deltek insight 2010: ifrs impact on government contractors

XT-303: IFRS Impact on Government ContractorsPresented by: William Choi, PWC

Assuming that the SEC determines in 2011 to incorporate IFRS into the US domestic reporting system, the first time US issuers would report under such a system would be approximately 2015 or 2016. The timeline will be evaluated as part of the Work Plan.

Current status of IFRS in the US

Regulatory update

2011Possible SEC decision on the incorporation of FRS into US financial reporting system

Mid-2011Completion of convergence agenda based on current FASB/IASB timeline

2012-2016US IFRS transition period • Assumes earliest date of adoption as

December 31, 2015• 2 Years of comparative information• Possible optional adoption period

2010-2011SEC Staff executes Work Plan

201520132011

2016

2014

2012

Expected Timeline

2012 – 2014Expected effective dates of converged

standards

2010

Slide 2

Updates from the SEC’s open meeting on February 24, 2010 :– Agreed to publish a statement of support for a single set of high-quality

global accounting standards. And acknowledged that IFRS is best option– Expects to make a determination on whether or not to further move towards

IFRS between now and 2011 with issues that need to be further analyzed, and the events that must occur in this timeframe

– Reiterated its commitment to addressing comment letters on the proposed roadmap, and also to basing any move to IFRS on the best interests of investors and the US capital markets

– Emphasized that ongoing FASB/IASB convergence projects must be successfully completed before any conversion to IFRS

SEC reaffirmed support for single set of global standards – IFRS as best option


Slide 3

– To develop a work plan to evaluate the impact of using IFRS on the securities markets focusing on the following areas:

• Sufficient development of IFRS for use in the US domestic reporting system

• Independence of standard setters• Investor understanding of IFRS• Impact on the US regulatory environment• Impact on large and small issuers• Human capital readiness• Evaluation of the scope and timeline for further incorporating IFRS into

the US reporting system– Expects to provide public progress reports on the work plan beginning in

October 2010

SEC reaffirmed support for single set of global standards – IFRS as best option (continued)


Slide 4

– The pressure is on for the FASB and IASB to finalize projects that will likely impact almost all aspects of financial accounting and reporting – all within the next 18 months

– SEC will assess what convergence and other preparations are needed, before setting a mandatory IFRS adoption date

– Once the SEC does decide to move forward and establishes a mandatory date, we expect a broad option for early adoption might be put in place

– Regardless of the final adoption date, in the near-term we see continued convergence between US GAAP and IFRS, followed by ultimate conversion. The complexity and significance of these sweeping changes greatly exceeds that of traditional revisions to existing US GAAP

– Continued global adoption impacts US businesses today as countries adopt IFRS for statutory reporting purposes

Where we stand now


Slide 5

– The planned convergence of US GAAP and IFRS will result in a significant number of new US GAAP standards between now and 2014 which will be significantly influenced by IFRS

– Outside the US a growing number of countries require IFRS or an IFRS equivalent for private statutory reporting

– Even after completion of the convergence project between the IASB and the FASB many differences will remain

– The challenge for US companies is to manage non-US conversions, address convergence changes, and anticipate the implication of conversion changes for those areas that will not fully converge

GA

AP

GA

P

2011 - 2014 Adoption2009

US GAAP

Convergence Conversion

IFRS


Global accounting landscape

Slide 6

*These projects are IASB projects that have the potential to impact the views of the FASB as it evaluates existing US GAAP in these areas.


Major projects on the horizon

Slide 7

Contracts: Consider how

IFRS affects the structure of long-term contracts and financial agreements

M & A: Understand the implications of

IFRS reporting by non-US targets and acquirers

Customers and vendors:

Know how IFRS influences non-US

counterparties’ negotiation biases

System upgrades:Anticipate IFRS impact on new

company-wide and subsidiary IT systems

Cost savings:Streamline non-US

subsidiaries’ financial reporting

via shared services

Adoption: Manage non-US

subsidiaries’ ongoing adoption

of IFRS

Tax strategies:Prepare for IFRS effects on tax rate

and cash flow.

