TORONTO, July 18 - - Retirees and other investors in income trusts
could see a clearer picture of their investment risk as a result of
recommendations for reporting of income trusts' distributable cash issued
today by the Canadian Institute of Chartered Accountants (CICA).
Inconsistencies in how income trusts calculate distributable cash and
other measures have made it difficult for investors to evaluate income trust
financial results over time and compare them across entities. Canada's
Chartered Accountants are taking a lead role in resolving this issue with
recommendations developed by the Canadian Performance Reporting Board (CPRB)
for improved disclosure, transparency and standardization in the reporting of
distributable cash in Management's Discussion and Analysis (MD&A).
This new guidance complements a recently published Canadian Securities
Administrators (CSA) policy statement by providing a standardized measure for
reporting distributable cash and a disclosure framework that will assist
preparers in meeting the objectives of the CSA policy.
"Up until now, the lack of consistent distributable cash calculations and
disclosures among income trusts has led to significant confusion about what
the term distributable cash represents," said Kevin Hibbert, Director and
Chief Accountant, Standard and Poor's Canada. "The CICA's new guidance, in
combination with the new CSA policy, provides income trusts with much needed
direction in how to improve comparability, clarity and consistency in the
reporting of distributable cash."
For Kevin Dancey, FCA, president and CEO of the CICA, the main issue is
safeguarding investors. "As a leader in establishing best practices in
reporting and disclosure, the CICA is filling this gap in financial reporting
that has put investors in income trusts at undue risk. The focus of our
guidance is to give investors information to answer two specific questions:
Where did the cash come from that funded their cash distributions and, in
arriving at the amount available for distribution, has the income trust made
the investments necessary to maintain its operations."
The term 'distributable cash' generally refers to the cash that an income
trust could potentially distribute to unit holders. Investors use this
information when assessing the entity's ability to fund future distributions
and to help value their investments. A standardized measure accompanied by
disclosure about productive capacity and finance strategy will assist
investors when making these assessments.
The CICA guidance recommends that income trusts report a new measure
called "Standardized Distributable Cash" to improve consistency of reporting
and comparability between entities. Together with other disclosures
recommended in the framework, the new measure gives the industry a common
methodology for providing investors with information to answer four key
questions:
<<
- How much cash was generated in the period and where did it come from?
- What is the entity's strategy for managing productive capacity and to
what extent has that capacity been maintained?
- What is the entity's strategy for managing debt (including long-term
unfunded operational liabilities such as pension plans) and how does
this impact distributions?
- What financial covenants exist that might restrict future
distributions and to what extent is the entity in compliance with
those covenants?
>>
Investors need this kind of information to properly understand and
interpret what is meant by distributable cash - and to assess and compare
investments. Indeed, with the passing of legislation to implement last fall's
decision to tax income trusts' distributions - commencing in 2011 for existing
trusts - disclosures of productive capacity management and finance strategies
take on additional significance for investors as these entities make plans for
how to deal with the post 2011 environment.
"By following this guidance, income trusts will provide their investors
with transparent and comparable information on how their cash distributions
are funded, as well as other related disclosures, such as the entity's
productive capacity history," Dancey added. "CEOs and CFOs may also wish to
consider this guidance when determining whether or not financial information
in the regulatory filings is fairly presented for certification purposes and
it may likewise be of assistance to audit committees making similar
assessments."
The CICA developed the recommendations after considering the comments of
the income trust community and investors to draft guidance issued last fall.
Copies of this guidance can be obtained from CICA's Performance Reporting
Resource Centre at www.cica.ca/cpr.
The Canadian Institute of Chartered Accountants (CICA), together with the
provincial, territorial and Bermuda Institutes/Ordre of Chartered Accountants,
represents a membership of approximately 72,000 CAs and 10,000 students in
Canada and Bermuda. The CICA conducts research into current business issues
and supports the setting of accounting, auditing and assurance standards for
business, not-for-profit organizations and government. It issues guidance on
control and governance, publishes professional literature, develops continuing
education programs and represents the CA profession nationally and
internationally. CICA is a founding member of the International Federation of
Accountants (IFAC) and the Global Accounting Alliance (GAA).
