Final Rule and Companion Policy: OSC Rule - 52-501 - Financial Statements (Repealed by 51-801)

Notice of Commission Approval OSC Rule

October 27, 2000

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

Notice of Rule and Companion Policy

The Ontario Securities Commission (the "Commission") has, under section 143 of the Securities Act(Ontario) (the "Act"), made Rule 52-501 Financial Statements (the "Rule") and adopted CompanionPolicy 52-501CP (the "Companion Policy").

The Rule and the material required by the Act to be delivered to the Minister of Finance was deliveredfor approval on October 13, 2000. If the Minister approves the Rule, the Rule will come into force fifteendays after it is approved. If the Minister does not approve, reject or return the Rule to the Commissionfor further consideration, the Rule will come into force on the seventy fifth day after the Rule is deliveredto the Minister.

The Companion Policy will become effective concurrently with the Rule.

Substance and Purpose of the Rule

The Rule reformulates sections 7 to 11 of the Regulation to the Act (the "Regulation") which set out thecontent requirements of interim and annual financial statements. In addition to reformulating the notedsections of the Regulation, the Rule adds certain requirements, including a requirement for issuers to (i)prepare an interim balance sheet, (ii) prepare an interim statement of retained earnings, (iii) prepare anincome statement and cash flow statement for each three-month period of its financial year, other thanthe last three-month period of the year, (iv) prepare notes to the interim financial statements, and (v)present certain line items in their annual and interim balance sheets. The last requirement has beenadded to ensure a consistent minimum level of disclosure in both the annual and interim balance sheets.The Rule requires that the annual financial statements be reviewed by the audit committee, if any, andapproved by the board of directors. The Rule also requires the board of directors to review interimfinancial statements prior to filing and delivery to securityholders. The Rule permits the board to satisfythe review obligation through delegation of the review to the audit committee of the board.

The Rule should be read in conjunction with the CICA Handbook and in particular, new section 1751,Interim Financial Reporting, which can be found at www.cica.ca. The new Handbook sectionsignificantly enhances current requirements under generally accepted accounting principles relating tothe content of interim financial statements.

Changes to the Proposed Rule

The Commission published proposed Rule 52-501 Financial Statements (the "Proposed Rule") forcomment on March 10, 2000 ((2000) 23 OSCB 1795). In response to the request for comments, theCommission received submissions from thirteen commentators. A summary of the comments receivedtogether with the Commission's response to the comments is contained in Appendix A to this notice.Appendix B to this notice provides a list of the commentators on the Proposed Rule. The Commissionwould like to thank each commentator for taking the time to provide their valuable comments.

As a result of comments received and further consideration of the Proposed Rule by the staff of theCommission, certain changes have been made to the Proposed Rule which are contained in the Rule.The Commission does not consider any of the changes to be material and therefore has not publishedthe changes for comment. For a detailed discussion of the contents of the Proposed Rule please refer tothe notice published with the Proposed Rule ((2000) 23 OSCB 1793). The following is a summary of thesignificant changes made to the Proposed Rule:

Part 1

A new section 1.1 has been included in the Rule which contains a definition of the term "foreign issuer".This definition was included for the purpose of subsection 2.2(8) of the Rule which exempts foreignissuers from the requirement for board review of interim financial statements. Subsection 2.2(6) in theProposed Rule provided an exemption for foreign constituted issuers that are registered with the SECunder the Exchange Act of 1934. The reference to foreign constituted issuers registered with the SECwas removed in favour of the defined term "foreign issuer". The principal reason for the change beingthat the new definition excludes those issuers incorporated or organized outside of Canada but which areeffectively Canadian issuers. In particular, excluded from the definition are issuers that are incorporatedor organized outside of Canada but have more than 50% of its voting securities held by Canadianresidents and where (i) more than 50% of the directors and senior officers are resident in Canada, (ii)more than 50% of the issuer's assets are located in Canada, or (iii) the business of the issuer isadministered principally in Canada.

New subsection 1.2(2) has been added to the Rule. The new subsection clarifies when the provisions ofthe Rule become applicable to subject issuers. The subsection provides that the Rule applies to annualfinancial statements for financial years beginning on or after January 1, 2001. The subsection alsoprovides that the Rule applies to interim financial statements for interim periods of fiscal yearscommencing on or after January 1, 2001.

