IFRS and GAAP Convergence Update

1. IFRS and GAAP Convergence Update Presented December 10, 2011 at Penn State University 611 Campus, Abington, PA by Joel Wagoner, MBA, CPA, CMA, CFM Assistant Professor of Business Administration Arcadia University

2. IFRS and GAAP Convergence Update Questions: Is the SEC going to require us to use IFRS? If so, when? Why aren’t we hearing as much about this as we did a few years ago? Are we going to have to learn IFRS? What will become of the FASB if we adopt IFRS?

3. IFRS and GAAP Convergence Update The potential conversion to IFRS has been a concern in the Accounting profession since the Securities and Exchange Commission first published their “roadmap” for conversion in 2008.

4. IFRS and GAAP Convergence Update The SEC released Publication 33-9109 in 2010, supporting “a single set of high-quality globally accepted accounting standards.”

5. IFRS and GAAP Convergence Update Few would disagree with the desirability of a single set of financial reporting standards and accounting principles. The question: How do we go from our divergent sets of principles, GAAP and IFRS, to a single set of high-quality standards?

6. IFRS and GAAP Convergence Update The SEC published a work plan to determine whether to require American publicly traded corporations to present their financial statements in accordance with International Financial Reporting Standards (IFRS.)

7. IFRS and GAAP Convergence Update The work plan “addresses [six] areas of concern that were highlighted by commenters” on the 2008 roadmap: 1 – Sufficient development and application of IFRS for the U. S. domestic reporting system;

8. IFRS and GAAP Convergence Update 2 – The independence of standard setting for the benefit of investors;

9. IFRS and GAAP Convergence Update 3 – Investor understanding and education regarding IFRS;

10. IFRS and GAAP Convergence Update 4 – Examination of the U. S. regulatory environment that would be affected by a change in accounting standards;

11. IFRS and GAAP Convergence Update 5 – The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies;

12. IFRS and GAAP Convergence Update 6 – Human capital readiness.

13. IFRS and GAAP Convergence Update In a progress report dated October 29, 2010, the SEC stated that a decision on whether or not to require IFRS in America would depend in part on the progress that the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are marking towards the convergence of American Generally Accepted Accounting Principles (GAAP) and IFRS.

14. IFRS and GAAP Convergence Update The FASB and IASB have been working towards the convergence of American and International standards since 2002.

15. IFRS and GAAP Convergence Update The two boards had an ambitious agenda for 2011. Here is the status of the items on their agenda:

16. Statement of Comprehensive Income The FASB published Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income in June, 2011.

17. Statement of Comprehensive Income Net income and comprehensive income must either be presented on the same report, or on consecutive reports.

18. Statement of Comprehensive Income This is effective for publicly traded entities with reporting dates after December 15 of this year. It is effective for nonpublic entities with reporting dates after December 15, 2012.

19. Statement of Comprehensive Income The boards recognize that there remain differences in what constitutes “other comprehensive income” between GAAP and IFRS.

20. Statement of Comprehensive Income There will also be differences in the timing of reclassifications between other comprehensive income and net income.

21. Fair Value Measurement The FASB published Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value measurement and Disclosure Requirements in U. S. GAAP and IFRSs.

22. Fair Value Measurement The two boards sought to “ensure that fair value has the same meaning” in GAAP as in IFRS, “other than minor necessary differences in wording or style.”

23. Fair Value Measurement The amendments in ASU 2011-04 “explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.”

24. Fair Value Measurement “The Board (FASB) does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.”

25. Fair Value Measurement “Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.”

26. Revenue Recognition On November 14, 2011, the FASB reissued a Proposed Accounting Standards Update (what we used to call an “exposure draft”) on Revenue Recognition (Codification Database Topic 605.)

27. Revenue Recognition The FASB and IASB had received almost 1,000 comments in response to an earlier version of the Proposed Accounting Standards Update (Exposure Draft). The earlier version had been released in June, 2010.

28. Revenue Recognition “[R]evenue recognition requirements in. . .GAAP differ from those in. . .[IFRS], and both sets of requirements are considered to be in need of improvement.”

29. Revenue Recognition GAAP “comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions.”

30. Revenue Recognition “Although IFRSs provide less guidance on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply to transactions beyond simple.”

31. Revenue Recognition The objective of the Revenue Recognition project is to “clarify the principles for recognizing revenue and to develop a common revenue standard for U. S. GAAP and IFRSs that would:

32. Revenue Recognition (a) remove inconsistencies and weaknesses in existing revenue recognition standards and practices;

33. Revenue Recognition (b) provide a more robust framework for addressing revenue recognition issues;

34. Revenue Recognition (c) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; and

35. Revenue Recognition (d) Simplify the preparation of financial statements by reducing the number of requirements to which entities must refer.”

36. Revenue Recognition The core principle underlying the project is that “an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.”

37. Revenue Recognition An entity accomplishes this through a five-step procedure:

38. Revenue Recognition 1 – Identify the contract with a customer.

39. Revenue Recognition 2 – Identify the separate performance obligations in the contract.

40. Revenue Recognition 3 - Determine the transaction price. In doing this, we must consider the effects of each of the following:

41. Revenue Recognition a - Variable consideration: “If the promised amount of consideration in a contract is variable, an entity would estimate the transaction price by using either the expected value. . .or the most likely amount, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled”;

42. Revenue Recognition b - The time value of money;

43. Revenue Recognition c: Non-cash consideration;

44. Revenue Recognition d: Consideration payable to the customer: “If an entity pays, or expects to pay, consideration to a customer. . .in the form of cash, credit, or other items that the customer can apply against amounts owed. . .the entity would account for the consideration payable. . .as a reduction of the transaction price unless the payment is in exchange for a distinct good or service.”

45. Revenue Recognition 4: Allocate the transaction price to the separate performance obligations in the contract.

46. Revenue Recognition 5 – Recognize revenue when (or as) the entity satisfies a performance obligation – by transferring a promised service or good to a customer.

47. Revenue Recognition A performance obligation is satisfied – control of a good or service has been transferred – when one of two criteria have been met:

48. Revenue Recognition 1 – The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced;

49. Revenue Recognition 2 – The entity’s performance does not create an asset with an alternative use to the entity and at least one of the following criteria is met:

50. Revenue Recognition a – The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs;