14. ACCOUNTING POLICY DEVELOPMENTS (continued)
The Company has completed the preliminary diagnostic phase and will continue to update its disclosures throughout 2011 to reflect specific actions taken to facilitate adoption of IFRS effective November 1, 2011. The Company will also continue to review and update its preliminary conclusions from the diagnostic phase during 2011 as new facts emerge. The differences that have been identified in the diagnostic phase are summarized below.
a) Transitional impact on financial statement presentation and classification
The Company’s financial statements will have a different format upon transition to IFRS. The components of a complete set of IFRS financial statements are: statement of financial position (balance sheet), statement of comprehensive income, statement of changes in equity, statement of cash flows, and notes including accounting policies. Income statement will be presented as a component of the statement of comprehensive income. Balance sheet may be presented in ascending or descending order of liquidity. Income statement is classified by each major functional area – marketing, distribu tion, etc.
Impact on Company: The Company will reformat the financial statements in compliance with IAS 1.
b)IFRS-1 Transitional policy choices and exceptions for retrospective application
IFRS-1 contains the following policy choices with respect to first-time adoption.
Property, plant & equipment:
IFRS 1 provides a choice between measuring property, plant and equipment at its fair value at the date of transition and using those amounts as deemed cost or using the historical valuation under the prior GAAP. The Company expects to use the historical valuation under the Canadian GAAP as the deemed cost for transitional purposes.
c) Mandatorily applicable standards with retrospective application (i.e., not specifically exempt under IFRS - 1)
Property, plant and equipment - cost
IFRS:: IAS 16 contains more extensive guidance with respect to components within property, plant and equipment. When an item of property, plant and equipment comprises individual components for which different depreciation methods or rates are appropriate, each component is accounted for separately (component accounting). Canadian GAAP: Section 3061 essentially contains similar guidance but is less extensive. The Company does not expect that this will have a material impact upon transition.
Property, plant and equipment – impairment
IFRS: Under IAS 36 an asset is impaired if the recoverable amount is lower than the asset’s carrying amount. The recoverable amount is defined as the higher of the asset’s fair value less cost to sell and its value-in-use. The value-in-use calculation involves discounting the expected future cash flows to be generated by the asset to their net present value. Canadian companies should (i) determine the existence of any impairment loss, and (ii) measure and recognize such impairment, if any at November 1, 2010. Canadian GAAP: A two-step approach is used to measure impairment. In step 1, a recoverability test is performed by comparing the expected undiscounted future cash flows to be derived from the asset with its carrying amount. If the asset fails the recoverability test, step 2 is triggered, and the entity must record an impairment loss calculated as the excess of the asset’s carrying amount over its fair value. During Phase II the Company will recalculate the recoverable amounts using the value-in-use methodology to determine whether an impairment must be recognized at November 1, 2010 or at October 31, 2011 and the interim periods and for the year then ended.
Intangible assets (franchise rights) – impairment
The Company has significant balances relating to Intellectual property and other Intangible assets. IFRS: Under IAS 36 an asset is impaired if the recoverable amount is lower than the asset’s carrying amount.
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