2014 Annual Accounting Update for Private Enterprises

Annual Update for Private Enterprises
Welcome to the
Welch LLP 2014
Private Enterprise
Update Seminar

Moderator
Garth Steele, CPA, CA
Indirect Tax Partner
gsteele@welchllp.com
www.welchllp.com
@garthsteele

Agenda
• ASPE Updates
• IFRS & U.S. Updates
• SR/ED Recent Developments
• EDC Exporting Solutions
• Audience Q&A
• BREAK
• Tax Update / Impact on Tax Strategies
• How to Prevent Fraud
• Audience Q&A

ASPE Updates
Shawn Kelso, CPA, CA
Partner, Director of Professional Standards
skelso@welchllp.com
www.welchllp.com
@WelchLLP

Changes to ASPE
• New standards
o 3462 Employee Future Benefits
o 1591 Subsidiaries
o 3056 Interests in Joint Arrangements
• Revised Standards
o 3475 - Discontinued Operations
o Improvements to ASPE

3462 - Employee Future Benefits
• Applies to periods beginning on or after January 1, 2014 (early
adoption permitted)
• Replaces Section 3461
• Summary of changes impacting defined benefit plans
o Deferral and amortization method no longer permitted
 Defined benefit liability (asset)
= fair value of obligation
- fair value of plan assets
 Measurement of assets and obligations must be at the
balance sheet date

1591 - Subsidiaries
• Applies to periods beginning on or after
January 1, 2016 (early adoption permitted)
• Replaces Section 1590 and AcG 15 on VIEs
• Provides for new guidance when control
exists by other than equity interest
o *Entities under common control not in
scope

3056 Joint Arrangements
adoption permitted)
• Replaces Section 3055 Joint Ventures
• Summary of changes
o Specifies 3 types of arrangements
 Jointly controlled operations, assets, enterprises
• Recognition of interest in JV now depends on classification
o Proportionate consolidation no longer permitted
• New requirements for recording gains/losses on contributions to
JVs

Recognition of Interest in Joint
Arrangements
Jointly Controlled
Operations
Jointly Controlled
Assets
Jointly Controlled
Enterprises
Responsible for their
own assets &
liabilities
Revenue & expenses
recorded in
accordance with
agreement terms
Record its share of
jointly controlled
assets & liabilities
Revenue & expenses
recorded in
accordance with
agreement terms
Equity
Cost or
Account for as a joint
operation or joint
asset (if underlying
agreement terms
provide for such
rights)

3475 - Discontinued Operations
adoption permitted)
• Summary of changes:
o Change to the qualifying criteria for discontinued operations
 Separate major line of business or geographic area
 Single co-ordinated plan to sell

2013 Annual Improvements
• Apply to periods beginning on or after January 1, 2014
(early adoption permitted)
o Business combinations –
 contingent consideration
 Disclosures when cost or equity used for subsidiaries
o Accounting for Changes in Ownership (subsidiaries and JVs)
o Non-controlling interest should not be a deduction on income
statement
o Financial instruments
 Redemption by virtue of economic compulsion
 Additional guidance on anticipated transaction
hedged by forward contract

Exposure Draft – Redeemable Preferred Shares
Issued in a Tax Planning Arrangement
• Proposes changes to redeemable preferred shares issued in tax planning
arrangement
o Account for liability (consistent with other redeemable preferred
shares)
o Corresponding debit would be a separate component of equity
o Reclassify other equity component to retained earnings as shares are
redeemed
• Proposed change would be effective for years beginning on or after
January 1, 2016

IFRS & U.S. Updates
Ken Brownlee, CPA, CA
Senior Manager
Kbrownlee@welchllp.com
www.welchllp.com
@WelchLLP

International Financial Reporting
Standards (“IFRS”)
• Revised standards
o IFRS 9, Financial Instruments
• New standards
o IFRS 14, Regulatory Deferral
Accounts
o IFRS 15, Revenue from
Contracts with Customers
• Projects in progress

IFRS 9 – Financial instruments
• Effective January 1, 2018
o Early adoption available
o Options on adoption
 Delay
 Entirety
 In part
• Recent changes
o Hedge accounting
o Impairment of financial assets
o Classification & measurement

