Transcript What if IFRS Replaced GAAP?

IIA Detroit Chapter Meeting
May 13, 2008
An Introductory
Roadmap to IFRS Convergence
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Agenda
• How We Got Here
• Seeking a Global Standard
– Convergence or Adoption of IFRS
• Differences between IFRS & US GAAP
• Considerations, Benefits & Opportunities
• Be Proactive and Reap the Benefits
• Web Based Resources
• Q&A
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New Terminology
• IASB – International Accounting Standards Board
• IFRS – International Financial Reporting Standards (formerly IAS
– International Accounting Standards)
• SAC – Standards Advisory Council (external)
• IFRIC – International Financial Reporting Interpretations
Committee (formerly SIC – Standards Interpretation
Committee)
• Convergence – Effort by the FASB and IASB to make US GAAP &
IFRS more compatible
• Roadmap – SEC’s plan and timetable for acceptance of IFRS in
the US…will be issued later this year
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IASB Structure
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How We Got Here
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2002 “Norwalk Agreement”
Reaffirmed in 2005
• The FASB and IASB affirmed their commitment
to:
– Converge accounting standards through the
development of high quality, common standards
– Eliminate significant differences between the
standards by developing new common standards
that improve financial information reported to
investors
– Promote convergence by replacing weaker standards
with stronger standards
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SEC – 2007 IFRS Activity
• IFRS Reconciliation to US GAAP
– March: SEC Roundtable on US GAAP reconciliation
for IFRS filers
– July: SEC Proposal eliminating IFRS reconciliation to
US GAAP for foreign private issuers
– November: IFRS to US GAAP reconciliation
eliminated
• Use of IFRS by US Companies
– August: SEC Concept Release on allowing use of
IFRS for US companies
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Public Comments on SEC’s
IFRS Concept Release
• Establish a mandatory IFRS conversion date for US
issuers
• The coexistence of US GAAP & IFRS should be
temporary
• IFRS standards are currently of sufficient quality to be
accepted as a basis of financial reporting by US issuers
• For practical reasons, IFRS should be the single set of
high-quality, globally-accepted accounting standards
• Allow US issuers the same option foreign issuers have,
to file statements with the SEC using IFRS
• No advantage to convert for smaller issuers with only
US operations
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SEC – 2008 IFRS Agenda
• Propose a new “Roadmap” that lays out a
schedule for the adoption of IFRS
• The new “Roadmap” will be conditioned on
appropriate convergence milestones
• Pursue mutual recognition of securities market
regulation
• Lower the barriers to the efficient operation of
the world’s capital markets
– by rationalizing the different regulatory approaches
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Other Events Supporting IFRS
• IFRS is now accepted or required in over 100
countries, including nine of top 10 capital markets
• There is strong demand from investors and
multinational companies for a uniform set of
international accounting standards
• EU recently completed conversion to IFRS three years
after a European Commission mandate
• Big 4 accounting firms favored conversion from US
GAAP to IFRS in their comments to SEC
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Not “If” but “When”?
EU Adopted
IFRS in 3 Years
20
08
20
09
2011 to 2013?
20
10
2009 to 2011?
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20
11
20
20
12
13
Can US Adopt
IFRS in 3 Years?
Seeking a Global Standard
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Demand and Alternatives
• Recognizing the demand, the IASB & FASB have been
working toward convergence of US and international
accounting standards
• However an alternate path has emerged
Convergence
Adoption of IFRS
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Global Standards
Convergence ≠ Sameness
• US GAAP
• IFRS
– Rules based
– Principles based
– Based on a GAAP
hierarchy (level A – D)
– No hierarchy, consists of
IASs, IFRSs & interpretations
– Primary accounting
standard setting body is
the FASB
– Standards and
interpretations approved by
the IASB
– Accounting guidance and
interpretation is provided
by several bodies e.g.,
FASB, SEC, AICPA etc.
