MFDA Financial Questionnaire and Report Basis of Presentation Note Disclosure

(Updated March 4, 2013)

The purpose of this Notice is to provide Members and their auditors with guidance with respect to providing appropriate note disclosure in the audited MFDA Form 1 as it relates to the basis of presentation used.

MFDA and Related Auditor Requirements

The General Notes and Definitions in the Form 1 require that the statements and schedules be prepared in accordance with International Financial Reporting Standards (“IFRS”), except as prescribed by the MFDA. In accordance with Canadian Auditing Standard (“CAS”) 800 Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks of The Canadian Institute of Chartered Accountants Handbook, auditors are required to modify their standard Auditor’s Report where they are reporting on financial statements prepared in accordance with specific regulatory requirements. CAS 800 requires the Auditor’s Report to clearly disclose the following details to the readers of the financial statements:

• Reference to the applicable financial reporting framework to make clear the purpose for which the financial statements are prepared and, if necessary, the intended users (i.e. the MFDA and MFDA Investor Protection Corporation);
• Reference to the responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances of the engagement (when management has a choice of financial reporting frameworks); and
• Reference to the fact that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose.

The two standard Independent Auditor’s Reports included in the Form 1 address the above requirements.

Prescribed IFRS Departures

The Independent Auditor’s Reports include a reference to the basis of accounting described in the Notes to the Form 1. Consequently, upon signing the standard Independent Auditor’s Reports, the auditor is asserting that the financial statements have been prepared in accordance with IFRS, except for the prescribed departures and accounting treatments which are detailed in the Notes to the Form 1. The following, while not necessarily inclusive, is a list of departures from IFRS required by the Form 1 that should be considered by the Member and its auditor:

• Trading balances relating to Member and client securities and other investment transactions may be netted if the receivable and payable balances are with the same counterparty;
• Preferred shares issued by the Member and approved by the MFDA are classified as capital;
• Certain statements are prepared in accordance with MFDA requirements;
• Certain statements and all schedules are prepared in accordance with MFDA requirements and are not contemplated under IFRS;
• The financial statements are prepared on a non-consolidated basis;
• A statement of cash flow is not required;
• Securities owned and sold short are to be valued and reported at market value;
• Subordinated loans are classified as capital;
• Client cash held in trust by the Member and the corresponding liability must be included in the statements (consider this point for client name accounts); and
• Accounting Standards for Private Enterprise may not be used.

Sample Note Disclosure

In order for the Member to adequately comply with the requirements of the Form 1, and the Auditor to adequately report on the financial statements in the prescribed Independent Auditor’s Reports format, the following statements may be considered for inclusion in the Notes to the Form 1:

Basis of Presentation

The financial statements have been prepared in accordance with the significant accounting policies set out below to comply with the prescribed reporting requirements contained within the By-laws, Rules and Policies of the Mutual Fund Dealers Association of Canada (“MFDA”).

These By-laws, Rules and Policies specify the form and content of the presentation and disclosure of the items contained within the Statements to the Form 1. The basis of accounting used in these financial statements materially differs from International Financial Reporting Standards (“IFRS”) in the following key areas:

1. A statement of cash flow has not been prepared.
2. Statements A and D present assets, liabilities, revenues and expenses in accordance with classifications required by the MFDA, which requires the presentation of liquid assets, other allowable assets and non-allowable assets, which are not terms defined under IFRS. Subordinated loans would be classified as financial liabilities under IFRS. In addition, cash held in trust for clients and the corresponding liability would not be included as an asset and liability under IFRS.
3. Statement D sets out revenue and expense captions in a prescribed format.
4. Statements B, C, E, F and Schedules 1, 2, 3, 4 and 5 are prepared in a form prescribed by the MFDA, and in accordance with the applicable instructions contained within its By-laws, Rules and Policies. These are not statements and schedules contemplated under IFRS.

The sample note disclosure as set out above is meant to provide Members and their auditors with an understanding and an initial template for drafting their own Notes to the Member’s Form 1. Members are reminded that their business activities and corporate structures may differ from the example provided above and, therefore, additional disclosures may be appropriate.