US reporting:Plan for business

implications driven by accounting

changes

Convergence

Non

-US

cou

nter

parti

es Non-U

S subsidiaries


How IFRS may impact US companies

Slide 8

Staying close to the standard setting process – Monitoring exposure drafts and providing comments to standard settersAssessing IFRS impacts particularly those beyond accounting – Assessing changes as a result of convergence and adoption that impact the

whole organization such as impacts on people, systems and processes Exercising corporate oversight on their non-US subsidiaries– Influencing transition timing, strategies and policy decisions of non-US

subsidiaries as they adopt IFRSDeveloping project plans– Identifying areas that are most impacted– Assessing the time line for implementation – Establishing teams to focus on these areas– Establishing a governance structure to facilitate decision making


What other companies are doing

Slide 9

Assessing and recruiting IFRS talent– Assessing IFRS knowledge existing within their organization– Starting to hire IFRS resourcesDetermining the training strategy for the organization – Determining what the training needs in the organization are– Starting to train appropriate people at the right time and keep them currentAssessing areas that are most complicated– Determining areas that have the most impact or are most difficult to address– Conducting a deep dive in these areas Starting to operate in a dual GAAP environment – Assessing current longer term contracts, transactions and projects not just

under US GAAP but also assessing impact of convergence including eventual IFRS adoption


What other companies are doing (continued)

Slide 10

– IFRS standards are set by the International Accounting Standards Board

– Both frameworks follow similar conceptual underpinnings

– IFRS differs from US GAAP in many different ways from an accounting and disclosure standpoint

– US GAAP is more detailed and prescriptive, addressing specific industries and types of transactions in many areas

IFR

S2,

500

pag

es

US

GA

AP

25,0

00 p

ages

US GAAP – IFRS Differences

Principles vs. rules: Key differences between IFRS and US GAAP

Slide 11

Area IFRS US GAAP Implications

Revenue Services

Recognized on a percent completion basis

Recognized based on specific guidance, which if not applicable, defaults to general criteria. US GAAP prohibits the use of the cost-to-cost percentage-of-completion method

Timing of service revenue may potentially be different under IFRS depending on the stage of deliverable at the reporting date.

Construction Contracts

The guidance applies to construction contracts for the construction of a single asset or a combination of assets that are interrelated or interdependent.

The completed contract method is prohibited.

Combining and segmenting contracts is required when certain criteria are met.

The guidance applies to accounting for performance of contracts for which specifications are provided by customer for the construction of facilities or production of goods or the provision of related services.

While the percentage of completion method is preferred, the completed-contract method is required in certain situations.

Combining and segmenting contracts is permitted provided certain criteria are met, but is not required.

Differences ranging from the transactions scoped into the construction contract accounting guidance in both frameworks to the actual application of models may result in significant impacts.

Systems Considerations• System’s impact could range from a minor change in workflow or business to a major system configuration effort (e.g., automating the

percentage of completion calculation in the systems may be a significant effort)• For service contracts currently accounted for under proportionate performance model may require a detailed and controlled tracking

mechanism to be in place to monitor the accumulation of costs incurred for cost-to-cost percentage-of-completion method


Key differences between IFRS and US GAAP - Revenue

Slide 12

– Discussion paper published on December 19, 2008

– High priority – new standard expected by end of 2011

– Contract based revenue recognition model

– Focus on asset or liability that arises from a contract

– Asset if remaining rights exceed remaining performance obligations

– Revenue recognized as performance obligations are met/delivered


IASB / FASB joint project on revenue recognition

Slide 13


Stock-based Compensation

Each traunche in a graded vesting scheme is valued and recognized separately

Deferred tax is revalued based on intrinsic value at each reporting date

Payroll taxes and social charges are recorded in each period

An accounting policy choice for a graded vesting scheme is recognized either on a straight line basis or treat each installment separately

Deferred tax is not revalued at each reporting date.

Payroll taxes and social charges are recorded upon the triggering event

Reassessment of stock compensation plans to apply criteria under IFRS.

Assessment of internal control structure and systems requirements in order to comply with IFRS requirements.

Systems Considerations• Need to ensure the company or the third party service provider (if applicable) has systems that can adopt any required changes for

IFRS (e.g., ensure the systems are capable of periodic calculation of payroll taxes, deferred taxes, social charges, etc. and how this can be accomplished to accommodate the company’s close process)


Key differences between IFRS and US GAAP – Stock-based compensation

Slide 14


Research and Development

Allows for capitalization of development expenses upon achieving specific criteria.1. technical feasibility for use or sale2. intention to complete and use or sell3. ability to use or sell4. how probable future economic benefits will be generated5. availability of technical, financial and other recourses to complete development and use or sell6. ability to measure expenditure reliability during development

Largely follow the existing guidance that allowed an element of software and software related (e.g. website development, or modifying an ERP system for internal use) development costs to be capitalized while all of their other spend on R&D activities are required to be expensed as incurred

Companies may potentially be able to capitalize and amortize a portion of R&D expenses. The amount of capitalized development costs could be different.