Part 2

A new subsection 2.1(3) has been added to the Rule in response to comments. The subsection relievesissuers of distinguishing a balance sheet line item required to be distinguished in accordance withsubsection 2.1(2) where the item represents less than five percent of total assets as at the balance sheetdate. Issuers are reminded in the Companion Policy that irrespective of the effect of this subsection,Canadian GAAP may require a particular item to be distinguished and that issuers must continue tocomply with the requirements of Canadian GAAP.

Subsection 2.1(4) of the Proposed Rule has been deleted. That subsection exempted foreign constitutedissuers registered with the SEC under the Exchange Act of 1934 from the requirement for board ofdirectors approval of annual financial statements.

Part 3

A new Part 3 has been added that deals with transitional matters. The Part provides guidance to issuerson the provision of comparative information in annual and interim financial statements in the first periodan issuer is subject to the requirements of the Rule. The Commission recognizes that comparativefigures required by the Rule may be difficult for some issuers to provide when an issuer first becomessubject to the Rule. The section indicates that where it is impractical to provide comparative informationin accordance with the Rule, issuers should provide the comparative information that is available andindicate that it has not been prepared in accordance with the requirements of the Rule.

Substance and Purpose of Companion Policy

The principal purpose of the Companion Policy is to provide additional guidance to assist reportingissuers in complying with their obligations under the Rule.

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

Changes to the Proposed Companion Policy

The Commission published proposed Companion Policy 51-501CP to Rule 51-501 AIF & MD&A (the"Proposed Companion Policy") for comment on March 10, 2000 ((2000) 23 OSCB 1791)contemporaneously with the Proposed Rule.

As a result of comments received, changes made to the Proposed Rule and further consideration of theProposed Companion Policy by the staff of the Commission, certain changes have been made to theProposed Companion Policy which are contained in the Companion Policy. The Commission does notconsider any of the changes to be material and has therefore not published the changes for comment.For a detailed discussion of the contents of the Proposed Companion Policy please refer to the noticepublished with the Proposed Companion Policy ((2000) 23 OSCB 1783). The following is a summary ofthe changes:

Part 1

A new section 1.2 has been added to the Companion Policy in response to comments. This sectionclarifies the interaction between the requirements set out in Rule and the requirements of CanadianGAAP.

A new section 1.3 provides clarification concerning the definition of "foreign issuer". In particular, thesection provides guidance on how to determine the percentage of shares of a reporting issuer held byCanadian residents for the purpose of paragraph (a) of the definition of "foreign issuer" contained in theRule.

A new section 1.4 clarifies the interrelationship of the Rule and Rule 51-501 AIF & MD&A in connectionwith the implementation of the rules.

Part 3

New section 3.1 points out that the balance sheet lines items required by subsections 2.1(2) and 2.2(4)set out minimum disclosure levels. The section indicates that issuers should add additional line items ornote disclosure where appropriate to provide a full picture of an issuer's financial position. It also pointsout that additional information may be necessary depending on the issuer's stage of development, itsindustry sector or due to recent transactions.

New section 3.2 clarifies that subsection 2.1(2) is not intended to prescribe the order or the format inwhich the items are presented. Further, the descriptions of the items do not have to correspond to thedescriptions in the subsection if the adaption of descriptions would enhance the presentation.

Authority for the Rule

Section 143 of the Act provides the Ontario Securities Commission with authority to adopt the Rule. Inparticular, paragraph 143(1)22 authorizes the Commission to prescribe requirements in respect of thepreparation and dissemination and other use, by reporting issuers, of documents providing for continuousdisclosure that are in addition to the requirements under this Act, including requirements in respect ofsupplemental analysis of financial statements. Paragraph 143(1)24 authorizes the Commission torequire issuers or other persons and companies to comply, in whole or in part, with Part XVIII(Continuous Disclosure), or rules made under paragraph 143(1)22 of the Act. Paragraph 143(1)25authorizes the Commission to prescribe requirements in respect of financial accounting, reporting andauditing for the purposes of the Act, the Regulation and the Rules. Paragraph 143(1)39 authorizes theCommission to make rules requiring or respecting the media, format, preparation, form, content,execution, certification, dissemination and other use, filing and review of all documents required under orgoverned by the Act, the regulations or the rules, including interim financial statements and financialstatements.

