International Financial Reporting Standards

1. International Financial Reporting Standards Good-bye GAAP? By: Robert W. Ragsdale

2. History • International Accounting Standards Committee- IASC (1973-2001) • 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…..

3. International Accounting Standards Board (IASB) • 2000 to Present • 14 Board Members • 5 Auditors • 3 Preparers • 3 Users • 1 Academic • 2 Others

4. 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.”

5. 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

6. 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.”

7. 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.

8. 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

9. 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”

10. 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”

11. 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

12. 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!

13. 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)

14. 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 write-downs 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.

15. SUM COMPARISONS: IFRS 2008- Wiley & Sons, has 14 pages of in-depth comparison

16. SUM COMPARISONS:

17. SUM COMPARISON

18. SUM COMPARISON

19. SUM COMPARISON

20. WHEW!!! • Remember Wiley IFRS (1-877-762-2974) has 14 pages of comparisons!!!

21. Effects of IFRS on Tax Practice • A company’s conversion to IFRS may affect: • 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

22. Schedule of Convergence- Requires IFRS

23. Schedule of Convergence- Converging with IFRS

24. SEC Roadmap forIFRS 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.

25. SEC Roadmap forIFRS 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!!

26. SEC Roadmap forIFRS 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.

27. SEC Roadmap forIFRS 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

28. Additional IFRS Resources • 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

29. QUESTIONS ? ? ? ? ? ? ? ?

30. By: Robert W. Ragsdale, CPA Slides can be found at: http://providence.imanet.org