IFRS 14 – Rate regulated
• Deferral ends January 1, 2015
• Interim guidance for entities with rate regulated activities
(Utilities, Pipelines, etc.)
• Comprehensive project – interim guidance

IFRS 14 – Rate regulated
• How is rate regulated?
o Conduct rate regulated activities
o Recognize qualifying regulatory deferral account balances
• Who qualifies?
o First time adopters only
o Apply IFRS 1 for all other financial statement line items
• Recognition and measurement of regulatory accounts

IFRS 15 – Revenue recognition
• Current status
o New standard
o Issued by IASB in May 2014, joint standard with FASB
o Expected to be finalized in Q4 2014
o Effective January 1, 2017
o Early adoption

• State of the nation
o FASB complexity and volume
o IFRS so many standards
 IAS 11
 IAS 18
 IFRIC 4
 IFRIC 15
 IFRIC 13
 IFRIC 18

• Framework
o Recognition of revenue for consideration expected in
exchange for promised goods or services
o Principles based framework

• Transition options
o Retrospective
 Full
 Optional practical expedients
o Modified
 New contracts and contracts in process

• 5 steps
1. Identify contract with customer
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to
performance obligations
5. Recognize revenue when
performance obligation satisfied
• Current approach
o Risks & rewards

• Implementation considerations
• Key changes
• Impact on stakeholders

United States GAAP
• Convergence with IFRS
o Revenue
o Leases
o Financial instruments
• Private company GAAP
• Other changes
o Discontinued operations
o Going concern
o Disclosure framework

SR/ED – Recent Developments
Terry Lavineway
Director of Business Incentives
tlavineway@welchllp.com
www.welchllp.com
@terryl99

SR&ED – Recent Developments
• Changes introduced in 2012 are
in full effect
o Proxy amount now at 55% for
2014 (60% for 2013)
o Subcontractors now at 80%
of eligible expenditure
o Capital expenditures no
longer eligible beginning
January 1, 2014

• Administrative changes at the CRA SR&ED directorate
o Ottawa team reports to Assistant Director in Toronto Centre
o Claim Revenue Manual revision coming
o Some sector-specific guidance being reintroduced
o More training for reviewers
o Mandatory communication on eligibility decision prior to an
assessment being released
o No more generic RFI’s

• Continuing to see interesting audit issues
o Supporting evidence issues – financial and science
o Routine Development
o Proof of concept = end of SR&ED
• Still seeing stranger audits outside of Ottawa … but it’s
creeping in

Introduction to EDC Solutions
Jennifer Ewin, MBA
Account Manager - EDC
jewin@edc.ca
www.edc.ca
@ExportDevCanada
Melanie Carter
Account Manager - EDC
mcarter@edc.ca
www.edc.ca
@ExportDevCanada

October 2014
Introduction to EDC Solutions
for
Welch Clients
Recognized EDC Solution Advisor

› Canada’s Export Credit Agency
› Crown corporation wholly owned by
Government of Canada
› Financially self-sustaining
› Operates on commercial principles
› Supports direct and indirect exporters
ABOUT EDC

2013 PERFORMANCE HIGHLIGHTS
› Facilitated $95.4 billion in business carried out by Canadian companies
› Served about 7,100 customers
› Supported business in 198 countries
› Facilitated $27.3 billion in emerging markets
› Contributed to 4% of GDP, supporting 568,799 jobs

HOW EDC CAN HELP
Sales Managers - Increase Sales
› Be more competitive getting contracts:
› Offer more attractive payment terms:
33
› Open terms – no payment up front,
› For example – 60, 90, 120 days… etc.
› Offer advance payment guarantees
› Issue bid bonds
› Bid on larger contracts even with up front working capital costs
› Potential to offer international buyer financing through EDC
› Increase credibility to foreign prospects:
› Able to issue performance bonds
› Backed by AAA rated, Canadian government organization
› Sell into new markets with confidence

HOW EDC CAN HELP
Finance Managers - Improve Cash Flow
› Increase Working Capital
› Obtain financing on one or multiple export contracts
› Eliminate collateral for Standby LCs or Bonds
› Get better credit terms with suppliers by offering them guarantees
› On SRED
› Increase Operating Lines:
› Include 90 % of foreign & domestic receivables
› Borrow against your inventory outside of Canada
› Get Financing
› With our loan guarantees, to acquire foreign assets or firms
› To obtain or increase a line of credit