Regulations to be Amended or Revoked

The Commission has, subject to the approval of the Minister of Finance, made a regulation that:

(i) revokes sections 7 to 9 of the Regulation effective May 31, 2001;

(ii) adds section clarifying that sections 7 to 9 apply to interim financial statements forperiods beginning prior to January 1, 2000;

(iii) revokes sections 10, 11 and 13 of the Regulation effective May 31, 2002;

(iv) adds section clarifying that sections 10, 11, and 13 apply to financial statements forperiods beginning prior to January 1, 2001; and

(v) amends section 246 of the Regulation by deleting the reference to subsection 12(8) ofthe Regulation.

If approved, the regulation will come into force on the effective date of the Rule.

Questions concerning the Rule should be referred to:

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

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

DATED: October 27, 2000.

APPENDIX A

SUMMARY OF COMMENTS RECEIVED ON PROPOSED RULE 52-501 AND COMPANION POLICY 52-501CP

The following is a summary of the thirteen comment letters received together with the responses of theCommission. The Commission thanks all commentators for their valuable input.

General Comments

Comments

Three commentators were fully supportive of the measures being taken by the Commission to enhancethe quality of financial reporting. In particular, they stated that the proposed Rules will improve theconsistency and availability of detailed interim financial information.

In addition, two commentators recommended that the Commission harmonize the requirements forinterim financial statements with the Canadian Institute of Chartered Accountants ("CICA") requirementsin CICA Handbook section 1751 Interim Financial Statements and have the Rule and the Handbooksection become effective on the same date. One commentator urged the Commission to harmonizefinancial disclosure regulations with the CSA jurisdictions.

Response

The Commission agrees that the requirements contained in the Rule will significantly enhance the qualityof financial reporting by reporting issuers. The Commission has worked closely with the CICAthroughout the rule making process with the goal of harmonizing the requirements. In this regard, therequirements of the Financial Statement Rule do not contradict GAAP; however, in some cases therequirements of the Rule extend beyond GAAP. In addition, the effective date for the Rule and CICAHandbook section 1751 Interim Financial Statements is the same, being January 1, 2001. Harmonizationwith the other CSA jurisdictions is desirable and the Commission will continue to work towards achievingthis end. In the Commission's view it is important not to delay the effective date of the Rule as the Rulewill result in a significant improvement in the financial disclosure of reporting issuers.

Specific Comments

1. Fourth Quarter Results

Comments

Two commentators were of the view that specific disclosure of fourth quarter results in the annualfinancial statements would be desirable as the information in the fourth quarter is very important tosecurity holders and often contains adjustments that affect the year-end balances. However, thecommentators acknowledged that the inclusion of fourth quarter results in a note to the annual financialstatements would be problematic as they would be audited as part of the annual financial statementsunlike the results from the first three quarters. The commentators noted that this would result in auditingissues that are not easily solved.

Response

The Commission agrees that fourth quarter results are very important. In establishing the disclosurerequirements for the fourth quarter, the Commission has attempted to be consistent with SECrequirements and as such will not require the presentation of fourth quarter results in the annualfinancial statements. The Commission is of the view that existing and proposed requirements provideinvestors with adequate information regarding the fourth quarter. Annual financial statements haveextensive note disclosure and are accompanied by annual MD&A which is more comprehensive thanquarterly MD&A. In addition, annual MD&A is required to contain quarterly information for the last eightquarters (Form NI 44-101F2 Item 2). Further, a description of the effect of any disposals of businesssegments, extraordinary, unusual or infrequently occurring items as well as the aggregate effect andnature of year-end or other adjustments, which are material to the results of the fourth quarter of themost recently completed financial year, are also required to be disclosed in annual MD&A through theRule and NI 44-101.

The Commission will give further consideration to fourth quarter disclosure once the effects of the newannual MD&A requirements are examined.

2. Effective Date

Comments

One commentator suggested that the Rule become effective some time after June 2001 and that at leastsix months notice of implementation be given once the Rule is final. This commentator stated thatnotice is necessary as the Rule mandates board of director review of interim financial statements andmany large companies organize the dates for meetings of the board and board committees well inadvance, in some cases two years in advance, due to the demands on the time of the directors.

Response

The Commission is of the view that the requirements of this Rule will significantly enhance the quality offinancial reporting by reporting issuers and it is desirable to have these improvements implemented assoon as possible. The Rule if made and approved, or not rejected or returned, by the Minister will comeinto force on January 1, 2001, the effective date contained in the Rule. The Rule was published forcomment in March 2000 and early adoption was encouraged.

3. Acceptability of Foreign GAAP/GAAS

Comments

One commentator recommended that the Rule be expanded to address the acceptability of foreignGAAP and the need for GAAP reconciliation for annual and interim financial statements prepared underforeign GAAP as well as the acceptability of foreign GAAS for annual financial statements provided forcontinuous disclosure.

