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Third Quarter Oil & Gas Update - KPMG | US€¦ · Third Quarter Oil & Gas Update ... Oil Mixed Gas...
Transcript of Third Quarter Oil & Gas Update - KPMG | US€¦ · Third Quarter Oil & Gas Update ... Oil Mixed Gas...
3© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
New partner announcement
Catherine Buhmiller
Partner, Tax
Marcello D’Egidio
Partner, Tax
Narmin Vasanji
Partner, Advisory
Kimberly Payne
Partner, Audit
Susanne DiCocco
Partner, Advisory
David Yung
Partner, Audit
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Agenda• Market activity overview – Chris Chan
• Regulatory update and impairment – Shane Doig
• Accounting updates – Reinier Deurwaarder
• Alberta carbon levy – Jeff Smith
• Tax dispute resolution update – Michel Bourque
• Cyber security – The Digital Privacy Act – Jeff Thomas
• Questions
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• Low price environment with continuing risk of global oversupply of oil
• Continuing decline in drilling activity
• Limited capital availability
• Limited transactions
• Focus on capital efficiency and declining costs
• Importance of infrastructure assets
Current environment and challenges
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• Buyers market
• Strategic or high quality economic asset acquisitions (similar asset/play)
• Targets with leverage challenges or lack capital access to further develop asset base
• Non-cash transactions
• Greater focus on value for producing over undeveloped assets
Transaction themes
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• Comparison of transaction metrics over the past several years
• Further decline in oil weighted metrics while balanced and gas weighted assets have improved
slightly
• Oil transaction metrics similar to balanced asset metrics
Market metrics
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15.73
19.41
13.03
10.42 8.62 8.19
11.14 10.81
7.45 9.14
5.75 5.90 5.91
2.94 3.70
0.0
5.0
10.0
15.0
20.0
25.0
2013 2014 2014 Q4 2015 2016 YTD
$/B
OE
-2P
Rese
rve
Median Transaction Metrics ($/BOE) - By Reserve Mix
Oil Mixed Gas
Market metrics – 2P reserve metrics
Source: Sayers Energy Advisors and publicly available information
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Market metrics – 1P reserve metrics
21.70
24.54
12.99
16.96
11.34
14.02
17.90 17.20
11.40 11.65
6.88
9.71 10.98
5.37 6.57
0.0
5.0
10.0
15.0
20.0
25.0
2013 2014 2014 Q4 2015 2016 YTD
$/B
OE
-1P
Rese
rve
Median Transaction Metrics ($/BOE) - By Reserve Mix
Oil Mixed GasSource: Sayers Energy Advisors and publicly available information
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Market metrics – Flowing barrel metrics
78,367
92,394
85,455
48,165 48,902
30,750
57,726 57,726
39,765
54,783
24,000
32,953
46,333
16,669 18,165
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2013 2014 2014 Q4 2015 2016 YTD
$/B
OE
PD
Median Transaction Metrics ($/BOEPD) - By Reserve Mix
Oil Mixed GasSource: Sayers Energy Advisors and publicly available information
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
• Significant decline on overall industry average drilling and completion costs
• Average drilling and completion cost reduction of approximately 10% to 15% in 2015 and a further
30% in 2016
• Longer wells and increasing number of stages resulting in greater costs efficiency with average
drilling and completion cost per stage decreasing by approximately 30% to 35% in 2015 and a
further 25% to 30% in 2016
Cost efficiency
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Cost efficiency
0
50
100
150
200
250
300
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2012 2013 2014 2015 2016
Average Drilling and Completion Costs
Total D&C Costs Average Cost per Stage
Source: Canadian Discovery Frac Database
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• Stabilization of near term WTI prices in the US$40-US$50 range since trough in February 2016
• Future prices remain steady with slight increase since December 2015
• Anticipate engineer price decks to remain similar in Q3
Price decks and price curves
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Price decks and price curves
76.7
67.9
44.7
48.4 48.4
62.6 61.9
40.7
49.4
45.3 44.8
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
12/31/2014 6/30/2015 12/31/2015 6/30/2016 8/31/2016 9/23/2016
2016 WTI - Price Deck vs Future Price
Engineer Price Deck Future Price
?
Source: Bloomberg
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83.3
72.6
55.2 56.2 56.2
66.663.4
46.1
52.248.5 48.0
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
75.00
80.00
85.00
12/31/2014 6/30/2015 12/31/2015 6/30/2016 8/31/2016 9/23/2016
2017 WTI - Price Deck vs Future Price
Engineer Price Deck Future Price
?
