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Accounting Standards Board's Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:

November 14, 2005

Business Income Tax Division
Department of Finance
17th Floor, East Tower
140 O'Conner St.
Ottawa, Ontario
K1A 0G5

Dear Sir/Madam,

Re: Tax and Other Issues Related to Publicly Listed Flow-Through Entities

Consultation Paper

I am writing to you in my capacity as Chair of the Accounting Standards Board to provide you with some background information which may assist you in your analysis of the issues identified in the above-noted Consultation Paper. The AcSB is an independent body with authority to develop and establish standards and guidance governing financial accounting and reporting in Canada. AcSB pronouncements form Generally Accepted Accounting Standards (GAAP) in Canada. The mission of the AcSB is to contribute to enhanced decision-making by continuously improving the quality of financial and other information about organizational performance reported by Canadian entities, including flow through entities.

The AcSB serves the public interest by developing and establishing standards and guidance governing financial accounting and reporting domestically and by contributing to the development of internationally accepted standards. High quality accounting standards assist investors and investment decisions through, among other things, improving comparability, consistency, and transparency in financial reporting.

This submission focuses on Question for Consideration #3—"What impacts are Flow Through Entities (FTEs) having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?" Other questions asked in the Consultation Paper are not addressed as they are outside the mandate of the AcSB.

Recently, some have suggested a lack of, and need for, financial reporting standards specifically addressing the Income and Royalty Trust sector. In response to these comments, the AcSB has reviewed and discussed financial reporting issues in this sector and has consulted its User Advisory and Accounting Standards Oversight Councils and representatives of various securities regulatory authorities.

As a result of its research and discussion the AcSB notes the following areas of concern with respect to financial reporting practices by income and royalty trusts:

  • Section 1540 of the CICA Handbook—Accounting, Cash Flow Statements, paragraph .55, requires certain disclosures of cash distributions made by income trusts. Some income and royalty trusts may not be following the requirements of this paragraph.
  • 'Distributable Cash' or 'Distributable Income' are metrics often used in the trust sector. Not all trusts define the term, and when actually defined in financial statements or other public disclosure documents, the definition appears to be vague and may be confusing to readers.
  • Income trusts sometimes provide a reconciliation of 'distributable cash' or 'distributable income' to the financial statements. Reconciliations and related discussion provided by many income trusts may not allow investors to understand the adjusting items in the reconciliation, particularly those items that are discretionary in nature.
  • Cash distributions may include substantial returns of capital. This does not appear to be well explained by many income trusts. A failure to distinguish return of capital from return on capital on a GAAP basis may mislead investors as to the actual performance of an investment.
  • Yield is often carefully considered in making investment decisions. Some trusts are including returns of capital in the calculation of yield. Although the basis of calculation may be evident, this may nonetheless mislead investors since it overstates yield. The variety of methods of calculating yield also leads to a lack of comparability between income trusts.

The AcSB, at this time, believes that reporting issues in this sector do not arise from deficiencies in accounting standards, and has been unable to identify changes in Canadian accounting standards that would respond to the concerns noted above. The AcSB believes that a proper application of GAAP and compliance with the disclosure requirements of the Canadian Securities Administrators should lead to proper disclosure of relevant information to investors in trust units.

The AcSB believes that it is important for investors to receive understandable disclosure and increased transparency in this sector, although much of that information is reported outside the financial statements and hence is usually the responsibility of the securities authorities. I have communicated the above concerns to several of the securities commissions, offering assistance in any efforts they may make in addressing financial reporting issues in this sector. I have also written to the Investment Dealers Association in its capacity as regulator of the conduct of investment dealers in advising retail investors.

The AcSB continues to communicate its concerns regarding the trust sector and to monitor financial reporting issues in this sector to ensure that it is aware of any matters that should lead to modifications to accounting standards.

I authorize these comments for publication on your website. Should you wish to contact me to discuss any of the matters discussed in this letter please do so, in English, via email at the address listed below.

Yours truly,


Paul Cherry, FCA
Accounting Standards Board
Email: paul.cherry@cica.ca