Notice of Proposed Rule and Companion Policy: OSC Rule - 52-501 - Financial Statements (Repealed by 51-801)

NOTICE OF PROPOSED RULE 52-501 AND
COMPANION POLICY 52-501CP FINANCIAL STATEMENTS

Substance and Purpose of Proposed Rule

Proposed Rule 52-501 (the "Rule") reformulates sections 7 to 11 of the Regulation (the "Regulation") to the SecuritiesAct (the "Act") by setting out the contents of interim and annual financial statements. The proposed Rule adds certainrequirements, including a requirement for issuers to (i) prepare an interim balance sheet, (ii) prepare an interimstatement of retained earnings, (iii) prepare an income statement and cash flow statement for each three-month periodof its financial year, other than the last three-month period of the year, (iv) prepare notes to the interim financialstatements, and (v) present certain line items in their annual and interim balance sheets. This last requirement hasbeen added to ensure a consistent minimum level of disclosure in both the annual and interim balance sheets. Theproposed Rule requires that the annual financial statements be reviewed by the audit committee, if any, and approvedby the board of directors. The proposed Rule also requires the board of directors and audit committee, if any, to reviewthe interim financial statements prior to filing and delivery to securityholders.

The proposed Rule should be read in conjunction with the CICA Accounting Standards Board's Exposure Draft, InterimFinancial Reporting, which can be found at www.cica.ca. This Exposure Draft proposes to significantly enhance currentrequirements under generally accepted accounting principles relating to the content of interim financial statements.

The Commission intends to continue to consider additional steps that might be taken to enhance the quality andreliability of financial reporting by reporting issuers. Matters under consideration include:

requiring all reporting issuers to have an audit committee;

developing rules relating to the qualifications required of audit committee members;

specifying certain minimum duties and responsibilities to be discharged by the audit committee;

requiring that approval by the board of directors of interim financial statements be evidenced in the samemanner as now required for annual financial statements;

mandating review of an issuer's interim financial statements by its external auditors prior to filing anddistribution to shareholders.

In considering these matters further, the Commission will take into account current developments in other countries,including requirements introduced recently in the U.S. The Commission's Staff will also be discussing with the CICA'sAssurance Standards Board the need to develop enhanced standards and guidance for review by an external auditorof interim financial statements. The Commission would appreciate comments and suggestions with respect to how itmight proceed in addressing these matters.

While issuers are not required to comply with the new requirements of the proposed Rule until such time as theproposed Rule comes into force, the Commission encourages issuers, as a matter of relevant financial disclosure, tobegin preparing financial statements in accordance with the proposed Rule before adoption of the proposed Rule.

Substance and Purpose of Proposed Companion Policy

The purpose of the proposed Companion Policy 52-501CP to the Rule is to advise issuers of the Commission's viewthat boards of directors and audit committees of issuers, in discharging their responsibilities for ensuring the reliabilityof interim financial statements, should consider engaging an external auditor to carry out a review of such financialstatements.

Summary of Proposed Rule

Section 1.1 of the proposed Rule provides that except as otherwise provided in Ontario securities law, the proposedRule applies to all reporting issuers other than mutual funds. The proposed Rule applies to non-redeemable investmentfunds. The option in the Regulation for an investment company to file a statement of changes in net assets instead ofa cash flow statement is not available under the proposed Rule. Non-redeemable investment funds will have to file cashflow statements unless not required to do so in accordance with generally accepted accounting principles.

Section 2.1 of the proposed Rule sets out the requirements for annual financial statements required to be filed undersection 78 of the Act. The requirements contained in section 2.1 of the proposed Rule do not differ materially fromthose set out in sections 10 and 11 of the Regulation, other than the requirement in subsection (2) to provide certainline item disclosure in the balance sheet. Subsection 2.1(3) adds a requirement to have the annual financial statementsreviewed by the audit committee, if any, prior to approval by the board of directors.