Response

The Commission considers these issues to be very important and as such is addressing them in aseparate initiative of the Office of the Chief Accountant.

4. Exemptions from Requirements of this Rule

Comments

One commentator indicated that the Rule does not differentiate between participating and non-participating securities, but applies to all reporting issuers in Ontario (except mutual funds). Thecommentator stated that in the case of a reporting issuer that does not have publicly traded participatingsecurities, the requirement to include notes to interim financial statements and to provide interim MD&Awould not give investors information relevant for making investment decisions. This commentatorsuggested that an exemption be made for reporting issuers which are subsidiaries of other reportingissuers and that do not have any publically-traded participating securities.

Response

The Commission disagrees with this comment. The Commission is of the view that the financialinformation provided in interim financial statements and interim MD&A is very important and has decidednot to provide specific exemptions from these requirements. Under Part 4 of the Rule reporting issuersmay apply for an exemption from the Rule; the merits of a particular situation will be evaluated at thattime.

5. Development Stage Companies

Comments

One commentator recommended that the Rule specifically address development stage issuers andoutline requirements and exemptions specific to these issuers.

Response

This Rule was written on a broad basis to apply to all reporting issuers. The Commission decided not totailor requirements to each specific reporting issuer type and industry. The requirements of this Rule seta minimum standard for all reporting issuers. If specific disclosure is required under GAAP, or isnecessary for the fair presentation of financial information, then the reporting issuer must provide suchinformation.

6. Dates for Financial Statements

Comment

One commentator suggested that subsection 2.1(1) of the Rule specifically set out the dates for whichannual financial statements are required, rather than cross-referencing to the Act. The commentatornoted that the current drafting is not particularly user-friendly as it requires the user to flip back and forthbetween the Rule and the Act.

Response

The Commission is constrained by the wording of the current legislation and is unable to make thischange.

7. Cash Flow Statement

Comment

Two commentators noted that the requirement for disclosure of the current quarter's cash flowinformation in addition to the year to date information was not consistent with the CICA's exposure drafton Interim Financial Statements or with SEC requirements. One commentator suggested making thequarterly cash flow statement optional while encouraging its presentation. The other commentatorindicated that it would be preferable to delete this requirement and harmonize with the CICA and withSEC requirements.

Response

The Commission is of the view that the quarterly cash flow statement provides relevant financialinformation. The CICA has revised its position and now requires a quarterly cash flow statement as partof Handbook section 1751 Interim Financial Statements. As such, the requirements are harmonized withthe CICA requirements. Although the SEC does not require the presentation of a quarterly cash flowstatement, it also does not prohibit its presentation. As such, issuers would not be violating SECrequirements by presenting the quarterly cash flow as additional disclosure. In the Commission's view,the preparation of the quarterly cash flow will not impose a significant burden on issuers.

8. Minimum Level of Disclosure in the Balance Sheet

Comments

Five commentators were strongly opposed to the Commission setting a minimum level of disclosure inthe balance sheet. Generally, these commentators were of the view that financial statement disclosureshould be governed solely by the CICA. Four commentators indicated that the current headings are toorestrictive and that a materiality threshold be added to the requirement. Two of the commentatorssuggested that the OSC modify its proposal to require interim balance sheet disclosure to be consistentwith the most recent annual financial statements. One commentator was supportive of the minimumlevel of disclosure in both annual and interim financial statements.

Response

The imposition of a requirement for specified line items on the balance sheet is to address concerns withdisclosure that have been identified by staff over the years and to ensure a minimum level of disclosure.International Accounting Standards, SEC requirements and CICA Handbook requirements wereconsidered when assessing the need for setting a minimum level of disclosure in the balance sheet. TheCommission considered requiring the interim financial statements to contain, at least the items in themost recent annual financial statements, but this approach did not take into account the difference in thelevel of note disclosure between interim and annual financial statements. Note disclosure in the annualfinancial statements is generally much more robust than for interim financial statements and containsdetails that do not appear on the face of the balance sheet. Since the detail is disclosed in the notes, theannual balance sheet could be very condensed. If the balance sheet for the interim financial statementswas consistent with the annual financial statements the overall level of disclosure may be significantlyreduced due to the difference in the requirements for annual statements and interim financial statements.