Price decks and price curves
Source: Bloomberg
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• Q3 price related impairment triggers unlikely
• Need to continue to evaluate potential impact of capital budget changes on underlying reserves
• Consideration of consistency in fair value assessment between acquisitions completed during the
year to yearend impairment, if required.
Fair value considerations
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CSA Notice 51-346 Continuous Disclosure Review Program - Fiscal 2016
Financial Statement deficiencies
• Market risk - sensitivity analysis
• Contingent consideration in business combinations
• Goodwill and intangible assets recognized in business combinations
• Functional currency
• Operating segment aggregation
• Credit risk disclosure
MD&A deficiencies
• Liquidity and capital resources
• Forward looking information
• Overall performance (discussion of operating segments)
• Non-GAAP financial measures disclosures
Regulatory update
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CSA Notice 51-346 Continuous Disclosure Review Program - Fiscal 2016
Other
• Material contracts
• Audit committee composition – venture issuers
• Management information circular
• Annual information form
• Insider reporting
• Oil and gas reporting
Regulatory update
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A few items to keep on your radar from the TSX:
TSX Disclosure Requirements for Compensation Arrangements – comment period ended
June 2016
• Expanded disclosures around multipliers
• Several other disclosure amendments and alterations
TSX Proposes Issuer Website Disclosures – comment period ended June 2016
• Considerable information would be required to be retained on your website such as
• Constating documents
• Security holder rights plans
• Stock based compensation plans
• Various governance documents (position descriptions, charters, etc.)
Regulatory update
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The new audit report – aka the “long form report”
• Significant audit areas are discussed in your audit report
• Disclosure of audit partner responsible
What is the current status of the legislation
• International – effective for years ending on or after December 31, 2016
• Canada – considering deferral from 2017 to 2018 (for TSX and into 2019 for TSX-V). Currently
early adoption is not permitted
• United States – re-exposure draft has been issued and no adoption date has been set
Regulatory update
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Will triggers occur in Q3 or Q4
• Now more than ever difficult to predict what will occur
• “System wide” impairment may be less likely in 2016 than in the prior year
• Individual facts and circumstances will need to be considered very closely
Some things to consider
• No triggers for impairment
• Considerable area of judgment – disclosures adequate?
• Triggers for impairment
• Treatment of ARO in the impairment test given new IFRIC guidance
• Given ARO fair value will not equal value in use – need to consider both more closely
• Be careful in your disclosure – did you use FVLCS or VIU
• Other disclosures – sensitivities and recoverable amount
Impairment
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Impairment and AROFair value less cost to sell Value in use
Discounted reserves (i.e. 2P 15% with ARO from
the RR added back)
100 100
Costs to sale (5)
ARO – discounted at market rate (10)
ARO – provision as recorded in the F/S (30)
Recoverable amount 85 70
Net book value 120 120
ARO per the F/S (30) (30)
Net of ARO book value 90 90
Impairment (5) (20)
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• IFRS 15 / ASC 606 – Revenue from Contracts with Customers
• IFRS 16 / ASC 842 – Leases
• IFRS 9 – Financial Instruments
• Extractive Sector Transparency Measures Act (ESTMA)
Accounting updates
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IFRS 15 - The five step model – A refresher 2018
Source: KPMG
Identify the contract with a customer1
Identify the performance obligations2
Determine the transaction price3
Allocate the transaction price4
Recognize revenue5
5
4
Step 3
3
2
1
Revenue
The new Revenue Standard also includes guidance for specific situations
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IFRS 15 - The journey matters
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IFRS 15 - What have we seen?1
2
3
4
5
Progress is limited
Surprises
Scoping the project is difficult
Not just an accounting project
Differences
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IFRS 16 – A refresher 2019
All major leases on-balance sheet
Balance sheet P&L
Asset
Liability
Depreciation
+ Interest
= Front-loaded total lease expense
= ‘Right-of-use’ of underlying asset
= Obligation to make lease payments
Lease expense
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IFRS 16 – Transition overview: Lessee operating lease
Applying lease
definition
Apply
recognition
exemptions?
