Categories
Accounting Standards

Income trusts get distributable cash standard

Canada’s CAs have announced guidance for a key metric of income trusts, that of distributable cash.

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.

But the problem with the measure is that investors had no way of knowing where the cash had come from: general operating activities, or selling off productive assets and related future capacity. There was no way to compare across trusts since they all defined the term differently, or even to compare the same trust year over year. The CICA recommendations seek to remedy this:

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.

Standardized Distributable Cash is defined as cash from operations, after adjusting for capital expenditures, restrictions on distributions due to debt covenants, and minority interests.

The recommendations are not without criticism, however.

Independent investor advocate Diane Urquhart noted that the new CICA measure of distributable cash is not an addition to generally accepted accounting principles and will appear only as part of management’s discussion and analysis. […] “It’s ugly,” declared Al Rosen of forensic accountants Rosen and Associates. “When you needed this – and in a tougher form – would have been at least five years ago.”

I believe those are the biggest criticisms of it: the “standard” isn’t part of GAAP officially, but merely guidance to help trusts provide investors with higher quality information, and the recommendations are a little late in coming.

Better something than nothing, and better late than never.

Categories
Taxation

Income trust foreign takeovers may be a good thing

There’s been a lot of activity lately on the income trust front. Foreign firms are making bids left and right to acquire the Canadian entities, in the wake of the 31.5% trust tax introduced by the Conservative government.

Jack Mintz, a professor at Rotman, the business school at the University of Toronto, discusses in a recent Globe and Mail article that trust takeovers are not always a bad thing:

Trusts were shielded from takeovers prior to the federal trust tax announcement because their relatively high market values made purchases more prohibitive. It allowed managers to avoid the threat of takeover and therefore encouraged inefficiency.

Makes sense to me. I’ve come around to the idea that trusts were not all they were cracked up to be. That the trust tax is a good thing. Maybe not for investors who plowed most of their assets into units instead of shares or bonds, but it didn’t make sense that a business could choose to structure itself in a way such that it would pay no tax while other entities would.

Prof. Mintz says trusts could end up being run more efficiently and productively by new management.

“When you are operating as an income trust and have the high valuations at that point – and the very high distributions – it made it difficult for someone to come in and do a takeover based on such a very high valuation,” Mr. Mintz said.

Canada has been lagging in productivity for years compared to our neighbours to the south. This could help close the gap, but it could also result in a dramatic increase in foreign ownership, which could potentially lower tax revenues for the government which set in motion this chain of events in an effort to strengthen the tax base!

What do you think? Could trust takeovers be a good thing for our productivity? Will the increased productivity make up for the potential lost tax revenues?

Categories
Accounting

Accounting news roundup

Categories
Accounting Blogs

‘Tis the season for giving links

Dan Meyers of Tick Marks is caught up in the spirit of giving in his own way – he’s revisiting his special 12 Blogs of Christmas from last year around this time and giving us all a refresher on the more memorable posts from the accounting blogosphere from the year nearly ended.

Since my blog wasn’t around this time last year I wasn’t featured, so I’m going to help Dan out and highlight what I think are the best posts I’ve made in the 10 months or so I’ve been blogging about the accounting and audit professional industry:

  • Income trust tax loophole gaining popularity
    One of my most popular posts in terms of number of comments, I discussed the tax law and theory surrounding income trusts in Canada, which quickly became one of the most controversial aspects of the still relatively new Conservative government here.
  • Terrorist accounting
    I’m still pretty proud of this little nugget, even though as I was writing it I was a little worried it might offend more than it entertained. It’s a flight of fancy as I try to get inside the head of a terrorist organization’s bean counter. It was timely and creative, if nothing else!
  • UFE results dreams begin
    Surprisingly my most visited post, possibly due to its primo position in Google’s search results, it was short but sweet and captured the growing anxiety I was feeling as UFE results day approached. I think most people who click on the link in Google are hoping for a wilder dream than the one I described!
  • Global ethics and international accounting standards
    Probably my most ardent foray into accounting related activism, the post details the struggle the Publish What You Pay campaign has had in lobbying for an international standard mandating companies in certain industries report payments they make to governments, in an effort to put an end to the injustice of corruption in the third world.
  • The CA Advantage – marketing the profession
    The profession debuted a new ad campaign highlighting the skills a CA can bring to an organization, and I compared it to the successful marketing of a rival designation here in Canada, the Certified Management Accountants.
Categories
Accounting Standards

Income trust standards (or lack thereof) and risk

So everyone and their grandpa is still upset about the recent change to income trusts introduced by the Canadian federal government. The change was, of course, to implement a tax on trust income similar to corporate income tax.

The outrage epicentre is Bay Street, Canada’s version of Wall Street, in the heart of the financial district in downtown Toronto. But in the radiating waves of anger from that focal point, senior citizens seem to be most upset. Could that be because they are more likely to be Conservative party supporters, the party that pledged no trust tax in the last election? Possibly, but it also has to do with retirement savings and poor investment advice.

The most apoplectic are the ones who concentrated their investments in the risky vehicles.

This violates the sacred first rule of investing – diversify your holdings. Unfortunately, it seems that the only diversification many people paid attention to was in the underlying nature of the trust business – i.e. natural resources (oil and gas trusts are huge). It didn’t occur to anyone to diversify amongst vehicles – some trusts, some equities, some bonds, some derivatives, etc.

The risky nature of trusts is related to the relative lack of policing by either securities regulators, or accounting standards setters. Distributable cash is a key metric for trusts, because they are by design supposed to distribute nearly all cash generated, and one that has to this point been ignored by both parties above.

The accounting standards body in Canada, the AcSB, has no guidance on trust disclosure, and the national securities regulator, the CSA, has only suggestions as to disclosing that distributable cash is estimated based on reasonable assumptions. As Al Rosen, a popular Canadian accountant and frequent contributor to various business publications, points out: “Is any company about to admit that their predictions of distributable cash are completely unrealistic?”

Trusts need more attention from accounting standards setters and securities regulators, that much is certain. But investors also need to be aware that diversification should be done across investment vehicles, as well as industries. Both carry different types of risks.