– Interpretations of IFRIC and
its predecessor the SIC
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Convergence ≠ Sameness
• Convergence = compatibility by eliminating
material differences
• Open items
– FASB and IASB continue to have differences in in
major accounting areas
– The FASB and IASB disagree over the project
agenda, scope of rulemaking projects, changes to
be made and how they should be made
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Adoption of IFRS
• Adoption of IFRS = One set of high quality
globally accepted set of standards
• Open items
– No prescribed MD&A equivalent
– Governance surrounding IASB activities
– IASB funding
– Jurisdictional versions of IFRS are being used
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Differences
Between IFRS & US GAAP
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IFRS & US GAAP Differences
• Financial Statement
Presentation
• Foreign Currency Issues
• Income Taxes
• Consolidations, Equity Method • Provisions and Contingencies
and Joint Ventures
• Revenue Recognition
• Business Combinations
• Share Based Payments
• Inventory
• Employee Benefits
• Intangible Assets
• Segment Reporting
• Long-Lived Assets
• Earnings Per Share
• Impairment of Assets
• Interim Financial Reporting
• Leases
• Subsequent Events
• Financial Instruments
• Related Parties
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Financial Statement Presentation
• US GAAP
• IFRS
– Deferred taxes shown
current & non-current
– Deferred Taxes shown noncurrent only
– Expenses must be shown
by function
– Expenses may be shown by
function or nature. If function
shown must disclose nature in
footnotes
– Financial instruments with
debt & equity components
must be classified as
liabilities
– Extraordinary items shown
as unusual & infrequent
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– Financial instruments with debt
& equity components – focus
on settlement method
– Extraordinary item
presentation prohibited
Consolidations & Equity Method
• US GAAP
• IFRS
– Presentation of noncontrolling interest shown
between liabilities and
equity (prior to effective
date of SFAS 160)
– Presentation of noncontrolling interest shown as
a separate component of
equity
– Equity method
investments: may account
for at fair value (SFAS
159). Equity method
required if don’t choose
fair value.
– Equity method investments:
requires equity method (IAS
28). If separate target entity
financial statements are
presented, can use fair
value.
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Business Combinations
• US GAAP
• IFRS
– Fair value = price that would – Fair value = amount for which
be received to sell an assets
an asset could be exchanged, or
or paid to transfer a liabilitya liability settled.
market participant focus
– No recognition of assets or
– Recognition of an asset or
liabilities for operating leases
liability if the terms of an
with favorable or unfavorable
operating lease are favorable
terms
or unfavorable compared to
– Acquire <100% – Identifiable
market
assets recognized at full fair
– Acquire <100% – Identifiable value. Non-controlling interest
assets & non-controlling
measured at fair value OR
interests recognized at fair
proportionate share of fair value,
value (FAS 141R)
exclusive of goodwill (IAS 27)
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Inventory
• US GAAP
• IFRS
– Last In, First Out
– LIFO Prohibited
– Recovery of previous
write-down is prohibited
– Write-downs must be
recovered if there is an
increase in net realizable
value
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Financial Instruments
• US GAAP
• IFRS
– Fair Value Measurement –
based on exit price to sell
asset or transfer liability
– Financial instruments can be
measured at fair value
except for specific ineligible
financial assets & liabilities
– May recognize day one gains
on financial instruments
reported at fair value (even
when all inputs to the
measurement model are not
observable)
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– Fair Value Measurement –Fair
value is generally the amount
that the asset could be
exchanged or liability
transferred (entry price)
– Financial instruments can be
measured at fair value
provided certain criteria are
met
– Day one gains are recognized
only when all inputs to the
measurement model are
observable
Revenue Recognition
• US GAAP
• IFRS
– Products:
Delivery, sale occurred, fee
fixed, fee collectable, no
contingencies
– Products:
Risk/reward transferred,
buyer controls goods, fee
measurable, benefits flow to
seller
– Services:
delivery, sale occurred, fee
fixed, fee collectable, no
contingencies
– Services:
LT contract accounting,
including consideration of %
complete
– Construction Contracts:
Percentage of completion or
Completed Contract
– Construction Contracts:
Percentage of completion or
cost recovery method only
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Considerations, Benefits and
Opportunities
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Considerations
• Internal Controls
– Initial conversion may be viewed as a significant change in
the internal control environment and may require
disclosure under SOX §302
– Conversion could result in changes to significant accounts
which could have an impact on:
• Current SOX §404 scoping methodology and processes
• Current composition of key controls
– Existing ICFR process documentation will have to be redocumented to reflect IFRS induced accounting and
financial reporting changes
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Considerations
• Internal Controls (cont)
– New internal controls will need to be designed and
implemented to ensure that IFRS conversion is complete
and accurate
– Additional internal controls may need to be designed to
satisfy temporary dual reporting requirements
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Consideration
• IT internal controls
– The IT control environment may change if the current IT
infrastructure does not easily provide mapping to IFRS
information
– New IT controls will need to be designed to manage IFRS
data conversions
– IT application control activities may change as a result of
accounting system changes e.g. COA and consolidation
entries
– Data privacy controls may need to be reviewed from a
global perspective
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Considerations
• Corporate Governance
– Tone at the top - support of Senior Management
– Impacted business units and corporate functions
are accountable for implementing changes in their
area
– Reviewers will need the knowledge and authority
to police sufficiency of disclosures
– Adequacy of current process and policies
– Sufficiency of compensation schemes and
performance evaluation
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Considerations
• Training and Communication
– Shareholders, investors, analysts and rating
agencies
– Audit Committee, senior executives, business units
and other corporate functions regarding the flexible
nature of IFRS
– Periodic transfer of knowledge from external
consultants and sub-contractors throughout
transition
– Continuous professional education for employees
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Considerations
• Expertise
– Lack of auditor scrutiny skills
– Internal resources
– Need for assistance from external consultants
• Regulatory Challenges
– SEC and foreign regulation scrutiny
– Determining the “correct” interpretation of
standards and resolving differences with auditors
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Considerations
• FAS 109 vs. IAS12 Income Taxes
– Currently 15-20 differences between
• Anticipated high-impact areas
– LIFO
– Accounting for Revenue
– Asset Impairments
– Hedging activities
– Stock-based compensation
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Considerations
• Other
– Contractual obligations
– Debt covenants & hedging contracts
– Lenders may require conversion
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Benefits of Conversion
• Reduces cost of raising capital
• Improves transparency of business transaction
reporting
• Reduces compliance costs for multinational companies
by creating synergies
• Reduces complexity resulting in fewer potential
accounting errors
• Increases US and worldwide competitiveness
• Improved Comparability(?)
