Access
the annual report for Canadian Tire Corporation, Limited for the year ended
January 2, 2010, from SEDAR (www.sedar.com).
Instructions
(a)
Reviewing the Consolidated Statement of Changes in Shareholders’ Equity,
discuss whether Canadian Tire reported any accounting changes in the years
presented. Which accounts were impacted and by how much?
(b)
Identify and explain each accounting change that the company implemented in
2009. How was each accounting change applied? If the change was due to an amendment
of the standards, provide the details of the effective date of the changes.
Classify each change as being one of the following:
1.
A change in accounting policy mandated by a change in a primary source of GAAP
2.
A voluntary change in accounting policy
3.
A change in estimate
(c)
For each change reported in (a) above, explain whether the change was
retrospectively or prospectively applied. What was the impact of each change on
the financial reports of Canadian Tire in each year presented?
(d)
The company also provides details for future accounting changes. Describe the
note disclosure provided for these.
(e)
In the Management Discussion and Analysis, the company has also provided
details on its adoption of IFRS. Explain the different phases that the company
has developed to adopt IFRS.
Summarize
the relevant accounting standards and preliminary findings as to their impact
on Canadian Tire’s financial statements.
(a)
As indicated on the
Consolidated Statement of Changes in Shareholders’ Equity, the company had
transitional adjustments on adoption of HB 1000 and 3064 which impacted the
opening balance of Retained Earnings for the years ended January 2, 2010 and
January 3, 2009. The impacts on the opening
balances were reductions of $4.3 million in 2009 and $3.1 million in 2010. These accounting changes would be
retrospectively applied. The company
also had a transitional adjustment to 2010 retained earnings of an increase of
$1.1 million related to the adoption of EIC 173. Finally, there was a transitional amount to
accumulated other comprehensive income in 2010 which resulted in a reduction of
$2.5 million and was related to the adoption of EIC 173.
All of these changes are discussed in Note 1.
(b) Note
1 discusses the changes in accounting policies as part of disclosure on
significant accounting policies. All of these changes related to changes in the
standards. There were no voluntary changes, changes in estimates, or errors
noted. The following changes were
discussed:
·
Financial
statement concepts – Effective January 4, 2009, the company adopted
retrospectively changes to CICA HB 1000 which impacted deferred costs and which
is part of the adoption of CICA HB 3064 on Goodwill and Intangible Assets. The changes were effective for year ends
beginning on or after October 1, 2008.
·
Credit
risk and the fair value of financial assets and financial liabilities –
Effective January 4, 2009, the company adopted CICA HB EIC 173 which states
that credit risk of the entity and the counterparty must be considered in
determining the appropriate discount rate to determine the fair values of the
financial instruments. This adoption was
applied retrospectively with the opening balances of financial assets and liabilities
remeasured using the appropriate credit risk adjusted rates. Any differences are to be reported as an
adjustment to opening retained earnings or the accumulated other comprehensive
income account (as appropriate). This
adoption required an adjustment to increase opening retained earnings (for
2010) by $1.1 million and to decrease the opening AOCI for 2010 by $2.5
million. These amendments were effective
for financial statements ending on or after January 1, 2009.
·
Financial
Instruments disclosures – CICA HB 3862 was amended in June 2009 to require
disclosure on categorizing the measures used to determine the fair values of
financial instruments into three levels.
The company does not need to provide comparative disclosure and as a
result disclosure for only 2010 is provided in the notes. There is no numerical impact on the financial
statements for the adoption of this amendment.
These amendments were effective for years ending after September 30,
2009.
·
Financial
instruments – impairment of debt instruments – In August 2009, CICA HB 3855 and
HB 3025 were amended to outline the classifications allowed for debt
instruments and the impairment for held-to-maturity financial assets. The company was not impacted by this change. The amendments were effective for years
beginning after November 1, 2008.
·
Capital
Management Disclosures – CICA HB 1535 requires companies to disclose
information about its objectives, policies and processes for managing its
capital. This new standard is
disclosure only, so there is no numerical impact on Canadian Tire’s financial
statements. The new note disclosure was
effective for years beginning on or after October 1, 2007.
·
Goodwill
and intangible assets – CICA HB 3064 was effective for years beginning on or
after October 1, 2008 and is to be applied retrospectively. Canadian Tire implemented this new standard
effective January 4, 2009. The standard
changes the accounting policies on recognizing, measuring and reporting goodwill
and intangible assets. Internally
developed software must now be reported as intangible assets, rather than as
property and equipment. In addition,
development costs can only be recognized as assets if they meet the definition
of an intangible asset, otherwise they need to be expensed when incurred. The total impact of the adoption of this
standard had the following impact on the company’s prior years’ statements:
|
In millions of $
|
January 3, 2009
|
December 29, 2007
|
|
Retained earnings
|
(3.1)
|
(4.3)
|
|
Long-term receivables and other assets
|
(3.3)
|
(4.6)
|
|
Intangible assets
|
189.5
|
174.0
|
|
Property and equipment
|
(190.9)
|
(175.8)
|
|
Income taxes recoverable
|
0.4
|
0.4
|
|
Future income tax liabilities
|
(1.2)
|
(1.7)
|
In addition, there were the following retrospective impacts
to net earnings for the year ended January 3, 2009 as follows:
i.
decrease
of $2.7 million to depreciation and amortization
ii.
an
increase of $0.9 million for the write off of deferred development costs to
cost of merchandise and other operating expense ;
iii.
net
impact on net earnings was an increase of $1.2 million.
