discussion of the financial performance and financial condition? Does the document help investors to further understand the financial statements? For example, does it clearly describe disclosures around off-balance sheet items? Are disclosures in the MD&A consistent with the financial statements? For example, is the business discussed in the same way as in the segment reporting note? Does the document discuss in further detail material transactions giving rise to items such as contingent liabilities, defaults under debt, off-balance sheet financing arrangements, or other contractual obligations? Does the document discuss important trends and risks that have affected the financial statements, and trends and risks that are reasonably likely to affect the financial statements in the future? Does the document provide information about the quality, and potential variability of the organization s earnings and cash flow, to assist investors in determining if past performance is indicative of future performance? Does the document explain how new regulatory and financial reporting requirements may affect the organization? Does the MD&A discuss and analyze any changes in accounting policies made in the current period or that will be adopted in future periods, including a description of the new standard, transition options and the date the change has or will be effective, and the expected effect of the change on the financial statements, including the effect on the business. If the organization is a non-venture issuer: Do the disclosure controls and procedures (DC&P) work as designed? Is the evaluation of their effectiveness fairly described in the MD&A? 48

49 Navigating annual reporting Management Discussion and Analysis (MD&A) Does the internal control over financial reporting (ICFR) work as designed? Is the evaluation of its effectiveness fairly described in the MD&A? Is the name of the framework used in the design of ICFR disclosed? If any material weakness in the design or operation of ICFR was identified and exists at the end of the annual reporting period, has a description of the weakness been disclosed along with the impact of the weakness on the financial reporting and ICFR? Does the MD&A include a disclosure of the current plans, or any actions already taken, to remediate the weakness? If there were any limitations imposed on the scope of design of either DC&P or ICFR to exclude controls, policies, and procedures, has this been disclosed? Have any material changes in ICFR that occurred since the last filing been disclosed? Regarding the annual certificates required to be filed as per National Instrument , has the board reviewed the certificates and ensured that they are filed using the exact wording prescribed by the required form? Are the representations included consistent with the disclosure in the MD&A? Has the board met with management to discuss any findings arising from the board s review of the MD&A. Does the board wish to hold discussions with the internal auditors and, if so, has it held those discussions? Has the board considered any comments raised by the independent auditor or legal counsel? Has the board documented its review of the MD&A? How does your organization s MD&A compare? Try our easy-to-use MD&A assessment tool to assess your company s MD&A. Looking for more guidance? Stacey Nagle Partner, Audit & Assurance stanagle@deloitte.ca

50 Navigating annual reporting Annual Information Form (AIF) Annual Information Form (AIF) CSA Form F2, Annual Information Form states: An AIF is intended to provide material information about your enterprise and its business at a point in time in the context of its historical and possible future development. The AIF should describe the enterprise, its operations and prospects, risks and other external factors that impact the enterprise specifically. 50

51 Navigating annual reporting Annual Information Form (AIF) The disclosures included in the AIF are supplemented throughout the year by subsequent continuous disclosure filings including news releases, material change reports, business acquisition reports, financial statements, and the management discussion and analysis. After reading the AIF, questions the board may wish to ask include: Does the AIF include any information that contradicts what the board knows about the organization or what is disclosed in other documents? Based on the board s knowledge of the organization, are there any significant omissions in the AIF? Is the discussion well balanced between positive and negative news? Does the AIF describe the organization, its operations and prospects, risks and other external factors that affect it specifically? Does the AIF focus on material information? Is the AIF written in plain language? Does the AIF avoid the use of boilerplate text? After reading the AIF, has the board met with management to discuss any findings arising from its review? Does the board wish to to hold discussions with the internal auditors and, if so, has it held those discussions? Has the board considered any comments raised by the independent auditor or legal counsel? Has the board documented its review of the AIF? How does your organization s AIF compare? Try our easy-to-use AIF assessment tool to assess your company s AIF. Looking for more guidance? Stacey Nagle Partner, Audit & Assurance stanagle@deloitte.ca

52 Navigating annual reporting Statement of executive compensation Statement of executive compensation CSA Form F6, Statement of Executive Compensation states: the objective of this disclosure is to communicate the compensation the enterprise paid, made payable, awarded, granted, gave or otherwise provided to each Named Executive Officer and director for the financial year, and the decision-making process relating to compensation. This disclosure will provide insight into executive compensation as a key aspect of the overall stewardship and governance of the enterprise and will help investors understand how decisions about executive compensation are made. After reading the Statement of Executive Compensation, questions the board may wish to ask include: Is the board up to date on any new or amended disclosure requirements issued by the CSA for the current year? Where applicable, are these new requirements fully understood by the board? Does the Statement of Executive Compensation clearly communicate the compensation the board intended the organization to pay, make payable, award, grant, give, or otherwise provide to each Named Executive Officer and director for the financial year? Will the disclosures made in the Statement help stakeholders understand how decisions about executive compensation are made? Does the Statement focus on material information? Have newly adopted or changes to compensation plans have been appropriately described? 52

