IFRS

Abandon Ship or Smooth Sailing Ahead?

Neal J. HannonAAA Interactive Data AssociatesStamford, CT 203-274-6806nhannon@gmail.com

Use of IFRSs Is Widespread!Use of IFRSs Is Widespread!• Used by more than 15,000 listed companies Used by more than 15,000 listed companies

overseasoverseas– Another 12,000 planned by 2011Another 12,000 planned by 2011

• Used by foreign subsidiaries of US-based Used by foreign subsidiaries of US-based multinationalsmultinationals

• Used by SEC foreign registrants without Used by SEC foreign registrants without reconciliation to US GAAPreconciliation to US GAAP

• Will probably be used by US companies in a Will probably be used by US companies in a few yearsfew years– Both SEC registrants and private companiesBoth SEC registrants and private companies

More than 100 countries, including the members of the EuropeanUnion and much of Asia, have already adopted and implementedIFRS. Israel is adopting IFRS this year, with Chile and South Koreaset for 2009, Brazil for 2010, and Canada for 2011.

Use of IFRSs Is Widespread!Use of IFRSs Is Widespread!

• FASB, SEC, AICPA, Big-4, and major US FASB, SEC, AICPA, Big-4, and major US multinationals all strongly favor use of IFRSsmultinationals all strongly favor use of IFRSs

• Designation of IASB under AICPA Rules 202-Designation of IASB under AICPA Rules 202-203 (May 2008)203 (May 2008)– Potential for use of IFRS for Private Entities when it is Potential for use of IFRS for Private Entities when it is

finished early 2009finished early 2009

• What will become of the FASB (and other What will become of the FASB (and other national standard setters)?national standard setters)?

Why globalWhy globalaccounting standards?accounting standards?

Why Global Standards?Why Global Standards?

• Enhanced worldwide comparability for Enhanced worldwide comparability for investorsinvestors

• Enhanced quality of reportingEnhanced quality of reporting– Some national GAAPs are weak or outdatedSome national GAAPs are weak or outdated

• Possibly a lower cost of capital for companies Possibly a lower cost of capital for companies adopting IFRSsadopting IFRSs

• More company-friendly US securities market More company-friendly US securities market for foreign listingsfor foreign listings

Why Global Standards?Why Global Standards?• Reduced reporting costsReduced reporting costs

– For instance, multinational with subs applying many For instance, multinational with subs applying many GAAPsGAAPs

• No need to develop and maintain national No need to develop and maintain national standardsstandards

• For audit firms and companies: Easier For audit firms and companies: Easier movement of auditors and accountants across movement of auditors and accountants across bordersborders

Brief HistoryBrief History

• IASC started 1973:IASC started 1973:– Volunteer, part-time, met 3X/yearVolunteer, part-time, met 3X/year– Issued IASs 1-41 + interpretationsIssued IASs 1-41 + interpretations

• Restructured 2001:Restructured 2001:– Full-time IASB based in LondonFull-time IASB based in London– 14 members14 members– Issues IFRSsIssues IFRSs

• Old IASs (most revised by IASB) remain in forceOld IASs (most revised by IASB) remain in force

IASB StructureIASB Structure

Use of IFRSs Around the Use of IFRSs Around the WorldWorld

For domestic For domestic listedlisted companies: companies: Number of Number of JurisdictionsJurisdictions

IFRSs required for allIFRSs required for all 8585

IFRSs required for someIFRSs required for some 44

IFRSs permittedIFRSs permitted 2424

Today, IFRSs are used by Today, IFRSs are used by listedlisted companies in over 100 companies in over 100 jurisdictionsjurisdictions

Use of IFRSs Around the Use of IFRSs Around the WorldWorld

For domestic For domestic unlistedunlisted companies:companies:

Number of Number of JurisdictionsJurisdictions

IFRSs required for allIFRSs required for all 2828IFRSs required for someIFRSs required for some 2020

IFRSs permittedIFRSs permitted 3636

Today, IFRSs are used by Today, IFRSs are used by unlistedunlisted companies in over 80 jurisdictionscompanies in over 80 jurisdictions

Use of IFRSs Means All Use of IFRSs Means All IFRSs!IFRSs!

