OSC finalizes rule on financial statements for issuers

The new rule reformulates sections of existing securities regulations and adds certain requirements. Issuers will now be required to prepare an interim balance sheet, an interim statement of retained earnings and an income statement, and a cash flow statement for each three-month period of their fiscal year. As well issuers must prepare notes to the interim financial statements, and must include certain line items in their annual and interim balance sheets.

The new rule requires that the annual financial statements be reviewed by the audit committee, and approved by the board of directors. It also requires the board of directors to review interim financial statements prior to filing, although this can be delegated to the audit committee.

The OSC published the proposed rule for comment in March and has received 13 submissions. Changes have been made to the proposed rule as a result of those comments, but the changes aren’t considered material, so the rule has been finalized.

A couple of the commentators recommended that the OSC harmonize the requirements for interim financial statements with the Canadian Institute of Chartered Accountants Handbook. The OSC says it has worked closely with the CICA throughout the rule making process in order to harmonize the requirements. However, in some cases the requirements of the rule extend beyond Generally Accepted Accounting Principles.

One commentator recommended that the rule be expanded to address the acceptability of foreign GAAP and the need for GAAP reconciliation for annual and interim financial statements prepared under foreign GAAP. The OSC says it considers these issues to be very important and is addressing them in a separate initiative of the Office of the Chief Accountant.

The OSC says five commentators were strongly opposed to setting a minimum level of disclosure in the balance sheet, saying that financial statement disclosure should be governed solely by the CICA. The OSC responds that International Accounting Standards, Securities and Exchange Commission requirements and CICA Handbook requirements were considered in assessing the need for setting a minimum level of disclosure in the balance sheet.

Three commentators suggested that reviews of interim financial statements by external auditors should be mandatory. Another recommended that external auditors be used instead of a review by the board of directors and audit committee. The commission says that because of the diversity of opinion on the issue it has not changed the rule, but will monitor it and will revisit it when the new TSE/CDNX Joint Committee on Corporate Governance makes its final recommendations.

The rule was delivered to the minister of Finance for approval on October 13. It will come into force 15 days after it is approved, or in 75 days if the minister neither approves nor rejects it.