1 © 2008 kpmg llp, a canadian limited liability partnership and a member firm of the kpmg network...

1© 2008 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Second Quarter UpdateJuly 8, 2008

Conference Call

KPMG LLP


Agenda

• Canadian Internal Control Over Financial Reporting – Murray Suey

• IFRS Developments – John Gordon

• Tax Issues for IFRS – Jodi Roworth

• Budget Update – Chris Post

• International Tax Developments – Jim Samuel

• Merger & Acquisition Environment – Rhys Renouf

• SEC Update –Wayne Chodzicki


Canadian Internal Control Over Financial Reporting

Murray SueyPartner, Audit

403.691.8474

[email protected]


Canadian Internal Control Over Financial Reporting

Currently• certified as to design of internal controls only

Proposal• certify as to effectiveness of internal controls


Highlights of Proposed NI 52-109

Certify on effectiveness of internal control over financial reporting (ICFR) for periods ending after December 15, 2008

• Significant documentation requirements• Much closer to current SEC guidance

− top-down, risk-based approach

− definition of material weakness

− scope exemptions (i.e. business acquisition – 365 days)

− requires use of a control framework, (i.e., COSO)

• Recommends disclosure of significant weaknesses in disclosure controls and procedures (DC&P)

− a material weakness in ICFR “often” means ineffective DC&P

• Venture issuers are exempt from DC&P and ICFR certifications


Summary of Responsibilities under Proposed NI 52-109

CEO and CFO• Certify design and effectiveness of DC&P and ICFR and report

conclusions in MD&A

• Maintain documentary evidence to support the certification

Audit Committee and Board of Directors• BOD to approve the issuer’s annual MD&A, including disclosures

concerning DC&P and ICFR

• Understand the basis for conclusions regarding material weaknesses


Summary of Responsibilities under Proposed NI 52-109 cont'd

KPMG• Under our professional standards, we will read MD&A and assess

any inconsistencies with our knowledge and any apparent material misstatement of fact or misrepresentation. We will also communicate any failure to meet the requirements of securities legislation of which we are aware

− We are not required to search out securities violations and are not required to read management’s documentation and evaluation of DC&P and ICFR


How KPMG can Help

To assist management and/or the audit committee with respect to their responsibilities, KPMG can perform a number of services. We can:

• Perform a more thorough readiness assessment to assist management and the Audit Committee in understanding the degree to which management is progressing in preparing for the ultimate certification requirements of proposed NI 52-109

• Provide observations and recommendations based on a detailed review of management’s documentation as it is developed to meet the provisions of NI 52-109

• Assist in documenting controls including entity-level controls, period-end financial reporting workflows and controls, process level workflows and controls, information technology general controls and IT application controls


How KPMG can Help cont'd

• Carry out procedures of an audit nature, including testing, upon which we have agreed in advance, and report the findings

• Provide an audit of internal control over financial reporting that is integrated with an audit of financial statements. We may perform audit engagements regarding aspects of an entity's internal control over financial reporting including a particular process, subsidiary or the entity as a whole


IFRS Developments

John GordonPartner

403.691.8118

[email protected]


Update

IFRSgo-live

Jan 1/07 Jan 1/09 Jan 1/10 Jan 1/11Jan 1/08

Calendar year

periods

AcSB’s progress review completed!

IFRSComparative

figures

IFRS Opening Balance Sheet

Developments:

IASB: IFRS 1 proposed exemption for oil and gas industry (Q3 2009?)

CSA: MD&A disclosures

CSA: Update on “Tentative Conclusions”

Disclosureconvergence plan per Q

Last reportingunder

Canadian GAAP

CSA (revised) tentativeconclusions

Changeover

date

AcSB/IASB IFRS 1submission

IASB to finalize O&G IFRS 1 exemption?


IFRS 1 – First-time Adoption of IFRS“Break” for O&G Industry

• IASB meeting March 2008: CAPP's submission regarding proposed IFRS 1 amendments:

− “IFRS 1 be amended to permit an allocation in the opening IFRS balance sheet of the full cost pool to individual assets, with each asset being subject to an impairment test at that date.”

