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© Grant Thornton LLP. All rights reserved.
The Current State of IFRS
© Grant Thornton LLP. All rights reserved. 2
The Current State of IFRS
Objectives & Agenda
• What is IFRS?• Convergence• Resources
Objectives Agenda
• Recognize what IFRS is and when it will become important
© Grant Thornton LLP. All rights reserved. 3
What is IFRS?
IASB Structure
TrusteeAppointments
Advisory Group
IASCFoundation
IASB IFRICSAC
IFRShigh quality, enforceable and global
advises
advises
reports
creates
appointsoversees
fundsap
point
s appoints
repo
rts
interprets
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What is IFRS?
IASB Standards and History
1973 International Accounting Standards (IAS)
↓
2001 SIC Interpretations (SIC)
2001 International Financial Reporting Standards (IFRS)
↓
Present IFRIC Interpretations (IFRIC)
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IASB Standards
Jurisdictional adoption process
IASB two year post-implementation review
Published IFRS
FeedbackStatement
ExposureDraft (ED)
DiscussionPaper (DP)
(Optional)
Input from:• Advisory Council• Working Group• International Groups;
Analysts; Preparers;Audit technical partners
• Special interest groups• Local standard-setters• Regulators• Political groups
Agenda DecisionRESEARCH
PROPOSALS PROPOSALS
Public Consultation
Public Consultation
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What is IFRS?
8 IFRSs in effect at 1 January 2008
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
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What is IFRS?
29 IASs in effect at 1 January 2008
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors
IAS 10 Events After the Reporting Period
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
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What is IFRS? 29 IASs in effect at 1 January 2008, continued
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary Economies
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What is IFRS? 29 IASs in effect at 1 January 2008, continued
IAS 31 Interests in Joint Ventures
IAS 32 Financial Instruments: Presentation
IAS 33 Earnings per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture
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What is IFRS?24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008
SIC 7 Introduction of the Euro
SIC 10 Government Assistance – No Specific Relation to Operating Activities
SIC 12 Consolidation – Special-Purpose Entities
SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers
SIC 15 Operating Leases – Incentives
SIC 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets
SIC 25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders
SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease
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What is IFRS?24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008, continued
SIC 29 Service Concession Arrangements: Disclosures
SIC 31 Revenue – Barter Transactions Involving Advertising Services
SIC 32 Intangible Assets – Web Site Costs
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities
IFRIC 2 Members’ Shares in Cooperative Entities and Similar Instruments
IFRIC 4 Determining whether an Arrangement contains a Lease
IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds
IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment
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What is IFRS?24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008, continued
IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies
IFRIC 8 Scope of IFRS 2
IFRIC 9 Reassessment of Embedded Derivatives
IFRIC 10 Interim Financial Reporting and Impairment
IFRIC 11 IFRS 2 – Group and Treasury Share Transactions
IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements, and their Interaction
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What is IFRS?
Current State
Source: Deloitte – www.iasplus.com
Countries that require or permit IFRSs for domestic entities
Countries seeking convergence with, or pursuing adoption of, IFRSs
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Activity 1
Principles vs. Rules
Discuss the advantages for a more or less principles-based standard for each category.
Category Fewer Rules
(more principles-based)
More Rules
(less principles-based)
Clients
Regulators
Litigation
Skill Set
Work Satisfaction
Take 5 minutes to complete
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Group check
IFRS are pure principles-based standards
True
False
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Group check
Debrief
IFRS are pure principles-based standards
True
False
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Group check
U.S. GAAP are not based on sound, accepted accounting principles
True
False
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Group check
Debrief
U.S. GAAP are not based on sound, accepted accounting principles
True
False
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What is IFRS?
Principles vs. Rules
U.S.GAAPIFRS
Principles Only
Rules Only
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Financial Statement Comprise:
IFRS GAAP
• Balance sheet• Income statement• A statement showing either:
– All changes in equity; or– Changes in equity other than
those arising from capital transactions with owners and distributions to owners (called a Statement of Recognised Income and Expense (SORIE))
• Cash flow statement (no exemptions)• Accounting policies and explanatory
notes (IAS 1.8)
• Balance sheet• Income statement• Statement of comprehensive income.
This statement may be combined with the income statement or the statement of changes in stockholders’ equity (SFAS130.22)
• Statement of changes in stockholders’ equity.