The Commission agrees that materiality would be a consideration when preparing the balance sheet, asis the case generally in financial statement preparation. The purpose of the requirement for minimumlevel of disclosure in the balance sheet is to provide investors with a base level of comparableinformation. To ensure that there is a base level of comparable information and to provide issuers withguidance on when a specific item would be required to be disclosed in the balance sheet, a threshold testhas been added. The Rule has been revised such that if an item represents less than five percent oftotal assets at the balance sheet date, it need not be separately distinguished unless otherwise requiredby GAAP.

9. Income Statement Disclosure

Comments

Two commentators noted that in their experience, there are more issues with respect to disclosure in theincome statement than there are with respect to the balance sheet and thus a minimum level ofdisclosure should be prescribed for the income statement. One commentator was of the view that theincome statement for the interim period should include each of the headings, line items and subtotalsincluded in the annual income statement. This commentator also suggested that some limited forms ofgrouping for line items should be permitted for the cash flow and balance sheet. The commentator notedthat this approach would be similar to the SEC requirements, which permits the issuance of condensedfinancial statements for interim periods.

Response

The imposition of a requirement for specified line items on the balance sheet is to address specificconcerns with disclosure that have been identified by staff over the years, and to improve comparability.At the current time, the Commission is not specifying disclosure requirements that go beyond the specificincome statement disclosure requirements of GAAP. On an ongoing basis, Commission staff will reviewdisclosure made by issuers and assess the need for additional disclosure requirements, which would thenbe recommended to the Commission for its consideration.

10. Interim Financial Statements

Comments

Five commentators recommended that the Rule require interim financial statements prepared inaccordance with GAAP rather than detailing requirements in this Rule. The commentator was of theview that this would simplify the Rule and clarify the requirements. Another commentator was of theview that the requirement to file the three month income statement and cash flow statement within 60days of the date to which it is made up was redundant and that the filing time frame was covered undersubsection 2.2(1). This commentator suggested that it would be sufficient to state that these items befiled simultaneously. Another commentator recommended re-wording section 2.2(2) or introducing afootnote to explain the requirement, as the commentator found this section confusing, when takentogether with subsection 77(1) of the Act.

Response

The Commission has worked closely with the CICA to harmonize the requirements for interim financialstatements. The Commission is of the view that it is appropriate for the Rule to detail requirementsregarding interim financial statement disclosure and the time periods to be presented for interim financialstatements.

On the second point, the Commission is constrained by drafting convention and the existingrequirements in the Securities Act. Subsection 77(1) of the Act does not require the filing of incomestatements and cash flow statements for the three-month period ended on the date of the balance sheetsrequired to be filed for the three six and nine-month periods. In order to add this requirement,subsection 2.2(2) is necessary.

11. Schedule of Retained Earnings

Comment

One commentator noted that in practice, a schedule of retained earnings is often provided as part of theinterim balance sheet or at the bottom of the income statement. The commentator suggested that theRule be modified to allow for a schedule of retained earnings as part of the interim balance sheet orincome statement rather than requiring a separate statement.

Response

As noted in the Policy, the requirements of this Rule do not mandate the format in which financialinformation must be presented. Issuers should present the financial statements in the format that isappropriate for their circumstances.

12. Balance Sheet

Comment

One commentator was of the view that providing a balance sheet as of the end of the issuer'simmediately preceding financial year as the comparative to the interim financial statements could bemisleading as the comparative periods will be different and the balance sheet ratios may not necessarilybe in line. This commentator suggested that consideration be given to presenting, the comparativebalance sheet for the corresponding date in the previous year, in addition to the previous year endbalance sheet.

Response

The requirement to provide a comparative balance sheet as of the date of the end of the issuer'simmediately preceding financial year is consistent with the CICA's requirement. The Commission agreesthat in some situations the presentation of a balance sheet, as at the date of the period ending a yearprior to the interim date, in addition to the balance sheet, as at the date of the end of the issuer'simmediately preceding financial year, would provide relevant information. This would be especiallyuseful in a cyclical business. The requirements of the Rule provide the minimum standards for interimfinancial statements and in no way preclude issuers from providing additional information that wouldenhance disclosure. CICA Handbook Section 1751 Interim Financial Statements echoes this position.

13. Notes to the Interim Financial Statements

Comments

Three commentators indicated that the requirement in subsection 2.2(3) of the Rule to include notes inthe financial statements is vague and confusing. These commentators were of the view that therequirement to prepare the interim financial statements in accordance with GAAP would be sufficient asGAAP contains a note requirement. Another commentator was of the view that the note requirement forinterim financial statements be expanded to include specific requirements for investment anddevelopment stage reporting issuers.

