Transcript Document
Leaseurope
Brussels
Noreen Whelan
Global Controller – International Financial
Reporting
General Electric Company
November 5, 2007
Agenda
• GE in EMEA
• GE and IFRS
• IASB and FASB Joint Leasing Project
• Questions
2
GE Substantial Presence Throughout
EMEA
• 115, 000 GE employees today
• $41.9 billion sales in 2006 (up from $3 billion in
1987)
• Six businesses: Commercial Finance,
Healthcare, Infrastructure, Industrial, GE Money
and NBC-U,
• GE’s International headquarters in
Brussels…GE Healthcare & GE - Oil & Gas:
global headquarters near London & Florence
• Global Research Centre in Munich
3
GE Locations:
• Infrastructure
• Industrial
• Global Research
• Healthcare
• Money
• Comm. Finance
• NBC Universal
GE and IFRS
Promising steps are underway.....global
trend is convergence with IFRS
• > 100 countries permit or require
IFRS......Australia, China, Canada, EU,
Russia
• Expect by 2012 150 countries (including
India, Israel, Japan and Korea) using IFRS
• IASB/FASB Convergence Roadmap
– Not identical standards…close alignment of
principles and continued co-operation
– Goal 2009: eliminate SEC reconciliation for
foreign registrants
6
US issuers - SEC ‘Concept Release’
• Published in Aug 2007, to obtain information
about the level of public interest in allowing
U.S. issuers, to prepare financial statements
in accordance with IFRS or US GAAP
• Comments due on or before Nov.13, 2007
• US issuer choice provides a level playing field
for raising capital
• For GE - cost and simplification opportunity
7
Countries converging to IFRS on different
time schedules
• Today: GE ensuring compliance for statutory and
regulated filings in global jurisdictions
• ‘IFRS as adopted by’……
– Benefits to investors, regulators and preparers??
– Consistent application??
• Going forward: IFRS global accounting standards
– One set of books…less complexity of reporting
processes, polices, training and IT platforms
– Integrity of financial statements
8
Principles bring challenges
• Education of all interested parties…internal and
external on accounting policies
• More disclosure of assumptions, judgements
and support for careful judgement?
• Greater User sophistication
• Trend is difficulty of Standards keeps rising
– Benefits to investor community? (approx. 10% of
comment letters from investor community)
– Specialists required (eg preparers, auditors)
– Work plan of SEC and CESR should avoid
conflicting regulatory decisions on application IFRS
and US GAAP
9
IASB/FASB Lease Project
What is GE Doing?
• Joining with worldwide leasing organisations to
interact with the IASB and FASB -- International
Working Group
– Providing industry input & expertise
– Discussing the compliance burden
– Discussing day 2 impacts
11
Objectives
• Fundamental review of current accounting
model:
– Leased asset either capitalized by lessee or offbalance sheet (all or nothing)
– Lessor recognises a finance lease receivable
– US GAAP >50 authoritative pieces of literature
• Global harmonization of accounting treatments
• Financial Statements reflect the economics of
leasing transactions (lessee and lessor)
• Allow investors make sound economic
investment decisions
12
Overview
• Project added to agenda July 2006
• Develop further a ‘right of use approach’ (ie
put rights and obligations on balance sheet at
fair value)
–Lessee’s right to use = Asset
–Lessee’s obligation to pay = Liability
• Principles based approach…. but may be
complex to implement in practice
• Critical that changes result in improved quality
financial reporting.....what do Users want?
13
Lessee - Open Items Include
• Relationship of leasing project to existing
literature and defination of ‘Right to Use’?
• Measurement asset and liability
– Fair value (consider interaction IFRS Fair Value
DP…next slide)
• Questions
– Does the asset equal the liability?
– Is there a day one gain or loss?
• Right to terminate may define lease term
– Effect of renewal options, variable lease
payments, residual guarantees?
14
Fair Value Measurement - IASB DP
• Defines fair value and establishes a framework
for measuring fair value – three-tier hierarchy
• Expands fair value disclosure requirements
• FASB issued SFAS 157….Effective Date and
Transition:
–“Effective for financial statements issued for fiscal
years beginning after November 15, 2007, and
interim periods within those fiscal years”
• GE established FAS 157 implementation
committee
–Significant impact on M&A and Financial Services
15
Lessor Accounting Not Yet Discussed
• Derecognition of the “hard” asset and recognition of a
“financial asset”….recognition and measurement
approach?
• Revenue Recognition project exploring ‘performance
obligations’ model (eg. obligations to: deliver goods,
warranties, accept returns)
– Likely two models exposed: (1) fair value model (lay off
notion) (2) customer consideration model (total contract
price allocated to performance obligations)
• Necessary and before final lease standard issued
– Thorough consideration of interaction of FVM, Revenue
Recognition and Lease projects
– Request: Don’t over-engineer!
16
Questions?
Appendix
FAS 157: Summary of Significant
Changes
Issue
Current
SFAS 157
Fair Value
Amount at which an asset or liability could
Price that would be received for an asset or paid to
be bought or sold in a current transaction
transfer a liability between market participants at the
between willing parties, that is, other than in measurement date EXIT PRICE
a forced or liquidation sale ENTRY OR
EXIT PRICE
Market participants
Current guidance on market participants in
unclear. Buyer-specific intent may be
considered
Buyer-specific attributes and intent should be
dismissed if different from other multiple market
participants
Transaction Entry Price
Presumed equal to fair value
May not be representative of fair value, provides
indicators of when the transaction price may not be fair
value
Highest and best use
Current practice is to value assets in
continued use unless identified for
disposition
Independent of the reporting entity’s intent; considered
from market participant perspective
Use of market data in valuations
Use of market data encouraged. In some
circumstances entity intent permitted to be
considered in valuations
Valuation techniques must maximize use of market
observable data and minimize use of unobservable
data
Hierarchy
No current mandated hierarchy
Three levels distinguishing between observable and
unobservable inputs:
Level 1: Active markets;
Level 2: Observable other than quoted prices;
Level 3: Unobservable inputs;
Principal/Most Advantageous
Market
19
--
Principal market: Entity sells assets/transfers liabilities
with the greatest volume and level of activity. Most
advantageous market is used when there is no
principal market.