(c) In Note 1, Canadian Tire also discloses
future accounting changes as follows:
·
Business
combinations – CICA HB 1582 was introduced and is effective for acquisitions
arising in years beginning on or after January 1, 2011, with earlier adoption
permitted. This standard is to be
applied prospectively. Canadian Tire
did not elect to early adopt this standard.
·
Financial
instruments – recognition and measurement – CICA HB 3855 was amended to include
guidance on embedded prepayment options and is effective for years beginning on
or after January 1, 2011. This standard
has no impact on Canadian Tire’s financial statements.
·
Multiple
deliverable revenue arrangements - EIC 175 was issued and requires the use of
the relative selling price method (and prohibits the residual method) to
determine revenue under multiple deliverable contracts. This EIC is effective for years beginning on
or after January 1, 2011, and Canadian Tire is currently determining the impact
that this new guidance will have.
·
IFRS –
IFRS adoption will be required effective for years beginning on or after
January 1, 2011. The company is
currently assessing the impact of this adoption.
(d) In
the MD&A for Canadian Tire, the company has outlined its transition plans
to IFRS . The company has developed three phases for
this adoption as follows:
·
Phase One
– Preliminary scoping and diagnostic impact assessment – Over the period 2007
to 2008, this phase included high level assessment of differences between
Canadian GAAP and IFRS, and the hiring and training of appropriate personnel.
·
Phase Two
– Detailed Analysis and Design – Starting in Quarter 4 of 2008, this Phase
involves detailed work in 13 key areas that the company has assessed to have
the most significant impact for the company.
The detailed work included the choices to be made, where applicable, and
the new disclosure required.
·
Phase
Three – Execution – This Phase builds on the analysis completed in Phase
2. Work is being done to determine the
impact on the financial statements, changes to systems and processes required,
drafting of pro-forma statements and related note disclosure.
The company also provides a detailed table of the impact
that the changeover to IFRS will have on the company’s financial
statements. These impacts are summarized
below:
|
Standard
|
Preliminary assessment of impact
|
|
Consolidations (IAS 27,28)
|
Glacier Credit Card Trust will be consolidated (currently
a VIE off the balance sheet). This
will impact assets and liabilities.
Other relationships with CTR Dealers, PartSource
franchisees, Mark’s franchisees and charities do not need to be consolidated.
|
|
Securitizations (IAS 39)
|
As noted above, the Glacier Credit Card Trust will be
consolidated and no longer meet the derecognition criteria to record the
securitization transactions.
|
|
Borrowing costs (IAS 23)
|
Borrowing costs will be capitalized on real estate
projects that only meet the criteria, and will also start to capitalize
borrowing costs on other classes of assets if the criteria are met ( IT
projects)
|
|
Property, plant and equipment (IAS 16)
|
Company will continue to use the cost model, and adopt
components for depreciation purposes for some of the fixed assets
|
|
Leases (IAS 17)
|
Some of the current operating leases will be classified
as finance leases under IFRS and will be capitalized impacting the assets,
liabilities and net earnings
|
|
Impairment of assets
(IAS 36)
|
Assets are more likely to be impaired under IFRS; the
company is also determining its cash generating units
|
|
Share based payments (IFRS 2)
|
The company is still assessing the impact of using fair
values for these awards
|
|
Compensation and benefits (IAS 19)
|
The company has decided to record revaluation gains and
losses on post employment benefit plans to OCI which will increase
liabilities and decrease equity
|
(e)
Below, the table outlines the
exemptions that the company proposes to apply on adoption of IFRS :
|
Optional exemption
|
Description of exemption
|
Company’s intention
|
|
Business combinations
|
May apply IFRS 3 prospectively from date of adoption
|
Use this exemption
|
|
Share based payments
|
Exempt from adopting IFRS 2 to previous grants of share
awards
|
Use this exemption to the extent possible
|
|
Fair value or revaluation as deemed cost
|
May initially measure PP&E at fair value on
transition
|
Will selectively adopt
|
|
Employee benefits
|
Reset cumulative actuarial gains and losses to zero
|
Intends to use
|
|
Cumulative translation differences
|
Reset cumulative translation differences to zero
|
Intends to use
|
|
Designation of previously recognized financial instruments
|
May designate any financial assets as available-for-sale
or fair value through profit or loss
|
Intends to use on selective basis
|
|
Decommissioning liabilities
|
Not to apply IFRIC 1 which requires specified changes to
the decommissioning liabilities to be reported against the related asset
|
Intends to use
|
|
Borrowing costs
|
Adopts IAS 23 prospectively
|
Intends to use
|
