Download Financial Statement Disclosures

The Investor’s Perspective on
Environmental Finance
Julie Desjardins, CA
Desjardins & Associates
on behalf of
The Canadian Institute of Chartered Accountants
October 28, 2004
Canadian Institute of Chartered
Accountants
1
Outline
•
•
New reporting environment
External reporting environment:
–
–
–
•
•
Financial statement disclosures
MD&A disclosures
Adequacy of current disclosures
Increasing accountability
Conclusion
October 28, 2004
Canadian Institute of Chartered
Accountants
2
New Reporting Environment
• 2002 The year of scandals
• 2003 The year of rules
• 2004+ The years of enforcement?
October 28, 2004
Canadian Institute of Chartered
Accountants
3
A new reporting package
Financial statements + the
Management’s Discussion and
Analysis report (MD&A)
October 28, 2004
Canadian Institute of Chartered
Accountants
4
A Changed Landscape
The MD&A report should communicate information that helps users
understand past performance and future prospects
Continuous Disclosure
Press Releases
AIF
Financial
MD&A
Statements
Financial
MD&A
Statements
Annual
Reports
Insider Trading
Prospectuses
Reports
Material
Change Reports
Together the MD&A and F/S form the foundation for “business
reporting”
October 28, 2004
Canadian Institute of Chartered
Accountants
5
Financial Statement Disclosures
• Environmental issues (e.g. site
contamination clean-up) affect
financial statements
• But materiality affects transparency
October 28, 2004
Canadian Institute of Chartered
Accountants
6
New Financial Statement
Disclosures
• New assets and liabilities to be
recorded in financial statements for
GHG emissions
• Related activities
• CICA/IETA workshop 2002
• IFRIC 2003
• CICA Research Report 2004
October 28, 2004
Canadian Institute of Chartered
Accountants
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Key IFRIC Financial Statement
Disclosures
• Allowances - record as assets at market
value on balance sheet
• If allowances allocated free of charge –
record government grant on balance sheet
and take to income over time
• As emissions occur – record expense and
liability (at market value)
October 28, 2004
Canadian Institute of Chartered
Accountants
8
CICA Research Report – GHG
Emissions
• Approved by the Canadian Accounting Standards
Board
Consider Canadian requirements for GHG emissions.
Discuss the accounting treatment for any related credits
and allowances and the disclosures that should be
included in published financial reports.
• Progress report expected 2005
• Completion will be linked to regulatory process
October 28, 2004
Canadian Institute of Chartered
Accountants
9
A Changed Landscape
The MD&A report should communicate information that helps users
understand past performance and future prospects
Continuous Disclosure
Press Releases
AIF
Financial
MD&A
Statements
Financial
MD&A
Statements
Annual
Reports
Insider Trading
Prospectuses
Reports
Material
Change Reports
Together the MD&A and F/S form the foundation for “business
reporting”
October 28, 2004
Canadian Institute of Chartered
Accountants
10
MD&A – What is it?
A regulatory filing that is:
“a narrative explanation, through the
eyes of management, of how your
company performed during the period
covered by the financial statements,
and of your company’s financial
condition and future prospects.”
Form 51-102F1
October 28, 2004
Canadian Institute of Chartered
Accountants
11
MD&A Disclosures
Required disclosures:
– Current Regulatory Requirement: NI 51102
– MI 52-109: CEO/CFO Certifications
Best practice disclosures:
– CICA’s MD&A Guidance (2002, revised
2004)
October 28, 2004
Canadian Institute of Chartered
Accountants
12
Required MD&A Disclosures
Your MD&A must discuss
important trends, events,
uncertainties and risks that are
reasonably likely to have an effect
on your company’s business.
