Further to our discussion of November 16, we appreciate the opportunity to comment on the potential impacts of this important policy paper. Our views deal primarily with issues and concerns arising for federally regulated financial institutions that are also publicly traded companies listed in Canada or both Canada and the United States. In addition, we identify specific implications for The Office of the Superintendent of Financial Institutions (OSFI) as a key user of information produced by these companies. While some of our comments are unique to these enterprises and relate to their reporting relationship to this office, several of our comments are likely to have broader applicability.

    Before providing our detailed comments, we wish to provide some important context for the discussion.

    First, OSFI strongly supports current initiatives on the part of Canadian and other accounting standard-setters to achieve accounting standards harmonization within an internationally recognized and respected framework. In this respect, we believe that our views and objectives are closely aligned with those of the CSA and other global securities regulators. As you are aware, OSFI takes a strong interest in not only continuing domestic standards development, but also key IASB initiatives that are likely to impact the direction of GAAP for financial institutions. Through direct liaison as well as membership in various international regulatory groups, OSFI strives to provide thoughtful, expert input to CICA and IASB due process from the perspective of a key user-stakeholder of financial institutions’ information.

    Second, federally regulated financial institutions are required by law to prepare their annual statement for presentation to shareholders in accordance with Canadian GAAP, the primary source of which is the CICA Handbook, except where the Superintendent specifies otherwise. As you are aware, specifications may take several forms, including narrowing the range of options to be used within GAAP, providing clarification in areas where GAAP may not deal with a particular issue in sufficient detail, or, on very rare occasions and only when determined to be in the public interest, articulating a treatment that is viewed as materially inconsistent with Canadian GAAP. For consistency, ease of preparation and clarity of understanding, institutions use this same framework of accounting principles as the basis of their regulatory reporting to OSFI.

    Third, subsection 22(6) of the OSFI Act requires that the Superintendent report annually “respecting the disclosure of information by financial institutions and describing the state of progress made in enhancing the disclosure of information in the financial services industry.” Prudential regulators, such as OSFI, take an interest in improving disclosure by financial institutions, not only to better serve the interests of their depositors and policyholders but also to promote the application of market discipline as a governance tool. As you are aware, this concept underlies Pillar 3 of the revised Basel Accord and also features in the international supervisory framework for insurance enterprises.

    For these reasons, OSFI believes that the frameworks of external and regulatory reporting are fully intertwined and that any changes that purportedly affect only external reporting will have profound effects on the institutions we regulate, the markets’ understanding of these institutions individually and within their industry, and on our use of both public and regulatory information to fulfil our responsibilities.

General comments

    Our primary concern deals with Canadian listed enterprises that may be provided with the option to file either US or international GAAP financial statements in Canada with either no reconciliation or a limited reconciliation to Canadian GAAP. We believe such an option will appeal primarily to those few domestic companies who also file in the United States and foreign-owned companies whose parents comply with international accounting standards. We see very little intuitive appeal or benefit to the many other Canadian enterprises that list only in Canada and, therefore, little likelihood that broader use of the option will occur.

    Because those enterprises that stand to benefit from this option are among the most significant in their respective industries, each industry may fragment into two or even three distinct subgroups based on reporting choice. While we recognize that the few, large enterprises who might choose to report in, say, US GAAP could be more easily compared to US enterprises that they believe are their peers, we are concerned that analysis of the domestic industry as a whole would become more difficult.

    We also share the concerns expressed by many that familiarity with US GAAP in particular may not be sufficient in Canada to fully support the needs of preparers, their auditors and various classes of users including domestic investors and regulators. With only a few exceptions, the highest level of US GAAP is sufficiently similar to Canadian GAAP to foster false comfort that full compliance is easy to achieve. However, we are aware that US GAAP also draws from several other authorized sources beyond the basic pronouncements of the FASB and the Emerging Issues Task Force, and that meeting all requirements under a specific set of circumstances can be quite complex. Because this level of expertise is not acquired easily or quickly, any decision to permit greater use of US GAAP within Canada in the near term carries the risk that the quality of information produced will be suspect. We would concur that the challenges are not as great in the case of international GAAP, although in some areas it has adopted some of the complexities of US GAAP.

    Finally, we are concerned that providing key institutions with the option to adopt US GAAP for Canadian filings will signal loss of confidence in Canadian GAAP and the Canadian standard-setting process. One undesirable consequence could be perceived or real pressure on smaller, less prepared companies to conform for competitive or other reasons.

