First, I'd like to thank you all on behalf of Standard & Poor's Canada for inviting me here to participate in today's proceedings.
I want to use my opening remarks to give you some insight into how Standard & Poor's is structured and what my role is at Standard & Poor's, in order to give you a sense of the perspective we take in looking at the Canadian income trust sector.
Standard & Poor's is a division of McGraw-Hill companies, and in Canada Standard & Poor's consists of two main operating segments that are separate and distinct from one another, the first being the index services group, which focuses on managing our various market indices, such as the S&P/TSX composite index. The second operating segment is the rating services group, which focuses primarily on assessing the creditworthiness of rated issuers, income trusts included, and the stability of income trust distributable cash.
The ratings group provides the capital markets with objective analysis and ratings opinions but does not comment on the relative value or market price of a security or the suitability of a security for an individual investor. As director and Canadian chief accountant for Standard & Poor's ratings group, my role is to contribute to the analytic process by analyzing the various risks inherent in the financial reporting practices of rated issuers.
At Standard & Poor's, we clearly have a keen interest in any event that is consequential to our rated universe. This would include changes to tax policy. However, our view of tax policy is focused on the impact it may have on a company's specific credit or stability rating.
To appreciate the effects of tax policy on an income trust, we pay particular attention to the business risk and financial risk profiles of the company, in addition to the specifics of the tax policy. This type of analysis is central to what we do as an organization. It provides us with insight into the risk profiles of different income trusts but does not position us to offer opinions on the merits of any particular tax policy.
Since last year, I've been engaged in a continuing study of the consistency and adequacy of financial reporting by income trusts. A two-part report that I co-authored entitled “Canadian Income Trusts and the Perceptions of Distributable Cash” found substantial inconsistencies in the reporting practices of income trusts, in some cases leading to significant over-statements of distribution capabilities.
In recent months, market participants have taken steps to improve the quality and consistency of income trust reporting and disclosure, in part driven by disclosure standards put forward by the Canadian securities administrators and the Canadian Institute of Chartered Accountants.
It should be noted that our observations did not speak to the legitimacy of the income trust structure as a whole and were not intended to single out income trusts as poor reporters; rather, our intent was to underscore to investors the fact that financial reporting risks evident in the earnings figures of corporations are just as prevalent in the cash-generation figures of income trusts. Consequently, investors were encouraged through our reports to maintain the same level of vigilance in assessing reported numbers of income trusts as they do for the reported numbers of corporations.
Finally, I'd like to provide two observations for the committee's consideration this morning.
First, the impact of the proposed tax fairness plan on our rated universe of trusts is by no means homogeneous. Several factors related to an individual income trust's business risk and financial risk profiles will determine the plan's impact, and consequently our response within the analytic process.
Second, it's very difficult to generalize about the extent to which income trusts engage in sufficient, appropriate reinvestment within their businesses. That issue requires a fundamental, case-specific examination of the specifics of each income trust, business risk, and financial risk characteristics. In this regard, income trusts are not unlike conventional corporations.
That said, I welcome any questions you may have and hope that our specific insights can prove valuable to the committee.
Thank you.