• 33 existing IASs (1 to 41, some deleted) 33 existing IASs (1 to 41, some deleted) issued by IASC 1973-2000:issued by IASC 1973-2000:– Most amended or replaced by IASB during Most amended or replaced by IASB during

2003-20082003-2008

• IFRSs 1-8 issued by IASBIFRSs 1-8 issued by IASB

• Also InterpretationsAlso Interpretations

Use of IFRSs by Listed Use of IFRSs by Listed EntitiesEntities

• Europe (EU+EEA+ Switzerland):Europe (EU+EEA+ Switzerland):– All listed (about 8,000 companies)All listed (about 8,000 companies)– In consolidated financial statements In consolidated financial statements – EU: One ‘modification’ (of IAS 39)EU: One ‘modification’ (of IAS 39)

• Consequently, audit report refers to ‘IFRSs as Consequently, audit report refers to ‘IFRSs as adopted by the EU’adopted by the EU’

– Endorsement mechanism results in time lagsEndorsement mechanism results in time lags

Use of IFRSs by Listed Use of IFRSs by Listed EntitiesEntities

• Asia-Pacific:Asia-Pacific:– Nearly word-for-word convergence:Nearly word-for-word convergence: Australia, Australia,

New Zealand, Hong KongNew Zealand, Hong Kong– Modifications, time lags, some not adoptedModifications, time lags, some not adopted: :

Singapore, Thailand, Malaysia, Philippines, Singapore, Thailand, Malaysia, Philippines, ChinaChina

– Own standardsOwn standards: : Japan (convergence program), Japan (convergence program), TaiwanTaiwan

– 2011 planned2011 planned: : India, KoreaIndia, Korea

Use of IFRSs by Listed EntitiesUse of IFRSs by Listed Entities• North America:North America:

– Canada:Canada: planned 2011planned 2011– USA: USA:

• Permitted for foreign SEC registrants since March Permitted for foreign SEC registrants since March 2008 2008

• SEC studying domestic registrants SEC studying domestic registrants ─ ─ roadmap roadmap suggests 2014suggests 2014

Use of IFRSs by Listed EntitiesUse of IFRSs by Listed Entities

• Latin America/Caribbean:Latin America/Caribbean:– IFRSs required:IFRSs required: Brazil (2010 all listed and Brazil (2010 all listed and

banks), Chile (2009-2011 phased in), and over banks), Chile (2009-2011 phased in), and over a dozen smaller jurisdictionsa dozen smaller jurisdictions

• Middle East and Africa:Middle East and Africa:– IFRSs required:IFRSs required: Many countriesMany countries

US vs. the World?

The stated objective of the 2002 “Norwalk Agreement”between FASB and the IASB is the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting.

Clearly, this approach says let’s make both sets ofstandards better, not choose one set over the other.

Convergence Still On• Sep 11, 2008 FASB, IASB To Complete Major Convergence

Projects by 2011, Says MoU FASB expects to release proposals in 2008 on Subsequent Events and Income Taxes.

 • Similar to the ‘improve and adopt” approach described by FASB

Chairman Robert Herz in interviews and Senate testimony  • Other matters noted in 2008 MoU Update: Conceptual

Framework: Work is ongoing on the boards’ joint conceptual framework projects.

• FASB and the IASB recognize the need for due process

• Work Programs Include Other Matters: – The boards “remain committed to completing the MoU projects because

they represent a significant step toward the goal of a common set of high quality standards.”

Principles Vs. RulesPrinciple: Drive safelyRule: 55 MPH Limit

Voices of Note

The question about whether the world is going to global standards is no longer ‘if,’ but ‘when’. Switching to IFRS significantly reduces the cost of accounting and financial reporting for multi-national companies, which would otherwise have to translate and reconcile records prepared under various country-specific standards.

KPMG Chairman and CEO Timothy P. Flynn

Voices of Note“An international language of disclosure and transparency

is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions,” said SEC Chairman Christopher Cox.

“The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors’ increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan.

Clearly setting out the SEC’s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.”

Voices of Note

• Meanwhile the IASB at the dawn of the 21st Century began to add meat to but left out many of the bright line rules. Hence it generated a reputation for principles-based standards instead of rules-based its milk toast "politically correct" starter-set of international standards.

In many instances it copied FASB standards.

– Bob Jensen, Professor emeritus Trinity University. www.trinity.edu/rjensen

Voices of Note

• "We should start off [a financial reporting standard] with the core principle, which is really the 'true and fair' core of the standard."

Sir David Tweedie, Chairman IASB.

• “The idea of true and fair in accounting is little more than faith-based accounting, and most certainly not the appropriate starting point for any process of developing high-quality accounting standards.”

Tom Selling (www.accountingonion.com)

Voices of Note

• On accounting, SEC Chairman Cox has unveiled a roadmap where US companies would switch from US GAAP to IFRS by 2014. Unthinkable only two years ago! A dramatic signal indeed. Following the EU's lead, the US is indicating it also wants to choose global standards. One set, in sight, at last. And of course we need to strengthen the governance of the IASB. That is why we are working hard with some of our major counterparts to install new, strengthened oversight mechanisms.

