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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
Current status of IFRS in the US
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)
Current status of IFRS in the US
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
Current status of IFRS in the US
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
Current status of IFRS in the US
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.
Current status of IFRS in the US
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
Current status of IFRS in the US
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
Current status of IFRS in the US
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
Current status of IFRS in the US
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
US GAAP – IFRS Differences
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
US GAAP – IFRS Differences
IASB / FASB joint project on revenue recognition
Slide 13
Area IFRS US GAAP Implications
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)
US GAAP – IFRS Differences
Key differences between IFRS and US GAAP – Stock-based compensation
Slide 14
Area IFRS US GAAP Implications
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
US GAAP – IFRS Differences
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
US GAAP – IFRS Differences
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
US GAAP – IFRS Differences
IASB / FASB joint project on leases
Slide 17
Area IFRS US GAAP Implications
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.
Systems Considerations
• May require system configuration effort depending on the ultimate impact from identified GAAP differences
US GAAP – IFRS 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.
US GAAP – IFRS Differences
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
US GAAP – IFRS Differences
Key differences between IFRS and US GAAP – Consolidation and joint ventures
Slide 20
Area IFRS US GAAP Implications
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.
Systems Considerations
• Possible restructuring of fixed asset registers to group assets in logical CGUs to facilitate and streamline the impairment process and evaluation of Goodwill
US GAAP – IFRS Differences
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
US GAAP – IFRS Differences
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.
Where to go for more information
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
Where to go for more information
Recent IFRS publications
Slide 25