RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with Canadian GAAP, which, in most respects, conform to the United States Generally Accepted Accounting Principles (“US GAAP”). These unaudited interim statements do not include all the disclosures included in TransAlta Corporation’s annual consolidated financial statements. Accordingly, these unaudited statements should be read in conjunction with the most recent annual statements.
The material differences to reconcile Canadian GAAP to US GAAP are described below:
A.
EARNINGS AND EARNINGS PER SHARE (EPS)
B.
BALANCE SHEET INFORMATION
C.
ADJUSTMENTS AND RECONCILING ITEMS
Derivatives and hedging activities
On Jan. 1, 2007, TransAlta adopted four new accounting standards that were issued by the CICA: Section 1530,Comprehensive Income, Section 3855,Financial Instruments – Recognition and Measurement, Section 3861,Financial Instruments – Disclosure and Presentation, and Section 3865,Hedges. We adopted these standards retroactively with an adjustment of opening AOCI.
I. Income taxes
Future income taxes under Canadian GAAP are referred to as deferred income taxes under U.S. GAAP.
Deferred income taxes under U.S. GAAP would be as follows:
II. Contributed surplus
In 1998, the corporation transferred generation assets to one of its subsidiaries TA Cogen. TA Power, an unrelated entity, concurrently subscribed to a minority interest in TA Cogen. The fair value paid by TA Cogen for the assets exceeded their historical carrying values. For Canadian GAAP, the corporation recognized a portion of this difference, to the extent it was funded by TA Power’s investment in TA Cogen, as a gain on disposition. As TA Power held an option to resell their interest in TA Cogen to the corporation in 2018, TA Power’s option to resell these units was eliminated and the unamortized balance of the gain was recognized in income.
Under U.S. Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 51, the option initially held by TA Power to potentially resell TA Cogen units to the corporation in 2018 causes the excess of the consideration paid by TA Power over the corporation’s historical carrying value in these assets to be characterized as contributed surplus in 1998. This amount of contributed surplus is reduced by the related tax effect. As a result, under U.S. GAAP, there is no amortization of the gain into income in the period from 1998 to 2002 and no recognition of the unamortized balance of the gain in 2003.
As a result, $133.0 million has been reclassified from retained earnings to contributed surplus.
III. Employee future benefits
U.S. GAAP requires that the cost of employee pension benefits be determined using the accrual method with application from 1989. It was not feasible to apply this standard using this effective date. The transition asset as at Jan. 1, 1998 was determined in accordance with elected practice prescribed by the SEC and is being amortized over 10 years.
IV. Joint ventures
In accordance with Canadian GAAP, joint ventures are required to be proportionately consolidated regardless of the legal form of the entity. Under U.S. GAAP, incorporated joint ventures are required to be accounted for by the equity method. However, in accordance with practices prescribed by the SEC, the corporation, as a foreign private issuer, has elected for the purpose of this reconciliation to account for incorporated joint ventures by the proportionate consolidation method.
V. Start-up costs
Under U.S. GAAP, certain start-up costs, including revenues and expenses in the pre-operating period, are expensed rather than capitalized to deferred charges and property, plant and equipment as under Canadian GAAP. This results in decreased depreciation and amortization expense under U.S. GAAP.
VI. Accumulated Other Comprehensive Loss
The difference between Accumulated Other Comprehensive Loss under Canadian and US GAAP in 2007 is related to the adoption of Financial Accounting Standards (SFAS) No. 158 (SFAS 158),Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).
VII. Restatement
In 2006 TransAlta adopted Statement of Financial Accounting Standards (SFAS) No. 158 (SFAS 158),Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires the cumulative impact of adopting this change in accounting principle to be charged to the opening balance of Accumulated Other Comprehensive Income (“AOCI”). For the year ended Dec. 31, 2006, TransAlta recorded this as a charge to Other Comprehensive Income (“OCI”) during the period ended Dec. 31, 2006, in the amount of $40.7 million, rather than to the opening balance of AOCI for the same amount. AOCI as at Dec. 31, 2006 is not impacted by this change.
This amount is also included in the US GAAP net earnings reconciliation. After correcting this treatment, US GAAP net earnings and earnings per share should be $40.4 million and $0.20 per share, versus reported net losses of $0.3 million and $nil per share.
VIII. Changes in accounting standards
1. Guidance on accounting for income taxes – Fin 48
In the first quarter of 2007, the Corporation adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (Fin 48). Total amount of unrecognized tax benefits as of the date of adoption is $118 million which includes $9 million of accrued interest. There is no change to the amount of unrecognized tax benefits from the adoption of this standard. No material change occurred during the third quarter of 2007 and no material increase or decrease is expected within the next 12 months.
TransAlta’s accounting policy is to treat interest and penalties relating to unrecognized tax benefits as a component of income taxes.
The Corporation is working with various tax authorities to resolve 1997 to 2000 appeals issues. 2001 to 2006 taxation years are open for audit examination. No material impact to the financial statements from the resolution or settlement of these tax matters is anticipated. However, actual settlements may differ from the amounts reserved.
2. Accounting for certain hybrid financial instruments – FAS 155
On Jan. 1, 2007, the Corporation adopted FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statement No. 133 and 140 (“FAS 155”). FAS 155 allows an entity to measure any hybrid financial instrument that contains an embedded derivative that requires bifurcation at its fair value, with changes in fair value recognized in earnings. The adoption of this U.S. accounting standard did not have a material impact upon the Corporation’s consolidated financial position or results of operations.
IX. Future changes in accounting standards
1. Framework on fair value measurement – FIN 157
On Sept. 15, 2006, FASB issued Statement No. 157, Fair Value Measurements (“FAS 157”), which establishes a framework for measuring fair value in U.S. GAAP, and is applicable to other accounting pronouncements where fair value is considered to be the relevant measurement attribute. FAS 157 also expands disclosures about fair value measurements and will be effective for us on Jan. 1, 2008.
TransAlta is currently assessing the impact of adopting the above standard on the consolidated financial position and results of operations.
2. Fair value option for financial assets and liabilities – FIN 159
On Feb. 15, 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Liabilities (“FAS 159”). FAS 159 provides an entity the option to report selected financial assets and liabilities at fair value and establishes new disclosure requirements for assets and liabilities to which the fair value option is applied. FAS 159 will be effective for us on Jan. 1, 2008.
The Corporation is currently assessing the impact of adopting the above standard on the consolidated financial position and results of operations.
