Trusts need transparency, accountants say

How much cash was generated in the period and where did it come from? How much cash was generated in the period and where did it come from? What is the entity’s strategy for maintaining productive capacity and managing debt? (This is particularly important in light of the recent federal government announcement of a new […]

By Steven Lamb | November 6, 2006 | Last updated on November 6, 2006
2 min read
  • How much cash was generated in the period and where did it come from?
  • What is the entity’s strategy for maintaining productive capacity and managing debt? (This is particularly important in light of the recent federal government announcement of a new tax on income trusts.)
  • Is sufficient cash being retained to provide for all long-term unfunded contractual liabilities, such as pension plans?
  • Is sufficient cash being retained within the income trust to maintain productive capacity?
  • If distributable cash were to be distributed, is it likely that the entity will meet its financial commitments, such as loan covenants, for the foreseeable future?

    “Income trusts that follow the recommendations in the guidance will help ensure investors have access to the information they need to assess the ability of these investments to pay future cash distributions and should help investors determine the relative value of income trust units — both of which will reduce risk to income trust investors,” said Dancey.

    Income trusts derived some of their tax-efficiency from the structure of the distribution, which could include return of capital. But the percentage of the distribution that was return of capital varied between trusts, making comparisons difficult.

    The practice of returning capital also allows many trusts pay out more in distributions in a year than they earn from operations, making sustainability of the distribution a real concern.

    “CICA’s recommendations fill a gap in financial reporting and go a long way to providing essential information to investors who own income trusts directly or through pension and mutual funds,” said Dancey. “They will help increase transparency in how management determines cash available for distribution and provides for maintaining operating capacity, debt covenants and other obligations as part of its calculation of distributable cash.”

    CICA developed its recommendations in consultation with the income trust community, regulators and investors. Comments on the recommendations will be received until March 2007.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (11/06/06)

    Steven Lamb

    • How much cash was generated in the period and where did it come from?
    • What is the entity’s strategy for maintaining productive capacity and managing debt? (This is particularly important in light of the recent federal government announcement of a new tax on income trusts.)
    • Is sufficient cash being retained to provide for all long-term unfunded contractual liabilities, such as pension plans?
    • Is sufficient cash being retained within the income trust to maintain productive capacity?
    • If distributable cash were to be distributed, is it likely that the entity will meet its financial commitments, such as loan covenants, for the foreseeable future?

    “Income trusts that follow the recommendations in the guidance will help ensure investors have access to the information they need to assess the ability of these investments to pay future cash distributions and should help investors determine the relative value of income trust units — both of which will reduce risk to income trust investors,” said Dancey.

    Income trusts derived some of their tax-efficiency from the structure of the distribution, which could include return of capital. But the percentage of the distribution that was return of capital varied between trusts, making comparisons difficult.

    The practice of returning capital also allows many trusts pay out more in distributions in a year than they earn from operations, making sustainability of the distribution a real concern.

    “CICA’s recommendations fill a gap in financial reporting and go a long way to providing essential information to investors who own income trusts directly or through pension and mutual funds,” said Dancey. “They will help increase transparency in how management determines cash available for distribution and provides for maintaining operating capacity, debt covenants and other obligations as part of its calculation of distributable cash.”

    CICA developed its recommendations in consultation with the income trust community, regulators and investors. Comments on the recommendations will be received until March 2007.

    Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

    (11/06/06)