Transcript International Financial Reporting Standards

International Financial
Reporting Standards
Good-bye GAAP?
By: Robert W. Ragsdale
History
• International Accounting Standards CommitteeIASC (1973-2001)
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Established in London UK
First Meeting June 29, 1973
Pronouncements very broad
Original Members Australia, Canada, Germany,
Ireland, Japan, Mexico, Netherlands, UK & US
▫ Interestingly IASC/FASB came into being around
the same time
▫ Restructured in May 2000 and renamed…..
International Accounting Standards
Board (IASB)
• 2000 to Present
• 14 Board Members
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5 Auditors
3 Preparers
3 Users
1 Academic
2 Others
Stated Objectives
• “To formulate and publish in the public interest
accounting standards to be observed in the
presentation of financial statements and to
promote their world wide acceptance and
observance and
• “To work generally for the improvement and
harmonization of regulations, accounting
standards and procedures relating to the
presentation of financial statements.”
International Accounting Standards Board
• Issued to date:
▫ 41 IAS
▫ 7 IFRS
• FASB has over 160 SFAS, ARB’s & APB’s which
will be ‘codified’ in July 2009
Rules vs. Principles
• IFRS- Principles Based
▫ IAS 17, pp8, “A lease is classified as a finance
(capital) lease if it transfers substantially all the
risks and rewards incidental to ownership. A lease
is classified as an operating lease if it does not
transfer substantially all the risks and rewards
incidental to ownership.”
Rules vs. Principles
• SFAS 13 (etal) 4 ‘tests’ (bright lines) for
Capitalization
▫ Title to leased property to lessee at end of the
lease term
▫ Bargain purchase option which it is reasonable to
assume lessee will exercise at the end of the lease
term
▫ Lease term 75% or more of economic life of asset
▫ Present value of minimum lease payments 90% or
more of the fair value of the leased property at the
inception of the lease. It is assumed that the
lessee will Pay for the asset leased.
Rules vs. Principles
• If Lease terms do not fit any ONE of the criteria,
under current GAAP, it may be classified as an
operating lease and hence OFF balance sheet
financing achieved
Sarbanes-Oxley 2002
• Requires an exhaustive study by SEC of
principles based standards which concluded
(9-25-2003)
▫ “We have conducted a study of the approach to
standard setting and found that imperfections
exist when standards are established on EITHER a
RULES-based or PRINCIPLES-only basis”
Sarbanes-Oxley 2002
• As a result of the study:
▫ Those involved in the standard setting process
more consistently develop standards on a:
 Principles-based OR
 Objectives-based
▫ “Avoid the use of percentage tests (bright-lines)
that allow financial engineers to achieve
TECHNICAL compliance with the standard while
evading the INTENT of the standard”
Rules vs. Principles
• Principles-based standards are sometimes more
difficult to implement in practice because little
guidance exists for their application.
• US GAAP only began to be codified in 1938
▫ Accounting Research Board
▫ Provide LEGAL cover for U.S. Accountants BY
U.S. Accountants (AICPA)
• Europeans/Asians much less litigious than “deep
pocket” American Lawyers/Shareholders
Rules vs. Principles
• One of the subtle flaws in principles based
standards
▫ Different accountants in different economies and
cultures will interpret and apply them differently
▫ Defeating the purpose of worldwide GAAP!
The Norwalk Agreement
• Norwalk, Connecticut September 18, 2002
• U.S. Standards setter FASB & IASB
• Agreement to ‘converge’ SFAS with IFRS
▫ Agreement guaranteed FASB a significant role in
the undertaking.
• Both organizations agreed to
▫ “Make their existing financial reporting standards
FULLY compatible as soon as practicable” and
▫ “To coordinate the future work programs to
ensure that once achieved, compatibility is
maintained.”
(Memorandum of understanding)
Differences between GAAP & IFRS
• IFRS
▫ Does not permit last in first out (LIFO) as an
inventory costing method.
