International Financial Reporting StandardsGood-bye GAAP?By: Robert W. Ragsdale

History

• International Accounting Standards Committee- IASC (1973-2001)

▫Established in London UK▫First Meeting June 29, 1973▫Pronouncements very broad▫Original Members Australia, Canada,

Germany, Ireland, Japan, Mexico, Netherlands, UK & US

▫Interestingly IASC/FASB came into being around the same time

▫Restructured in May 2000 and renamed…..

International Accounting Standards Board (IASB)•2000 to Present•14 Board Members

▫5 Auditors▫3 Preparers▫3 Users▫1 Academic▫2 Others

Stated Objectives•“To formulate and publish in the public

interest accounting standards to be observed in the presentation of financial statements and to promote their world wide acceptance and observance and

•“To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.”

International Accounting Standards Board

•Issued to date:▫41 IAS▫7 IFRS

•FASB has over 160 SFAS, ARB’s & APB’s which will be ‘codified’ in July 2009

Rules vs. Principles

•IFRS- Principles Based▫IAS 17, pp8, “A lease is classified as a

finance (capital) lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.”

Rules vs. Principles

•SFAS 13 (etal) 4 ‘tests’ (bright lines) for Capitalization▫Title to leased property to lessee at end of the

lease term▫Bargain purchase option which it is reasonable

to assume lessee will exercise at the end of the lease term

▫Lease term 75% or more of economic life of asset

▫Present value of minimum lease payments 90% or more of the fair value of the leased property at the inception of the lease. It is assumed that the lessee will Pay for the asset leased.

Rules vs. Principles

•If Lease terms do not fit any ONE of the criteria, under current GAAP, it may be classified as an operating lease and hence OFF balance sheet financing achieved

Sarbanes-Oxley 2002•Requires an exhaustive study by SEC of

principles based standards which concluded (9-25-2003)▫“We have conducted a study of the

approach to standard setting and found that imperfections exist when standards are established on EITHER a RULES-based or PRINCIPLES-only basis”

Sarbanes-Oxley 2002•As a result of the study:

▫Those involved in the standard setting process more consistently develop standards on a: Principles-based OR Objectives-based

▫“Avoid the use of percentage tests (bright-lines) that allow financial engineers to achieve TECHNICAL compliance with the standard while evading the INTENT of the standard”

Rules vs. Principles

•Principles-based standards are sometimes more difficult to implement in practice because little guidance exists for their application.

•US GAAP only began to be codified in 1938 ▫Accounting Research Board▫Provide LEGAL cover for U.S. Accountants

BY U.S. Accountants (AICPA)•Europeans/Asians much less litigious than

“deep pocket” American Lawyers/Shareholders

Rules vs. Principles•One of the subtle flaws in principles based

standards

▫Different accountants in different economies and cultures will interpret and apply them differently

▫Defeating the purpose of worldwide GAAP!

The Norwalk Agreement•Norwalk, Connecticut September 18,

2002•U.S. Standards setter FASB & IASB•Agreement to ‘converge’ SFAS with IFRS

▫Agreement guaranteed FASB a significant role in the undertaking.

•Both organizations agreed to▫“Make their existing financial reporting

standards FULLY compatible as soon as practicable” and

▫“To coordinate the future work programs to ensure that once achieved, compatibility is maintained.”

(Memorandum of understanding)

Differences between GAAP & IFRS•IFRS

▫Does not permit last in first out (LIFO) as an inventory costing method.

▫Uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP. (Making write-downs more likely)

▫Has a different probability threshold & Measurement objective for contingencies

▫Does not permit curing debt covenant violations after year-end

▫Guidance regarding revenue recognition is LESS extensive than GAAP & Contains relatively little industry-specific instructions.

SUM COMPARISONS:Financial Item US GAAP IFRS

Contingencies Recognized if estimable & probable

Recognized if estimable & “more likely than not”

Intangibles Do not revalue unless impaired

Regular revaluation at fair value permitted

R& D Expense as incurred unless alternative future use can be proven

Research expensed; Development may be capitalized under certain conditions

Inventories 4 cost flow methods: LCM rules base market value on replacement cost

Inventory write-downs with no subsequent reversals

Does not allow LIFOLCM bases market value on Net realizable value (Sales price less cost to sell)Both write-down and reversal allowed

IFRS 2008- Wiley & Sons, has 14 pages of in-depth comparison

SUM COMPARISONS:Financial Item U.S. GAAP IFRS

Preferred Stock Reported as Equity Reported as debt

Statement of Cash Flows

Dividends paid are classified as financingInterest paid, interest received and dividends received are classified as operating

Dividends paid may be either operating or financingInterest paid can be either operating or financing; interest & dividends received can be either operating or investing

Joint Ventures Interests accounted for by the equity method

Interests accounted for by the equity method or proportional consolidation

Financial Instruments

No current parallel under GAAP to IFRS “fair value option” but it has been proposed

“fair value option “allows ANY financial asset or liability to be designated AT INCEPTION to be accounted for at fair value with changes reported in current earnings

SUM COMPARISONFinancial Item

U.S. GAAP IFRS

PP & E Mandatory capitalization of construction period interest costs (only- no ancillary)

Mandatory capitalization of construction period interest costs; ancillary costs may also be capitalized

Cost of major overhauls generally expensed

Cost of major overhauls may be capitalized

Impairments recognized in current income

If cost method used impairments recognized income; if revaluation employed reversal of revaluation excess of revaluation to current income

