IFRS – It’s Headed Our Way!

1. IFRS – It’s Headed Our Way! Stephen G. Austin, CPA, MBASwenson Advisors, LLP CalCPA Conference Handlery HotelSeptember 25, 2008

2. Screaming Headlines - 2008 Convergance is Coming Goodbye GAAP SEC Sets IFRS Deadline! Global Accounting Standards US Warming to IFRS

3. Overview of IFRS • What are IFRS? • A single set of globally-accepted, high quality accounting standards • Developed by the International Accounting Standards Board (IASB) • Used in approximately 105 countries and growing • Standards are principles based and less extensive • Lack guidance (including industry specific guidance) • Frequently, the application of IFRS requires judgment • 8 IFRS and 41 IAS compared to 161 SFAS and more

4. Why International Convergance and IFRS • How did we get here? • International Accounting Standards Committee (IASC)1973 – 2000 • Objective of enhancing cross-border comparisons through harmonization • International Accounting Standards (IAS’s) – principles based standards • 2000 International Organization of Securities Commissions (IOSCO) recommends member bodies to permit the use of IAS (w/reconciliation to national GAAP) • Endorsement by IOSCO was limited • Members of IOSCO are permitted to require reconciliation of certain items, supplementary information, and eliminate some options existing in IAS • Members will individually determine whether or not to endorse IFRS for cross-border listings

5. Why International Convergance and IFRS (continued) • How did we get here? • International Accounting Standards Board (IASB) 2001 to present • Full time board – 14 members: US, UK, South America, Japan, Sweden, Germany, Australia • Objective: One global set of accounting standards • Adopted 41 IAS standards, completed 5 new standards and revised 15 existing standards • Achievements • Completed a core set of standards in 2000 as agreed with IOSCO for cross-board and national listings • Recent efforts are focused on EU compliance with IFRS in 2005

6. Why International Convergance and IFRS (continued) • How did we get here? • International Accounting Standards Board (IASB) • Objective: • To develop, in a public interest, a single set of high quality, understandable and enforceable global accounting standards; • To promote the use and rigorous application of those standards; • To work actively to bring about convergence of national accounting standards and IFRS • 12 full time and 2 part time members • Does not issue detailed application guidelines • Addresses business ventures – not public sector, government or not-for-profit activities

7. Why International Convergance and IFRS (continued) • What is convergence? • Does note mean identical standards • Means to an end, not an end itself • Recognition of equivalence between IFRS and US GAAP • Common financial language • IASB and FASB lead project • Other standard setters involvement • Convergence goes beyond the US and EU (IASB) • Canada, Japan, China (adopt IFRS in 2007 and beyond), India, Israel, Korean and more…

8. The World is Getting Smaller

9. IFRS Timeline – 8 Years

10. Why International Convergance and IFRS (continued) • Advantages to Convergence • Financial reporting that is not easily understood by global users is unlikely to bring new business or capital to a company • Why is this the case? • Transparency and comparability • Growing economies access to the following (all of which stimulate growth): • Global capital markets/global economies • Promote private investment across borders • Global access to financial institutions • Cross-border mergers and acquisitions • Companies seek capital at the lowest price anywhere globally

11. Why International Convergance and IFRS (continued) • Advantages to Convergence • Cross-border accountability and audit issues • Understandability • Improve the quality of financial reporting • IASB and AICPA convergence of auditing standards • Reduction of audit costs • International benefits for multinational companies • Improve internal reporting (parent/subsidiaries) • Quality of management reporting and group decision making

12. Why International Convergance and IFRS (continued) • Why International Financial Reporting Standards (vs US GAAP) • Rules versus principles • For several years this has been a major debate in the United States • Recent scandals and aftermath perhaps show a need for principle-based standards – Rules often lend more opportunity to form over substance • Sarbanes-Oxley requires the SEC to examine the feasibility of principles-based standards • Problems with principles-based standards • Guidance for application • Comparability • No or very limited guidance for complex transactions • Australian experience • Audit fees • Footnote expansion

13. Why International Convergance and IFRS (continued) • Principles vs Rules • Generally, US standards are developed on principles • Interpretive guidance adds many bright lines (to name a few) • Emerging Issues Task Force (EITFs) • AICPA (SOPs, Industry Guides) • FASB (Staff Positions and Interpretations) • SEC (Staff Accounting Bulletins) • IFRS are strictly principles based • Very limited interpretations by IFRIC • “Non agenda” items as discussed in the “green book” • The “spirit” of a US GAAP “rule” and an IFRS principle may be the same but result in a different answer