• Alternatively, disclosure of changes in the separate accounts comprising stockholders' equity (in addition to retained earnings) could be made in the notes to financial statements (APB 12.10)
• Statement of cash flows (limited exemptions; see Section 2.5)
• Notes to financial statements
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Comparison of IFRS and US GAAP
IFRS GAAP
A finance lease is not determined by a bright lines test. Instead, IAS 17 lists factors normally indicating a finance lease, including any of the following (IAS 17.10):
• Transfer of ownership by end of lease term• Lessee has option to purchase asset on such
favourable terms such that option exercise is reasonably certain at inception
• Lease is for major part of asset's life, even if no purchase option exists
• Present value of minimum lease payments at inception amounts to at least substantially all of the fair value of the leased asset
• Leased assets are specialised such that only the lessee can use them without major modification
A capital lease is one that meets one or more of the following criteria (SFAS 13.7):
• Lease transfers ownership of the property to the lessee by the end of the lease term
• Lease contains a bargain purchase option• Lease term is equal to 75 percent or more of
the estimated economic life of the leased property.*
• Present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by the lessor.*
For the lessor to classify a lease as a capital lease, the following additional criteria must also be met (SFAS 13.8):
© Grant Thornton LLP. All rights reserved. 22
What is IFRS?
Principles vs. Rules
• Industry accounting not adequately addressed– Insurance contracts– Extractive activities
• No IFRS equivalent– In absence of a standard that specifically applies,
• Management should use judgment• Should not conflict with IFRS• May also consider other GAAP
© Grant Thornton LLP. All rights reserved. 23
The Current State of IFRS
Objectives & Agenda
• What is IFRS?• Convergence• Resources
Objectives Agenda
• Recognize what IFRS is and when it will become important
• Communicate key points about IFRS to your clients
© Grant Thornton LLP. All rights reserved. 24
Convergence
Definition
Where transactions or events are the same or similar, the accounting should be the same, or there should be enough transparency in the disclosures to allow the reader to understand the differences.
(Plus a continuing effort by standard setters to
reduce differences between systems over time.)
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Convergence
Movement toward one set of standards - benefits
Investor confidence and understanding
Lower risk premium
Lower cost of capital
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Convergence
Movement toward one set of standards - benefits
Greater transparency
Greater credibility
Greater comparability between companies wherever they are
Greater cross-border capital flows
Most efficient allocation of capital
Thriving economies
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Convergence
Movement toward one set of standards - obstacles
• National pride• Endorsement process• Legal issues• Standard setters• Language
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Group check
Which of the following is most correct?
1. U.S. GAAP and IFRS are already converged
2. U.S. GAAP and IFRS are not converged but will be eventually
3. U.S. GAAP and IFRS will never be converged
4. U.S. GAAP and IFRS are sufficiently converged to be acceptable in the U.S. capital markets
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Group check
Debrief
Which of the following is most correct?
1. U.S. GAAP and IFRS are already converged
2. U.S. GAAP and IFRS are not converged but will be eventually
3. U.S. GAAP and IFRS will never be converged
4. U.S. GAAP and IFRS are sufficiently converged to be acceptable in the U.S. capital markets
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Convergence
U.S. Convergence – FASB/IASB
• 2002 Norwalk Agreement
• 2006 Memorandum of Understanding (MOU)
• 2008 Memorandum of Understanding (MOU)
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Convergence
U.S. Convergence – FASB/IASB
• FASB adopts IASB standard– Fair value option (SFAS 159)– Research and development assets acquired in a
business combination (SFAS 141 – revised 2007)
• IASB adopts FASB standard– Borrowing costs (IAS 23 – revised 2007)– Segment disclosures (IFRS 8)
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Convergence
U.S. Convergence - FASB/IASB
Short–term convergence
Short-term projects deferred• Government grants• Impairment
To be examined by the FASB To be examined by the IASB
Income taxes (joint project) Income taxes (joint project)
Investment properties Joint arrangements (joint ventures)
Research and development
Subsequent events
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Convergence
U.S. Convergence – FASB/IASB
Major joint projects• Consolidations• Derecognition• Fair value measurement• Financial instruments• Financial statement presentation• Leases• Liabilities and equity distinctions• Post-employment benefits (including pensions)• Revenue recognition
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Convergence
U.S. Convergence – FASB/IASB
Conceptual Framework – joint project• Mentioned in the 2008 MOU; however no specific timetable • Major joint projects will take account of ongoing Conceptual
Framework projects
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Convergence
U.S. Convergence - SEC
Roadmap – 7 milestones
1. Improvements in accounting standards
2. Funding and accountability of IASCF
3. Improved ability to use XBRL for IFRS
4. Education and training on IFRS in the U.S.
5. Limited early use by select few
6. Anticipated future rulemaking
7. Potential implementation sequence – FYE on or after 15 December− Large Accelerated Filers 2014− Accelerated Filers 2015− Non-Accelerated Filers 2016
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What’s your opinion?