Comments Specifically Related to Federally Regulated Financial Institutions

    Capital adequacy is a significant, unique measure applied to financial institutions and is becoming an important part of these institutions’ public disclosures. Although regimes like the Basel Accord provide a broad international framework for determining capital adequacy, it is left to individual country regulators to adapt the regime in a manner most appropriate to local legal, tax and accounting frameworks, with the result that the same institution may not require precisely the same capital underpinning from one jurisdiction to the next. A Canadian institution filing in US GAAP and viewing itself as part of a peer group comprised primarily of US competitors will still be required to apply Canadian capital adequacy rules for regulatory and public disclosure purposes in Canada. At the very least, we believe a “mix and match” approach, whereby a Canadian institution would report a US GAAP-based balance sheet along with OSFI-based capital adequacy requirements, will require careful and considerable explanation that may or may not level the disclosure playing field.

    As noted earlier, federal financial institutions statutes clearly endorse the use of Canadian GAAP for shareholder financial statements. Although the Superintendent does have extensive override power, we do not believe the scope of that power includes complete replacement of Canadian GAAP with US GAAP on an optional basis, as this would effectively undermine the intent of the statute. Therefore, we believe that any federally regulated financial institution wishing to publish only US GAAP shareholder statements would find itself in breach of current legislation and that compliance would require publication of comprehensive Canadian GAAP financial statements as well.

    OSFI as a key user of regulatory information depends on institutions’ internal accounting records to provide a level of data that is much more detailed than normally found in externally published reports. In addition, we rely on our ability to review and reconcile externally reported information to the same institution’s regulatory information to ensure that reporting to both user communities has been derived from the same underlying data.

    It has been suggested by some that a separation of these two streams of reporting (US external, Canadian regulatory) might be a solution. However, in order to prepare an audited Canadian GAAP-based annual statement and related regulatory returns, we anticipate that institutions wishing to take advantage of the US filing option will still need to maintain parallel reporting systems (general ledgers, key application systems, etc.). Thus, we do not see that the full hoped-for cost savings will accrue to this group of institutions. From the perspective of enabling OSFI to monitor safety and soundness, we could accept this approach, provided the statutes were changed to remove the legal barrier and if we were convinced of the continued integrity of the Canadian GAAP information. This might be achieved, in part, by requiring publication of an audited reconciliation of the US or international GAAP financial statements to Canadian GAAP. However, this approach would seem to us to be far from ideal, as it would reduce the ease of comparability for other stakeholders within Canada, including the investor community, and raise other issues noted earlier.

    OSFI’s preference for a Canadian GAAP-based regulatory reporting system is based on the need to monitor both individual institution and systemic health and safety. As noted earlier, we would not be supportive of changes that might place perceived or real pressure on large numbers of smaller institutions to adopt US GAAP for public filing purposes where the operating risks of such a conversion are largely unknown. For the same reason, we would be reluctant to make US GAAP the basis for our smaller public and privately-held institutions’ regulatory reports, even if this would restore industry comparability.

    In addition, our earlier observation about the state of user readiness extends to our own current situation. While OSFI’s internal accounting experts have some degree of familiarity with US GAAP, we would require significant lead time to build or acquire the necessary level of expertise to deal with US accounting issues, interpret regulatory information expressed in US GAAP terms and transfer essential US GAAP knowledge to our field supervision staff.

    Finally, we would observe that although some aspects of US GAAP are more robust and would likely strengthen certain accounting, reporting and disclosure practices by Canadian enterprises, we would strongly resist promoting greater use of current US GAAP for life insurance enterprises in the Canadian marketplace. This model is a mixture of relatively new and comprehensive guidance on financial instruments and derivatives with insurance contract accounting that in some respects is several decades old. In contrast, CICA’s Handbook Section 4210 is relatively new, is acknowledged as one of the most progressive life insurance accounting models in the world, is well integrated with equally up-to-date actuarial practices, and has been the inspiration for similar developments in Australia, the UK and now the IASB.

    OSFI is pleased to have been given the opportunity to comment on the CSA discussion paper. OSFI is concerned in both a general and industry-specific sense that any move at this time to permit the use of US or international GAAP as a reporting option in Canada will have short-term negative repercussions. We believe that it would be much better to devote resources to achieving rapid and effective harmonization of accounting standards, and to developing effective processes for maintaining harmonization.

    We trust these comments will be useful to the CSA and will be pleased to continue consultations as appropriate. If you have any further questions, please do not hesitate to call Donna Bovolaneas at 416-954-6464.