− AcSB instructed to work with IASB staff to create proposal and develop a more comprehensive description of issue


IFRS 1 – First-time Adoption of IFRS“Break” for O&G Industry cont'd

• IASB meeting May 2008: AcSB's presented IFRS 1 proposal:− IASB approved AcSB's suggested disclosure requirements re IFRS 1

proposed exemption− Suggested disclosure requirement was presented and stated:

"Paragraph XX provides an exemption for oil and gas assets. If an entity uses that exemption, it shall disclose that fact and the basis on which carrying amounts under previous GAAP were allocated."

• AcSB will draft ED: will receive a 120 day comment period• Final IFRS 1 amendment not expected before Q3 2009


CSA Notice 52-320IFRS Disclosure

• May 9, 2008 CSA Notice 52-320, “Disclosure of Expected Changes in Accounting Policies relating to Changeover to IFRS”

• Changeover IFRS = changes due to new accounting standards

• CSA: within scope of current MD&A form requirements that apply to annual and interim MD&A filed in compliance with National Instrument 51-102, Continuous Disclosure Obligations, as well as MD&A included in a prospectus

• Requirements in other securities legislation might also require disclosure of specific information about broader implications of changeover to IFRS



• Disclosure “relating to each financial reporting period in the three years before the first year (2011) financial statements prepared in accordance with IFRS”

• Disclosure begins as early as Q2 2008 MD&A (for companies that have developed IFRS changeover plans) and no later than the annual 2008 MD&A



• CSA staff desire an incremental approach to disclosure

• Level of detail and amount of quantified information increases as move closer to 2011

• Key elements of a changeover plan may address impact on:− accounting policies, including choices among policies permitted under

IFRS, and implementation decisions such as whether certain changes will be applied on a retrospective or a prospective basis

− information technology and data systems − internal controls over financial reporting − disclosure controls and procedures, including investor relations

and external communications plans − sufficiency of financial reporting expertise, including training

requirements − business activities that may be influenced by GAAP measures such

as foreign currency, hedging, debt covenants, capital requirements and compensation arrangements.


CSA Notice 52-320IFRS Disclosure Communication 2008

2008 annual and interim MD&A disclosure (3 years to changeover)

• Interim MD&A − Developed IFRS changeover plan?

Discuss key elements and timing− Well advanced in IFRS project?

Discuss impact of IFRS changeover on financial reporting

• Annual MD&A − No later than three years before changeover date

Discuss status key elements and timing plan − Well advanced in IFRS project?

Discuss impact of IFRS changeover on financial reporting



2009 annual and interim MD&A disclosure (2 years to changeover)

• Interim MD&A − Provide update progress on IFRS plan and changes

• Annual MD&A − Discuss preparations for changeover to IFRS, building on aspects

discussed in 2008 and interim 2009 MD&A − To allow investors to understand the key elements of the financial

statements that will be affected, narrative description of major identified differences between current accounting policies and those required / expect to apply in preparing IFRS financial statements, including assumptions about future changes to IFRS



2010 annual and interim MD&A disclosure (1 year to changeover)

• Interim and Annual MD&A− Provide updated discussion of preparations, building on aspects

discussed in 2008, 2009, and interim 2010 MD&A− Discuss in more detail key decisions and changes (to be) made

relating to changeover, including decisions about accounting policy choices under IFRS 1 and other relevant individual IFRS standards

− When preparing interim and annual MD&A, if have available quantified information on impact of IFRS on key line items in financial statements, included in MD&A


CSA Notice 52-321

Update Staff Concept Paper re IFRS


CSA Notice 52-321Update Staff Concept Paper

• June 27, 2008 CSA Notice 52-321, “Early Adoption IFRS, Use of US GAAP and Reference to IASB-IFRS”

• Notice 52-321 updated issues addressed in CSA Concept Paper 52-402 on "Possible changes to securities rules related to IFRS (the concept paper or tentative conclusions)”

• 42 comment letters: CSA Staff further developed their views

• Staff now propose that for Canadian domestic issuers, who are also SEC registrants, the existing option in NI 52-107 would be retained, and US GAAP could be used

− limited to Canadian SEC registrant companies


CSA Notice 52-321Update Staff Concept Paper

Staff continue to propose that IFRS could be early adopted:• Exemptive relief on case-by-case basis

• Assess readiness staff, Board, AC, auditor, investors

• Consider implications on obligations under securities legislation including CEO/CFO certifications, BARs, offering documents, previously released material forward-looking information

If choose to early adopt and previously filed interim reports under “old GAAP” in first year proposing to adopt IFRS:

• Revise interim financial statements

• Revise MD&A

• Issue new certificates


IFRS & Tax: Why us Tax Geeks should care?