Response

Issuers are required to prepare their annual and interim financial statements in accordance with bothCanadian GAAP and the requirements of this Rule. Based on its experience reviewing interim financialstatements, the Commission believes a specific requirement in the Rule for interim financials statementnotes is necessary.

On the second point, this Rule is meant to provide the minimum disclosure requirements; nothing in thisRule is intended to prohibit or discourage issuers from presenting information that provides more thanthe minimum or is required for fair presentation of financial results. The Commission encourages issuersto provide information that will assist investors in understanding an issuer's financial position.

14. Board of Directors and Audit Committee Involvement

Comments

One commentator was of the view that it is acceptable and customary corporate governance practice foronly an issuer's audit committee to review interim financial statements. This commentatorrecommended that the Rule mandate review of the interim financial statements by the issuer's auditcommittee, but make review by the full board of directors optional. Another commentator was of theview that the audit committee should not be the only committee that the Board is allowed to delegate thereview of interim financial statements. This commentator suggested that the Board be given the latitudeto select a committee it deemed appropriate.

Three commentators were of the view that review by the board of directors is a significant improvement,but would also favour a requirement for board approval of interim financial statements. Threecommentators strongly supported the proposal to have the board and audit committee, if any, review theinterim financial statements prior to filing and delivery to security holders. Two commentators were ofthe view that a requirement for the board of directors and audit committee to review prior to the releasingof information, be extended to other documents including, the annual report. One commentatorquestioned whether it is appropriate to include a mandatory requirement to have interim financialstatements reviewed by the issuer's audit committee, especially when it is accompanied by thesuggestion that such statements should be reviewed by external auditors. This commentator believedthat audit committee review of interim financial statements is acceptable on a voluntary basis but doesnot believe that this requirement should be mandatory for all reporting issuers.

Response

The Commission is of the view that the board of directors and audit committee are a key element of thecorporate governance process and, as such, they should be involved in the interim financial reporting.The Commission is also of the view that it is appropriate for the board of directors to be able to delegatethe responsibility for the review of interim financial statements to the audit committee and, as a result,has modified the Rule accordingly. This will provide issuers with the flexibility to have the interimfinancial statements reviewed at the committee level while ensuring that the board retains ultimateresponsibility for the interim financial statements. The audit committee is viewed by the Commission asbeing most the appropriate committee of the board to review financial statements due to itsindependence and expertise.

15. External Auditor Involvement

Comments

Three commentators were of the view that the benefits of pre-issuance reviews of interim financialstatements by external auditors are significant and should be a requirement of the Rule. One of thesecommentators believed that the involvement of external auditors in the interim financial statementprocess serves to protect all parties involved in the financial reporting process and would help to promoteconfidence that there is appropriate discipline in interim reporting. However, three commentators wereof the view that the cost to engage an external auditor to review the interim financials statements wouldbe substantial. One of these commentators pointed out that for junior issuers, in particular, there shouldbe an exemption with respect to external auditor involvement.

Another commentator recommended that a requirement for external auditor review of the interimfinancial statements be imposed in place of the requirement for the review of the interim statements bythe board of directors and audit committee. The commentator was of the view that the SECrequirements seem to indicate that the benefit of an auditor review of interim financial statements isgreater than the benefit to be derived from such a review being undertaken by the board of directorsand/or audit committee and that this conclusion was probably based on the relative level of experienceand the amount of time that the board or audit committee can devote to the task.

One commentator noted that there is a significant difference in the level of assurance provided by anaudit in accordance with generally accepted auditing standards than that provided by a review ofunaudited financial statements. Based on experience, this commentator believes that the general publicdoes not have an appreciation for the difference in the level of assurance and accordingly, until theCommission has concrete evidence that there is little risk that the public will misunderstand the level ofassurance provided, the commentator strongly urges the Commission not to mandate public reporting ofauditors' reviews of interim financial statements.

Response

Given the diversity in views expressed, the Commission has not modified the Companion Policy at thistime. The Companion Policy continues to encourage boards of directors and audit committees ofissuers, in discharging their responsibilities for ensuring the reliability of interim financial statements, toconsider engaging an external auditor to carry out a review of the interim financial statements. This is anissue that the Commission will continue to monitor and will revisit the matter when the new TSE/CDNXJoint Committee on Corporate Governance makes its final recommendations.