Required by NI 51-102
October 28, 2004
Canadian Institute of Chartered
Accountants
13
Required MD&A Disclosures
“Your MD&A must discuss
material information that may not
be fully reflected in the financial
statements. Some examples are
environmental, social or cultural
matters…”
Required by NI 51-102
October 28, 2004
Canadian Institute of Chartered
Accountants
14
Board of Director Responsibilities
• Approve annual and interim financial
statements
• Approve annual and interim MD&As
Required by NI 51-102
October 28, 2004
Canadian Institute of Chartered
Accountants
15
Required Management Certifications
Annually and quarterly, CEOs and
CFOs must certify that their filings:
“fairly present in all material respects
the financial condition, results of
operations and cash flows of the
issuer”
Required by MI 52-109
October 28, 2004
Canadian Institute of Chartered
Accountants
16
Required Management Certifications
Annually and quarterly, CEOs and
CFOs must certify that their filings:
“do not contain any untrue statement
of a material fact or omit to state a
material fact required to be stated or
that is necessary to make a statement
not misleading”
Required by MI 52-109
October 28, 2004
Canadian Institute of Chartered
Accountants
17
Required Management Certifications
CEOs and CFOs must certify that they:
• are responsible for establishing, maintaining,
designing and evaluating disclosure controls
and procedures
• responsible for establishing, maintaining and
designing internal control over financial
reporting and for disclosing in the MD&A
material changes thereto
Required by MI 52-109
October 28, 2004
Canadian Institute of Chartered
Accountants
18
CICA’s MD&A Guidance
• November 2002, revised 2004
• principles on completeness, materiality
• disclose key performance drivers, including
environmental issues
• disclose any need to develop new systems,
processes
• calls for quantitative, as well as qualitative,
risk disclosures
October 28, 2004
Canadian Institute of Chartered
Accountants
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Vision, Core
Businesses
& Strategy
MD&A Disclosure
Framework
Executed thro ugh
Key
Performance
Drivers
R
I
S
K
Ena bled by
Capability
(Resources &
Systems)
Le adin g to
Results
(historical/
prospective)
A Continuum of Rele vant Inform ation
a bout the Pa st and Future
October 28, 2004
Canadian Institute of Chartered
Accountants
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CICA Report - 2001
Environmental Performance: Measuring and
Managing What Matters
• How does environmental performance matter to
our company and our strategy for shareholder
value creation?
• Are we measuring and managing this effectively?
• Are we communicating this effectively to our
internal and external stakeholders?
October 28, 2004
Canadian Institute of Chartered
Accountants
21
World Resources Institute
Changing Oil - 2002
• Studied 16 oil companies
• “Few companies have disclosed the degree
to which they are financially exposed to
these issues, and no company has attempted
to quantify the financial implications for its
shareholders.”
October 28, 2004
Canadian Institute of Chartered
Accountants
22
CERES Report – June 2003
• All of 20 examined companies taking some
governance actions to respond to climate
change.
• Few have developed comprehensive
programs to treat issue as imminent threat
• Risk disclosures inadequate
October 28, 2004
Canadian Institute of Chartered
Accountants
23
Contrasting MD&A Disclosures
Suncor:
• specific estimate of impact of Kyoto on Oil
Sands cash operating costs
• notes major assumptions
• concludes impact not expected to be
material (but ultimate impact dependent on
government implementation plans.)
October 28, 2004
Canadian Institute of Chartered
Accountants
24
Contrasting MD&A Disclosures
Nova Scotia Power Inc. (100% owned by
Emera (EMA- TSX)
• “recognizes the importance of climate change and
is committed to support prudent Canadian
abatement efforts. However, Nova Scotia Power
is concerned that the lack of a clearly articulated
implementation plan for Kyoto does not allow an
accurate determination of the impact of ratification
on the company and its customers”
October 28, 2004
Canadian Institute of Chartered
Accountants
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Food for Thought
•
•
•
•
management’s financial decision making –
pressures to deliver on short term targets
board of director consent to the strategy?
how important is the environment to
- the public in general
- to shareholders
good news: analyst report highlighted issue
October 28, 2004
Canadian Institute of Chartered
Accountants
26
New CICA MD&A Interpretive
Release
• Additional MD&A guidance
• MD&A disclosures about the impact of climate
change and other environmental issues on
financial performance and prospects
• Early 2005
October 28, 2004
Canadian Institute of Chartered
Accountants
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Increasing accountability
• Aggressive regulatory environment –
best practices important
• CEO/CFO certifications
• Audit committee and board
involvement
October 28, 2004
Canadian Institute of Chartered
Accountants
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Increasing accountability
More agents of change:
• institutional investors (Carbon Disclosure
Project, Institutional Investors Group on
Climate Change)
• shareholder activism
• insurance companies
• bondholders
• lenders
October 28, 2004
Canadian Institute of Chartered
Accountants
29
Conclusion
• Existing MD&A regulations
require better disclosures
• Current disclosures are lacking
• The time for change is now; the
agents of change are numerous.
October 28, 2004
Canadian Institute of Chartered
Accountants
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