▫ Uses a single-step method for impairment writedowns rather than the two-step method used in
U.S. GAAP. (Making write-downs more likely)
▫ Has a different probability threshold &
Measurement objective for contingencies
▫ Does not permit curing debt covenant violations
after year-end
▫ Guidance regarding revenue recognition is LESS
extensive than GAAP & Contains relatively little
industry-specific instructions.
SUM COMPARISONS:
Financial Item
US GAAP
IFRS
Contingencies
Recognized if estimable &
probable
Recognized if estimable & “more
likely than not”
Intangibles
Do not revalue unless
impaired
Regular revaluation at fair value
permitted
R& D
Expense as incurred unless
alternative future use can be
proven
Research expensed;
Development may be capitalized
under certain conditions
Inventories
4 cost flow methods:
LCM rules base market value
on replacement cost
Does not allow LIFO
LCM bases market value on
Net realizable value (Sales price
less cost to sell)
Both write-down and reversal
allowed
Inventory write-downs with
no subsequent reversals
IFRS 2008- Wiley & Sons, has 14 pages of in-depth comparison
SUM COMPARISONS:
Financial Item
U.S. GAAP
IFRS
Preferred Stock
Reported as Equity
Reported as debt
Statement of Cash
Flows
Dividends paid are classified as
financing
Interest paid, interest received
and dividends received are
classified as operating
Dividends paid may be either
operating or financing
Interest paid can be either
operating or financing;
interest & dividends received
can be either operating or
investing
Joint Ventures
Interests accounted for by the
equity method
Interests accounted for by
the equity method or
proportional consolidation
Financial
Instruments
No current parallel under
GAAP to IFRS “fair value
option” but it has been
proposed
“fair value option “allows
ANY financial asset or
liability to be designated AT
INCEPTION to be accounted
for at fair value with changes
reported in current earnings
SUM COMPARISON
Financial Item
U.S. GAAP
IFRS
PP & E
Mandatory capitalization of
construction period interest
costs (only- no ancillary)
Mandatory capitalization of
construction period interest
costs; ancillary costs may also be
capitalized
Cost of major overhauls
generally expensed
Cost of major overhauls may be
capitalized
Impairments recognized in
current income
If cost method used impairments
recognized income; if revaluation
employed reversal of revaluation
excess of revaluation to current
income
Intangibles currently carried at Revaluation of intangibles
cost
permitted
SUM COMPARISON
Financial Item U.S. GAAP
IFRS
Business
Combinations &
Consolidation
Many
Many subtle technical
differences
Special consolidation
requirements apply to variable
interest entities (Vies’)
(Thank you Enron)
Vies’ not addressed by IFRS
(because they did not
experience Enron)
No promulgated rules
governing “parent company
only” financial statements, but
use of the equity method is
currently acceptable
In “parent company only”
financials, the investment in
subsidiaries, equity investees
and joint ventures may be
presented at cost or under rules
for investments in securities,
but the equity method cannot
be used in those circumstances
SUM COMPARISON
Financial Item U.S. GAAP
IFRS
Business
Combinations &
Consolidation
Not necessary to conform parent
& subsidiary accounting policy
Need to conform parent &
Subsidiary accounting policies
Minority interest in consolidated
subsidiary may be presented in
liabilities, equity or separate line
item
Minority interest included in
equity
Goodwill not amortized; tested
for impairment & adjusted
Similar to US GAAP but
difference in impairment
testing methods
Purchased in process R&D
expensed
Purchased in process R & D
capitalized
Negative goodwill from
acquisition credited to carrying
value of nonfinancial assets
acquired with excess treated as
gain.
Negative goodwill from
acquisition credited to gain
immediately
WHEW!!!
• Remember Wiley IFRS (1-877-762-2974) has 14
pages of comparisons!!!
