Confidential and Proprietary IIA Detroit Chapter Meeting May 13, 2008 An Introductory Roadmap to...

Confidential and Proprietary

IIA Detroit Chapter Meeting May 13, 2008

An IntroductoryRoadmap to IFRS Convergence


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


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


IASB Structure


How We Got Here


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


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


Public Comments on SEC’sIFRS 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


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


• 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

Other Events Supporting IFRS


Not “If” but “When”?

2008 2009 2010 2011 2012 2013

2009 to 2011?

2011 to 2013?EU Adopted

IFRS in 3 Years

Can US Adopt IFRS in 3 Years?


Seeking a Global Standard


• Recognizing the demand, the IASB & FASB have been working toward convergence of US and international accounting standards

• However an alternate path has emerged

Demand and Alternatives

Convergence

Adoption of IFRSGlobal Standards


Convergence ≠ Sameness

• US GAAP

– Rules based

– Based on a GAAP hierarchy (level A – D)

– Primary accounting standard setting body is the FASB

– Accounting guidance and interpretation is provided by several bodies e.g., FASB, SEC, AICPA etc.

• IFRS

– Principles based

– No hierarchy, consists of IASs, IFRSs & interpretations

– Standards and interpretations approved by the IASB

– Interpretations of IFRIC and its predecessor the SIC


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


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


DifferencesBetween IFRS & US GAAP


IFRS & US GAAP Differences

• Financial Statement Presentation

• Consolidations, Equity Methodand Joint Ventures

• Business Combinations

• Inventory

• Intangible Assets

• Long-Lived Assets

• Impairment of Assets

• Leases

• Financial Instruments

• Foreign Currency Issues

• Income Taxes

• Provisions and Contingencies

• Revenue Recognition

• Share Based Payments

• Employee Benefits

• Segment Reporting

• Earnings Per Share

• Interim Financial Reporting

• Subsequent Events

• Related Parties


Financial Statement Presentation

• US GAAP – Deferred taxes shown

current & non-current

– Expenses must be shown by function

– Financial instruments with debt & equity components must be classified as liabilities

– Extraordinary items shown as unusual & infrequent

• IFRS– Deferred Taxes shown non-

current only

– Expenses may be shown by function or nature. If function shown must disclose nature in footnotes

– Financial instruments with debt & equity components – focus on settlement method

– Extraordinary item presentation prohibited


• US GAAP – Presentation of non-

controlling interest shown between liabilities and equity (prior to effective date of SFAS 160)

– Equity method investments: may account for at fair value (SFAS 159). Equity method required if don’t choose fair value.

• IFRS– Presentation of non-

controlling interest shown as a separate component of equity

– Equity method investments: requires equity method (IAS 28). If separate target entity financial statements are presented, can use fair value.

Consolidations & Equity Method


Business Combinations

• US GAAP – Fair value = price that would

be received to sell an assets or paid to transfer a liability- market participant focus

– Recognition of an asset or liability if the terms of an operating lease are favorable or unfavorable compared to market

– Acquire <100% – Identifiable assets & non-controlling interests recognized at fair value (FAS 141R)

• IFRS– Fair value = amount for which

an asset could be exchanged, or a liability settled.

– No recognition of assets or liabilities for operating leases with favorable or unfavorable terms

– Acquire <100% – Identifiable assets recognized at full fair value. Non-controlling interest measured at fair value OR proportionate share of fair value, exclusive of goodwill (IAS 27)


Inventory

• US GAAP – Last In, First Out

– Recovery of previous write-down is prohibited

• IFRS– LIFO Prohibited

– Write-downs must be recovered if there is an increase in net realizable value


Financial Instruments

• US GAAP– 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)

• IFRS– 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 – Products:

Delivery, sale occurred, fee fixed, fee collectable, no contingencies

– Services: delivery, sale occurred, fee fixed, fee collectable, no contingencies

– Construction Contracts: Percentage of completion or Completed Contract

• IFRS– Products:

Risk/reward transferred, buyer controls goods, fee measurable, benefits flow to seller

– Services:LT contract accounting, including consideration of % complete

– Construction Contracts: Percentage of completion or cost recovery method only


Considerations, Benefits and Opportunities


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 re-documented to reflect IFRS induced accounting and financial reporting changes


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


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


• 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

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

Considerations


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


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


Considerations

• Other

– Contractual obligations

– Debt covenants & hedging contracts

– Lenders may require conversion


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(?)


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


Be Proactive and Reap the Benefits


Estimated Cost of Implementation

• Estimated cost of preparing the first IFRS consolidated financial statements of publicly traded companies is:

• Estimated costs of preparing IFRS consolidated financial statements in following financial years is:

N=162

Source: EU implementation of IFRS and the Fair Value Directive, October 2007

Turnover Cost Companies with turnover below USD777m

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

Turnover Cost Companies with turnover below USD777m

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


Lessons Learned

N=162

Source: EU implementation of IFRS and the Fair Value Directive, October 2007


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


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


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


• 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

Get Ahead of the Game


• Identify project resources (company wide representation)


Accounting &

Reporting

IT systems

Operations &

Processes

Human Resources

Governance



• Conduct a preliminary business impact assessment– Financial Results - SOX 404 Compliance

– Processes - Risk Management

– Policies

• Actively manage project issues

• Utilize change management discipline


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]


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