Jodi L. RoworthSenior Principal, Tax

403.691.8092

[email protected]


Why move to International Financial Reporting Standards (IFRS)?

What are they?• Single set of globally-accepted, high-quality accounting standards• Used in 100+ countries, including five G8 countries

Rationale for Canada’s move to IFRS:• Provide better access to global capital markets• Move to principles-based standards and away from rule-based U.S.

standards (costly / difficult to apply)• More cost effective than maintaining Canadian GAAP

U.S GAAP & IFRS – likely more aligned over time


Timeline for Canada’s adoption of IFRS

2007 2009 2010 20112008

Group 2:IFRS under development

at change-over datee.g. leases, revenues, employee benefits

Group 4:IFRS with no Canadian GAAP equivalent:

Adopt at change-over datee.g. provisions, biological assets

Group 1: Converge prior to change-over datee.g. inventories,

business combinations, income taxes,

earnings per share

Group 3: Canadian GAAP replaced at

change-over datee.g. impairment, securitizations,

financial instruments

Group 5: Cdn standards – no IFRS equivalent

Expected to be discontinuede.g. AcG 16 – full cost, rate reg’d accg


IAS 12 – Income Taxes

IAS 12 Income Taxes – October 1996• Paragraphs 1-91• All paragraphs have equal authority

Fundamental Principle

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probably that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognize a deferred tax liability (deferred tax asset), with certain limited exceptions.


Scope

• The scope of IAS 12 includes: All domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are

payable by subsidiary, associate or joint venture entities on distributions to the parent entity.

• Taxes that are not based on taxable profits are not within the scope of IAS 12 (i.e., payroll taxes and value added taxes)

• Excludes accounting for government grants or investment tax credits; however, does account for temporary differences that may arise from such grants or ITCs

Income Taxes Current Taxes Deferred Taxes= +


Tax Convergence Project – Group 1

• IASB and FASB – objective to reduce the differences between IAS 12 and FAS109

• Exposure Drafts expected to be published in 2008/final standard in 2009

• Both based on the balance sheet liability approach whereby an entity recognizes DITA/DITL for TD and loss carryforwards

• Differences arise because both standards have numerous exceptions to the basic principle

• Approach to convergence is to eliminate exceptions, not to reconsider the underlying approach

• Added to the Boards agenda in September 2002 (not a short project)

• AcSB has indicated that it is their intent to adopt revised IAS 12 without modification. IASB/FASB

Convergence


Comparison (IAS 12/CICA 3465/FAS109)

• Exceptions – Goodwill & Initial Recognition

• Investments in Subs/Joint Ventures – Outside Basis

• Enacted vs. Substantive enactment

• Business Combination – previously unrecognized tax asset

• Compound Financial Instruments

• Tax Credits & ITC’s – not part of IAS12

• Presentation – Current vs. Long-Term

• Allocation within consolidated group

• Intra-period Allocations – Equity vs. Income

• Interim Period Taxes

• Disclosure

• Uncertain Tax Positions


Other IFRS Differences

• Provisions, Cont liabilities/assets ( IAS 37)

• Property, Plant & Equipment (IAS 16)

• Financial Instruments (IAS 39)

• Intangible Assets and Goodwill (IAS 38)

• Investment Property (IAS 40)

• Impairment (IAS 36)

• Revenue Recognition (IAS 11 & 18)

• Government Grants (IAS 20)

• Related Parties (IAS 24)

• Leases (IAS 17)• Debt vs. Equity Classification (IAS 32)• Derivatives and hedging (IAS 39)• Pensions and post-retirement benefits

(IAS 19)• Consolidations, equity method and

joint ventures (IAS 27, 28, 31)• Rate Regulated• Share based payments (IAS 2)

• Events After the Balance Sheet date (IAS 10)

• First Time Adoption (IAS 1)


Oil and Gas Industry: Where are we after May announcement?