HOW EDC CAN HELP
Risk Managers - Reduce Risk
› Peace of mind that you will be paid on international
contracts
› Protect your foreign assets from political risk
› Protect your balance sheet
› Protect yourself from both contract and cancellation risk
› Protect your down-payment when purchasing capital
equipment

REACHING OUT
One Question:
Are you exporting – directly or indirectly – or
close to having an export contract?
If the answer is yes … please reach out!
 Contact WelchGroup Consulting
• Candace Enman
• 613.236.9191 ext.195
• cenman@w-group.com

Audience Q&A
Have questions so far?
Ask us now!

Break
We will now have a 15 minute break.
Thank You.

Tax Update / Impact on Tax Strategies
Don Scott, FCPA, CA
Tax Partner, Director of Tax Services
dscott@welchllp.com
www.welchllp.com
@WelchLLP

Federal & Ontario Budgets –
Corporate Tax Measures
• Corporate Tax Rates
• No Changes
• When Ontario Budget Balanced?
2014 General M&P
Small
Business
Investment
Income
Federal 15.0% 15.0% 11.0% 34.7%
Ontario 11.5% 10.0% 4.5% 11.5%
Combined 26.5% 25.0% 15.5% 46.2%
• Ontario Small Business Deduction
• Clawback when capital > 10M (Similar to FED rule)

Combined Federal and Provincial
Corporate Tax Rates for 2014
Active Income
Manufacturing
Income
Small Business
< $500,000
Investment
Income (9)
Federal 15.00% 15.00% 11.00% 34.67%
Province
Newfoundland (1) 29.00% 20.00% 14.50% 48.67%
Nova Scotia (2) 31.00% 31.00% 14.00%/27.00% 50.67%
Prince Edward Island 31.00% 31.00% 15.50% 50.67%
New Brunswick 27.00% 27.00% 15.50% 46.67%
Quebec (3) 26.90% 26.90% 19.00% 46.57%
Ontario (4) 26.50% 25.00% 15.50% 46.17%
Manitoba (5) 27.00% 27.00% 11.00%/23.00% 46.67%
Saskatchewan (6) 27.00% 25.00% 13.00% 46.67%
Alberta 25.00% 25.00% 14.00% 44.67%
British Columbia 26.00% 26.00% 13.50% 45.67%
Yukon (7,8) 30.00% 17.50% 13.00%/14.50% 49.67%
Nunavut 27.00% 27.00% 15.00% 46.67%
Northwest Territories 26.50% 26.50% 15.00% 46.17%

Corporate Income Tax –
2014 Federal Budget Measures
• Eligible Capital Property Consultations
o Replace ECP Regime with CCA Framework
o Old – 75% Add / 7% AMORT
o New – 100% Add / 5% CCA
o Transitional Rules
o Tax Implications for Asset Sale Transactions

ECP Consultations –
Compare Old vs. New
ECP CAP Gain
Proceeds (no
cost)
1,000,000 1,000,000
Addition to CDA 500,000 500,000
Initial Corp. Tax
Small Business 75,000 225,000
Big Business 125,000 225,000
Combined Corp
250,000 250,000
& Personal Tax
Sell Shares /
CAP Gain
250,000 250,000
• Lose tax deferral on asset sale

Ontario Budget – Other Matters
• Ontario Retirement Pension Plan
o 3.8% / $90K Earnings
o 50/50 Employer/Employee
o “Comparable” Workplace Plan
o Start 2017
• Other Matters Under Study
o SR/ED Credit Incremental increase
o ATTC / CETC not refundable for big businesses

Federal & Ontario Budgets –
Personal Income Tax
• Personal Tax Rates
o Federal – no changes
o Ontario –
 New Intermediate Tax Bracket - $150K
 Lower Income Threshold for Top Tax Bracket - $220K (from $514K)
 No Inflation Adjustment
• Top Marginal Rates for 2014:
Type of Income
• Dividend Tax Credit & Surtax Calculations
• Federal – Increase tax on non-eligible dividends
• Ontario – Now after 56% Surtax
– Adjust for Eligible Dividends
Over
$220,000
$150,000
-
$220,000
$136,270
-
$150,000
Eligible Dividends 33.82% 31.67% 29.52%
Non-eligible
Dividends
40.13% 38.29%
36.45%
Capital Gains 24.76% 23.98% 23.20%
Other Income 49.53% 47.97% 46.41%