Select transition
option
Full
retrospective
Modified
retrospective
Identifying the population Applying the standard
Source: KPMG
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New financial instruments standard:
• Classification & Measurement
• Impairment
• Hedge accounting
IFRS 9 - Refresher
Financial assetsAR allowance
2018
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ESTMA - Refresher
Source: http://eiti.org/countries
Canada:
Extractive
Sector
Transparency
Measures Act
US: Dodd
Frank Act
Section 1504
(consultation)
Norway:
Extractive
industry
country-by-
country
reporting
EU: Accounting
& Transparency
Directive
UK: Report on
payment to
Governments
Regulations 2014
OECD: Base
Erosion Profit
Shifting (BEPS)
–
Country-by-country
reporting by multinationals operating in
OECD or G20 countries.
Australia: Corporations
Amendment (Publish
What You Pay) Bill 2014
(pending)
EITI Candidate Country – Implementing EITI, not yet compliant
Other
EITI Compliant Country – confirmed to have met all EITI requirements
Suspended – Compliant/Candidate status is temporarily suspended
• On June 1, 2015 the Extractive
Sector Transparency Measures Act
(the Act / ESTMA) came into force.
• The Act requires extractive entities
to report annually on payments
made to governments relating to the
commercial development of oil, natural
gas, or minerals, at home and abroad.
• ESTMA delivers on Canada’s
international commitments to
contribute to global efforts to increase
transparency and deter corruption
in the extractive sector.
2016
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• Project status
• Internal responsibilities
• Guidance
• ESTMA goal – compliance or communication
ESTMA- What have we seen?
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Where do we stand today?
Two current pieces of legislation
• Bill 20 – Climate Leadership Implementation Act - passed on June 7, 2016.
• Specified Gas Emitters Regulation (“SGER”) (to the Climate Change and Emissions
Management Act)
One outstanding piece of legislation
• Regulations to Climate Leadership Implementation Act
Alberta carbon levy
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Alberta carbon levy - Framework
• Impacts Large Final Emitters (“LFE”)
(> 100,000 tonnes of C02e)
• SGER requires that performance
improves year over year based on a
baseline emissions test
• Covers 45% of emissions in the
province today
• Price will increase from $15 today to
$20 (2017) and $30 (2018)
Specified Gas Emitters
Regulation (“SGER”)
• Impact to consumers of fuels
• Estimated that it will cover an
additional 45% of emissions
New Carbon Levy
Source: KPMG
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Alberta carbon pricing - Framework
New Alberta Carbon
Levy
• SGER to be replaced with Climate
Competitiveness Regulation (CCR) in
2018
• $15 per tonne increased to $20 and
then $30
Framework for LFEs
• $ per litre
• Collection mechanism – security vs
tax
• Upstream/Midstream vs Downstream
Framework for Distribution of Fuels
• Required Retrofitting of Pneumatic
Pumps
• Exemptions until 2023
Framework for Conventional Drilling
• Phase out of coal
• Collection on retail sales
Framework for Power Generation
Source: KPMG
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Direct Remitters
• Registration requirement for sellers of fuel
• Proposed licensing requirement to manage exempt purchases/self-assessments
• May be required to register even where making all exempt sales
Self-Assessment of Levy
• Requirement to report and self-assess levy where consumption of own fuel
Exemptions
• Identify and manage exempt purchases to ensure proper payment of levy
Alberta carbon levy – Overview
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Specific Exemptions
• Consumer with exemption certificate
• Consumer using fuel in SGER facility
• Consumer for prescribed use (as prescribed in the regulations)
• Consumer uses the fuel before 2023 as set out in the regulations
• Consumer of fuel used in farming
• Consumer uses fuel that is not combusted:
• As a raw material in an industrial process that produces another fuel
• As a raw material in an industrial process that produces something other than fuel
• As a solvent or diluent in a pipeline
• For prescribed use
We’re going green – Alberta carbon levy
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2023 Exemption
• Available for fuel consumed in conventional oil and gas activities
• Uncertainty to what constitutes “conventional”
• Further uncertainty whether this extends to all fuel consumed – early indication was that it would
only be available for “own use” fuel (i.e. would not be available to fuel purchased from a third
party)
Licensing and Registration
• Indication that TRA would prefer to manage wholesalers and exporters with licensing - may be
administrative in nature
SGER Reporting Facilities
• Analysis to whether more beneficial to report under SGER – opt in election not currently being
considered
• Management of exemptions
Alberta carbon levy – Expected in regulations
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Type of Fuel January 1, 2017 Rate ($20/ton) January 1, 2018 Rate ($30/ton)
Aviation Jet Fuel 5.17 ¢/L 7.75 ¢/L
Aviation Gas 4.98 ¢/L 7.47 ¢/L
Bunker Fuel 6.36 ¢/L 9.55 ¢/L
Butane 3.56 ¢/L 5.34 ¢/L
Coal Coke $63.59 /ton $95.39 /ton
Coke Oven Gas 1.40 ¢/m3 2.10 ¢/m3
Diesel 5.35 ¢/L 8.03 ¢/L
Ethane 2.04 ¢/L 3.06 ¢/L
Gas Liquids 3.33 ¢/L 4.99 ¢/L
Gasoline 4.49 ¢/L 6.73 ¢/L
Heating Distillate Oil 5.51 ¢/L 8.27 ¢/L
Heavy Fuel Oil 6.35 ¢/L 9.53 ¢/L
High Heat Value Coal $44.37 /ton $66.56 /ton
Kerosene 5.14 ¢/L 7.71 ¢/L
Locomotive Diesel 5.94 ¢/L 8.90 ¢/L
Low Heat Value Coal $35.39 /ton $53.09 /ton
Methanol 2.18 ¢/L 3.26 ¢/L
Naphtha 4.49 ¢/L 6.73 ¢/L
Natural Gas $1.011 /GJ $1.517 /GJ
Non-Marketable or Raw Gas $1.150 /GJ $1.720 /GJ
Pentanes Plus 3.82 ¢/L 5.73 ¢/L
Propane 3.08 ¢/L 4.62 ¢/L
Refinery Gas 3.77 ¢/m3 5.65 ¢/m3
Refinery Petroleum Coke $63.86 $/ton $95.79 $/ton
Upgrader Petroleum Coke $58.50 $/ton $87.75 $/ton
Source: Alberta Finance, 2016 Tax Plan
Alberta - Carbon levy rates by type of fuel
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• No regulations = No certainty but should be front of mind especially where new accounts and IT
systems are impacted
• Likely necessary for various functions to collaborate, especially those impacted by both SGER
and Carbon Levy
• May be a very short window to obtain registration and licenses – be prepared
Alberta carbon levy – Final thoughts
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Tax dispute resolution update
Tax authority initiatives
Tax authority areas of focus
Encouraging developments in recent Tax Court of Canada appeals
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Setting the stageRegulatory responses
Europe
• General Data Protection Regulation
US
• State level
• Financial Sector – Gram-Leach-Bliley
• Health Information – Health Insurance Portability and
Accountability Act, American Recovery and Reinvestment Act
• US Personal Data Notification and Protection Act (draft)
Provinces
• Various acts
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The Digital Privacy Act - BackgroundBackground
• Digital Privacy Act (formerly Bill S-4) produced significant amendments to the Personal
Information Protection and Electronic Documents Act (PIPEDA)
• Royal Assent in June 2015 (many aspects already in force)
• “Breaches of Security Safeguards” deferred pending development of associated regulation
• Draft Breach Notification and Regulations issued for discussion March 2016
• Final Regulations are expected this fall
Today’s discussion will focus on the changes related to Breaches of Security Safeguards
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The Digital Privacy Act – Your obligationsBreach disclosure obligations
Organizations must report
• To the Office of the Privacy Commissioner of Canada (OPC)
• Notify affected individuals
• To relevant third parties
About
• Breaches of Security Safeguards
• That pose a “real risk of significant harm” to affected individuals
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The Digital Privacy Act – Your obligations
Breach
• Personal information is lost, or accessed by an
unauthorized individual
• The loss or access is a result of a violation of the
organization’s security safeguards, or the failure to
establish such safeguards
Significant harm
• Bodily harm, humiliations, damage to reputation or
relationships, loss of employment or business
opportunities, financial loss
• Organizations must consider the sensitivity of the
information and the probability it will be misused
Notification
• Required as soon as feasible after an organization
determines a breach has occurred
• Must notify third parties who could reduce the risk
or mitigate harm (ex. law enforcement)
Record keeping
• Maintain a record of all breaches involving personal
information, and
• Provide the OPC with the record on request
Penalties
• Failure to report to OPC or affected individuals, or
to maintain a record of all breaches
• Maximum fine of $100,000
Definitions
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – When to reportDetermining real risk of significant harm
• Organizations must conduct a situational analysis to determine whether or not the breach poses a
“real risk of significant harm”
• Context of the breach is seen as critical and therefore even seemingly innocuous information
could have seriously harmful information
Factors to consider include
• The nature of the information and its sensitivity, whether it is anonymized or encrypted, and
whether it can inflict harm
• The cause and extent of the breach
• The individuals affected, including their number and relationship to the organization
(customers/clients, employees, etc.)