APPENDIX B

LIST OF COMMENTATORS

1. McCarvill Corporation by letter dated May 1, 2000

2. Talisman Energy Inc. by letter dated May 16, 2000

3. BDO Dunwoody LLP by letter dated May 26, 2000

4. Association for Investment Management and Research by letter dated May 30, 2000

5. Canadian Bankers Association by letter dated May 31, 2000

6. The Bank of Montreal by letter dated June 1, 2000

7. TransCanada PipeLines Limited by letter dated June 5, 2000

8. Manulife Financial by letter dated June 5, 2000

9. British Columbia Securities Commission by letter dated June 9, 2000

10. The Canadian Institute of Chartered Accountants, Task Force of the Accounting and AssuranceStandards Boards by letter dated June 9, 2000

11. KPMG LLP by letter dated June 9, 2000

12. PricewaterhouseCoopers LLP by letter dated June 9, 2000

13. TD Bank Financial Group by letter dated June 9, 2000

ONTARIO SECURITIES COMMISSION RULE 52-501 FINANCIAL STATEMENTS

TABLE OF CONTENTS

PART TITLE

PART 1 DEFINITION AND APPLICATION

1.1 Definition

1.2 Application

PART 2 FINANCIAL STATEMENTS

2.1 Annual Financial Statements

2.2 Interim Financial Statements

PART 3 TRANSITION

3.1 Transition

PART 4 EXEMPTION

4.1 Exemption

ONTARIO SECURITIES COMMISSION RULE 52-501FINANCIAL STATEMENTS

PART 1 DEFINITION AND APPLICATION

1.1 Definition - In this Rule, "foreign issuer" means an issuer that is not incorporated or organized underthe laws of Canada or a jurisdiction, unless

(a) voting securities carrying more than 50 percent of the votes for the election of directors areheld of record directly or indirectly by residents of Canada, and

(b) any one or more of

(i) the majority of the senior officers or directors of the issuer are residents of Canada,

(ii) more than 50 percent of the assets of the issuer are located in Canada, or

(iii) the business of the issuer is administered principally in Canada.

1.2 Application

(1) Except as otherwise provided in Ontario securities law, this Rule applies to all reportingissuers other than mutual funds.

(2) This Rule applies to

(a) annual financial statements for financial years of the issuer beginning on or afterJanuary 1, 2001; and

(b) interim financial statements for interim periods in financial years of the issuer beginningon or after January 1, 2001.

PART 2 FINANCIAL STATEMENTS

2.1 Annual Financial Statements

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

(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;

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

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

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.

(3) Despite subsection (2), an item listed in subsection (2) need not be distinguished if the itemrepresents less than five percent of the total assets as at the balance sheet date.

(4) Every financial statement required to be filed under section 78 of the Act shall be reviewedby the audit committee, if any, and approved by the board of directors of the reporting issuerand the approval shall be evidenced by the signatures of two directors authorized to evidencethe approval.

2.2 Interim Financial Statements

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

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

(b) an income statement for the most recent financial year-to-date period for which thefinancial statements are prepared and comparative financial information for thecorresponding period in the immediately preceding financial year;

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

(d) a cash flow statement for the most recent financial year-to-date period for which thefinancial statements are prepared and comparative financial information for thecorresponding period in the immediately preceding financial year.

(2) In addition to the interim financial statements required to be filed under subsection 77(1) ofthe Act, an issuer 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 thedate of the balance sheet required under paragraph (1)(a), other than the last three-month period in its financial year; and

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

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

(4) The interim balance sheet referred to in paragraph (1)(a) shall distinguish at least the itemslisted in subsection 2.1(2).

(5) Despite subsection (4), an item in subsection 2.1(2) need not be distinguished if the itemrepresents less than five percent of the total assets as at the interim balance sheet date.

(6) The board of directors shall review the financial statements referred to in subsection (1) and(2) prior to filing and delivery of the statements to securityholders.

(7) In fulfilling the requirement in subsection (6), the board of directors may delegate the reviewof the financial statements to an audit committee of the board.

(8) Subsection (6) does not apply to a foreign issuer.

(9) The income statement and cash flow statement required to be filed under subsection (2) shallbe sent by the issuer at the same time and to the same securityholders as the financialstatements referred to in subsection (1) are required to be sent.

