related to the various accounting frameworks. Today’s presentation is Bringing clarity

to an IFRS world - IFRS quarterly technical update.

I am Jon Kligman, your host for today’s webcast, and I am joined by others from our

National Office. Before we get to our agenda and speakers, a couple of housekeeping items.

As you are aware, this webcast has been pre-recorded. If you know of colleagues who could not listen

in to the webcast at this time, they can simply access the webcast at www.deloitte.com/ca/update

at a later date. Now let me introduce our speakers and discuss the agenda.

First, you will hear from Kerry Danyluk who will provide an IFRS Interpretations Committee

update. After Kerry, Maryse Vendette, will discuss new developments on IFRS 15 Revenue

from Contracts with Customers. After Maryse, An Lam will provide an update on the leasing

standard as well as provide insight into future accounting amendments.

I would like to remind our viewers that our comments on this webcast represent our own

personal views and do not constitute official interpretive accounting guidance from Deloitte.

Before taking any action on any of these issues, it is always a good idea to check with a qualified

advisor.

I would now like to welcome our first speaker, Kerry Danyluk. Kerry joined Deloitte as a

partner in 2006 with over 20 years’ experience in public practice, standard setting and industry.

Kerry is currently a partner in Deloitte’s National Assurance and Advisory services and

specializes in a variety of areas of IFRS, ASPE and not-for-profit accounting. Over to

you Kerry.

Thanks Jon and good day everyone. So, as Jon mentioned today, I am going to discuss some

aspects of the recent IFRIC meeting and some of the decisions that they have made. In March

2015, they did discuss a number of different topics and ongoing projects, some of which

will no doubt be updating on in future webcasts as they get more advanced. So, today, what

we are really going to do is confine our discussion to a number of tentative agenda decisions

that they have finalized, the IFRIC has finalized related to IFRS 11, which is of course the

joint arrangements standard that we got, that became final in IFRS and effective in IFRS

a couple of years ago. So, during that couple of years or really the few years since the

standard was issued, there have been a number of interpretive questions raised and the IFRIC

has dealt with a bunch of these and discussed a number of them and finalizing decisions

in the March 2015 meeting. So, they decided not to take any of the matters onto their

agenda as projects. So, this means that there would not be any standard-setting activity

out of these discussions or any new IFRICs or amendments to the IFRS standard itself,

but they do provide their comments and their notes and the reasoning for not taking these

questions onto their agenda and while not authoritative, sometimes those notes and basically

the final decision that they publish offer some helpful interpretive guidance in how

they believe the standards should be interpreted. So, while we are not changing IFRS 11 at all,

these agenda decisions do add to the sort of body of literature out there that is available

for question, something that you might look at is if you are trying to look at different

interpretive matters under IFRS 11, which you will know if you had to deal with it,

did have a number of challenges around how things should be interpreted.

So, on the first slide here, we have got the decision tree, basically which takes you through

deciding whether your joint arrangement is a joint operation or a joint venture and of

course you remember that, that is an important determination because joint operations and

joint ventures get different accounting, with joint ventures being accounted for under the

equity method and then joint operation, each party accounts for its share of revenues,

expenses, assets and liabilities. So, it is an important consideration and really a big

area for interpretive questions has been around the part of the slide that has got the circled

box on it, other facts and circumstances. So, as you work through, one of the first

questions is whether the arrangement is conducted through a separate legal entity and if not

that is the easier consideration than it is a joint operation and the operators are accounting

for their share of revenues, expenses, assets and liabilities, sort of almost quasi kind

of line by line consolidation of each of the items, what we used to call proportionate

consolidation. So, that is a sort of the easy case, but where the issues have arisen is

as you work down this decision tree and you pass through the legal entity questions and

the questions about the contractual arrangements and you get to this notion of other facts

and circumstances. The idea is that there might be other facts and circumstances present

in the arrangement that indicate that the parties to the arrangement have rights to

assets and obligations for liabilities, in which case you would end up back in the joint

operation camp even if you had a separate legal entity for example. What we saw in Canada

in our implementation of IFRS 11 is it is often in that box that we end up because a

lot of the joint arrangements are conducted through a separate legal vehicle and so you

do sort of pass your way all the way down into other facts and circumstances and we

see such things as both parties are buying all the output for example, which may be an

indicator that you have a joint operation. So, a lot of the final decisions that we will

talk about today that the IFRIC has just released out of their March 2015 meeting do centre

around this question of interpreting other facts and circumstances.

So, on the next slide, issue #1 first addresses whether the assessment of other facts and

circumstances should be performed considering other facts and circumstances that create

enforceable rights to assets and obligations for liabilities, or is it a matter of we could

just look at the design, purpose and maybe the entity’s business needs and past practices.