Within the next few years the FASB will be irrelevant and should disband
True
False
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Convergence
U.S. Convergence - SEC
• Policy issues• International Organization of Securities Commissions (IOSCO)
2000Concept Release
April2005
Roadmap
March 2007Roundtables
December2007
Final Rule
December2007
Roundtables
July 2007ProposingRelease
August2007
ProposingRelease
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Convergence
Rest of the world
Country Status
Europe Required (as adopted by EU)
Argentina Required starting 2011 (awaiting approval)
Australia andNew Zealand
National standards described as IFRS equivalentInclude unreserved statement of compliance
Brazil Required starting 2010; optional before
Canada Required starting 2011
Chile Required starting 2009
China Must use Accounting Standards for Business Enterprises, which are close but not exactly IFRS. Companies listed in Hong Kong have choice of IFRS or HK FRS
India Required starting 2011
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Convergence
Rest of the world, continued
Country Status
Japan Japanese GAAP to converge to IFRS by 2011
South Korea Required starting 2011; permitted 2009
Mexico Permitted
Peru Required
Russia Required for banks
Singapore Singapore IFRS – changed several IFRSs and did not adopt others
South Africa Required
Switzerland Permitted
Turkey Permitted
Uruguay Must use IFRS in existence at 19 May 2004
USA Not permitted; concept release out for comment
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Convergence
Application
• Jurisdictional variations• Different interpretations• Small and Medium-sized Entities (SMEs)
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What’s your opinion?
Choose either View A or View B
View A View B
The SEC should allow market forces to determine when to allow IFRS in the U.S.
The SEC should decide what is best for the U.S. markets and mandate IFRS when it is ready
© Grant Thornton LLP. All rights reserved. 42
Activity 2
Are companies ready for IFRS?
Discuss the characteristics of a company that is unprepared to adopt IFRS and one that is prepared.
Take 2 minutes to complete
Unprepared Company Prepared Company
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Activity 2
Debrief
Unprepared Client Prepared Client
• Waits until the switch to IFRS is mandatory
• Has the accounting staff prepare excel spreadsheets to support top-level adjustments to its U.S. GAAP statements
• Misses some items that are caught at the last minute by the GT audit team
• Disclosures are so poorly written it gets several comment letters from the SEC on its late filing
• Budgets for a project to evaluate what will change if it switches to IFRS
• Project team includes accounting, reporting, operations and IT
• Produces pro forma statements two years prior to changeover – Highlights how reported results
will change – Allows better evaluation of
transition options – Highlights needed changes in
information requirements & IT
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Next Steps
What you need to know
• Whether and when to switch to IFRS• Required• Competition• Cost / benefit• Future developments
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How will movement to IFRS impact Financial Reporting?
Concerns:
• Data collection• Potential impact on tax liability• Potential increased volatility in reporting• Potential change in patter of earnings• Potential increased financial disclosures
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How will movement to IFRS impact Financial Reporting?
Benefits:
• Potential cost savings• Opportunity to review and improve process• Potential impact on tax liability• Increased access to funds and markets
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Top Twenty Issues to Consider
1 IAS 1 Presentation issues: judgments and estimates2 IAS 1 Presentation issues: primary statement formats3 IAS 36 Impairment disclosures4 IFRS 3 Goodwill justification disclosure 5 IFRS 3 Other business combination issues and disclosures 6 IFRS 7 Financial instruments: disclosures7 IAS 12 Deferred tax accounting and disclosure8 Accounting policies general messages 9 Accounting policies specific problems: revenue 10 Accounting policies specific problems: financial instruments 11 IFRS 1 Explanation of transition to IFRS 12 IFRS 5 Non-current assets held for sale and discontinued operations 13 IAS 14 Segment information 14 IAS 37 Provisions disclosure 15 IAS 39 Financial instruments: recognition and measurement16 Standards in issue not yet effective 17 Operating items and exceptional items 18 Comparative information 19 IAS 19 Employee Benefit Disclosures 20 Detail counts don't forget
© Grant Thornton LLP. All rights reserved. 48
The Current State of IFRS
• What is IFRS?• Convergence• Resources
Objectives Agenda
• Recognize what IFRS is and when it will become important
• Communicate key points about IFRS to your clients
© Grant Thornton LLP. All rights reserved. 49
• IFRS Resource Center
http://www.grantthornton.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/index561b974be30c92e309882716712c24c3.html?vgnextoid=bb444cfadd5d3110VgnVCM1000003a8314acRCRD
Grant Thornton Resources
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For additional information, visit these Web sites:
AICPA• International Financial Reporting Standards (IFRS) – An AICPA Backgrounder at
www.ifrs.com• For the latest information on the status of IFRS and educational opportunities
visit www.ifrs.comIASB• Memorandum of Understanding with the FASB:
http://www.iasb.org/Current+Projects/Memorandum+of+Understanding+with+the+FASB.htm
• IFRS summaries:http://www.iasb.org/IFRS+Summaries/IFRS+and+IAS+Summaries+English+2008/IFRS+and+IAS+Summaries+English.htm
FASB• Overview of International Activities: http://www.fasb.org/intl/SEC• International Financial Reporting Standards Road Map:
http://www.sec.gov/spotlight/ifrsroadmap.htm
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