The Life and Death of the Canadian Contingent Gains and Losses Accounting Standards Project*

The Life and Death of the Canadian Contingent Gains and Losses

Accounting Standards Project*

BROCK DYKEMAN, University College of the Cariboo

GARY ENTWISTLE, University of Saskatchewan

ABSTRACT

In April 1994, the Canadian Accounting Standards Board formally approved a newaccounting standard for contingent gains and losses. The new standard would haveincreased the frequency of recording contingent losses, enabled the accrual of some contin-gent gains, and enhanced disclosures for all contingencies. The changes would primarilyhave been achieved by requiring management, and their legal advisers, to make predic-tions, estimates, and disclosures that the existing accounting standard enabled them toavoid. Over two years later, and following numerous changes to the implementation date,the board ultimately decided not to release the new standard, and in July 1999, formallyabandoned the contingencies project. This study provides a telling of the standard’s gene-sis, development, and ultimate demise, which should prove instructive to those partieswith an interest and a stake in accounting standard setting.

Keywords Accounting standard setting; Case study; Contingencies; Disclosure

N.B. Le condensé française de l’article qui suit commence à la page 27.

In April 1994, the Canadian Accounting Standards Board (AcSB) made the followingannouncement (CICA, 1994):

The Accounting Standards Board (AcSB) approved, subject to modifications needed toexplanatory paragraphs and a written ballot vote, a revised CICA Handbook Section 3290,Contingent Gains and Losses.

This new approved standard would have significantly changed the existing Canadianaccounting standard for contingencies, arguably shifting the balance in favour of financialstatement users. This shift was to have been achieved by requiring or, perhaps more accu-rately, by forcing management and their legal advisers into making predictions, estimates,and disclosures that the existing accounting standard enabled them to avoid. Specifically,the new standard would have resulted in an increase in the accruals of contingent losses, inenhanced disclosure of both contingent losses and gains, and would have provided limitedscope to accrue contingent gains (not allowed under the existing standard). Subsequently,

CAP Vol. 3 No. 1 — PCC vol. 3, no 1 (2004) pages 5–31 © CAAA/ACPC

* We greatly appreciate the helpful comments of the previous editor, Alan Richardson, the associate editor, Irene Gordon, and two anonymous reviewers for Canadian Accounting Perspectives. We also thank the reviewers for the 2003 Canadian and American Accounting Association annual conferences, and colleagues Glenn Feltham, Grant Isaac, Daryl Lindsay, and Ganesh Vaidyanathan.

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CANADIAN ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES CANADIENNES

however, and owing primarily to a late-inning campaign by the Canadian Bar Association(CBA), including the threat to not respond to legal inquiry letters, the new (and approved)standard was never officially released, and the contingencies project was formally aban-doned in July 1999.

This study, drawing on the review of internal documentation and meeting notes, theanalysis of exposure draft responses, and through a series of interviews with key individu-als involved in the standard-setting project, provides a narrative description of the genesis,development, and the ultimate demise of this approved contingencies standard. The storyshould prove both interesting and instructive to those parties, both in Canada and beyond,who are affected by, and hence have a stake in, accounting standard setting.1

The study is set out as follows. The next section provides a brief overview of the liter-ature on standard setting, including the two existing Canadian studies. This is followed bya section that describes the Canadian accounting standard-setting process, presents theessence of the proposed new standard on contingencies, and provides the research design.The next section then tells a story of the life and death of the contingencies standard. Thelast section provides some concluding comments.

LITERATURE REVIEW2

According to Chantiri (1995), three broad theoretical approaches — socio-political, eco-nomic, and sociological — underlie much of the research concerned with the process ofaccounting standard setting. The socio-political perspective, the primary approach used toinform this study, emphasizes the interplay between various interest groups in the forma-tion of regulations. Two such (contrasting) subperspectives are pluralism and regulatorycapture. According to Dahl (1982), a political system is pluralist when a multiplicity ofinterest groups compete for influence on public policy. Furthermore, although the influ-ence of particular groups and individuals may vary depending on the importance of theparticular issue to members of the group or individuals, no particular interest group is seento dominate and control the decision-making process. In contrast, regulatory capture (e.g.,Mitnick, 1980) suggests that one particular interest group can come to dominate and effec-tively control the regulatory process in a given policy area — most often, the industrybeing regulated.3 In the various standard-setting studies examined by Walker and Robinson(1993), pluralism, either implicitly or explicitly, was the dominant socio-political paradigmused by authors to explain the accounting regulatory process.

The second theoretical approach is economic. This approach might arguably be con-sidered a subset of the socio-political perspective because it has its base in recognizing

1. Tutticci, Dunstan, and Holmes (1994) characterize the withdrawal of Exposure Draft 49 (Accounting for Intangible Assets) in Australia as “unprecedented in the Australian standard-setting process” (88). On the basis of recent discussions (late April 2003) with a 13-year staff member with the AcSB, and the author’s own recollections, the contingencies situation could also be accurately portrayed as unprecedented.

2. This section is a synopsis of chapter 2 of Dykeman’s 2002 thesis (Dykeman, 2002).3. Walker (1987) suggested that the Australian Standards Review Board in its first two years of operation

exhibited signs of regulatory capture by the accounting profession.

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THE CANADIAN CONTINGENT GAINS AND LOSSES ACCOUNTING STANDARDS PROJECT

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and analyzing the incentives and interests of different groups and individual actorsinvolved in the decision-making process. The specific lens used, however, is economic.This economic perspective is perhaps best exemplified within the accounting standard-set-ting realm in the extensive economic consequences literature (e.g., Watts and Zimmerman,1986), a literature that relies primarily on the examination of lobbying behaviour (that is,analyzing exposure draft submissions). Part of this study’s research design involves exam-ining submissions on the contingencies’ exposure draft, and in so doing, touches on thiseconomic perspective. Overall, this body of literature tends to confirm that economic con-sequences are indeed an important motivating factor in lobbying; however, the specificlobbying behaviour tends to be defined by its context (that is, accounting standards).

The third approach (not examined as such in this study) is sociological. This approachconstitutes “the study of accounting as a social and organizational phenomenon” (Burchellet al., 1980: 22). One line of this research has concentrated on power relationships in soci-ety and how accounting standard setting helps to preserve the hegemony of capitalism (seeFogarty, 1992; Booth and Cocks, 1990; and Puxty et al., 1987). Another line of thisresearch focuses on the construction of social space and the complex relationship betweenorganizations and society (see Young, 1996; Young, 1994; Robson, 1991; and Burchell etal., 1985).

Canadian Research4

Waterhouse (1981)

Waterhouse (1981), using a mail survey of members of the Accounting Research Commit-tee (the body then responsible for accounting standard setting), provided an overviewdescription of the Canadian accounting standard-setting system.5 Overall, Canadianaccounting standard setters seemed to view their role as technical and nonpolitical. Theyalso tended to reject the claims that management and shareholders have conflicting interests,and that managers, if left to their own devices, would minimize disclosure. Consistency withU.S. generally accepted accounting principles (GAAP) was seen as an important objectivefor Canadian standards. Waterhouse also noted disagreement among committee memberson whether accounting standards should limit firm choice, as well as on the main objectiveof accounting.

In the second part of the mail survey, committee members answered questions withregard to the process underlying the development of the recently released foreign currencystandard. Diversity in existing accounting practice and changes in the business environment

4. Although this study does not attempt to replicate either of these two earlier Canadian studies, where warranted, any pertinent similarities and differences are identified.

5. Waterhouse’s study arguably adopts aspects of both the socio-political and economic consequences approaches. For example, two questions the committee members were asked to respond to (that is, to state their agreement or disagreement with) were: (1) “In choosing between (among) accounting alternatives, the most important consideration is to balance the preferences of various interested parties,” and (2) “Most accounting standards have economic consequences of a significant magnitude for the business firms required to adopt them” (130).