Charles McCreevy, European Commissioner for Internal Market 14 September 2008.

Voices of Note

• A precipitous move away from U.S. Generally Accepted Accounting Principles will undermine the U.S. regulatory system, and thereby "put in jeopardy the thing that gives the U.S. a competitive advantage. All research shows that the U.S. is unique in its regulation. No [country] is as effective . . . . We have the lowest cost of capital in the world. Do we really want to give that up?”

Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board

Voices of Note

By the logic of others, which I can’t explain, fuzzy lines in accounting standards have come to be exalted as “principles-based” and bright lines are disparaged as “rules-based.” 

Tom Selling, author of The Accounting Onion blog

It is important to note that conversion to IFRS will require the retroactive restatement of certain historical periods presented within a company’s first set of IFRS based financial statements. Those restated periods could show a host of changes to a company’s key metrics, bottom-line performance and financial position.

Source: PriceWaterhouseCoopers, September 2008

What Are the Major Differences?

Major DifferencesUS GAAP - IFRS

• Revenue recognition

• Expense recognition: share-based payments

• Financial liabilities and equity

• Consolidation

• Assets—nonfinancial assets

• Assets—financial assets

Major DifferencesUS GAAP - IFRS

• Liabilities—taxes

• Liabilities—other

• Financial liabilities and equity

• Derivatives and hedging

• Consolidations

• Business combinations

• Other accounting and reporting topics

What If IFRS starts 12-31-11?• Preparing IFRS financial statements for the three years ending

December 31, 2011, would have a transition date of January 1, 2009. That would also be the date of the opening IFRS balance sheet.

– IFRS 1 requires that the opening IFRS balance sheet:– Include all of the assets and liabilities that IFRS requires;– Exclude any assets and liabilities that IFRS does not permit;– Classify all assets, liabilities and equity in accordance with IFRS; and– Measure all items in accordance with IFRS.

• These general principles are followed except where one of the optional exemptions or mandatory exceptions does not require or permit recognition, classification and measurement in accordance with IFRS.

IFRS ResourcesIFRS Resources

• Download a comprehensive list:Download a comprehensive list:www.iasplus.com/resource/0808aaaifrsresources.pdfwww.iasplus.com/resource/0808aaaifrsresources.pdf

Or Or http://fairfield-ais.wikispaces.com/IFRS+Resource+http://fairfield-ais.wikispaces.com/IFRS+Resource+PagePage

• Most of the cited hyperlinks lead to additional Most of the cited hyperlinks lead to additional resourcesresources

• Most available for freeMost available for free

IFRS ResourcesIFRS Resources• DeloitteDeloitte

– iGAAP 2009 – A Guide to IFRS Reporting (2iGAAP 2009 – A Guide to IFRS Reporting (2ndnd ed., ed., 2,100 pages)2,100 pages)

– iGAAP 2008 Financial Instruments: IAS 32, IAS 39 iGAAP 2008 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (4and IFRS 7 Explained (4thth ed., 851 pages). ed., 851 pages).

– www.iasplus.comwww.iasplus.com– IFRS e-LearningIFRS e-Learning– IFRSs in your Pocket 2008IFRSs in your Pocket 2008

IFRS ResourcesIFRS Resources

• Ernst & YoungErnst & Young– Ernst & Young International GAAP 2008 (2 Ernst & Young International GAAP 2008 (2

volumes)volumes)– www.ey.com/ifrswww.ey.com/ifrs– New academic resource center to be New academic resource center to be

launched Sept. 2008launched Sept. 2008• Grant ThorntonGrant Thornton

– http://faculty.gtexperience.comhttp://faculty.gtexperience.com

IFRS ResourcesIFRS Resources• KPMGKPMG

– KPMG IFRS InstituteKPMG IFRS Institute• www.kpmgifrsinstitute.com/www.kpmgifrsinstitute.com/

– KPMG faculty portalKPMG faculty portal• www.kpmgfacultyportal.comwww.kpmgfacultyportal.com

– KPMG IFRG websiteKPMG IFRG website• www.kpmgifrg.comwww.kpmgifrg.com

– IFRS publications libraryIFRS publications library• www.kpmgifrg.com/pubs/index.cfmwww.kpmgifrg.com/pubs/index.cfm

IFRS ResourcesIFRS Resources

• PricewaterhouseCoopersPricewaterhouseCoopers– IFRS reporting websiteIFRS reporting website

• www.pwcglobal.com/ifrswww.pwcglobal.com/ifrs

– IFRS Pocket Guide 2008IFRS Pocket Guide 2008– ’’IFRS Ready’ toolkit for educatorsIFRS Ready’ toolkit for educators