Expected 2011 change-over date – to be finalized in early 2008

• AcSB not expected to keep AcG-16

• AcSB not expected to delay implementation

• AcSB not expected to allow exceptions to IFRS

• AcSB not expected to modify IFRS 1 transition standard

IFRS Extractive Industries project not complete by 2011• AcSB not expected to “wait” for project completion as project not

likely to completed before 2012


IFRS Impact on Tax Reporting and Tax Filings

• Income Tax Act of Canada (“ITA”) – no requirement directing the use of one particular accounting methodology when preparing tax filings – therefore IFRS/CDN GAAP both acceptable

• Management will need to assess what, if any, adjustments to accounting profit are required to arrive at taxable profit per the ITA

• IFRS impact on the balance sheet may also impact a company’s tax on capital

• CRA has not issued any formal statement or guidance on the effects of the transition to IFRS


IFRS Impact on Tax Reporting and Tax Filings

• Understand differences in reported balances under IFRS for both first-time adoption and on ongoing basis

• Determine proper treatment on the company’s tax returns

• Changing the accounting treatment under IFRS will raise several questions:

− Is there a financial conformity rule that needs to be followed under the tax law?

− Can the historical tax method be continued?− Does the company have the information to compute and schedule new

TD?


Income Tax vs. Royalty

IAS 12 • For the purposes of this standard, income taxes include all

domestic and foreign taxes which are based on taxable profits.

• Taxable profit (tax loss) is the profit(loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable)


Income Tax vs. Royalty

AAcSB – Australian Accounting Standards Board• Australian Petroleum Resource Rent Tax

Canadian/World-Wide Issues• Oilsands Royalty

• Ontario Mining Tax

• Potash Production Tax

• Foreign Profit based royalties

• Licence agreements


KPMG IFRS Publications

External Canadian IFRS Website• www.kpmg.ca/ifrs

KPMG’s IFRS publications posted on www.kpmg.ca/ifrs

Publications include• IFRS compared to Canadian GAAP: An overview (Fall 2007)• Managing the Transition to IFRS: The Journey to 2011• IFRS: An Overview – An executive summary of the key requirements of IFRS• Illustrative Financial Statements

− First-time adopters− Different industries

• The Transition to IFRS: Implications for the Audit Committee (06/2007)


The Alberta Budget

Chris PostPartner

403.691.8434

[email protected]


The Alberta Budget – 2008

SR&ED Tax Incentive Introduced for corporations• Refundable Tax Credit

• 10% of qualified expenditures in Alberta

• Expenditures incurred after December 31, 2008

• Annual maximums:− Expenditures in Alberta of $4,000,000− Refundable tax credit $400,000

• Same rules and benefits apply to CCPC’s, public corporations, non-resident corporations with a branch in Alberta

• Alberta ITC’s will “grind” the federal SR&ED base for federal ITC’s

• No technical details published yet



IMPACT ON LARGE CORPORATIONS: Before After

Annual SR&ED Expenditures, say $10,000 $10,000

Federal ITC (2,000) (1,800)

Alberta ITC - (1,000)

Tax saving, deduction of SR&ED costs (2,900) (2,900)

Tax cost of all SR&ED ITC’s 580 812

After-tax cost of SR&ED in Alberta $5,680 $5,112

Improvement $568



IMPACT ON CCPC’s: Before After

Annual SR&ED Expenditures, say $10,000 $10,000

Federal ITC (3,500) (3,150)

Alberta ITC - (1,000)

Tax saving, deduction of SR&ED costs (1,400) (1,400)

Tax cost of all SR&ED ITC’s 490 581

After-tax cost of SR&ED in Alberta $5,590 $5,031

Improvement $559



Other Corporate Budget Measures• Harmonisation with federal measures on:

− Capital cost allowance classes (if and when the fed’s enact!) Rental properties with M&P and other business tenants, computer

equipment, etc.