Systems Considerations• May have to implement or change project accounting system, accumulating the detailed costs and cost allocations• May have to implement a general ledger/system that can receive the automated postings from the project accounting and fixed

asset systems, and has the ability to track and report project costs, intangible assets and amortization• May have to establish processes and procedures to capture expenditures by project rather than by business unit or cost center,

which is usually done through time tracking and financial accounting software systems


Key differences between IFRS and US GAAP – Research and development

Slide 15

Area IFRS US GAAP Implications Fixed Asset Accounting

Policy decision allows for an option to revalue fixed assets

Fixed assets with distinguishable attributes are to be depreciated separately (componentization)

Requires the residual value, useful life, and depreciation method applied to an asset be reviewed at least each financial year-end

Fixed assets recorded at cost Companies with a large quantity of fixed assets may have the option to fair value fixed assets as a matter of policy.

Fixed assets with distinguishable attributes (manufacturing elements, plant & fixtures) are to be assessed and depreciated separately. Tax records may be a reasonable “starting point” for that information.

May need to design and implement year-end procedures to review potential changes to residual value, asset lives and depreciation methods

Fixed Asset Accounting (Leases)

Classification of leases between operating and finance is based on a “risk and rewards” model

Classification of leases between operating and finance is based on prescriptive, rules based criteria

Companies would need to reassess the classification of leases based upon the IFRS model

Systems Considerations

• Restructuring of fixed assets modules and sub-ledger master records to break apart certain assets. Also requires data conversion effort to restructure fixed asset and accumulated depreciation balances


Key differences between IFRS and US GAAP – Nonfinancial assets

Slide 16

– Discussion paper published on March 19, 2009

– The aim of this joint project is to develop a new common approach to lease accounting that would ensure that all assets and liabilities arising under lease contracts are recognized on the balance sheet

– The boards plan to issue an exposure draft of a new lease accounting standard in the second quarter of 2010

– The current project plan envisages that a final standard will be issued in the second quarter of 2011


IASB / FASB joint project on leases

Slide 17


Income Taxes Uncertain tax positions based on an expected value approach as opposed to a cumulative probability analysis

Presented “net” as one item on B/S.

ASC 740-10 (FIN 48) is prescriptive and requires all uncertain tax positions to be measured using the cumulative probability methodology. The resulting tax liability may not be the amount that management actually expects to pay. Extensive disclosure is also required.

Presented “net” in 2 categories – current and non-current

Companies would need to reevaluate provisions related to uncertain tax positions.


• May require system configuration effort depending on the ultimate impact from identified GAAP differences


Key differences between IFRS and US GAAP – Income taxes

Slide 18

Area IFRS US GAAP ImplicationsProvisions/ Contingencies

Under IFRS, the recognition criteria for provisions is more likely than not which is considered as a probability of greater than 50%.

If a range of estimates is present in measuring a provision, IFRS requires use of the mid-point of the range.

Higher recognition threshold under US GAAP for provisions, generally 75% or over

In such a case, US GAAP requires use of the lowest point in the range.

Companies would need to reassess recognition criteria of provisions in accordance with the IFRS model

Potential for increased values of provisions if estimated ranges are considered

Systems Considerations• Due to manual nature of transaction processing and reporting activities in this particular area, no major system impact expected but changes to manual processes likely.


Key differences between IFRS and US GAAP – Provisions / Contingencies

Slide 19

Area IFRS US GAAP ImplicationsConsolidation - Control

Control is defined as the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities Control is presumed to exist when parent owns more than one half of an entity’s voting power. Control also exists when the parent owns half or less of the voting power but has legal rights to control, or de facto control. The existence of currently exercisable potential voting rights is also taken into consideration.

A bipolar consolidation model is used, which distinguishes between a variable interest model and a voting interest model. Under the voting interest model, control can be direct or indirect and may exist with less than 50% ownership. ‘Effective control’, which is a similar notion to de facto control under IFRS, is very rare if ever employed in practice.

Companies would have to re-assess the definition of control within the IFRS framework.

Associates / Joint Venture polices

Requires the accounting policies of associates / joint ventures to conform with the company.

No specific requirement to synergize the accounting policies of associates / joint ventures.

Companies are required to conform accounting policies of associates / joint ventures with the company.