Section 2.2 of the proposed Rule sets out the contents of interim financial statements required to be filed undersubsection 77(1) of the Act. Section 2.2 is derived from sections 7 to 9 of the Regulation and adds certain newrequirements. The requirements that have been added are (i) the requirements in paragraphs 2.2(1)(a) and (c)regarding the preparation of an interim balance sheet and interim statement of retained earnings, (ii) the requirementsin subsections 2.2(2) and (8) to file and send an income statement and cash flow statement for each three-month periodof the issuer's financial year, other than the final three-month period, (iii) the requirement in subsection 2.2(3) to providenotes to the financial statements, (iv) the requirement in subsection 2.2(4) to provide certain line item disclosure in theinterim balance sheet, and (v) the requirement in subsection 2.2(5) the board and audit committee, if any, to reviewthe interim financial statements prior to filing and mailing to securityholders.

Summary of Proposed Comparison Policy

Section 2.1 of the proposed Companion Policy provides that in the Commission's view, the boards of directors and auditcommittees of issuers, in discharging their responsibilities for ensuring the reliability of interim financial statements,should consider engaging an external auditor to carry out a review of such financial statements.

Authority for Proposed Rule

The following section of the Act provides the Ontario Securities Commission with authority to adopt the proposed Rule.Paragraph 143(1)22 authorizes the Commission to prescribe requirements in respect of the preparation anddissemination and other use, by reporting issuers, of documents providing for continuous disclosure that are in additionto the requirements under the Act, including requirements in respect of supplemental analysis of financial statements.Paragraph 143(1)24 authorizes the Commission to require issuers or other persons and companies to comply, in wholeor in part, with Part XVIII (Continuous Disclosure), or rules made under paragraph 143(1)22 of the Act. Paragraph143(1)25 authorizes the Commission to prescribe requirements in respect of financial accounting, reporting and auditingfor the purposes of the Act, the regulations and the rules. Paragraph 143(1)39 authorizes the Commission to makerules requiring or respecting the media, format, preparation, form, content, execution, certification, dissemination andother use, filing and review of all documents required under or governed by the Act, the regulations or the rules,including interim financial statements and financial statements.

Alternatives Considered

The Commission considered leaving the relevant sections of the Regulation in place and adopting a Rule containingonly the additional items in the proposed Rule that are not in the Regulation. The Commission determined that onceit introduced the requirement for an interim balance sheet and statement of retained earnings and notes in interimfinancial statements, it was desirable to have all the requirements in one place.

Unpublished Materials

In proposing the Rule, the Commission has not relied on any significant unpublished study, report, decision or otherwritten materials.

Anticipated Costs and Benefits

Many of the requirements imposed by the proposed Rule are currently found in the Regulation. Securityholders willbenefit from the financial disclosure mandated by the proposed Rule. In addition, the proposed Rule will result ingreater harmonization with International Accounting Standards and with standards in the U.S.

As a result of imposing some requirements on issuers that are in addition to the requirements currently in theRegulation, the proposed Rule imposes some nominal additional costs on issuers. The Commission notes that anumber of issuers already prepare financial statements in compliance with certain of the additional requirements in theproposed Rule.

The Commission is of the view that the benefits of the proposed Rule significantly outweigh the costs.

Regulations to be Amended or Revoked

The Commission proposes to revoke sections 7 to 11 and 13 of the Regulation. Section 12 was previously revoked.The Commission proposes to amend section 161 of the Regulation by deleting the reference to section 11 and byadding a reference to the proposed Rule. The Commission proposes to amend section 246 of the Regulation bydeleting the reference to section 11.

Comments

Interested parties are invited to make written submissions with respect to the proposed Rule. Submissions receivedby June 9, 2000 will be considered.

Submissions should be made to:

John Stevenson, Secretary
Ontario Securities Commission
20 Queen Street West
Suite 800, Box 55
Toronto, Ontario M5H 3S8
e-mail: [email protected]

A diskette containing an electronic copy of the submissions (in DOS or Windows format, preferably WordPerfect) shouldalso be submitted. As the Act requires that a summary of written comments received during the comment period bepublished, confidentiality of submissions received cannot be maintained.