• www.pwc.com/facultywww.pwc.com/faculty

– PWC IFRS BlogPWC IFRS Blog• http://pwc.blogs.com/ifrs/http://pwc.blogs.com/ifrs/

IFRS ResourcesIFRS Resources• US SEC Global Accounting PageUS SEC Global Accounting Page

– www.sec.gov/spotlight/ifrsroadmap.htmwww.sec.gov/spotlight/ifrsroadmap.htm• IASBIASB

– www.iasb.orgwww.iasb.org– Subscriptions and e-IFRSSubscriptions and e-IFRS– Webcasts of meetingsWebcasts of meetings

• World Accounting ReportWorld Accounting Report– www.i-financial.com/www.i-financial.com/

IFRS Academic ResourcesIFRS Academic Resources• IAAERIAAER

– www.iaaer.orgwww.iaaer.org– Offers very low-cost academic subscription to Offers very low-cost academic subscription to

eIFRS (from IASB)eIFRS (from IASB)• Includes all IFRSs and other educational materials of the Includes all IFRSs and other educational materials of the

IASB $25 (academician) and $20 (student) IASB $25 (academician) and $20 (student) • Normal price from IASB $400Normal price from IASB $400

IFRS ResourcesIFRS Resources• AICPAAICPA

– IFRSs on CPA Exam:IFRSs on CPA Exam:• www.cpa-exam.orgwww.cpa-exam.org

– New IFRS websiteNew IFRS website• www.ifrs.comwww.ifrs.com

• Canadian Institute of CAsCanadian Institute of CAs– IFRS Transition Page:IFRS Transition Page:

• www.cica.ca/index.cfm?ci_id=39166&la_id=1www.cica.ca/index.cfm?ci_id=39166&la_id=1

IFRS ResourcesIFRS Resources• European CommissionEuropean Commission

– Accounting:Accounting:• http://ec.europa.eu/internal_market/accounting/index_en.htmhttp://ec.europa.eu/internal_market/accounting/index_en.htm

– This includes links to:This includes links to:• EU accounting newsEU accounting news• IFRS news and informationIFRS news and information• EU IFRS-related committeesEU IFRS-related committees• EU IFRS directives and regulationsEU IFRS directives and regulations

• IFRS - How to Assess Your Financial Readiness Date: Tuesday, November 4, 2008Time: 1:00 p.m. EDT Place: Online

• The move to International Financial Reporting Standards (IFRS) is of extreme importance to finance professionals as it has already been adopted in Europe and will be required in Canada in 2011.  In the US growing evidence suggests that the SEC is accelerating measures to retire US GAAP and require all public companies to adopt IFRS.

• The impact of IFRS will not only affect the finance function, but stretch to encompass key business decisions across the entire organization.  Having the right plan and systems in place is critical to ensure a smooth transition. But where do you start

• Register Now for this LIVE Webcast

• Join Deloitte and Longview Solutions as they offer helpful advice on key IFRS topics including:

• The status of IFRS adoption in North America • How to assess your company’s IFRS readiness

– People – Processes – Support Systems

• Business Performance Management (BPM) as an enabler of IFRS • Featured Speakers: • Don Newell, Deloitte Partner, National IFRS Leader • Tony Wright, Director of Product Management, Longview Solutions • Sign up now and join us on November 4 for this educational webcast!

IFRS Resources for EducatorsIFRS Resources for Educators• Textbooks – some recent ones:Textbooks – some recent ones:

– Nobes and ParkerNobes and Parker– Roberts, Weetman and GordonRoberts, Weetman and Gordon– Choi and MeekChoi and Meek– Holt, Mirza and OrrellHolt, Mirza and Orrell– Alfredson, Leo, Picker, Pacter et alAlfredson, Leo, Picker, Pacter et al

• Histories of the IASC:Histories of the IASC:– Camfferman and ZeffCamfferman and Zeff– KirschKirsch

Credits for IASB history and IASB Resources:Credits for IASB history and IASB Resources:

Stephen Zeff, Rice UniversityStephen Zeff, Rice University

and Paul Pacter, IASBand Paul Pacter, IASB

From a presentation to:

American Accounting Association

Anaheim, CA August 4, 2008Anaheim, CA August 4, 2008

Thank you.Thank you. Questions and comments?Questions and comments?

For more: ficpa-For more: ficpa-ifrs.wikispaces.comifrs.wikispaces.com

Neal J. Hannon, AAA Interactive Data AssociatesStamford, CT 203-274-6806nhannon@gmail.com“Bridging the GAAP between XBRL and the SEC”