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OSC Proposes Important Changes to Financial Statements and Role of Audit Committee

Date

April 1, 2000


OSC Proposes Important Changes to Financial Statements and Role of Audit Committee

The OSC has published for comment new financial statement disclosure requirements affecting all reporting issuers in Ontario (other than mutual funds). The proposed rules expand the categories of issuers which must prepare periodic continuous disclosure documents, broaden the scope of required quarterly financial disclosure and require quarterly analysis of financial results. In addition, the rules propose significant changes to the role of audit committees. A summary of the principal changes proposed is provided below. 

Financial Statements

Interim financial statements will be required to include:

  • comparative balance sheets;

  • comparative quarterly and year to date income and cash flow statements, other than for the last three-month period of a financial year;

  • a comparative year to date statement of retained earnings; and

  •  notes to the interim financial statements. 

The content of annual and interim balance sheets will be prescribed, and will include at least 14 specific line items.

Interim financial statements will be required to be reviewed by the board of directors and, if the issuer has one, the audit committee prior to filing and delivery to shareholders.

Annual financial statements will be required to be reviewed by the audit committee, if the issuer has one, prior to approval by the board.

The OSC refers issuers to the CICA Accounting Standards Board’s proposals relating to the content of interim financial statements under GAAP. 

Annual Information Form

The thresholds that trigger the requirement to file an annual information form ("AIF") are to be expanded to include issuers with low revenues or shareholders equity but which have a market capitalization over $75,000,000.

Issuers required to file an AIF must do so for the most recently completed financial year and each year thereafter, even if the issuer falls below the filing thresholds in the future.

Non-Canadian reporting issuers who file a U.S. Form 20-F as their AIF will be allowed 180 days after year-end to file their AIF, rather than the current 140 days. 

Management Discussion and Analysis

An issuer that is required to file an AIF must also file discussion and analysis of its interim financial results ("MD&A") for each of the first three quarters in the following financial year and must deliver that interim MD&A to all shareholders who receive interim financial statements. While interim MD&A has been encouraged by the OSC for many years, this requirement will impose a significant burden on many smaller issuers.

Interim MD&A will be required to include:

  • an update of the annual MD&A, although issuers will be entitled to assume users have read the annual MD&A

  • a comparison of financial results for the interim period to either the preceding year-end or the corresponding interim period in the preceding year;

  • changes in results of operations that are material and any significant elements of the issuer’s income or loss that do not reflect ongoing business; and

  • any seasonality that has materially affected financial results. 

Where non-Canadian GAAP financial information is included in interim MD&A for an SEC registrant incorporated in Canada, the issuer must concurrently file a supplement which restates the interim MD&A to reflect Canadian GAAP. 

Audit Committee Proposals

The OSC is also considering additional steps designed to enhance the quality and reliability of financial reporting. These steps may include:

  • requiring all reporting issuers to have an audit committee;

  • introducing rules respecting the qualifications of audit committee members;

  • specifying minimum duties and responsibilities to be discharged by the audit committee;

  • requiring board approval of interim financial statements; and

  • requiring external audit review of interim financial statements.

 

The OSC has invited comment on these proposed rules until June 9, 2000. Accordingly, they are unlikely to be in force until the autumn of 2000. Nevertheless, the OSC is encouraging issuers to comply with the proposed rules in the interim.

For further information about our Securities Law Practice, please contact:
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