CFO Series: New Year, New Accounting Rules

In the latest CFO Series webinar, “New Year, New Accounting Rules”, Richter partner, Audrey Mercier highlighted the new rules and changes coming into effect in 2024. She discussed updates regarding interest rate benchmark reform, accounting for cloud computing arrangements, and business combinations between related parties. The presentation was hosted by Richter partner, Michael Dube.

So, what should CFOs understand as we head into the new year? Here is a summary of the key points of the webinar.

INTEREST RATE BENCHMARK REFORM

For context, several countries, including Canada, are replacing existing interbank rates with alternative reference rates, which will result in the modification of loan and derivative contracts that refer to these rates. The standard guidance in Section 3856, Financial Instruments, requires companies to determine qualitatively and quantitatively whether the modification of a debt contract should be treated as an extinguishment.

The Accounting Standards Board (AcSB) concluded that it should intervene and offer relief aimed at: a) Simplifying the accounting analysis of modifications to debt instruments resulting solely from the reform of benchmark interest rates, and thus treat modifications as a continuation of the original contract, rather than as an extinguishment; and b) Allow hedging relationships to be maintained in the event of a change in certain key conditions linked to the reform of benchmark interest rates.

To note, these measures apply only to the replacement of interbank rates. If the optional measure is chosen, it must be applied uniformly to all debt instruments that refer to interbank rates.

ACCOUNTING FOR CLOUD COMPUTER ARRANGEMENTS – Applicable to 2024 year-ends

Cloud computing means providing access to computer resources on demand, over the internet, via private or public server networks. Practical examples include QuickBooks Online, an accounting software, and Microsoft OneDrive, that allows for the storage of documents. In other industries, such as the medical industry, for example, this includes online diagnostics and test results stored on the cloud (as is the case in healthcare), and application-based tracking for trucking and logistics companies.

Cloud computing is gaining prevalence, and many clients are moving away from local servers, which are prone to damage in the event of a disaster in favor of cloud-based applications. This leads to a rise in new accounting challenges which have not been experienced before. The Accounting Standards Board is now attempting to update its standards and provide more guidance for these types of arrangements through the publication of Accounting Guideline 20 – Accounting for cloud computer arrangements (“AcG-20”).

Cloud computing consists of providing access to computer resources on demand over the internet or a private network. These arrangements can have multiple components including software or access to software, equipment and implementation activities. Traditionally, CPA Canada Handbook Sections 3061 – Property, Plant and Equipment or 3065 – Leases would be applied in order to capitalize certain tangible property. AcG-20 will apply where the component is not a tangible property.

The new guidelines offer a simplification measure where companies can recognize as an expense all expenditures related to the cloud computing agreement components, in particular:

• When goods are provided, the entity recognizes these expenditures as an expense when it has a right of access to these goods. When services are provided, the entity recognizes these expenditures as an expense when it receives the services in question.
• An entity is not prohibited from recognizing an advance payment as an asset when goods or services are paid for before the enterprise receives them.

The simplification measure must be applied consistently to all cloud computing arrangement expenditures if adopted.

If a company chooses not to apply the simplification measure, it will be required to analyze the cloud computing agreement to determine the existence of an intangible asset. The software component of an arrangement is recognized as a software intangible asset if it meets the definition as defined in Section 3064, Goodwill and Intangible Assets. The handbook stipulates that the software component must be identifiable; controlled by the entity; and provide future economic benefits to said entity in order to be recognized as an intangible asset.

The Accounting Standards Board has proposed guidance to help a company determine whether or not it has control over the software. If the entity has the contractual right to obtain the software without incurring a significant penalty and if it is possible for it to run it on its own infrastructure or that of a third party, may indicate that control over the software exists. Other factors that may indicate the existence of control include exclusive rights (e.g., the supplier cannot make the software available to other customers), and decision rights (e.g., the entity can decide how and when the software is updated or reconfigured).

If the service software does not meet the definition of an intangible asset and the recognition criteria set out in Section 3064 are not met, it should be accounted for as a service software and expensed as incurred.

Current expenses are accounted for in different ways depending on whether they relate to an intangible asset or a service software. The table below describes the treatment of the different categories of expenses:

Implementation Activity

What is the impact on financial statements?

Software intangible assets

Software as a service and directly attributable implementation costs capitalized

Disclosures

1. If the enterprise applies the simplified approach, disclose that fact; and the amount expensed for the period, including the caption in the income statement in which the expense is included.
2. For a software intangible asset, disclose information in accordance with Section 3064: cost; amortization; methods and periods of amortization; and impairments, if any.
3. For a software as a service, disclose the policy followed to account for expenditures that are directly attributable to implementing the software service including, the amount expensed for the period, the caption in the income statement in which the expense is included, if directly attributable expenditures on implementation activities are capitalized, the net carrying amount capitalized as other assets and the method used to expense the other assets. If there is any impairment loss recognized on the other assets, the amount of the impairment loss, the caption in the income statement in which the impairment loss is included, and the facts and circumstances leading to the impairment.

An enterprise shall disclose information in accordance with Section 3280, Contractual Obligations, regarding commitments to make expenditures on a cloud computing arrangement.

This is applicable to annual financial statements for fiscal years beginning on or after January 1, 2024. Earlier application is permitted. The guideline must be applied retrospectively. Transitional relief is provided. Companies not using the simplification measures may elect to apply AcG-20 retrospectively only to implementation expenditures incurred in a cloud computing arrangement from the beginning of the earliest period presented in the financial statements where the guideline is first applied. If the relief is applied, AcG-20 must be applied retrospectively to previously recognized assets. Any adjustment must be recognized in the opening balance of retained earnings for the first period presented.

BUSINESS COMBINATIONS BETWEEN RELATED PARTIES

The proposed changes to the accounting treatment of business combinations under common control are
summarized as follows:

• Removal of the reference to “exchange amount” in paragraph 3840.44(a) to permit the application of all the requirements of Business Combinations, Section 1582, in the case of certain business combinations under common control.
• Added an election in paragraph 3840.44(b) between retrospective restatement of all prior periods when carrying amounts are used to account for a combination and prospective recognition of the transaction.

The removal of the reference to the exchange amount and restriction on use of Section 1582 removes an ambiguity in the standard to make for consistent reporting. The election to recognized prospectively or retrospectively the transaction provides flexibility. Depending on your financial reporting objectives you can decide whether you want to use either option.

This is applicable to annual financial statements relating to fiscal years beginning on or after January 1, 2025. Early application is permitted.

Another area of note that CFOs should be aware of is Bill S-211: Assessing the risks related to forced labour and child labour in your supply chain. The deadline for complying with this new law is May 31^st of each year and will require companies to report on supply chain activities and complete a questionnaire. Fines for non-compliance could be up to $250,000 for the company or for any of its officers or directors. Richter partners, Massimo Cecere and Stéphane Marcassa can assist companies in navigating compliance with this new law.

This article is for information purposes only. Please talk with your accountant or reach out to us to see how these changes may affect you and your business.

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