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Opportunities
• Centralize finance and control functions
• Streamline accounting & financial reporting
• Expand merger & acquisition activities
• Refine existing policies & procedures
• Train employees in accounting policies & procedures
• Expand Stock and Debt Offerings
• Streamlines tax strategy and planning development
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Be Proactive and Reap the
Benefits
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Estimated Cost of Implementation
• Estimated cost of preparing the first IFRS consolidated financial
statements of publicly traded companies is:
Turnover
Companies with turnover below USD777m
Cost
0.31% of turnover
Companies with turnover from
USD777m to USD7,773m
0.05% of turnover
Companies with turnover above USD7,773m
0.05% of turnover
• Estimated costs of preparing IFRS consolidated financial
statements in following financial years is:
Turnover
Companies with turnover below USD777m
Cost
0.06% of turnover
Companies with turnover from
USD777m to USD7,773m
0.01% of turnover
Companies with turnover above USD7,773m
0.008% of turnover
N=162
Source: EU implementation of IFRS and the Fair Value Directive, October 2007
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Lessons Learned
N=162
Source: EU implementation of IFRS and the Fair Value Directive, October 2007
Confidential and Proprietary
Lessons Learned
• Set a firm adoption date for the company to encourage
employee/participant buy-in.
• Implement some conversion steps along the way to reduce
procrastination (e.g. proformas, policy review)
• Consider IFRS only in determining accounting policies (to avoid
adopting a US flavor of IFRS)
• Audit fees were the 2nd and 3rd highest costs. Support provided
by auditors with the introduction of IFRS included:
– giving advice on selection of accounting policies;
– providing model IFRS financial statements;
– issuing publications/guidance notes;
– giving training seminars; and
– giving advice on developing accounting policies
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IFRS Project Team Composition
• 32% - External Consultants played advisory role
• 30% - Impacted Business Units/Corporate Function
were represented in relevant project team
• 27% - Impacted Business Units/Corporate Function
were represented in central project team
• 11% - External Consultants played a major role or led
in the project team
• 0% - Sub-contractors were used to implement changes
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Extent of System Changes Required
• 40% - Implement new information systems
• 32% - Modified existing information systems
• 8% - Plan to implement new information
systems
• 4% - Plan to modify existing information
systems
• 16% - Do not plan to modify existing
information systems
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Get Ahead of the Game
• Get educated and be proactive to stay educated
• Look for opportunities to build your team expertise
• Educate your internal and external stakeholders
• Establish a Project Management Plan, including
milestones
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Get Ahead of the Game
• Identify project resources (company wide
representation)
Accounting
&
Reporting
Operations
&
Processes
Governance
IT
systems
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Human
Resources
Get Ahead of the Game
• Conduct a preliminary business impact assessment
– Financial Results
- SOX 404 Compliance
– Processes
- Risk Management
– Policies
• Actively manage project issues
• Utilize change management discipline
Confidential and Proprietary
Web Based Resources:
• Website Resources
– www.iasb.org
– www.fasb.org
– www.sec.gov
– www.cfo.com
• Website Resources
– www.aicpa.org
– www.complianceweek.com
– www.accountingweb.com
– www.executiveboard.com
• Jefferson Wells and Regional IFRS
SME
– [email protected]
Confidential and Proprietary
Comments and Discussion
Confidential and Proprietary