Combined Federal & Provincial
Top Marginal Tax Rates for 2014
Province
Salary and
Interest
Capital
Gains
Non-eligible
Dividends (1)
Eligible
Dividends
Newfoundland (2) 42.30% 21.15% 31.01/32.08% 22.47/30.19%
Nova Scotia (3) 46.5/50.00% 23.25/25.00% 34.94/39.07% 31.23/36.06%
Prince Edward Island 47.37% 23.69% 38.74% 28.7%
New Brunswick 46.84% 23.42% 36.02% 27.35%
Quebec 49.97% 24.99% 39.78% 35.22%
Ontario 46.41% 23.21% 36.45% 29.52%
Ontario (4) 47.97/49.53% 23.98/24.77% 38.29/40.13% 31.67/33.82%
Manitoba 46.4% 23.2% 40.77% 32.26%
Saskatchewan 44.0% 22.0% 34.91% 24.81%
Alberta 39.0% 19.5% 29.36% 19.29%
British Columbia (3) 43.7/45.8% 21.85/22.9% 35.51/37.99% 25.78/28.68%
Yukon (6) 42.4% 21.2% 32.04% 15.93 to 19.29%
Nunavut 40.5% 20.25% 31.19% 27.56%
Northwest Territories 43.05% 21.53% 30.72% 22.81%
This schedule reflects information concerning Federal and Provincial tax rates
known as of July 14, 2014.

Federal & Ontario Personal Tax Rates
by Tax Bracket
Taxable Income Ordinary Eligible
Dividend
Non-eligible
Dividend
Capital Gain
Lower Upper
11,138 40,120 20.05% 0.00% 5.35% 10.03%
40,121 43,953 24.15% 0.00% 10.19% 12.08%
43,954 70,648 31.15% 9.63% 18.45% 15.58%
70,649 80,242 32.98% 10.99% 20.61% 16.49%
80,243 83,236 35.39% 14.31% 23.45% 17.70%
83,237 87,907 39.41% 19.86% 28.19% 19.70%
87,908 136,270 43.41% 25.38% 32.91% 21.70%
136,271 150,000 46.41% 29.52% 36.45% 23.20%
150,001 220,000 47.97% 31.67% 38.29% 23.98%
220,001 ∞ 49.53% 33.82% 40.13% 24.76%

Integration
Small Business Big Business Investment
CORPORATION
Income $1000 $1000 $1000
Tax (155) (265) (462)
845 735 538
RDTOH 267
845 735 805
PERSONAL
Tax as Dividend (339) (249) (323)
Net $ 506 $ 486 $ 482
Tax Overall $ 494 $ 514 $ 518
Tax as Individual $ 495 $ 495 $ 495

Impact on Remuneration Strategies
• Bonus down to Small Business Limit
o Not automatic anymore
o Tax Deferral
o Eligible Dividends / No Big Tax Cost
o Cashflow of Shareholders / RRSP / CPP
o Income Splitting / Family trust
• Build up of Retained Earnings / Value
o Creditor Proofing
o Impact on CGE

• Pay Dividends to get RDTOH
o Not Automatic anymore
o Dividend Tax rate higher than refund rate
o Break even if GRIP
o Income Splitting / Family Trust
• Capital Gain vs. Dividend
o Less tax on capital gain compared to dividend
o “Pipeline” Transaction
o Capital Gains / Family Trusts

• Consider Non-CCPC to earn investment income
o No RDTOH System
o Taxed similar to big business income
o Tax Deferral

Impact on Exit Strategies
• Increases Value at Corporate Level
o No more “Bonus”
o Higher capital gain on exit
• Small Business Capital Gain Exemption
o May no longer qualify
o Need to “Purify”
o Trust sandwich
o Butterfly transaction

• Sell Shares or Assets
o Sell shares to get SBCGE
o Sell assets if goodwill
 Tax deferral on ECP
 Not if new rules
o S.84.1 Planning
• Capital Gain Better in Company
o Tax deferral
o Consider TRF to company prior to sale

• Exit Due to Death
o Capital gain cheaper than dividend
o S.164(6) Planning
o “Pipeline” Strategy
o Life Insurance Strategies