53 Navigating annual reporting Statement of executive compensation Is the Statement written in plain language? Does the Statement avoid the use of boilerplate text? Does the Statement include any information that contradicts what is known to the board? Based on the board s knowledge, are there any significant omissions? Is the discussion well balanced between positive and negative news? Has the board met with management to discuss any findings arising from its review? Does the board wish to hold discussions with the internal auditors and, if so, has it held those discussions? Has the board considered any comments raised by the independent auditor or legal counsel? Has the board documented its review of the Statement of Executive Compensation? How does your organization s executive compensation disclosure compare? Try our easy-to-use executive compensation assessment tool to assess your company s executive compensation disclosure. Looking for more guidance? Allan Donald Partner, Audit & Assurance adonald@deloitte.ca

54 Navigating annual reporting Beyond compliance Promoting excellence in financial reporting in Canada Beyond compliance Promoting excellence in financial reporting in Canada Keep up-to-date with the latest in financial reporting at Canada s Centre for Financial Reporting. The Centre features: 54

55 Navigating annual reporting Beyond compliance Promoting excellence in financial reporting in Canada An extensive collection of news and resources on financial reporting, assurance, and regulatory developments relevant to the Canadian marketplace Daily summaries of the activities of the accounting, assurance and regulatory boards, and Summaries of developments in the US that are closely related or might have an impact on IFRS standards. To further keep up to date on financial reporting matters, subscribe to Financial Reporting Insights our monthly electronic communication published by Canada s Centre for Financial Reporting that covers all financial reporting frameworks used in Canada, informs you about the potential impacts for your organization, and invites you to our events and webcasts. And visit the CFO s corner where you will find editorials on top of mind issues for CFOs. Join us on our official LinkedIn page, Deloitte s Corporate Governance Forum where we provide regular updates and comprehensive resources and tools that support the unprecedented demands and responsibilities of board directors. Ask questions and share your thoughts with our subject matter experts on top of mind corporate governance issues. Looking for more guidance? Chantal Rassart Assurance Knowledge Management Officer crassart@deloitte.ca

56 Navigating annual reporting Next steps Next steps If you have questions or would like to further discuss any of the matters discussed in this report, please contact one of the professionals listed below. Deloitte s professionals have a broad range of expertise and can offer a range of solutions including technical accounting, governance or technological solutions that can be customized to meet your organization s specific compliance needs. Subject to appropriate independence safeguards and service preapproval, Deloitte can help your organization ensure that its financial filings are in compliant with regulatory requirements. Let us help design a strategy that can turn the continuous disclosure obligations into value generators for your organization. 56

57 Navigating annual reporting Next steps For further information, please contact Richard Olfert, Chair of the Deloitte Institute of Audit Innovation and Quality at or one of these Deloitte professionals: Annual Information Form (AIF) Challenges arising from volatile economic conditions Clarity and completeness of disclosures in financial statements Cyber security risks and incidents Management Discussion and Analysis (MD&A) Management s significant judgments and estimate uncertainty New and Revised Auditor Reporting Standards Non-GAAP financial measures Stacey Nagle stanagle@deloitte.ca Mike Goodfellow mgoodfellow@deloitte.ca Allan Donald adonald@deloitte.ca Nick Galletto ngalletto@deloitte.ca Stacey Nagle stanagle@deloitte.ca Kerry Danyluk kdanyluk@deloitte.ca Julie Corden jcorden@deloitte.ca Deanne Kennedy deakennedy@deloitte.ca 57

58 Navigating annual reporting Next steps Our mission: Beyond compliance Promoting excellence in financial reporting in Canada Related information in addition to the financial statements Significant accounting policies Significant or unusual transactions Statement of executive compensation The board s due diligence Transparency Women on boards and in executive officer positions Chantal Rassart crassart@deloitte.ca Allan Donald adonald@deloitte.ca Karen Higgins khiggins@deloitte.ca David Dalziel ddalziel@deloitte.ca Allan Donald adonald@deloitte.ca André Vincent avincent@deloitte.ca Richard Olfert rolfert@deloitte.ca Jacqueline Bukaluk Smith jbukaluk@deloitte.ca 58