Questions may be referred to:

Heidi Franken
Manager, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-8249

Lisa Enright
Senior Accountant, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-3686

James McVicar
Legal Counsel, Continuous Disclosure
Ontario Securities Commission
e-mail: [email protected]
(416) 593-8154

Proposed Rule

The text of the proposed Rule follows, together with footnotes that are not part of the proposed Rule but have beenincluded to provide background and explanation.

DATED: March 10, 2000.

ONTARIO SECURITIES COMMISSION RULE 52-501 FINANCIAL STATEMENTS
TABLE OF CONTENTS

PART TITLE

PART 1 APPLICATION

1.1 Application

PART 2 FINANCIAL STATEMENTS

2.1 Annual Financial Statements

2.2 Interim Financial Statements

PART 3 EXEMPTION

3.1 Exemption

ONTARIO SECURITIES COMMISSION RULE 52-501 FINANCIAL STATEMENTS

PART 1 APPLICATION⁽¹⁾

1.1 Application - Except as otherwise provided in Ontario securities law, this Rule applies to all reporting issuersother than mutual funds.

PART 2 FINANCIAL STATEMENTS

2.1 Annual Financial Statements

(1) The comparative financial statements required to be filed under section 78 of the Act shall include

(a) a balance sheet as at the end of the applicable period referred to in subsection 78(1) of the Act;

(b) an income statement for the applicable period referred to in subsection 78(1) of the Act;

(c) a statement of retained earnings for the applicable period referred to in subsection 78(1) of theAct; and

(d) a cash flow statement for the applicable period referred to in subsection 78(1) of the Act⁽²⁾.

(2) The balance sheet referred to in paragraph (1)(a) shall distinguish at least the following items⁽³⁾

1. Cash and cash equivalents.

2. Temporary investments.

3. Long term investments.

4. Accounts and notes receivable.

5. Investments accounted for using the equity method.

6. Inventories.

7. Property, plant and equipment.

8. Intangible assets.

9. Accounts payable.

10. Current interest bearing liabilities.

11. Long-term debt.

12. Minority interest.

13. Share capital.

14. Contributed surplus.

⁽⁴⁾

(3) Every financial statement required to be filed under section 78 of the Act shall be reviewed by the auditcommittee, if any, and approved by the board of directors of the reporting issuer and, unless thefinancial statement is filed in electronic format under National Instrument 13-101 System for ElectronicAnalysis and Retrieval, the approval shall be evidenced by the manual or facsimile signatures of twodirectors duly authorized to signify the approval.⁽⁵⁾

(4) Subsection (3) does not apply to a reporting issuer that

(a) is not incorporated, organized or continued under the laws of Canada or a jurisdiction; and

(b) is registered with the SEC under the 1934 Act, other than a reporting issuer exempt from thereporting requirements of the 1934 Act under Rule 12g 3-2 of the 1934 Act.⁽⁶⁾

2.2 Interim Financial Statements

(1) The interim financial statements required to be filed under subsection 77(1) of the Act shall include⁽⁷⁾

(a) a balance sheet as at the date to which the financial statements are prepared and a comparativebalance sheet as of the end of the issuer's immediately preceding financial year;

(b) an income statement for the most recent financial year-to-date period for which the financialstatements are prepared and comparative financial information for the corresponding period inthe immediately preceding financial year;

(c) a statement of retained earnings for the most recent financial year-to-date period for which thefinancial statements are prepared and comparative financial information for the correspondingperiod in the immediately preceding financial year; and

(d) a cash flow statement for the most recent financial year-to-date period for which the financialstatements are prepared and comparative financial information for the corresponding period inthe immediately preceding financial year.

(2) In addition to the interim financial statements required to be filed under subsection 77(1) of the Act, anissuer shall file, within 60 days of the date to which it is made up,

(a) an income statement and cash flow statement for the three-month period ended on the date ofthe balance sheet required under paragraph (1)(a), other than the last three-month period in itsfinancial year; and

(b) comparative financial information for the corresponding period in the preceding financial year⁽⁸⁾.