So, maybe everything is not written down, but that is how we always do it or that was

our intention and so on. So, the IFRIC did discuss this question and where they landed

is, what their notes indicate is that they believe that these facts and circumstances

need to create enforceable rights to assets and obligations for liabilities in order to

be really considered in the other facts and circumstances part of the test. If they are

not enforceable, then they should not affect the determination of joint operation versus

joint venture. So, at the end of the day, the IFRIC decided that this was clear enough

within the body of the standard that already existed in IFRS 11 and so the issue has not

been added to the agenda, but as I said it does give us an important indication that

they do believe that these should be enforceable rights. So, of course, that does not answer

all the questions because we still get questions about does it need to be written down, could

you have an enforceable right based on a verbal agreement and so on and so, I think those

are still questions and really what is enforceable may come down to a legal question. So, it

does not answer everything, but at least it gives us some indication that they believe

that there should be enforceability. Next, they talked about how and why particular facts

and circumstances can create rights and obligations and so, there they sort of looked to, well,

we need to think about the rights and obligations that get created outside of the existing legal

agreement. So, for example, once you get down into this box, you have already passed through

considerations of the separate legal entity and the rights and obligations that the nature

of that separate legal entity confers and so then you are talking about being in, as

I mentioned enforceable rights and obligations, something it overcomes or goes beyond what

is already in the existing legal agreements and legal arrangements that are inherent in

the nature of the legal entity that you have. So again they have decided not to add anything

to the agenda on that point.  

The next number of issues talk about this whole idea of purchasing the parties to the

arrangement, purchasing the output. So, as we have seen in practice that is a common

consideration in figuring out whether we have got a joint operation or a joint venture,

because it is often the case that the parties to the joint arrangement are purchasing all

of the output. So, that has given rise to a number of questions about those purchase

arrangements and other factors in the arrangement and what impact they might have. So, as I

mentioned, one of the facts and circumstances that can get you to a conclusion of joint

operation is that the parties are buying all of the output and the standard IFRS 11 itself

actually has an example where the parties are buying all of the output, but they are

buying it in a cost plus arrangement. So, they are not paying market price for the output

necessarily, they are paying cost plus a margin and so that gave rise to a lot of questions.

Well, what about if the purchase price for the output is market and that is actually

the more common thing that we do see in Canada as purchase arrangements are at market price.

So, it is a perfectly valid question and one that we certainly consider through the application

or implementation of IFRS 11. So, the agenda decision that they published goes through

really to say that it is really important to think about the cash flows and where those

cash flows come from, through the parties, obligations to buy the output and so whether

it is at market price or not is not necessarily determined out in the determination of whether

it is a joint operation or a joint venture. So, I think that is a good interpretation

in the sense that that has been somewhat consistent with how we have interpreted the standard

or pretty much consistent with how we have interpreted the standard as we implemented

IFRS 11 in Canada. The next question is still within the context of the parties buying all

the output, what if you layer on the idea that there is third party financing as well?

So, in that case, the question arises perhaps because you have got not only the joint arrangement

parties providing the funding and the cash flows for the joint operation, but also there

is a third party involved who has provided funding. And again, the IFRIC has noted that

they do not believe that the existence of third-party funding should effect the classification.

So, based on the other factors that are present, it may be sort of neither here nor there.

They do note that yes some of the cash obligations in the joint operation may be settled by the

third-party financing, but eventually that third-party financing needs to be repaid and

it will come from the cash flows provided by the joint arrangement parties if they are,

in fact, required to buy the output. So, again nothing added to the agenda there.

In the next series of considerations, it is still within the context of buying the output,

the parties buying the output. The other question was does the nature of the output matter?

If the output is bespoke or customized, let us say does that make a difference compared

to if it is fungible or kind of interchangeable, identical type of output. So, gold bullion

compared to some kind of customized manufactured output, does that matter? And again, the IFRIC

has said well that is not a determinative factor either - we are just looking at the

cash flows in the joint arrangement and where they come from and the nature of the product

does not really matter. And then another question that has come up is around the volumes or

this concept of the joint arrangement parties buying substantially all of the outputs that

is the words in the standard. It talks about when they buy substantially all. So, of course,

the question has come up how should substantially all be interpreted? Is that volume or monetary

values? So that might be important, for example if the joint arrangement has different output

and maybe one set of output is expensive, but maybe lower volume and then the other

maybe a higher volume, but lower cost. Should we be looking at substantially all in the

context of the volume or the monetary value? So, the IFRIC has said that since it is cash

flows that matter and cash inflows and what the joint arrangement is earning from selling

to the parties then it is really the monetary or dollar value that is important in that

context.  

The next issue that they looked at was whether two joint arrangements could be classified

differently, when they have similar features except that one is structured through a separate

legal entity and the other is not? So, really, I guess, people were asking questions, well,

we hope, we want to, we believe that we should be having economic substance-based standards.

So if you have got two arrangements that are similar in a lot of respects except for ones

operated through not a separate legal entity, so maybe parties are owning shares of assets

directly and just kind of cooperating together, there is no separate legal entity. And then

you have a similar case where it is in a separate legal entity. So, in the one case with no

separate vehicle on the right-hand side of the slide that would be a joint operation

and the other part of the slide where it is through a separate vehicle that could be either

based on the analysis of facts and circumstances. So, the questions come up, does that make

sense and is that a good answer given that if you accept that the two arrangements might

be quite similar in other respects? So, the IFRIC did confirm that they do not believe

that, that does conflict with the concept of economic substance and they note that the

existence of a separate legal entity can play a big role in rights and obligations. So,

the differences in accounting probably relate to actual differences in people, in the two

parties rights and obligations. So they confirm that, that is a legitimate not unexpected

outcome.

The next issue considers how a joint operator should recognize revenue in relation to the

output that they purchase from the joint operation. So, remember it is a joint operation. So,

in this case, we are looking to be recording for the joint operators, to be recording their

share of revenues and expenses, assets and liabilities. So, the question is well if you

are doing that and so there is a point in time where the joint operators have bought

the output, but they have not yet sold it onto third parties, is it appropriate to record