(1) Access to underlying entity – The nature of an issuer’s interest in an underlying entity will affect the certifying officer’s ability to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity.
Subsidiary – In the case of an issuer with an interest in a subsidiary, as the issuer controls the subsidiary, certifying officers will have sufficient access to the subsidiary to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity.
Proportionately consolidated entity or SPE – In the case of an issuer with an interest in a proportionately consolidated entity or a SPE, certifying officers might not always have sufficient access to the underlying entity to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity. Whether the certifying officers have sufficient access to a proportionately consolidated entity or a SPE to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity is a question of fact. The sufficiency of their access could depend on, among other things:
(a) the issuer’s percentage ownership of the underlying entity;
(b) whether the other underlying entity owners are reporting issuers;
(c) the nature of the relationship between the issuer and the operator of the underlying entity if the issuer is not the operator;
(d) the terms of the agreement(s) governing the underlying entity; and
(e) the date of creation of the underlying entity.
Portfolio investment or equity investment – In the case of an issuer with a portfolio investment or an equity investment, certifying officers will generally not have sufficient access to the underlying entity to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity.
(2) Access to an underlying entity in certain indirect offering structures – In the case of certain indirect offering structures, including certain income trust and limited partnership offering structures, the issuer could have:
(a) a significant equity interest in the underlying entity but not legally control the underlying entity, since legal control is retained by a third party (typically the party involved in establishing the indirect offering structure) or
(b) an equity interest in an underlying entity that represents a significant asset of the issuer and results in the issuer providing the issuer’s equity holders with separate audited annual financial statements and interim financial reports prepared in accordance with the same accounting principles as the issuer’s financial statements.
In these cases, we generally expect the trust indenture, limited partnership agreement or other constating documents to include appropriate terms ensuring the certifying officers will have sufficient access to the underlying entity to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity.
(3) Reasonable steps to design and evaluate – Certifying officers should take all reasonable steps to design and evaluate the effectiveness of the controls, policies and procedures carried out by the underlying entity that provide the certifying officers with a basis for the representations in the annual and interim certificates. However, it is left to the discretion of the certifying officers, acting reasonably, to determine what constitutes “reasonable steps”.
If the certifying officers have access to the underlying entity to design the controls, policies and procedures discussed in subsection (2) and they are not satisfied with those controls, policies and procedures, the certifying officers should consider whether there exists a material weakness or a weakness in DC&P that is significant.
(4) Disclosure of a scope limitation relating to a proportionately consolidated entity or SPE – A scope limitation exists if the certifying officers would not have a reasonable basis for making the representations in the annual or interim certificates because they do not have sufficient access to a proportionately consolidated entity or SPE, as applicable, to design and evaluate the controls, policies and procedures carried out by that underlying entity.
When determining whether a scope limitation exists, certifying officers must initially consider whether one, or a combination of more than one, proportionately consolidated entity or SPE includes risks that could reasonably result in a material misstatement in the issuer’s annual filings, interim filings or other reports. The certifying officers would consider such risks when the certifying officers first identify the risks faced by the issuer in order to determine the scope and necessary complexity of the issuer’s DC&P or ICFR, as discussed in subsection 6.6(2) of the Policy.
The certifying officers would disclose a scope limitation if one, or a combination of more than one, proportionately consolidated entity or SPE includes risks that could reasonably result in a material misstatement and the certifying officers do not have sufficient access to design and evaluate the controls, policies and procedures carried out by each underlying entity.
The certifying officers would not disclose a scope limitation if a proportionately consolidated entity or SPE, individually or in combination with another such entity, does not include risks that could reasonably result in a material misstatement.
The issuer must disclose in its MD&A a scope limitation and summary financial information about each underlying entity in accordance with section 3.3 of the Instrument. The summary financial information may be disclosed in aggregate or individually for each proportionately consolidated entity or SPE.
Meaningful summary financial information about an underlying entity, or combination of underlying entities, that is the subject of a scope limitation would include:
(a) revenue;
(b) profit or loss before discontinued operations;
(c) profit or loss for the period; and
unless (i) the accounting principles used to prepare the financial statements of the underlying entity permit the preparation of its statement of financial position without classifying assets and liabilities between current and non-current, and (ii) the MD&A includes alternative meaningful financial information about the underlying entity, or combination of underlying entities, which is more appropriate to the underlying entity’s industry,
(d) current assets;
(e) non-current assets;
(f) current liabilities; and
(g) non-current liabilities.
Meaningful disclosure about an underlying entity that is the subject of a scope limitation would also include any contingent liabilities and commitments for the proportionately consolidated entity or SPE.
(5) Limited access to the underlying entity of a portfolio investment or equity investment – Although the certifying officers may not have sufficient access to design and evaluate controls, policies and procedures carried out by the underlying entity of a portfolio investment or equity investment, the issuer’s DC&P and ICFR should address the issuer’s controls over its disclosure of material information relating to:
(a) the carrying amount of the investment;
(b) any dividends the issuer receives from the investment;
(c) any impairment loss in the investment; and
(d) if applicable, the issuer’s share of any profit or loss from the equity investment.
(6) Reliance on financial information of underlying entity – In most cases, certifying officers will have to rely on the financial information reported by a proportionately consolidated entity, SPE or the underlying entity of an equity investment. In order to certify an issuer’s annual or interim filings that include information regarding the issuer’s investment in these underlying entities, the certifying officers should perform the following minimum procedures:
(a) ensure that the issuer receives the underlying entity’s financial information on a timely basis;
(b) review the underlying entity’s financial information to determine whether it has been prepared in accordance with the issuer’s GAAP; and
(c) review the underlying entity’s accounting policies and evaluate whether they conform to the issuer’s accounting policies.