(3) The financial statements required under subsection (1) and (2) shall include notes.⁽⁹⁾

(4) The interim balance sheet referred to in paragraph (1)(a) shall distinguish at least the items listed insubsection 2.1(2).⁽¹⁰⁾

(5) Subject to subsection (6), the board of directors and audit committee, if any, should review the financialstatements referred to in subsection (1) and (2) prior to filing and delivery to securityholders.⁽¹¹⁾

(6) Subsection (5) does not apply to a reporting issuer that

(a) is not incorporated, organized or continued under the laws of Canada or a jurisdiction; and

(b) is registered with the SEC under the 1934 Act, other than a reporting issuer exempt from thereporting requirements of the 1934 Act under Rule 12g 3-2 of the 1934 Act.⁽¹²⁾

(7) The income statement and cash flow statement required to be filed under subsection (2) shall be sentby the issuer at the same time and to the same securityholders as the financial statements referred toin subsection (1) are required to be sent.

(8) The interim financial statements required to be filed under subsection 77(1) of the Act and subsection(2) need not include an auditor's report.⁽¹³⁾

PART 3 EXEMPTION

3.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to such conditionsor restrictions as may be imposed in the exemption.

COMPANION POLICY 52-501CP TO ONTARIO SECURITIES COMMISSION RULE 52-501 FINANCIAL STATEMENTS

PART 1 GENERAL

1.1 General

The purpose of the Companion Policy is to provide additional guidance to assist reporting issuers in complying withtheir obligations under Rule 52-501.

PART 2 REVIEW BY AUDIT COMMITTEE

2.1 Auditor Involvement with Interim Financial Statements

In the Commission's view, the boards of directors and audit committees, of issuers, in discharging their responsibilitiesfor ensuring the reliability of interim financial statements, should consider engaging an external auditor to carry out areview of such financial statements.

1. A general definition rule has been adopted as Rule 14-501 Definitions. It contains definitions of certain terms used in more thanone rule. Rule 14-501 also provides, among other things, that terms used in a rule and defined or interpreted in section 1 of theSecurities Act or subsection 1(2) of the Regulation will have the respective meaning given to them in the Securities Act or theRegulation, as appropriate. Rule 14-501 also incorporates terms defined in subsection 1.1(3) of National Instrument 14-101Definitions. National Instrument 14-101 contains, among other things, definitions for terms used in more than one nationalinstrument.

2. Subsection 2.1(1) replaces subsection 10(1) of the Regulation. As the Rule does not apply to mutual funds, the words "by anissuer that is not a mutual fund in Ontario" have been deleted. The reference to a statement of surplus has been changed tostatement of retained earnings. The reference to a statement of changes in financial position has been changed to a cash flowstatement.

3. This requirement is new.

4. The Commission is proposing to revoke subsection 10(2) of the Regulation as it applies to mutual funds.

5. Subsection (3) replaces section 11 of the Regulation. A reference to SEDAR has been added as section 11 of the Regulation issubject to section 246 of the Regulation.

6. This provides the relief found in paragraph (7) of the Rule In the Matter of Certain Reporting Issuers (1997), 20 OSCB 1218, asamended.

7. Subsection 2.2(1) replaces subsection 7(1) and section 8 of the Regulation. The requirements to file a balance sheet and astatement of retained earnings are new. The reference to a statement of changes in financial position has been changed to a cashflow statement. The Commission is proposing not to carry forward the requirement in subsection 7(2) of the Regulation for everyissuer primarily engaged in the business of investing to file a statement of changes in net assets instead of a statement of changesin financial position.

8. This subsection is new and requires an issuer to file three month income statements and cash flow statements, except for thefourth quarter.

9. The requirement to prepare notes is new. The CICA Accounting Standards Board's Exposure Draft, Interim Financial Reportingproposes to enhance significantly current requirements under generally accepted accounting principles relating to the content ofinterim financial statements.

10. This requirement is new.

11. This requirement is new.

12. This provides corresponding relief to that described in note 6.

13. Subsection (9) replaces section 9 of the Regulation. Reference is now made specifically to subsection 77(1) rather than section77. Section 91 of the Regulation provides the same exception for mutual funds.