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played a key role in the entrance of this issue onto the agenda. The members indicated that avariety of information sources were important in their decision making, with the threemost important sources being exposure draft comments, section meetings, and associates’comments. Decision criteria that were rated as most important were relevance to user deci-sion making and a reflection of economic reality. Most of the respondents did not agreewith all parts of the resulting standard, indicating a process involving some compromise.

Waterhouse also provided descriptive statistics on comment letters to four exposuredrafts issued in 1977, both in terms of the characteristics of the respondents and their lobby-ing positions. He found that the most frequent responders were “Big 8” accounting firms,large corporations, and corporations that were Securities and Exchange Commission(SEC) registrants. Furthermore, the SEC registrants tended to oppose any changes thatwould lead to a difference with U.S. GAAP. He also found that public accounting firmstended to agree with the SEC registrants’ positions, while individual respondents’ posi-tions tended to agree with the non-SEC registrants.

Berger (1986)

Drawing on the (primarily U.S.) economic consequences literature, and using commentletters on two exposure drafts — investment tax credits (issued in 1983) and pensions(issued in 1985) — Berger (1986) explored whether firms’ lobbying submissions wereconsistent with their actual choices of accounting policies, and whether their lobbying wasconsistent across the two standards. He found only weak evidence supporting the firsthypothesis, and had to reject the hypothesis that lobbying was consistent across projects.He also failed to find support for a third hypothesis that firm size was related to politicalcosts. Berger suggested that his weak results could be due to dominance of other factors —notably, differences in the business environment between the United States and Canada.

BACKGROUND AND RESEARCH DESIGN

Standard-Setting Authority and Process

In Canada, the Accounting Standards Board (AcSB or board),6 under the jurisdiction ofthe Canadian Institute of Chartered Accountants (CICA), has been designated as the solebody responsible for developing and promulgating Canadian accounting standards. Thesestandards are recognized in various Canadian companies acts and by the provincial securi-ties commissions as constituting GAAP in Canada, and are required to be used by publiclylisted companies. Adherence to the standards is primarily enforced by the securities commis-sions for publicly listed companies, and by the professional accounting bodies for publicaccountants reporting on GAAP-based financial statements. Canadian assurance standardsare developed and promulgated by a similar body, the Assurance Standards Board

6. Shortly after the commencement of the contingencies project, both the Accounting Committee and Auditing Standards Committee of the CICA were renamed as “boards”; other minor changes were also made to their composition and size. “Board” or “AcSB” will be used interchangeably throughout this study to refer to the Canadian accounting standard-setting body.



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(AuSB),7 also under the aegis of the CICA. Except for a full-time chair of the AcSB,8 boththe AcSB and the AuSB are composed of volunteer members, who are provided staff sup-port by the CICA. The process that a standard-setting project goes through is described inAppendix 1. This process involves several steps and is generally consistent with that usedin other Anglo-Saxon countries. Appendix 2 highlights the process followed in the contin-gencies project.

Accounting for Contingencies

In Canada, the accounting for contingencies is provided in CICA Handbook section 3290(CICA, 1978a). These rules are generally consistent with those in both the United Statesand the United Kingdom,9 and can be characterized as favouring both the nonaccrual andthe minimal disclosure10 of all contingencies. The proposed exposure draft (ED) set outto change the ground rules — arguably, to result in financial statements favouring theinterests of investors and other users. Overall, the new standard proposed changes thatwould have resulted in the accrual of more contingencies, as well as greater disclosureof all contingencies.

One of the most significant proposed changes was to require (or force) managementinto determining specific probability likelihoods (from 1 to 99 percent)11 for both contin-gent losses and gains.12 Most critically, the “not determinable” option available under theexisting standard (section 3290.06(c)) was to be removed. That is, under the existing stan-dard, a professed inability by management to “reasonably determine” the future outcomeof a contingent loss was sufficient grounds to avoid accrual — this option would now belost to management. Furthermore, whenever management determined a probability of afuture confirming event to be greater than 50 percent (characterized as “likely” under thenew standard), an accrual would now be required for contingent losses. The accrual wasthen to be made using management’s best estimate of the dollar amount. In this latterregard, the new standard also proposed removing the option for management to claim theywere unable to make a “reasonable” estimate (section 3290.12(b)) — this claim also being

7. The “Assurance” Standards Board is the new name for the previous “Auditing” Standards Board.8. This full-time chair was hired after the contingencies project was abandoned.9. U.S. rules are found in SFAS No. 5 (FASB, 1975); British rules are found in FRS No. 12 (ASB, 1998),

which superseded (with no significant changes) SSAP No. 18 (ASC, 1980). These rules were in effect during the period of consideration of changes to the Canadian standard, and have not significantly changed since this period.

10. Two empirical studies — Entwistle, Lanfranconi, and Robertson (1994) and Chui (2002) — identified significant shortcomings in Canadian public companies’ contingency disclosure practices. The Entwistle et al. study also reviewed the U.S. empirical literature, which had identified similar shortcomings.

11. Probability likelihoods were not part of the existing contingency standard. Their inclusion in the new standard arguably came from the findings of academic research such as Chesley (1986), which suggested that such guidance restricted the variance across managers’ contingency determinations, and hence should lead to more comparability and consistency of financial reporting.

12. The standard proposed five probability categories: virtually certain (91–99 percent); likely (>50–99 percent); neither likely nor unlikely (50 percent); unlikely (1–<50 percent); and remote (1–15 percent).


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sufficient under the existing standard to justify not accruing a contingent loss.13 To be cer-tain, the new standard would force management into making specific predictions and esti-mates, and would likely have led to an increase in the accrual of contingent losses, as wellas a corresponding increase in the volatility of income.

A second critical feature of the proposed new standard was to require that contingentlosses with a determined probability of at least 15 percent be disclosed, both in terms oftheir nature and with a range of estimated dollar amounts. Similar disclosure requirementswere proposed for any contingent gains assessed as likely (greater than 50 percent). Exist-ing accounting rules enabled firms to avoid the disclosure of estimated dollar amounts forboth contingent losses and gains whenever management professed an inability to reason-ably estimate dollar amounts (section 3290.22(b)). The new standard also required that thedollar amount of any accrued contingent losses or gains be disclosed, unless disclosuremight prove detrimental to the firm; existing standards only “desired” that losses or gainsbe disclosed (section 3290.12). Overall, the new standard would have led to significantlyenhanced disclosure with regard to the nature and dollar amounts of firms’ contingencies.

A final change was to require (or perhaps enable) the accrual of contingent gainsassessed by management as being virtually certain (greater than 90 percent). Under theexisting rules, contingent gains could not be accrued until realized (section 3290.20). Ascan be seen from Appendix 4, these proposed changes would have put Canadian account-ing standards at odds with comparable standards in both the United States and the UnitedKingdom.

Research Design

Both Dykeman (2002) and Walker and Robinson (1993) criticized accounting regulationresearch that studied only a narrow portion of the standard-setting process, and conse-quently called for more complete examinations of standard-setting cases. Specifically,they noted that most standard-setting research examines only the written submissionsmade in response to exposure drafts, and leaves unexamined the lobbying behaviour goingon behind closed doors. Such lobbying, they suggest, may have been more timely or effec-tive than the written submissions. Conversely, external lobbying may be ineffective if thestandard setters have strong prior beliefs or incentives relating to a particular topic. Follow-ing from this call, and hence to better enable the telling of this story of the contingenciesproject, a blend of research methods was used in this study.

First, a number of interviews were carried out between February and May 1999 withkey players knowledgeable about the contingencies project. Those persons interviewedincluded two chairs of the AcSB, the chair of the Auditing Standards Board (AuSB), amember of the Western Section of the AcSB,14 the chair of the Contingencies Project Task

13. According to a CICA survey of financial reporting practices of Canadian firms between 1991 and 1994, between 11 and 20 percent of all companies that reported contingent losses in their financial statements specifically stated that an estimate of the loss could not be made (CICA, 1995a).