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

PART 3 TRANSITION

3.1 Transition - Despite sections 2.1 and 2.2, an issuer is not required to provide comparativeinformation in financial statements for the financial year, and for interim periods in the financial year,in which the issuer is first subject to this Rule if

(a) it is impracticable to present prior period information on a basis consistent with this Rule;

(b) the prior period information that is available is presented; and

PART 4 EXEMPTION

4.1 Exemption - The Director may grant an exemption to this Rule, in whole or in part, subject to suchconditions or 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 Introduction - The purpose of this Companion Policy is to provide guidance to assist reportingissuers in complying with their obligations under Rule 52-501.

1.2 Interrelationship with Canadian GAAP

(1) Reporting issuers are required to prepare their annual financial statements in accordance withboth Canadian GAAP and the requirements of Rule 52-501. For example, if Canadian GAAPrelating to preparation of annual financial statements requires the disclosure of an item on theface of the balance sheet and the item either is not listed in subsection 2.1(2) of Rule 52-501or is listed in subsection 2.1(2) but represents less than five percent of total assets as at thebalance sheet date, then the item would be required to be disclosed on the face of the balancesheet. Similarly, if Canadian GAAP does not specifically require an item to be presented onthe face of the balance sheet but the item is listed in subsection 2.1(2) and represents fivepercent or more of total assets, the item would be required to be disclosed on the face of thebalance sheet.

(2) Interim financial statements are also required to be prepared in accordance with bothCanadian GAAP and the requirements of Rule 52-501. For example, Section 1751 InterimFinancial Statements of the Handbook requires that the interim financial statements include,at a minimum: each of the headings and subtotals included in the most recent annual financialstatements; the line items required by the Handbook sections regarding annual financialstatements; and the specific disclosures required by Section 1751. Subsection 2.2(4) of Rule52-501 requires the interim balance sheet to distinguish the items listed in subsection 2.1(2)other than items that represent less than five percent of total assets as at the balance sheetdate. Issuers must ensure that interim financial statements comply with both Section 1751of the Handbook and Rule 52-501.

1.3 Foreign Issuer - For the purposes of the definition of "foreign issuer", it is the Commission's viewthat, in determining the voting securities that are directly or indirectly held of record by residents of Canada,an issuer should

(a) include securities held of record by a broker, dealer, bank, trust company or nominee for anyof them for the accounts of customers resident in Canada;

(b) count securities beneficially owned by residents of Canada as reported on reports of beneficialownership; and

(c) assume that a customer is a resident of the jurisdiction or foreign jurisdiction in which thenominee has its principal place of business if, after reasonable inquiry, information regardingthe jurisdiction or foreign jurisdiction of residence of the customer is unavailable.

1.4 Interrelationship with Rule 51-501 AIF and MD&A regarding Implementation - Rule 52-501 andRule 51-501 AIF and MD&A do not necessarily apply for the first time to the same financial periods. Rule52-501 applies to annual financial statements for financial years beginning on or after January 1, 2001 andto interim financial statements for interim periods in financial years beginning on or after January 1, 2001.Rule 51-501 AIF and MD&A applies to annual MD&A for financial years ending on or after January 1, 2001and to interim MD&A for interim periods beginning on or after January 1, 2001. For example, if an issuerhas a January 31 year end, it would file an AIF for the financial year ending January 31, 2001 but would notbe required to comply with the annual financial statement requirements of Rule 52-501 until the financial yearending January 31, 2002. If an issuer filed an AIF for a financial year ending December 31, 2000, the issuerwould file interim financial statements in accordance with Rule 52-501 and interim MD&A in accordance withRule 51-501 commencing with the interim period beginning January 1, 2001.

PART 2 REVIEW BY BOARD OF DIRECTORS

2.1 Auditor Involvement with Interim Financial Statements - In the Commission's view, the boardof directors of an issuer, in discharging its responsibilities for ensuring the reliability of interim financialstatements, should consider engaging an external auditor to carry out a review of such financial statements.

PART 3 BALANCE SHEET

3.1 Balance Sheet Line Items - The balance sheet line item requirements in subsections 2.1(2) and2.2(4) of Rule 52-501 establish a minimum level of balance sheet disclosure. An issuer should consider itsindustry sector, stage of development and transactions and determine whether additional items should beincluded in the balance sheet or the notes to provide information that is necessary for an investor's overallunderstanding of the issuer's financial position.

3.2 Line Item Disclosure - Section 2.1(2) of Rule 52-501 does not prescribe the order or format in whichthe items are to be presented. The descriptions and ordering of items should be adapted to create a clearbalance sheet presentation thereby enhancing disclosure to investors of the financial position of the issuer.