Systems Considerations• Consolidation software might require amendments to include entities that fall within the new definition of control• Effects of chart of accounts restructuring should be implemented in consolidation software


Key differences between IFRS and US GAAP – Consolidation and joint ventures

Slide 20


Impairment Single impairment model for goodwill, amortizable assets and indefinite lived intangibles.

• Impairment model based on “Cash Generating Unit” (CGU), one level below a FAS 131 segment

• One Step approach based on discounted cash flows

• Indefinite lived intangibles included within CGU

• Reversals are permitted• Cash flows – discounted

Separate impairment models for goodwill, amortizable assets and indefinite lived intangibles.

• Impairment model generally based upon cash flows of ASC 280-10 (FAS 131) segments

• Two step approach

• Indefinite lived intangibles tested separately

• Reversals are not permitted• Cash flows – undiscounted

Companies are required to apply the IFRS model to assess impairment of assets and goodwill.Impairments often recognized sooner under IFRS due to one-step approach.


• Possible restructuring of fixed asset registers to group assets in logical CGUs to facilitate and streamline the impairment process and evaluation of Goodwill


Key differences between IFRS and US GAAP – Impairment

Slide 21

Area IFRS US GAAP Implication

Inventory Use of LIFO is not allowed

Valued at the lower of cost or net realizable value (net realizable value is defined as estimated selling price less estimated selling expenses)

Reversals of obsolescence provisions are allowed

LIFO is an acceptable method of valuing inventory

Value at the lower of cost or market (market is defined as current replacement cost subject to an upper limit of net realizable value (i.e., estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal) and a lower limit of net realizable value less a normal profit margin

Reversals of obsolescence provisions are allowed

Requires changes in inventory accounting if LIFO is used

Differences could arise where the current replacement cost is below net realizable value

IFRS may introduce volatility within the income statement in the event that obsolescence provisions are reversed.

Systems Considerations• Re-configuration and modification of existing systems to capture IFRS valuation methodology (e.g., cost versus net realizable value)

might be required• Changes might be required to chart of accounts capture the differences in accounting and reporting purposes• Systems need to be adjusted to not allow the valuation of inventory at the LIFO method


Key differences between IFRS and US GAAP – Inventory

Slide 22

U.S. GAAP—IFRS diagnostic questionnairesA tool that includes a set of leading practice questions to facilitate the identification of differences between U.S. GAAP and IFRS that can be tailored and used to efficiently involve the subsidiaries in the IFRS conversion process

IFRS disclosure checklistA financial statement disclosure checklist for IFRS

Illustrative consolidated financial statementsSample IFRS consolidated financial statements

Illustrative interim consolidated financial statements for first-time adoptersSample IFRS interim financial statements, including all IFRS 1 disclosures

Financial statement mapping toolsA tool to identify gaps between data and information required to prepare IFRS financial statements and the data and information that is currently available

IFRS adoption by country mapSummarizes our understanding of the use of IFRS by domestic listed and unlisted companies in over 100 countries and territories.

The following tools are also available for use with our clients:

We will also provide you with generic, leading practice templates for high level project plans, internal newsletters, external stakeholder communication, and other project deliverables.

Where to go for more information

Slide 23

Additional tools and templates

Stay informed: visit www.pwc.com/usifrs.

• Extensive library of publications• Video Learning Center• Monthly webcast series• Interactive demonstrations, and more. IFRS First updates newsletter• Timely, easily digestible updates on the US IFRS conversion

process as well as announcements of new PwC publications, webcasts or events.

• Be among the first to know when new IFRS resources are available for your use. Register today at www.pwc.com/usifrs.


Slide 24

Additional tools and templates (continued)

IFRS readiness series: • IFRS and US GAAP: similarities and differences (September 2009)• Complying with International Financial Reporting Standards:

Getting your systems ready to meet financial consolidation and reporting requirements

10Minutes series:• 10Minutes on Transitioning to IFRS• 10Minutes on International Financial Reporting Standards in the USTax IFRS readiness series: • IFRS, US GAAP, and US tax accounting methods (a comparison)• The uncertain future of LIFO• Transfer pricing and IFRS: Implications of IFRS on cost

sharing arrangements

Other recent IFRS publications

• IFRS for SMEs: How does this affect US companies?• 2010 IFRS manual of accounting• IFRS pocket guide• IFRS perspectives: An executive survey• Series of IFRS industry-specific publications


Recent IFRS publications

Slide 25

deltek insight 2010: ifrs impact on government contractors

Business

ifrs implications

current status of ifrs

ifrs equivalent

ushow ifrs

mandatory ifrs adoption

us companiescustomers

sufficient development

existing us gaap