14. The Western Section of the AcSB formally ceased to exist in late fall 1991, and its work was taken over by the Contingencies Project Task Force. (See related comments in note 27.)



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Force, the CICA staff director for accounting standards, the CICA staff manager for thecontingencies project, a representative of the CBA,15 the chair of the AcSB/AuSB JointTask Force on Contingencies, the CICA auditing standards director, and the CICA assis-tant director of auditing standards. These interviews were critical in determining theimportance of various events and actions, and in providing more complete views of thevarious positions held by different stakeholders in the project. They also provided infor-mation about the source materials drawn on by the board in developing the new standard,helped identify the extent of any informal lobbying that took place, and helped identify thecritical events or meetings that determined the fate of the proposed standard.16

A second source of information stemmed from the analysis of 90 comment letters thatwere received in response to the ED. During the formal submission period, 72 letters werereceived; 38 came from preparers or organizations representing preparers (for example,the Financial Executives Institute), 31 from the accounting community (auditing firms,individual accountants, and provincial institutes), and 3 from securities regulators, includ-ing the Ontario Securities Commission, which regulates firms listed on the Toronto StockExchange. A further 18 (late) comment letters were received after the official submissionperiod; 13 came from preparers, 3 from groups representing the insurance and bankingindustries, and 2 from law firms representing preparers. A formal response from the CBAwas also received in January 1994. As discussed in the next section, these late submissionsseemed to be part of an orchestrated campaign to derail the proposed exposure draft.

Each of the 90 comment letters was coded to gather information about both therespondent and the response. In order to capture each response more fully, the codingapproach follows that employed in Tutticci et al. (1994) in which various guiding principleswere used to capture attributes of a response “beyond the casting of a vote” (90) — forexample, the strength of the arguments employed (see Appendix 3).17 The reliability ofthe coding was checked using an independent-judge approach, with the inter-rater reliabil-ity (or coefficient of agreement) being 92.2 percent (see Milne and Adler, 1999).18 Forthose instances of disagreement, a consensus outcome was agreed upon.

Finally, a significant amount of additional documentation was reviewed including rel-evant press reports and commentaries, bulletins issued by the AcSB, the approved project

15. On the basis of discussions with staff of the project, and as described in the following section, the CBA was instrumental in the ultimate abandonment of this project.

16. A general interview script was developed for the various interviews, each of which lasted between one to two hours. Notes were taken during the interview. These notes were written up immediately after each interview and sent to the interviewees for comments about their accuracy and completeness. One minor correction was pointed out.

17. Tutticci et al. (1994) cite P.R. Brown, a former FASB member, as saying that “standard setters were influenced by both the nature and the strength of the arguments presented by the respondents” (90). Similarly, an AcSB staff member interviewed for this study stated that the staff and board paid most attention to those respondents who presented well-argued rationales for their opinions.

18. One of the study’s authors coded each of the lobbying submissions, then an accounting faculty colleague, trained in the coding protocol, independently coded each submission.


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proposal, the statement of principles (SOP) and ED, and notes related to the Contingen-cies Task Force meetings.19

THE STORY

The story is told in four parts. The first part describes how and why the contingenciesproject came to be on the agenda of the AcSB. The second part describes the developmentof the proposed new standard.20 The third part deals with the responses to the proposednew standard. The fourth part is an epilogue.

Part One: Getting on the Agenda

A project proposal regarding contingencies was approved by the Accounting StandardsSteering Committee (AcSSC) on July 31, 1990. This steering committee, an advisorybody to the AcSB, was responsible primarily for providing guidance to the board onagenda setting. The project proposal cited four reasons why contingencies should bestudied:

1. MacDonald Commission report (CICA, 1988),

2. Boritz report (Boritz, 1990),

3. increased volatility of capital markets, and

4. environmental protection issues.

The genesis of the contingencies project appears to have been the bank failures thatoccurred in western Canada during the 1980s. After these bank failures, the federal gov-ernment established a commission, commonly known as the Estey commission (Canada,1986), to investigate the collapse of the banks and make recommendations to help ensurethat bank failures did not reoccur. Similarly, the CICA formed the MacDonald commis-sion to examine the public’s expectations of audits in light of these same bank failures,and in response to suggestions in the financial press that these failures were “audit” fail-ures.21 The MacDonald commission report (CICA, 1988) recommended that the CICAcommission a study of the disclosure of risks and uncertainties in financial statements. Itdid not, however, specifically criticize the existing reporting of contingencies. In fact, itseemed to endorse the current reporting of contingencies by suggesting that uncertain

19. The approved project proposal, the SOP, and the notes from the Contingencies Task Force meetings were obtained from the CICA. All other documentation had been released into the public domain.

20. Appendix 4 provides an overview of the evolution of the proposed new accounting standard (labelled as ED), contrasting it to the existing Canadian standard, with other relevant documents, and with comparable U.S and U.K. rules.

21. These visible bank failures, and the CICA’s concern that they were viewed as audit failures, could constitute a “change in the business environment”, which Waterhouse (1981) found plays a key role in adding projects to the standard setter’s agenda.



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gains and losses be recognized “along the lines of present recommendations with respectto contingencies” (53). Nevertheless, the recommendations of the MacDonald commis-sion were perceived to be a major impetus for the contingencies project.22

In response to the recommendations of the MacDonald commission, the CICA com-missioned a research report by Professor Efrim Boritz on risk and uncertainty. Boritz’s(1990) report recommended that the CICA “initiate an accounting standards project toconsider modifying Handbook Section 3290, Contingencies” (88). Boritz went on to enu-merate several principles that he believed any revision should encompass. These principles,included as part of Appendix 4, dealt primarily with improved disclosure.

In conclusion, it appears that there was a direct sequence of events starting with thewestern Canadian bank failures, leading to the MacDonald commission report, which inturn led to the Boritz report, which recommended a project to revise the contingenciesstandard.23 The CICA, therefore, appears to have been responding to changes in the busi-ness environment and to concerns expressed by the popular press, which were filteredthrough the MacDonald commission and Boritz reports. As discussed in the next section,the actual proposed standard (ED) encompassed recommendations that went far beyondthose envisaged by the project antecedents, suggesting that the project, once set in motionand formally added to the standard-setting agenda, developed its own dynamic.

Part Two: Developing the Exposure Draft

In addition to the MacDonald commission report and the Boritz study, the project proposalapproved by the AcSSC on July 31, 1990 referenced a number of additional sources forconsideration. These included Skinner (1987), Austin, Strawser, and Mixon (1985), andThornton (1983), as well as the relevant Canadian, U.S., U.K., and international contin-gency standards.24 Using these various sources, staff of the Studies and StandardsDepartment prepared a background paper and a draft SOP — the latter a precursor to anED. In accordance with the practices of the then Accounting Standards Committee(AcSC), the project was given to a subgroup of the board. Subgroups were generally orga-nized on a geographic basis. This project was assigned to the Western Section of theboard.

The CICA staff provided the Western Section with summaries of research and othermaterials to aid in their deliberations; they also provided assistance in drafting proposals.The Western Section member who was interviewed for this study recalled reviewing theBoritz report as well as studies on probability terminology (Davidson, 1991) and on riskand uncertainty (Thornton, 1983). He also reported that the section examined U.S. standards

22. This impetus was also specifically noted in various responses to the ED (for example, the CBA and the Commission de valeurs mobilières du Québec), and by various interview subjects.

23. None of the interview subjects noted increased volatility in the stock markets, and only one noted environmental protection issues as a factor motivating the review of contingencies standards.