How to Prevent Fraud
Andre Auger, CGA, CFE
Government Services Advisor
aauger@welchllp.com
www.welchllp.com
@WelchLLP

Agenda
• Definition of Fraud
• Some Statistics
• Occupational Fraud
• Warning Signs
• What to do if You Find Fraud
• Penalties & Offences
• Assessing Susceptibility
• Prevention Measures
• Fraud Risk Assessments

Definition of Fraud
• Financial fraud is defined as one
or more intentional acts to deceive
other persons and cause them
financial loss.
• Involves a violation of trust
• The violation of trust is sometimes
more harmful than the actual
financial loss
• Fraud Triangle
• Internal fraud = Occupational fraud
• External fraud = mortgage fraud,
insurance fraud, bankruptcy fraud,
money laundering, tax fraud

Some Statistics – CFE Survey
• The typical business loses 5% of its
revenues to fraud each year
• The avg. loss for small businesses is $140K.
• Occupational fraud is the biggest threat to
small businesses (asset misappropriation,
corruption, F/S fraud)

Occupational Fraud
• Financial statement schemes
o improper revenue recognition, inadequate disclosure of
related party transactions, improper asset valuations,
fictitious fixed assets, improper capitalization, improper
deferral of expenses
• Employee schemes
o expense abuse, theft, fictitious documents, forgery
• Bribery and Corruption
o conflict of interest, bid rigging, kickbacks, economic
extortion

Warning Signs
• Personal characteristics of a fraudster
o intelligent, inquisitive, egotistical,
risk taker, rule breaker
• Behavioural red flags
o living beyond means, big spender,
keeps unusual work hours, financial
difficulties
• Other signs
o cash flow issues despite regular
sales’ activity
o decreasing profit margins despite
normal market activity
o significant drop in inventories

What to do if You Find Fraud
• ‘Tone at the Top’ is critical; adopt the
zero tolerance approach
• Seek advice from your legal counsel
• Contact your local police force for
guidance and advice
• If employees are involved, consider
termination of employment
• Pursue recovery strategies; negotiate
repayment agreements
• Press charges
• Proceed methodically, do not
jeopardize a potential investigation

Penalties & Offences
• Applicable sections under the Criminal Code
 121 ‘Frauds against the Government’
 122 ‘Breach of Trust’
 322 ‘Theft’
 380 ‘Fraud’
 397 ‘Books and Documents’
• Section 380: where the offence > $5,000, a term of imprisonment
not exceeding 14 years; if the offence is
< $5,000, a term of imprisonment not exceeding 2 years
• Section 397: falsifying documents, term of
imprisonment not exceeding 5 years

Assessing Susceptibility
• What sector do you operate in? Are
you in a high risk sector?
• What controls do you have in
place; are they reasonable &
practical for your organization
• Stay away from costly and
resource consuming controls
• Is your staff experienced & loyal?
• Emphasize prevention

Prevention Measures
• Be visible, let people know you are
watching the money; sign cheques, ask for
original documents, ask questions
• Show up on site unexpectedly
• Let people know you are looking for fraud
• Never sign stacks of blank cheques
• Do your homework before hiring
employees; background checks,
references, etc…
• Have employment contracts in place with
clear sections dealing with fraud and
consequences

Prevention Measures
• Check the monthly bank
statements
• Review your F/S regularly,
compare to previous periods
• If you are a small
organization, consider hiring
an external accountant for a
few hours per month to do
your bookkeeping and review
your records

Fraud Risk Assessments
• Helps you identify risks and gaps in your organization’s controls
• Focus is on deterrence
• Not a complicated, costly exercise
• Assesses the risks associated with employees and management
• Assesses the risks associated with outside parties dealing with
your organization (vendors, customers, banks, etc…)
• Assesses the likelihood of cash schemes, purchasing schemes,
contracting schemes, payroll schemes, theft of inventory,
conflicts of interest, etc…
• Looks at the physical controls in place
to deter fraud

Audience Q&A
Have questions?
Ask us now!

Thank you.
All event registrants will receive a
digital copy of the presentation via e-mail.
Event recording & slide content also available soon at
www.welchllp.com

2014 Annual Accounting Update for Private Enterprises

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2014 Annual Accounting Update for Private Enterprises

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