Intangibles currently carried at cost

Revaluation of intangibles permitted

SUM COMPARISONFinancial Item

U.S. GAAP IFRS

Business Combinations & Consolidation

Many Many subtle technical differences

Special consolidation requirements apply to variable interest entities (Vies’) (Thank you Enron)

Vies’ not addressed by IFRS (because they did not experience Enron)

No promulgated rules governing “parent company only” financial statements, but use of the equity method is currently acceptable

In “parent company only” financials, the investment in subsidiaries, equity investees and joint ventures may be presented at cost or under rules for investments in securities, but the equity method cannot be used in those circumstances

SUM COMPARISONFinancial Item

U.S. GAAP IFRS

Business Combinations & Consolidation

Not necessary to conform parent & subsidiary accounting policy

Need to conform parent & Subsidiary accounting policies

Minority interest in consolidated subsidiary may be presented in liabilities, equity or separate line item

Minority interest included in equity

Goodwill not amortized; tested for impairment & adjusted

Similar to US GAAP but difference in impairment testing methods

Purchased in process R&D expensed

Purchased in process R & D capitalized

Negative goodwill from acquisition credited to carrying value of nonfinancial assets acquired with excess treated as gain.

Negative goodwill from acquisition credited to gain immediately

WHEW!!!

•Remember Wiley IFRS (1-877-762-2974) has 14 pages of comparisons!!!

Effects of IFRS on Tax Practice•A company’s conversion to IFRS may

affect:▫Calculation of tax liabilities▫Effective tax rates▫Deferred tax balances▫Unrecognized tax benefits▫Compensation & Employee benefit plans▫Planning▫Accounting for taxes▫Technology systems▫Provision & Compliance processes▫Internal training needsSource J of A Mar ‘09

Schedule of Convergence- Requires IFRS

Europe & Central Asia Americas Asia-Pacific

Africa/ Middle East

Armenia Germany Portugal Bahamas Australia Egypt

Austria Greece Romania Barbados Brunei Jordan

Bangladesh Hungary Russia Costa Rica Nepal Kenya

Belgium Ireland Slovenia Dominican Republic Singapore Kuwait

Bulgaria Italy Spain Ecuador Taiwan Malawi

Croatia Kyrgyzstan Sweden Guyana Mauritius

Cyprus Latvia Switzerland Haiti Oman

Czech Republic

Lithuania Tajikistan Honduras Tunisia

Denmark Luxembourg Ukraine Jamaica

Estonia Macedonia United Kingdom

Panama

Finland Malta Papua New Guinea

France Netherlands Peru

Georgia Norway Trinidad & Tobago

Schedule of Convergence- Converging with IFRSEurope/Central Asia

Americans Asia-Pacific Africa/ Middle East

Moldova Argentina New Zealand Iran

Uzbekistan Brazil China/ Hong Kong

Israel

Canada India Pakistan

Cayman Islands Indonesia South Africa

Chile Japan Zimbabwe

Guatemala South Korea

Mexico Malaysia

Uruguay Philippines

Venezuela Thailand

United States

SEC Roadmap forIFRS Recognition Implementation

• The ‘Cox’ (Rep Christopher Cox) SEC Chairman▫“The currently proposed timetable would

allow the largest U.S. Companies to begin reporting their 2009 results in IFRS.

▫Large, accelerated filers in 2014▫Other accelerated filers in 2015▫Smaller companies in 2016▫Companies would have to provide

statements from the previous three years in IFRS. Cost/benefit choice for non-mne’s- IFRS, 1st

time converters) at that time, for comparability purposes.

SEC Roadmap forIFRS Recognition Implementation

•SEC Chairwoman Mary Schapiro

▫It remains to be seen what the new ‘madam’ chairwoman’s feelings on these issue are

▫What affect the current economic malaise will have on the timing

▫BUT….. Implementation is pretty much assured!!

SEC Roadmap forIFRS Recognition Implementation•Deadline for IFRS Implementation

roadmap comments, originally scheduled for Feb 19 extended to Apr 20

•New Chairwoman, Mary Schapiro has expressed concern with SEC’s current roadmap for transitioning U.S. public companies to IFRS.

SEC Roadmap forIFRS Recognition Implementation

•Potential problems include:▫Lack of consistency in the application of

IFRS, ▫The cost inherent in the switch and ▫IASB’s independence, or lack there of.

•The Roadmap is available at:▫www.sec.gov/rules/proposed/2008/33-

8982.pdf

Additional IFRS Resources• AICPA> www.ifrs.com• IFAC’s > www.ifac.org• IASB’s> www.iasb.org• FASB’s > www.fasb.org• Canadian Institute of Chartered Accountants >www.cica.ca• CICA Accounting Standards Board> www.acsbcanada.org• Chartered Accountants of Scotland’s > www.icas.org.uk• Chartered Accountants in England > www.icaew.com• Chartered Accountants in Australia >

www.charteredaccountants.com.au• International organization of Securities Commissions >

www.IOSCO.org• Securities & Exchange Commission > www.sec.gov• SEC Roadmap > www.sec.gov/spotight/ifrsroadmap.htm• Deloitte > www.deloitte.com• KPMG > www.kpmgifrsinstitute.com• Pricewaterhousecoopers> www.pwc.blogs.com/ifrs• Ernst & Young> www.ey.com

QUESTIONS ? ? ? ? ? ? ? ?

By: Robert W. Ragsdale, CPA

Slides can be found at: http://providence.imanet.org