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May 30, 2002

Mr. Ron Salole
Director, Accounting Standards
The Canadian Institute of Chartered Accountants
277 Wellington Street West
Toronto, Ontario Canada M5V 3H2

Re: CICA Proposed Standards for Impairment or Disposal of Long-Lived Assets

Dear Mr. Salole:
The Financial Reporting Subcommittee (FRS or the Committee) of the Canadian Advocacy Committee (CAC) of the Association for Investment Management and Research^® (AIMR^®)¹ is pleased to respond to the Canadian Institute of Chartered Accountants (CICA or the Institute) regarding its Exposure Draft of proposed standards for impairment or disposal of long-lived assets (the Exposure Draft). The CAC is the standing committee of AIMR that represents investment professionals who are members of the organization, as well as the 11 Canadian member societies and chapters. The CAC consists of members from across Canada who review regulatory, legislative, and standard setting developments that affect investors, investment professionals, and the capital markets in Canada.

Specific Comments Addressing Issues in the Exposure Draft

Are the disclosure requirements appropriate?
In general AIMR and the FRS have consistently expressed their desire that accounting standards makers require comprehensive disclosures only as a supplement to, not a replacement for, the information displayed in the financial statements. These views are consistent with the position AIMR's Financial Accounting Policy Committee voiced to the Financial Accounting Standards Board in its Nov. 13, 2000 comment letter regarding FAS 144, which is included as an attachment to this letter.

Regarding the Exposure Draft, we were particularly troubled by the Institute's decision not to follow the lead of the FASB and require companies to disclose the methods used to determine the fair value of an impaired asset. In its "Background Information and Basis for Conclusions" to the Exposure Draft, the CICA indicates that it did not regard that information "a necessary disclosure," adding that companies may disclose this information if they wish. We strongly disagree with this decision and urge the CICA to reconsider for the following reasons.

We see this omission as contrary to the needs of financial-report users. Such disclosures are indeed relevant because they enable users of financial information to understand why a company has concluded an asset is impaired. By allowing companies to avoid disclosing the valuation models they use to determine impairment, the proposed rule would eliminate one of the ways in which investors and analysts can ensure that management's assumptions and calculations are adequate and appropriate under the specific circumstances of the impairment.

Further, changes in key assumptions and models can significantly impact the results of any value calculation. The method for determining terminal value can have an influence, as can a decision to use a single-stage discounting model instead of a multi-stage discounting model. Even the use of market comparables can produce widely disparate numbers depending upon whether a company chooses to use the bid, ask or the midpoint of a quote, or chooses to use a price-to-earnings ratio instead of a price-to-cash flow multiple.

In consideration of the wide range of results produced by different assumptions and models, we strongly urge the CICA to reconsider its original decision about disclosure of valuation models and require companies to disclose much more about their valuation calculations. We further urge the Institute to require companies reporting impairments to not only disclose what valuation methods were used to calculate the impairment, but to also inform financial-statement users of the key assumptions that went into those calculations and provide a sensitivity analysis to show how changes in those key assumptions might effect the results. It is likely that companies already perform such analyses in house, so the incremental cost of providing this information is likely to be immaterial.

Issue: Do you agree with the decision to harmonize the accounting for the impairment of long-lived assets held for use with FAS 144?
The FRS supports the Institute's efforts to reduce differences between Canadian and U.S. generally accepted accounting principles. Such efforts are particularly beneficial in this case because there are no significant country differences that the proposed rule would need to address.

Nonetheless, the Committee believes that while harmonization of cross-border accounting rules is a good idea in general, it would not serve the purposes of Canadian investors if that process were to lead to the adoption of standards that reduced the transparency of financial information. Specifically, the Committee is concerned that the proposed rule, like the one adopted by the Financial Accounting Standards Board (FASB) in 2001, treats the impairment of long-lived assets differently from the impairment of goodwill.

Instead of accepting the multi-faceted methodology used by the FASB to measure and report impairment, the FRS urges the CICA to adopt a unified standard that treats all impairments or disposals of all types of assets in a similar manner.

Issue: Is the guidance on fair value in Appendix A to the proposed Exposure Draft sufficient?
In general, we agree with much of the valuation guidance provided in Appendix A. We also agree, in principle, with the hierarchy of fair market valuation methods provided.

However, we are concerned that putting the guidance as written into practice might create problems. In particular, practitioners and companies may conclude that the methods provided in the guidance are the only models endorsed for use in calculating fair value of impaired assets by the CICA. If that is indeed the case, then we might see a situation where companies report valuations that are less reflective of actual value than is really the case.

When it comes to calculating fair value on assets that do not have direct market comparables, there are a number of different yet appropriate valuation methods that are applicable in different industries. Many of these may reflect actual industry practice and present a truer picture of what a third-party buyer might pay for the impaired asset. However, we are concerned that preparers of financial statements may feel reluctant to use such methods in favor of those provided in the guidance, thereby reducing the accuracy of the information.

As a possible remedy to the potential confusion, the Committee urges the CICA to more effectively and more prominently stress that the methodologies listed in Appendix A do not constitute an exhaustive list of the acceptable valuation methods available to practitioners and companies.

Moreover, the Committee believes that while it is not necessary that preparers of financial statements adhere to specific valuation models, what is more important is that they disclose which methods they used. To that end, the Committee reiterates its view that the Institute should require companies to disclose which valuation method or methods they used to calculate impairment, the value created under each method, the assumptions used in the calculations and how the results might change in different circumstances.

Issue: Are the transitional requirements appropriate?
In general the FRC and AIMR are both strongly in favor of immediate implementation of new accounting rules. Nonetheless, given that it is unlikely that the CICA could publish a final rule before September 2002, it might create a hardship for companies and their financial-statement preparers to require them to implement the rule for fiscal years beginning Jan. 1, 2003. Therefore, we agree with the transitional requirements provided in the Exposure Draft.

Issue: Do the proposed Recommendations create a need to amend other areas of current Canadian GAAP?
We reiterate our view that the CICA should adopt a unified standard that would treat all types of asset impairments in the same manner. As such, we believe that any changes in current Canadian GAAP that would bring it into alignment with the Exposure Draft are welcome.

We appreciate the opportunity to comment on the Canadian Institute of Chartered Accountants proposed rule for impairment or disposal of long-lived assets. If you have any questions or seek elaboration of our views, please do not hesitate to contact James Allen at 1.434.951.5558 or james.allen@cfainstitute.org.

Sincerely,

Robert F. Morgan, CFA
Acting Chair of Financial Reporting Subcommittee
Canadian Advocacy Council

James C. Allen, CFA
Associate, Advocacy

¹ AIMR is a global, nonprofit organization of more than 58,000 analysts, portfolio managers, and other investment professionals in 110 countries. Through its headquarters in Charlottesville, Virginia and more than 100 Member Societies and Chapters throughout the world, AIMR provides global leadership in investment education, professional standards, and advocacy programs. More than 7,500 AIMR members live and work in Canada.