24. The relevant international standard at the time was IAS No. 10, “Contingencies and Events Occurring after the Balance Sheet Date”. The current standard is IAS No. 37 (IASB, 1998), which is similar to IAS No. 10 in accounting for contingencies.


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and, to a lesser degree, U.K. and international standards. He also recalled that the section feltthat the comparable U.S. standard was likely to be changed soon and that the trend wastoward placing more reliance on estimates. Notably, he also recalled a sense within thesection that Canada did not always have to follow the United States, and that Canadianstandard setters could “innovate”.25

The draft SOP was dated April 23, 1991 and was presented to the Western Sectionmeeting on May 15 and 16, 1991. The Western Section had six members, with its chair basedin Calgary. A staff note after this first meeting states, “The revised draft SOP … acknowledgesthe assessment of a contingency in certain situations can be difficult. Section did not, however,go so far as to say there may be situations or conditions for which an assessment is ‘notdeterminable.’” However, after a meeting of the Western Section on June 20, 1991 to con-sider revisions to the SOP, under the heading “Guidance to Staff”, a staff note indicates,“Allow for ‘not reasonably determinable’ situations or conditions.” It is evident, therefore,that the Western Section either clarified or changed its position on this issue.

After the May 1991 meeting, a draft SOP was circulated to associates for comment.Associates are individuals who have been chosen by committee members and staff toprovide input on projects on an ongoing basis. A data sheet prepared by a staff memberindicates that 34 associates provided written responses to the draft SOP. The staff reportcategorized responses by type of respondent and by attitude, provided issue-by-issueresponses by each associate, and summarized those comments for the section members.

The majority of associates were from public practice and the preparer community;there was no indication that any associates came from the user community. The attitudesummary indicated a large amount of disagreement, with a substantial majority eitherexpressing overall disagreement or significant disagreement with the SOP. One associatewas reported to have mentioned concern for differences between the SOP and U.S. andinternational standards. Some concern was also expressed by several associates of possi-ble detrimental effects of increased disclosure. One associate, in reference to concernsover the consequences of additional disclosure, stated that “[t]his issue, which was a keypart of the FEI [Financial Executives Institute] presentation to the CICA does not appearto be addressed.” Apparently, the FEI, a group made up of corporate executives in seniorfinancial positions, had already made a presentation regarding concerns over additional dis-closure of contingencies. Unfortunately, there was no copy of this presentation nor any fur-ther mention of this presentation in the files made available to the researcher. No doubt, thepreparers and their legal advisers were concerned lest any increased disclosure have thepotential to be used by adversaries (and potential litigants) in legal proceedings, and per-haps also by the firms’ competitors.

Six associates also expressed concern about the ability to obtain adequate detailedinformation from lawyers. At least one associate mentioned the need to amend the jointpolicy statement with the CBA (Handbook section 6560: CICA, 1978b). However, the sec-tion notes state, “Section felt there was no need to talk to lawyers at this stage — section is

25. The member noted that the capital assets section of the CICA Handbook (section 3060: CICA, 1990) had been revised in the previous couple of years and had deviated from existing U.S. standards.



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working on the accounting principle.” Major concerns were also expressed about widen-ing the scope of the definition of contingencies (to include, for example, warrantyexpenses excluded under the existing standard). A majority supported the use of five proba-bility categories (remote, unlikely, mid-point, likely, and virtually certain); some preparersindicated that they could classify their company’s contingencies into these five categories.

The Western Section appears to have made only minor changes to the draft SOP as aresult of these comments. The notes indicate that it was agreed that a contingency shouldbe disclosed if classified into the mid-point category. In addition, the notes revise the rec-ognition principle to “more clearly note that a contingency must be reasonably estimable”.Overall, the notes seem to indicate a weak response to the fairly negative comments fromthe associates. In the area of disclosure, whereas a fair amount of opposition was voicedby the associates, it seems that an increase in disclosure resulted from the section meeting,rather than a decrease.26

The SOP was formally approved by the AcSC at its meeting of September 19, 1991.The SOP is similar to an ED, but contains only the proposed rule changes (that is, the ital-icized wording in the CICA Handbook) without the amount of detailed explanation that anED would have. However, a comparison of the SOP and the ED (see Appendix 4) indi-cates that the proposals underwent significant alteration between the time that the SOPwas approved and the time that the ED was released in February 1993. Specifically, in theED, contingent losses were to be accrued if likely, while both the SOP and the Boritzstudy required that losses also be reasonably estimable. Similarly, the ED proposed thatdollar amounts accrued were to be disclosed unless detrimental to the firm, while disclo-sure was not required in the SOP or by Boritz. In addition, the ED subsequently called fordisclosure of contingent losses “unless remote”, while the SOP requested disclosure if con-tingent losses were “unlikely”. While this study’s research found no definitive explanationfor this change, various meeting notes identified a general consensus that when “a contin-gency is likely, management will be able to come up with a best estimate.” Furthermore, itwas felt that “the exemption included in the [ED] proposals would provide protectionagainst disclosure when it would be harmful to the entity”.27

Part Three: Responding to the Exposure Draft

The ED on contingent gains and losses was released in February 1993 with a public com-ment deadline of May 7, 1993 (CICA, 1993). It was released jointly with an exposure draft

26. This situation is in contrast to the findings of Waterhouse (1981), who found that associates’ comments were regarded as very important sources of feedback.

27. Following from note 14, only two of the six members of the original Western Section remained members of the subsequent Contingencies Project Task Force throughout the life of the contingencies project. Hence, it is possible that changes to the group charged with moving the project forward might have accounted for the increased rigour seen in the ED.


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draft on measurement uncertainty.28 As noted in the previous section, 72 responses werereceived before the deadline date, and a further 18 (late) responses were received after thedeadline.29 In addition, a submission from the CBA was received in January 1994 (CBA,1994). The coding of each response follows that shown in Appendix 3. Consistent with thechart in Appendix 4, the responses were analyzed in terms of comments provided on tworecognition issues and three disclosure issues, as follows:30

1. recognition of contingent losses,

2. recognition of contingent gains,

3. disclosing ranges of estimated dollar amounts,

4. disclosing dollar amounts accrued, and

5. disclosing potential contingent losses.

The responses were also analyzed for whether the respondents provided an overall opinionon the ED.

Early Respondents

As seen in Table 1, preparers were on balance (7 to 4) opposed to the new rules for the rec-ognition of contingent losses, but generally in favour (9 to 4) of allowing the recognitionof contingent gains. Preparers meanwhile were strongly opposed to any disclosure rulechanges.31 Specifically, of those preparers that responded individually to the three disclo-sure issues, 100 percent were in opposition to disclosing actual dollar amounts accrued, 95percent to disclosing the range of estimated dollar amounts, and 85 percent to disclosingall potential contingent losses. As an example of this opposition, Xerox Canada Ltd.’sresponse letter stated, “The exposure draft as written requires an onerous level of disclo-sure of items which would be prejudicial to the reporting entity.”

The accounting community was also generally opposed (10 to 4) to the change in theloss-recognition standard, but was fairly evenly split on the gain-recognition change.32

However, whereas preparers were almost unanimous in expressing their displeasure at theproposed changes to the existing disclosure rules, the accountants’ responses were mixed.

28. This standard (CICA, 1995b), which was eventually released and which remains in force today, was partly designed to alleviate some of management’s concerns by enabling the disclosure in the financial statements of the uncertainty in management’s reported estimates. This “sister” standard was apparently ineffective in alleviating management’s fears with regard to the proposed changes to the accounting for contingencies.

29. Discussions with a senior AcSB staff member indicated that it is normal for a significant number of responses to be received after the deadline has passed. Furthermore, these responses are read and reviewed as long as the project has not been finalized.

30. Not all respondents provided feedback on each of these five issues.31. Note that Waterhouse (1981) found that accounting standard setters rejected the claim that managers

(preparers) favour minimal disclosure.



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CAP

Vol. 3 No. 1 —

PCC

vol. 3, no 1 (2004)

TAB

LE 1

Exp

osu

re d

raft

resp

on

ses

— E

arly

resp

on

den

ts (n

= 7

2)

Rec

ogni

tion

—co

ntin

gent

loss

es0

40

727

13

28

170

10

02

Rec

ogni

tion

—co

ntin

gent

gain

s1

81

325

08

25

160

00

03

Dis

clos

ure

—ra

nges

of

estim

ated

$am

ount

s0

18

1217

26

25

161

10

01

Dis

clos

ure

—$

amou

nts

accr

ued

00

514

190

03

325

10

00

2D

iscl

osur

e —

pote

ntia

lco

ntin

gent

loss

es1

11

1025

43

04

201

00

02

Ove

rall

opin

ion

on E

D0

71

327

27

01

210

30

00

Prep

arer

s (3

8)A

ccou

ntin

g co

mm

unity

(31

)Se

curi

ties

com

mis

sion

s (3

)

Stro

ngly

su

ppor

tSu

ppor

tSt

rong

ly

oppo

seO

ppos

e

No

posi

tion

take

nSt

rong

ly

supp

ort

Supp

ort

Stro

ngly

op

pose

Opp

ose

No

posi

tion

take

nSt

rong

ly

supp

ort

Supp

ort

Stro

ngly

op

pose

Opp

ose

No

posi

tion

take

n

18 CANADIAN ACCOUNTING PERSPECTIVES / PERSPECTIVES COMPTABLES CANADIENNES

Specifically, like the preparers, the accountants disliked the proposal to disclose specificdollar amounts accrued. However, the accounting community was split (8 to 7 in support)on disclosing ranges of estimated dollar amounts, and was also generally in favour (7 to 4)of disclosing all potential contingent losses.

Three securities commissions that regulate stock exchanges in Canada also responded:the Ontario Securities Commission (OSC), the Commission de valeurs mobilières duQuébec (CVMQ), and the Alberta Securities Commission (ASC).33 The ASC did notrespond to individual issues, but did express overall approval of the ED. The OSC and theCVMQ meanwhile addressed various individual issues. The OSC supported the contin-gent loss-recognition proposal, while both the OSC and the CVMQ were in favour of thedisclosure of ranges. The OSC was strongly in favour of the disclosure of specific amountsaccrued, and the CVMQ was strongly in favour of extending contingencies to be dis-closed. None of the commissions specifically commented on gain recognition. Overall,the securities commissions’ favourable response to the ED is in marked contrast to thatof the preparers, and might be attributed to their primary mandates of protecting the public(that is, investors’) interest in the securities markets.34 Nevertheless, one of the inter-viewees involved in the standard-setting project expressed disappointment at the lack ofactive support by the OSC for the proposed new standard when it came to gaining “buy-in”from the CBA.

It is interesting that where early respondents provided an overall opinion on the ED,the majority (including 7 of the 11 preparers) responded in favour of the proposed stan-dard. One of the staff members who was interviewed for this study suggested that CICAstaff, and the task force and AcSB members, pay more attention to those respondents thatprovide specific reasons for their opinions; hence, knowing this, providing an overall opin-ion contrary to the individual assessments could be considered a form of low-cost voting,or could even be considered to indicate support for the process of independent standardsetting.35

In summary, except for the favourable views of the three securities commissions and someaccountants on disclosure issues, and the overall support for enabling earlier recognition of

32. These responses are similar to those of preparers, which is in line with previous research in the United States on alignment between accountants and preparers with respect to recognition issues (see Puro, 1984).

33. The fourth main securities regulator in Canada, the B.C. Securities Commission, did not respond.34. The Web sites of both the OSC and the CVMQ speak to their mission of protecting investors’ interests in

the market. The main U.S. regulator, the SEC, calls itself “The Investor’s Advocate”.35. A useful avenue for future research might be to explore the motivations for giving overall opinions that

are in opposition to the tone of the commentary on individual items in a response.


THE CANADIAN CONTINGENT GAINS AND LOSSES ACCOUNTING STANDARDS PROJECT 19

contingent gains, the early ED responses can generally be characterized as opposing theproposed changes.36

Late Respondents

As seen in Table 2, the 18 late respondents, primarily preparers or their representatives,were much more likely to give an overall opinion than the early respondents, and thisopinion was overwhelmingly negative. Furthermore, the late respondents were nearlyunanimously opposed to the proposed changes regarding the accrual of contingent lossesand extending the rules for disclosure. Those opposing additional disclosure also tended touse emotive language and provided conceptual arguments in their opposition. An examplewas the response of Alcan Aluminum Limited, which stated, “We do not agree that thebest way to address the concerns expressed in the Macdonald Commission’s report … inthe area of uncertainty is through the excessive and possibly misleading and prejudicialdisclosure of contingencies” and “there does not appear to be any ‘demand’ for the disclo-sures called for in the exposure drafts, even from ‘sophisticated’ users”. In addition toAlcan, many of the late responses expressed concerns for the users of the financial state-ments. For example, the BCE Inc. response expressed the concern that the new disclosures“might confuse rather than assist shareholders”. These late respondents, as well as thesubsequent CBA submission, employed such public interest arguments, in addition tothe economic consequences argument of harm to the disclosing company.

A review of the wording of the late responses, and of the role within the organizationof the person writing the response, also indicates that many of these responses were part ofan orchestrated campaign to derail the contingencies project. Nine of the 18 late responsesreferred to responses by other parties that submitted late responses. Eight of the corporatepreparer responses were also signed by a lawyer, in contrast to the early responses by prepar-ers, the majority of which were signed by accountants. This change in role of the individualsigning the response is in line with the involvement of the CBA in trying to derail the newstandard.37 In addition, two responses were prepared by law firms acting on behalf of cor-porate clients. Two of the late responses were also second responses from preparers thathad sent in earlier responses. In both cases, the second response was more negative thanthe first response. This evidence points to the possibility of there being a coalition of pre-

36. The responses gave no indication of a difference in position between Canadian-listed and cross-listed preparers as posited by Waterhouse (1981). The proposed changes would have created differences between Canadian and U.S. GAAP and, therefore, one might have expected a more vigorous opposition by cross-listed firms. This lack of evidence of a difference may be an artifact of a small or biased sample, or it may be due to the fact that the Canadian and U.S. economies have become more integrated since the Waterhouse study, so that most large companies are now concerned about GAAP differences whether or not they have a foreign stock exchange listing. In total, 16 of the respondents specifically mentioned concern over the introduction of differences between Canadian standards and U.S. and/or international standards.

37. Fifty-six percent of the late responses as compared with 53 percent of the early responses were prepared by persons with an executive position. This suggests that opponents of the ED did not attempt to sway the AcSB by using the level of the signatory as an indication of the level of concern.



TABLE 2Exposure draft responses — Late respondents (n = 18)

Recognition — contingent losses 0 1 3 4 10Recognition — contingent gains 0 1 0 1 16Disclosure — ranges of estimated $ amounts 0 1 4 4 9Disclosure — $ amounts accrued 0 0 6 2 10Disclosure — potential contingent losses 0 0 6 2 10Overall opinion on ED 0 0 5 9 4

Stronglysupport Support

Stronglyoppose Oppose

No positiontaken

parers, their legal counsel, and the CBA, who together made a concerted effort to lobbyfor the nonadoption of most of the proposed changes.