• Establish $100 million Alberta Enterprise Corporation to improve access to capital for early-stage knowledge-based companies

• No changes to:− corporate tax rate− small business tax rate− small business limits



Other Personal Budget Measures• Lower non-eligible dividend threshold from $460,000 (Alberta small

business limit) to $400,000 (federal small business limit)− eliminate over-integration on dividends paid on $60,000 income

eligible for Alberta small business limit in excess of federal limit− Technical details not released yet

• Harmonisation with federal measures on:− Tax-Free Savings Accounts (TFSA’s) - $5,000 annual contribution

starting in 2009

• Health Care insurance premiums eliminated after 2008

• Annual Alberta Caregiver and Disability Tax Credits, and Income Thresholds, all increased by $5,000 over inflation indexing for 2008

• Alberta Family Employment Tax Credit increases 10%, July 1, 2008


Other Alberta Tax Developments

Previously-scheduled Alberta small business limit changes:• From $430,000 to $460,000 effective April 1, 2008

• Scheduled to go to $500,000 effective April 1, 2009

Personal tax credit indexing for 2008• 4.7% increase over 2007 amounts


June Federal Developments

1. Bill C-50 containing most of the tax measures of the 2008 federal budget substantively enacted in June for both Canadian and US GAAP

2. Deadline for filing election to report for tax purposes in functional currency deferred to October 31, 2008• from June 30

3. Deadline for filing election on application of Foreign Affiliate amendments deferred by 18 months• For a December 31, 2007 year-end – from June 30, 2008 to

December 31, 2009


International Tax

Jim SamuelPartner, Tax

403.691.8349

[email protected]


International Tax

• International Tax Advisory Panel

• Protocol – U.S. – Canada Tax Treaty

• Foreign Affiliate Elections


Merger & Acquisition Environment

Rhys RenoufPartner, Advisory Services

403.691.8426

[email protected]


E & P and Energy ServicesIndustry Overview

What a difference a year makes• Much more optimistic outlook today compared to 2007

− Key factors driving optimism include high commodities prices, emerging resource plays (Bakken, Montney, Horn River, Utica) and strong cash flows for producers

− Record cash flows are expected to drive increased capital expenditure budgets and drilling activity in H2 2008 and into 2009

− High commodity prices have mitigated the impact of Alberta royalty structure− Current pricing environment should allow companies to strengthen balance

sheets and reduce debt levels

• Energy services companies stand to benefit from higher capex budgets− Demand for directional drilling and pressure pumping is especially strong− Migration of rigs from Canada to the U.S. is coming to a halt− Pricing power expected to return for service providers in late 2008 or 2009− Labour continues to be the limiting factor


Public Equity Valuations

• Publicly traded energy companies have underperformed relative to commodity prices

• Significant changes in the underlying fundamentals (i.e. commodity prices) have not been fully reflected in valuations

• YTD returns for producers and service providers are highly correlated

Sources: Bloomberg, Google Finance

2008 Returns: Commodity Prices and Equity Market Indices

-40%

-20%

0%

20%

40%

60%

80%

100%

J an-08 Feb-08 Mar-08 Apr-08 May-08 J un-08Per

centa

ge

Chan

ge

Sin

ce J

anuar

y 1,

200

8

WTI Price ($CAD)AECO-C Price ($CAD)TSX Energy Services IndexTSX Energy IndexTSX Composite Index

27%

49%

91%

26%

5%


Mergers & Acquisitions Environment

Producers• Commodities prices have solved most of the debt issues that were present

in 2007− Liquidity is creating a positive setting for M & A activity

− Look for larger premiums as valuations increase, especially in emerging resource play areas

− Strong cash flows are increasing cash reserves or reducing debt, paving the way for strong asset and corporate M & A activity

Energy Services• Geographic diversification and operational focus are the driving force

− Large Canadian firms are actively pursuing geographic diversification, particularly in the U.S. – acquisitions are a vital part of this effort

− Unlike producers, several distressed situations exist on the services side

− Look for more share-for-share exchanges such as Builders/Essential

− Divestitures of non-core divisions in order to maintain operational focus are likely to continue (i.e. Essential divests its transport division to focus on downhole services)

Sources: Scotia Capital, Tristone Capital


SEC Update

Wayne ChodzickiPartner

403.691.8004

[email protected]


DISCLAIMER

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

© 2008 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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