14. Private Companies • This will impact private companies! • Private Company Financial Reporting Committee (PCFRC) 4 CPAs in practice 4 F/S preparers 4 users of F/S 12 “The Private Company Financial Reporting Committee (“PCFRC”) is part of a broad initiative by the Financial Accounting Standards Board (“FASB” or “the Board”) and the American Institute of Certified Public Accountants (“AICPA”) to further improve the FASB's current standard-setting process to better meet the financial reporting needs of private companies and the users of their financial statements. The PCFRC considers user needs and conducts cost-benefit analysis to make formal recommendations to FASB about existing and prospective GAAP. Under protocols set up with the FASB, the Board must consider all recommendations, and decisions made concerning those recommendations become a part of the Board minutes.”

15. Private Companies (continued) • PCFRC comments on IFRS in September 2007: • In recognition of the importance and magnitude of this SEC Concept Release, the PCFRC communicated to the FASB: 1) its support of current efforts to converge US and international accounting standards as that process is currently working, and 2) the need for a comprehensive parallel initiative for private company financial reporting, involving the key constituents of that reporting.

16. Private Companies (continued) • PCFRC (April 2008 meeting) roadmap for Private Company Accounting Standards assumptions: • US public companies will be required to prepare financial statement in accordance with IFRS by 2013 • Country-specific IFRS differences are likely to exist • Pressure will exist to move private companies to IFRS or IFRS Small and Medium sized Entity (private entities) standards

17. Private Companies Impact • Two-tier reporting system? • Freeze US GAAP • US GAAP with ongoing development and changes • IFRS private entities standard • US version of private entities standard • IFRS with differential reporting exceptions (for example – limited disclosures)

18. Private Companies Impact (continued) • Global audits and reporting responsibilities • Multinational private companies • Foreign investments / foreign investors • M&A activities • Joint ventures • Cross border transactions

19. IFRS for Private Entities • Intended for entities that do not have public accountability and do publish general purpose financial statements for external users • Principles based • Based on full IFRS • Self-contained, 2000 pages (85% of full IFRS) • Historical cost is main accounting convention. • Accrual basis • Assumption that user needs are focused on short-term cash flows, liquidity, and solvency; less interest in long-term earnings forecast • Simplification based on user needs and cost-benefit

20. IFRS for Private Entities (continued) • IASB issued an Exposure Draft (ED) on IFRS for Private Entities, comment period ended November 30, 2007 • 116 private entities from 20 countries participated in “field testing” the ED • Staff is has begun analyzing the comments and field test results and preparing recommendation to the Board • The Board plans to issue a final IFRS for private entities in the forth quarter of 2008 • 162 comment letters received

21. Key differences between IFRS and US GAAP

22. IFRS vs US GAAP Key differences • IFRS • Principles based standards • Limited interpretations (SIC, IFRIC) • Lack of industry guidance • US GAAP • Principles based standards, with a significant number of rules • Multiple levels of interpretations • A significant amount of industry guidance

23. IFRS vs US GAAP (continued) • Converged standards • Beware!!! Just because standards are converged, doesn’t mean there aren’t differences • Example – IAS 23R and SFAS 34 • Convergence by 2011-2014, differences will remain • LIFO for inventory • Subsequent events

24. IFRS vs US GAAP (continued) • Many different concepts • Revenue recognition • Methodologies for impairment of PP&E, intangibles • Revaluation accounting • Recovery of impairments under IFRS • Recognition and measurement of provisions (including restructurings) • Consolidations • More detailed disclosures under IFRS (vs. US GAAP private company)

25. IFRS vs US GAAP (continued) • Many detailed differences • Accounting for asset retirement obligations • Accounting for income taxes • Goodwill impairment testing • Business combinations (post Phase II) • Minority interests • Acquired in-place leases • Accounting for R&D • Contract accounting • Equity method – excess of losses over basis

26. Some Examples of Differences #1 Intangibles:

27. Some Examples of Differences #2 Revenue:

28. Some Examples of Differences #3 Accounting Changes:

29. Convergance Issues • Adoption of IFRS will be a MAJOR project • When it comes to magnitude, this WILL be another Sarbanes-Oxley, but different • Sarbanes did not have private company implications • IFRS acceptance in the US will have private company implications (the questions is when) • Much, much more than an accounting exercise • Accounting and reporting • Systems and processes • Business enterprise • Human capital

30. Convergance Issues (continued) • Impact and considerations on accounting and reporting • Education and understanding of IFRS • Auditors, Preparers, Investors • Identify key differences between US GAAP and IFRS • Recognition and measurement and disclosures • In-depth understanding of IFRS 1, IAS 8 • Develop new accounting policies • Create new chart of accounts or restructure current • Design new internal/external reporting packages

31. Convergance Issues (continued) • Impact and considerations on business enterprises • Develop communication plan to investors, lenders, etc. • Evaluate internal reporting requirements • Evaluate impact on compensation arrangements • Impacts on budgeting (financial, processes, measurement attributes) • Evaluate impact on contracts, debt covenants, etc.