Epilogue: Abandoning the Project

As noted in Appendix 2, the official deadline for comment on the contingencies ED wasMay 7, 1993. As described in the previous section, the on-time responses on individualissues were predominantly negative, although any overall opinions expressed tended to bepositive in tone. The task force met on July 5 and 6, 1993 to consider the initial receivedresponses to the ED. The meeting summary stated that “the general sense of the commentswas that there was support for what was trying to be done but most respondents had atleast one significant concern”. The summary also noted that “a large number of respon-dents also expressed the view that the proposed disclosure would be detrimental to theirorganization”. The data package prepared by staff gave the number of respondents con-cerned with each issue and examples of their comments. The data package also included adraft SOP — “Disclosure of Certain Significant Risks and Uncertainties and FinancialFlexibility” — that had been issued by the AICPA on March 31, 1993.38 It was noted inthe meeting notes that the U.S. SOP did not propose to require the disclosure of ranges orthe disclosure of the amount accrued for contingencies. Nevertheless, the meeting sum-mary mentions only that changes to the “scope” of the ED were agreed to at the meeting;interviews with staff indicated that there were apparently no changes with regard to thespecifics of the ED.

Over the summer and fall of 1993, the additional “late responses” were received. Asmentioned, a number of these responses were from companies and law firms that had seri-ous reservations about the ED, especially the additional disclosure required. Their major

38. This SOP was published in 1994 as SOP No. 94.6, “Disclosure of Certain Significant Risks and Uncertainties” (AICPA, 1994). Statements of position provide additional guidance on financial reporting topics until the official standard setters (that is, the FASB) set formal standards in the area of concern. This SOP recommended increased disclosure of significant estimates used in the financial statements, as well as of current vulnerabilities of firms to certain concentrations (for example, reliance on one supplier). This SOP had no significant subsequent effect on SFAS No. 5.



concern appears to have been that disclosure of ranges and amounts accrued would pro-vide useful information to adversaries in lawsuits, leading to added losses to the disclosingcompanies. The task force subsequently met on August 25, 1993 to review the ED, and tospecifically consider letters from “in-house legal counsel objecting to the disclosure of lit-igation matters” (a letter from McMillan Binch, Barristers and Solicitors, written onbehalf of Alcan was listed as being included in the data package for the meeting). Notably,the meeting summary stated that “it was felt that there were no new arguments presentedwhich would cause the Task Force to change its views regarding the proposals”.

It appears that, at this stage (summer or fall 1993), the CICA staff contacted the Busi-ness Section of the CBA and held a briefing for them. Until that time, it does not appearthat the CBA was formally involved in the standard-setting process. Indeed, the McMillanBinch late response letter stated, “In our preliminary discussions with CBA representa-tives and corporate counsel at other major companies, we were rather surprised to discoverthe limited awareness of these proposals.” Subsequently, however, the CBA produced aformal submission dated January 1994. In the submission (CBA, 1994), the CBA men-tions reviewing submissions by Alcan, Northern Telecom, General Motors, Ernst & Young,KPMG, and Price Waterhouse. The three corporate preparers had all made strongly negativelate submissions, and appear to belong to a loose coalition opposing the ED. The three auditfirms had not initially strongly opposed the ED and did not submit late responses. Thesubmission also mentioned knowledge of one proposed amendment to the ED under discus-sion by the task force. This confirms that there were formal and / or informal contactsbetween the CBA and the task force members and/or staff.

The CBA submission reiterated concerns expressed by many other respondentsregarding the possibility that the added disclosure required by the ED would lead to highersettlements in claims against the reporting party. The submission stated that “it is oftenimpossible to estimate the amount of a contingent gain or loss” (CBA, 1994: 12). The sub-mission also (ominously) raised the issue of the willingness of lawyers to respond to auditinquiry letters. It stated, “considering that the potential exists for a legal adversary toobtain these letters through discovery, it may not be in the client’s best interest for counselto respond to a detailed audit inquiry letter” (CBA, 1994: 18). The implication for theauditor is that the new standard would possibly result in the loss of the evidence that thelawyer’s inquiry letter traditionally provides. The researchers were unable to find any doc-umented record of the CBA submission having been reviewed by the task force before theformal approval of the new standard by the AcSB in April 1994,39 a standard that, accord-ing to a staff member, contained only minor changes from the ED.40

In its June 1994 meeting, the AcSB set implementation for the new Handbook sectionfor year-ends beginning on or after January 1, 1995. This suggests that the AcSB thoughtthat any remaining issues would be quickly resolved. However, in the task force data pack-age for its last formal meeting on August 31 and September 1, 1994, there is a memo from

39. The last formal meeting of the task force was on August 31 and September 1, 1994. Unfortunately, the summary notes for this meeting could not be found.

40. Substantive changes would have required the issuance of a revised ED.



a staff member that mentions a meeting on August 19, 1994 with Jim Lisson, the head ofthe Business Law Section of the CBA. This meeting appears to have been the first inwhat became a series of meetings involving members of the task force, the AcSB, theAuSB, CICA staff, and various CBA members.

Initially, there appears to have been a general sense that it would be possible to obtainagreement with the CBA. The CBA group at first was made up of corporate lawyers, ledby the head of the Business Law Section of the CBA. One CICA volunteer said, “ in theend, he [the head] seemed to accept what we were saying”. At this stage the Business LawSection of the CBA took the issue to the Governing Council of the CBA for approval. Thisaction caught the attention of the members of the Litigation Section of the CBA. The CBAcommittee that had been in discussions with the CICA was then reconstituted, accordingto the CBA interviewee, with the addition of “a large number of prominent litigators andone or two corporate counsels”. It appears that, at this point, the discussions and negotia-tions essentially began again.

From the board’s point of view, dealing with the lawyers was “trying”. One CICA per-son stated, “the CBA kept us off balance, different people at meetings, they kept substitutingpeople, we had trouble making policy in those circumstances … it was frustrating, eachmeeting, the same discussion occurred.” Another CICA interviewee stated that he per-ceived that “the CBA governance process was unclear.” He suggested that the CBA wasrun on a much more ad hoc basis than the CICA, and therefore it was hard to get a handleon who would really make any decision as well as how. The standard setters had theimpression that the discussions were dragging on without any resolution in sight. Accord-ing to a CICA source, there were more than 20 meetings held over approximately twoyears. The composition of the AcSB also changed over the period of discussion.

Eventually, a critical impasse was reached because the lawyers would not agree toprovide any additional information in the lawyer’s inquiry letter beyond that envisaged inthe existing contingency accounting standard. One board member indicated that the finalstraw for him was when the chief accountant of the Ontario Securities Commissionattended a meeting and did not come out strongly in favour of the new standard.41 Afterthat meeting, this member decided to push for abandonment of the project. At this point,the joint AcSB/AuSB committee also reported back to their respective boards that theycould not proceed.42 As seen in Appendix 2, the AcSB had delayed implementation of thenew Handbook section three times (in January 1995, April 1995, and January 1996). InOctober 1996, the AcSB ended its attempt to implement the new contingencies standard,and the following release was made (CICA, 1996):

41. In somewhat stark contrast, Crandall (1983) describes a situation where the OSC provided strong and critical support to the board when it was being challenged in 1982 by both the federal government and the oil and gas industry on the existing accounting standard for government assistance (Handbook section 3800: CICA, 1975).

42. This is a joint committee designed to explore accounting / auditing interface issues. An AcSB staff member stated that the AuSB had raised the “significant difficulty defence”, basically saying that if the joint protocol with the CBA was not satisfactorily revised, the AuSB would effectively veto the implementation of the new standard.



The AcSB [earlier] decided not to release the new Section and to defer its effective date toenable the Auditing Standards Board and the Canadian Bar Association to revise therelated CICA/CBA Joint Policy Statement concerning communications with law firms. Aspart of this process, the CBA expressed concerns about the practical implications of therevised accounting Section when applied to contingencies involving litigation. After con-sidering the CBA’s concerns, the AcSB decided not to pursue release of the new Section.