• Foreseeable harm
Consider the need to review related policies, procedures, monitoring, and record keeping
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – What to reportReporting objective
• Enable OPC to provide oversight and compliance
• Standardized tracking of breaches
Current OPC voluntary reporting includes
• Date and location of the breach and date of its discovery
• Description of the incident
• Cause of the breach
• Estimated number of individuals affected
• Relation of individuals to the organization (employee, customer, etc.)
• Type of information involved
• Measures taken by the organization to contain the breach
• Whether anyone else has been notified of the incident (affected individuals, law enforcement, third
parties) and when
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – Reporting timelineCurrent state for voluntary OPC reporting
• “As soon as feasible after the organization determines a breach has occurred”
• Designed to allow time to deal with the breach
• Recognizes that breach information may develop over time
Other considerations
• EU ePrivacy Directive requires initial reporting in 24 hours
• Should early reports be updated as new information is determined? At what frequency?
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – Notification requirementsNotification to affected parties
Content
• “The notification shall contain sufficient information to allow the individual to understand the significance to
them of the breach and to take steps, if any, to reduce the risk of the harm that could result from it or to
mitigate that harm”
• Content requirements vary across provinces and countries
• Europe has the most detailed requirements including “likely consequences of the breach to the individual” and
“steps the organization has taken to mitigate the risk”
• US notifications are often seen as confusing and containing too much legalese – making it difficult for affected
individuals to understand the potential impact of the breach
Delivery
• Affected individual must clearly understand that their personal information has been compromised and they
are at risk of potential harm
• Communicated directly to the individual in a manner that ensures it is not confused with “junk mail”
• Flexibility allowed to suit the circumstances, the organization, and the affected individuals
• Existing delivery requirements vary widely by jurisdiction
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – Notification requirementsNotification to third parties
“An organization that notifies an individual of a breach of security safeguards …shall notify any other
organization, a government institution, …of the breach if the notifying organization believes that the
other organization or the government institution …may be able to reduce the risk of harm that could
result from it or mitigate that harm, or if any of the prescribed conditions are satisfied.”
OPC currently specifies the following organizations for consideration:
• Law enforcement agencies, if theft or crime is suspected
• Insurance companies, if required by contract
• Professional or other regulatory bodies, as requires by professional or regulatory standards
• Credit card companies, financial institutions, credit reporting agencies, if required to mitigate harm
• Union or employee bargaining units, if the breach involves their members
Reporting requirements vary considerably across geographies.
56© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights
reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – Record keepingOrganizations that become aware of a breach of security safeguards must keep and maintain a
record of the breach, regardless of the conclusion of their situational analysis into whether the
breach poses a “real risk of significant harm”.
Objective
• Allow the Privacy Commissioner to execute their oversight and compliance mandate
• Force organizations to systematically document breaches, regardless of risk or severity, to enable
organizations to take action to systemic problems and reduce the risk of future harm
Existing record keeping frameworks include information such as
• Details of the breach
• Risk assessment demonstrating the assessment of probability of harm - including where the risk
is assessed as low
• Remedial actions taken
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The Digital Privacy Act – Next stepsConsider understanding and assessing maturity of:
• Inventory of personal information
• Risk assessment of personal information
• Information security safeguards over personal information
• Breach detection and incident response processes
• Process for risk assessment of breach
• Record keeping
• Monitoring and compliance processes
• Regulatory compliance processes
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reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International.
Data Breach Preparation and ResponseAbout the book
The first book to provide 360 degree visibility and guidance on how to proactively
prepare for and manage a data breach and limit impact.
• Defines breach response plan requirements and describes how to develop a
plan tailored for effectiveness within your organization
• Covers critical first-responder steps and breach management practices,
including containing a breach and getting the scope right, the first time
• Offers guidance on how to manage internal and external breach
communications, restore trust, and resume business operations after a breach,
including the critical steps after the breach to reduce breach-related litigation
and regulatory fines
About the author
Kevvie Fowler is a Partner and National Cyber Response Leader for KPMG
Canada and has over 19 years of IT security and forensics experience. He is an
instructor who trains law enforcement agencies on cyber forensic and response
practices. Credited with advancing the field of digital forensic science, Kevvie is a
SANS lethal forensicator and sits on the SANS Advisory Board where he guides the
direction of emerging security and forensics research.
Contact partner for more information
about obtaining a copy
kpmg.ca
© 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG
name and logo are registered trademarks or trademarks of KPMG International.
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 endeavour 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.