32. Convergance Issues (continued) • Impact and considerations on human capital • Create a project team (all levels of organization as this impacts most, including project management) • Hire external consultants to assist with project • Develop training program for all levels • Revise performance targets for individuals and company • Develop a project plan with timelines to meet established deadlines

33. Convergance Issues (continued) • Impact and considerations on processes and systems • Develop new internal accounting and reporting guidelines (manuals) • Evaluate new IT system needs/controls • Evaluate and implement controls over conversion and changes in current control processes and structure • Develop transition plan • Embed IFRS reporting in systems to avoid manual processes, when possible

34. Convergance Issues (continued) • Transition to IFRS is governed by one standard, IFRS No. 1 First Time Adoption of IFRS • It is important to note that IFRS requires comparative financials (so timing of decision to adopt is key!) • Adopt accounting policies at first year presented • Restate as of effective date of adoption • Example – adopt calendar year 2008, effective date is 1/1/07 • Remeasure as if IFRS were always used • Important to monitor IASB activities (a lot of changes on the horizon) • Note that IFRS provides for exclusions/exemptions to ease burdens of transition

35. Convergance Issues (continued) • E&Y survey on first time IFRS filers in the EU • 2005 financial statements • Surveyed 65 companies • As a result of adoption of IFRS (vs. 2004 national GAAP) • More than 90% of the companies reported charges to income from share based payment plans • 50% of the companies reported an impairment to goodwill • 67% reported impairment to tangibles or intangibles with indefinite lives • 20% - 40% of the financial statements were greater in length • Policy disclosures discussing the accounting policies vs. the application and implications of the policies themselves

36. Breaking News – August 2008 • Recent IFRS Roundtable – August 4, 2008 • Featured two panels • Focus on financial reporting in the financial industry services sector • Focus on other industry sectors • Transition to IFRS • EU opted to go with “Big Bang” and convert all member countries to IFRS at same time • Currently 24 members of the EU, Australia and South Africa are on board • In the coming years they will be joined by Japan, South Korea, Canada and at some point, the United States • “Big Bang” approach may be big hurdle in the US

37. Breaking News – August 2008 • SEC Proposed IFRS Roadmap – August 27, 2008 • SEC will publish for public comment a proposed roadmap that could lead to the use of IFRS by US issuers, rather than US GAAP, beginning in 2014. • In 2011, SEC is expected to decide whether to require that all US public companies begin using IFRS by 2016. • Commissioner Cox has charged SEC staff with presenting a proposal this summer • Roadmap to include a schedule and milestones for eventual acceptance of IFRS

38. Breaking News – September 2008 • Adoption of IFRS recently criticized • September 10, 2008 - Charles Niemeier, member of the PCAOB said that adopting the IFRS and scrapping US GAAP would do more harm that good to US companies and inventors • “The idea is not convergence, it’s capitulation” • Niemeier’s chief concern was that his counterparts at the SEC were phasing out a financial reporting regime that was working well in favor of one that was still largely untested.

39. Breaking News – September 2008 • FASB and the IASB’s revised memo of understanding (MOU) outlines an ambitious convergence agenda • The chief of both boards called the document an important milestone in their long-term plan to converge US GAAP with the IASB’s IFRS • 2006 MOU established milestones for 11 major projects – currently 7 projects has been converged • 2008 MOU includes specific changes to the other 4 major projects

40. What Should I Do Now? • Keep abreast of the ongoing developments of IFRS • Seek training • Understand the impact • According to new survey of US professors, first class of US accounting students trained in IFRS won’t arrive until the Class of 2011 • Changes are already underway to the CPA exam

41. Think About It...“The Perfect Storm” IFRS 2009 - 2015 IDEA/XBRL 2004 – 2013 Fair Value Accounting for US GAAP 2009 - ? Non-accelerated files SOX Attestation 2009 - ?

42. Resources • IFRS resources • www.ifrs.com • www.ifac.org • www.iasb.org • www.fasb.org

43. Contact me: steve.austin@swensonadvisors.comwww.swensonadvisors.com A Regional PCAOB Firm With Global Outreach Certain slides accredited to: Integra International Symposium May 2008 Sean Lager, CPA Frazier & Deeter, LLC