The new contingencies standard was, therefore, abandoned in the end because of theinability to obtain revisions to the protocol covering lawyers’ inquiry letters. The standardsetters faced the choice of releasing a new accounting standard and risk having auditors beunable to obtain sufficient audit evidence to support the accounting and disclosurerequired (that is, a scope limitation), or of abandoning the standard. The AcSB chose toabandon the standard. Rather quietly, three years later, an AcSB release contained a short,one-line item under the heading “Planning & Review of Priorities”, in which it was notedthat the AcSB agreed to formally “discontinue” its project on contingent gains and losses(CICA, 1999).

CONCLUDING COMMENTS

The process that the Canadian AcSB employs in the development of new standards has allthe hallmarks of a pluralistic decision-making process. Most notably, the process allowsfor public input at two stages: when the hand-picked associates are given the SOP toreview and, more visibly, when the ED is sent out for general response. Although struc-tured as a pluralistic process, the case of the contingencies proposal suggests that publicinput comes primarily from accountants, and predominantly from those representing thepreparer community. Except for the securities commissions, which can be considered toact as advocates for the investment community, there were no formal responses to the EDreceived from financial statement users. Just as important, the consistent negative feed-back actually received from both the associates and the ED respondents appeared to havehad little impact on the content of the final approved accounting standard. In fact, themove seen to push forward on significant change to the existing standard even in the faceof consistent external opposition is more suggestive of a situation of regulatory capture,possibly by AcSB members and staff. Indeed, the process is somewhat reminiscent of thestudies by Nobes (1991) in the United Kingdom and Jönsson (1988) in Sweden, whichreported that “individual senior members of the profession” or “elites”, respectively, sawthemselves as responsible for improving the quality of accounting standards. Of note hereis that one of the subjects interviewed in this research mentioned that the ContingenciesTask Force was a “very determined” group. Hence, even in the light of strong oppositionto the proposed changes, it is conceivable that this small group pushed ahead (that is, cap-tured the process), believing that the proposed changes were, on balance, in the best interestsof all stakeholders and, therefore, would have improved accounting quality. Whether suchan approach should be applauded or criticized is an open question. In addition, whether thissituation is consistent across other standard-setting cases remains open to future research.

Using a different lens to view the research, the overall support of the ED respondentsfor earlier recognition of contingent gains, while similarly opposing earlier recognition ofcontingent losses, is consistent with the notion that economic consequences may underlie



respondents’ lobbying activity. This contingencies case study also exhibits characteristicsof a phenomena referred to by economists as a “holdup” problem (e.g., Tirole, 1986; Wil-liamson, 1975), whereby a group, in this case lawyers, holds up policy change. This wasrevealed when the CBA threatened that its members would withhold critical audit evi-dence (legal inquiry letters) if the new standard were released, essentially rendering thisgroup a de facto veto over proposed accounting standard change.

To conclude, while one case study does not enable a definitive stance to be made onthe nature and workings of the Canadian accounting standard-setting process, the findingsof this research should nevertheless prove interesting and insightful to those with a stakein accounting standard setting. For example, accounting educators could use this case tohighlight the due process that is followed in the setting of accounting standards, as well asthe lobbying that is both encouraged and expected on any proposed accounting change.Educators could also use the contingencies project to illustrate how changes to accountingstandards may be constrained by the ability to gather sufficient, appropriate audit evidence— in this case, legal inquiry letters. Financial executives (for example, CFOs) chargedwith dealing with proposed accounting changes might also find the study insightful — forexample, in deciding when to change their accounting systems in response to proposedaccounting changes. The current case of stock options presents an interesting parallel situ-ation where both U.S. managers and Canadian managers of cross-listed firms must decidewhether to “proactively” expense the cost of issuing stock options before any formal require-ment to do so. Financial analysts, faced with having to consider adapting their evaluationmodels to proposed accounting changes, should also find this case study of interest.Finally, in reading this study, current standard setters, both in Canada and beyond, mightbe encouraged to hold early discussions, both with auditors and with other relevant parties(for example, specialists), to identify any critical audit information needs without which aproposed accounting standard may be eventually derailed. For example, in the UnitedStates, the FASB holds regular liaison meetings with the American Bar Association. Giventhe eventual outcome of the contingencies project, one could speculate that similar meet-ings in Canada (in this case with the CBA) might have proved fruitful. Standard settersmight also be more circumspect in evaluating the strength of significant opposition to pro-posed changes, and carefully assess whether the costs of confronting such opposition areoutweighed by the benefits of the new standard. Canadian standard setters might also con-sider expanding (or realigning) their associates group to encompass more financial state-ments users — parties that in the contingencies case might have provided additionalcritical support for moving the proposed accounting changes into practice.

In sum, whether the eventual decision of the Canadian AcSB to halt the release of thenew contingencies standard was on balance positive for Canadian financial reportingremains unanswered. Certainly in Canada, this debate is unlikely to resurface any timesoon.



APPENDIX 1: THE CANADIAN ACCOUNTING STANDARD-SETTING PROCESS

The following overview of the Canadian accounting standard-setting process is based onCICA (1992), Bloom and Naciri (1989), and interviews conducted by the author.

• A project proposal on a particular topic, usually based on a prior research study, isrequested by the Accounting Standards Board (AcSB). This proposal is then devel-oped by CICA staff and approved by the AcSB.

• A project task force is struck and further develops the proposal with the assistanceof CICA staff.

• A statement of principles (SOP) outlining key decisions is developed, circulated toassociates for comment, and presented to the AcSB for approval.

• An approved SOP is used as a basis for the development of an exposure draft (ED)by the project task force with the assistance of CICA staff.

• The ED, once approved by the AcSB, is distributed to all chartered accountants(CAs) and to other interested parties.

• Comment letters are solicited by a specified date. Copies of letters received are pro-vided to all project task force members and later to all AcSB members, along with asummary prepared by CICA staff.

• The AcSB then decides whether to: (1) approve the standard as presented in theED; (2) approve the standard with amendments; (3) request the development of arevised ED for re-exposure; or (4) abandon the project.

Note that the contingencies project was approved (as in (1) above) by the AcSB in April1994, but the new standard was never officially released. The project was abandoned inJuly 1999.

APPENDIX 2: CONTINGENT GAINS AND LOSSES PROJECT — SIGNIFICANT DATES AND ITEMS

1988 Report of the Commission to Study the Public’s Expectations of Audits (theMacDonald commission) released (CICA, 1988). Calls for CICA to initiatea study of risks and uncertainties.

1990 (Feb.) The research study, Approaches to dealing with risk and uncertainty, byJ. E. Boritz is published (Boritz, 1990).

1990 (July) Project proposal for contingencies approved by the Accounting StandardsSteering Committee (AcSSC).

1991 (early) Task force (Western Section — see footnote 14) created to develop contingentgains and losses proposal.

1991 (April) Draft statement of principles (SOP) presented to task force, and later circu-lated to associates for comment.



1991 (Sept.) AcSB approves SOP for contingencies.

1993 (Feb.) ED issued. The ED significantly differed from the SOP (see Appendix 4 andthe discussion under the heading “Part Two: Developing the ExposureDraft”). Comments deadline set for May 7, 1993.

1994 (Jan.) (Late) submission by the Canadian Bar Association received.

1994 (Apr.) AcSB approves new Handbook section based on the ED.

1994 (June) AcSB sets implementation date to year-ends beginning on or after January 1,1995.

1994 (Oct.) AcSB postpones implementation pending consideration of measurementuncertainty recommendations.

1995 (Jan.) AcSB resets implementation date to year-ends beginning on or afterNovember 1, 1995.

1995 (Apr.) AcSB resets implementation date to year-ends beginning on or after May 1,1996.

1996 (Jan.) AcSB resets implementation date to year-ends beginning on or afterNovember 1, 1996.

1996 (Oct.) AcSB formally decides not to release the new (and approved) Handbooksection.