Effects of IFRS on Tax Practice
• A company’s conversion to IFRS may affect:
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Calculation of tax liabilities
Effective tax rates
Deferred tax balances
Unrecognized tax benefits
Compensation & Employee benefit plans
Planning
Accounting for taxes
Technology systems
Provision & Compliance processes
Internal training needs
Source J of A Mar ‘09
Schedule of Convergence- Requires IFRS
Europe & Central Asia
Americas
AsiaPacific
Africa/
Middle East
Armenia
Germany
Portugal
Bahamas
Australia
Egypt
Austria
Greece
Romania
Barbados
Brunei
Jordan
Bangladesh
Hungary
Russia
Costa Rica
Nepal
Kenya
Belgium
Ireland
Slovenia
Dominican Republic
Singapore
Kuwait
Bulgaria
Italy
Spain
Ecuador
Taiwan
Malawi
Croatia
Kyrgyzstan
Sweden
Guyana
Mauritius
Cyprus
Latvia
Switzerland
Haiti
Oman
Czech Republic
Lithuania
Tajikistan
Honduras
Tunisia
Denmark
Luxembourg
Ukraine
Jamaica
Estonia
Macedonia
United Kingdom
Panama
Finland
Malta
Papua New Guinea
France
Netherlands
Peru
Georgia
Norway
Trinidad & Tobago
Schedule of Convergence- Converging with IFRS
Europe/Central
Asia
Americans
Asia-Pacific
Africa/ Middle
East
Moldova
Argentina
New Zealand
Iran
Uzbekistan
Brazil
China/ Hong Kong Israel
Canada
India
Pakistan
Cayman Islands
Indonesia
South Africa
Chile
Japan
Zimbabwe
Guatemala
South Korea
Mexico
Malaysia
Uruguay
Philippines
Venezuela
Thailand
United States
SEC Roadmap for
IFRS Recognition Implementation
• The ‘Cox’ (Rep Christopher Cox) SEC Chairman
▫ “The currently proposed timetable would allow
the largest U.S. Companies to begin reporting
their 2009 results in IFRS.
▫ Large, accelerated filers in 2014
▫ Other accelerated filers in 2015
▫ Smaller companies in 2016
▫ Companies would have to provide statements
from the previous three years in IFRS.
 Cost/benefit choice for non-mne’s- IFRS, 1st time
converters) at that time, for comparability
purposes.
SEC Roadmap for
IFRS Recognition Implementation
• SEC Chairwoman Mary Schapiro
▫ It remains to be seen what the new ‘madam’
chairwoman’s feelings on these issue are
▫ What affect the current economic malaise will
have on the timing
▫ BUT….. Implementation is pretty much assured!!
SEC Roadmap for
IFRS Recognition Implementation
• Deadline for IFRS Implementation roadmap
comments, originally scheduled for Feb 19
extended to Apr 20
• New Chairwoman, Mary Schapiro has expressed
concern with SEC’s current roadmap for
transitioning U.S. public companies to IFRS.
SEC Roadmap for
IFRS Recognition Implementation
• Potential problems include:
▫ Lack of consistency in the application of IFRS,
▫ The cost inherent in the switch and
▫ IASB’s independence, or lack there of.
• The Roadmap is available at:
▫ www.sec.gov/rules/proposed/2008/33-8982.pdf
Additional IFRS Resources
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AICPA> www.ifrs.com
IFAC’s > www.ifac.org
IASB’s> www.iasb.org
FASB’s > www.fasb.org
Canadian Institute of Chartered Accountants >www.cica.ca
CICA Accounting Standards Board> www.acsbcanada.org
Chartered Accountants of Scotland’s > www.icas.org.uk
Chartered Accountants in England > www.icaew.com
Chartered Accountants in Australia > www.charteredaccountants.com.au
International organization of Securities Commissions > www.IOSCO.org
Securities & Exchange Commission > www.sec.gov
SEC Roadmap > www.sec.gov/spotight/ifrsroadmap.htm
Deloitte > www.deloitte.com
KPMG > www.kpmgifrsinstitute.com
Pricewaterhousecoopers> www.pwc.blogs.com/ifrs
Ernst & Young> www.ey.com
QUESTIONS ? ? ? ? ? ? ? ?
By: Robert W. Ragsdale, CPA
Slides can be found at:
http://providence.imanet.org