1999 (July) AcSB formally discontinues the contingencies project.

APPENDIX 3: CODING PROTOCOL FOR COMMENTS LETTERS

• Strongly Support: If the respondent addressed the issue and (1) used emotive language(for example, “strongly agree”), (2) used conceptual and economic consequences argu-ments in support, or (3) stated a preference for a more rigorous proposal than theED.

• Support: If the respondent addressed the issue and expressed general agreement,but did not meet the requirements of “strongly support”.

• Strongly Oppose: If the respondent addressed the issue and (1) used emotive language(for example, “strongly disagree”), (2) used conceptual and economic consequencesarguments in opposition to the ED, or (3) stated a preference for a position thatwould be less rigorous than the ED.

• Oppose: If respondent addressed the issue and expressed general disagreement, butdid not meet the requirements of “strongly oppose”.

• Not addressed or No position taken: Respondent did not address the issue, or dis-cussed it in a way that did not clearly express agreement or disagreement (forexample, disagreed with particular wording or pointed out inconsistencies withother Handbook sections).



APPENDIX 4: EVOLUTION OF THE PROPOSED STANDARD ON CONTINGENT GAINS AND LOSSES

VIE ET TRÉPAS DU PROJET CANADIEN DE NORME COMPTABLE SUR LES GAINS ET PERTES ÉVENTUELS

Condensé

En avril 1994, le Conseil des normes comptables du Canada (CNC) approuvait une nouvelle norme comptable qui allait modifier sensiblement la norme canadienne existante relative aux éventualités et qui redresserait la situation, croyait-on, en faveur des utilisateurs des états financiers. En fait, on allait opérer ce changement en demandant à la direction et à ses conseillers juridiques (ou, pour être plus exact, en le leur imposant) de produire des prévisions, des estimations et de l’information qu’ils n’étaient pas tenus de publier en vertu de la norme comptable en vigueur. La nouvelle norme allait plus précisément donner lieu à une augmentation des pertes éventuelles portées dans les comptes, à une meilleure information relative aux pertes comme aux gains éventuels, et à la possibilité de comptabiliser certains gains éventuels (ce que ne permettait pas la norme

Relevant aspect of the

standard

Existing standard —

Canada (s. 3290)

Boritz (1990)

SOP(1991)

ED(1993)


U.S. (SFAS No. 5)


U.K. (FRS No. 12)

Recognition of contingent losses

Recognize if likely and can be reasonably estimated



Recognize if likely

Recognize if probable and can be reasonably estimated

Recognize if probable and can be reasonably estimated

Recognition of contingent gains

Recognition not permitted

Recognize if virtually certain



Recognized when realized

Recognition not permitted

Disclosure of ranges of dollar amounts

Not required Required Required Required Required if can be reasonably estimated

Not required

Disclosure of dollar amounts accrued

Not required Not required Not required Required unless detrimental (if not disclosed, state reason)

Required if necessary for financial statements not to be misleading

Not required

Disclosure of potential contingent losses

Disclose unless likely

Disclose unless probability is remote

Disclose unless unlikely and not catastrophic

Disclose unless remote and not catastrophic

Disclose unless remote

Disclose unless remote



en vigueur). Par la suite, toutefois, principalement en raison d’une campagne de lobbying de dernier round menée par l’Association du barreau canadien (ABC), et de la menace de laisser sans réponse les demandes de confirmation adressées aux cabinets d’avocats, la nouvelle norme (qui avait pourtant été approuvée) n’a jamais été officiellement adoptée, et le projet sur les éventualités a été officiellement mis au rancart en juillet 1999. La présente étude, basée sur l’examen de la documentation interne et des comptes rendus de réunions, sur l’analyse des réponses à l’exposé-sondage, et sur une série d’entrevues avec des personnes clés qui avaient participé au projet de norme, présente une description narrative de l’origine, de l’élaboration et, pour finir, de l’abandon de cette norme approuvée sur les éventualités.

Selon l’étude, bien que le processus canadien de normalisation comptable soit pluraliste de par sa structure, les faits observés dans ce cas précis donnent à penser que l’apport du public provient principalement des comptables appartenant majoritairement au groupe des préparateurs d’états financiers. Sauf celle des commissions de valeurs mobilières, dont on peut penser qu’elles défendent les droits de la collectivité des investisseurs, l’exposé-sondage n’a suscité aucune réponse officielle des utilisateurs des états financiers. Élément tout aussi important, les commentaires négatifs quasi unanimes des correspondants à qui la norme avait été soumise et des groupes qui ont réagi à l’exposé-sondage ont eu, est-on enclin à conclure, peu de retombées sur le contenu définitif de la norme comptable approuvée. En fait, l’entêtement avec lequel il semble que l’on ait voulu apporter ces importantes modifications à la norme existante malgré l’opposition générale s’apparente à une « emprise réglementaire », les mandarins ou l’« élite » de la profession s’étant attribué la responsabilité d’améliorer la qualité des normes comptables. Ce cas portant sur les éventualités révèle également les caractéristiques d’un phénomène que les économistes appellent le comportement d’« obstruction », un groupe — celui des avocats dans le cas présent — faisant obstacle à la modification d’une politique. En effet, l’ABC a menacé de recommander à ses membres de retenir des éléments probants cruciaux (les demandes de confirmation des réclamations en cours et des réclamations éventuelles) si la nouvelle norme était adoptée, ce qui conférait pour ainsi dire de facto à ce groupe un droit de veto sur la modification proposée.

Globalement, les observations des auteurs devraient intéresser et renseigner tous ceux que préoccupe la normalisation comptable. Ainsi, les professeurs de comptabilité pourraient utiliser cette étude de cas pour faire ressortir les règles de la procédure officielle suivie dans l’élaboration des normes comptables et du lobbying dont l’exercice est encouragé et prévu, relativement à toute modification comptable proposée. Ils pourraient également utiliser le projet sur les éventualités pour illustrer comment les modifications projetées de la norme comptable peuvent être tributaires de la capacité de réunir les éléments probants suffisants et adéquats — dans le cas présent, les demandes de confirmation adressées aux cabinets d’avocats. Cette étude pourrait également éclairer les cadres financiers (les directeurs financiers, par exemple) responsables de l’intégration des modifications apportées aux normes comptables, notamment dans le choix du moment où il convient de modifier leur système comptable en conséquence. Les analystes financiers, qui doivent planifier l’adaptation de leurs modèles d’évaluation aux modifications comptables adoptées, s’intéresseront également à cette étude. Enfin, la lecture de ce récit



devrait inciter les normalisateurs en place, tant au Canada qu’à l’étranger, à tenir, dès le début des travaux relatifs à un projet de norme, des discussions avec les vérificateurs et autres intervenants appropriés (des experts, par exemple) en vue de définir avec précision les renseignements essentiels relatifs à la vérification s’ils veulent éviter qu’un autre projet de même nature ne déraille. Aux États-Unis, par exemple, le FASB tient régulièrement des réunions de concertation avec l’Association du barreau américain. Compte tenu du sort du projet de norme comptable sur les éventualités, l’on peut penser que des réunions du même genre au Canada (avec l’ABC) auraient peut-être porté fruit. Les normalisateurs pourraient également faire preuve de plus de prudence dans l’évaluation du poids de l’opposition aux modifications proposées et évaluer soigneusement si les avantages d’une nouvelle norme excèdent les coûts de la confrontation. Enfin, les normalisateurs canadiens pourraient aussi envisager d’élargir (ou de restructurer) leur groupe de correspondants afin d’y inclure davantage d’utilisateurs des états financiers, des intervenants dont l’appui, dans le cas de la norme comptable sur les éventualités, aurait peut-être suffi à faire en sorte que les modifications comptables proposées soient adoptées.

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The Life and Death of the Canadian Contingent Gains and Losses Accounting Standards Project*

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