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Agenda
Overview of IFRS in the Americas
Case Study: IFRS Convergence in Brazil
Best Practices & Lessons Learned
Looking Forward
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 2
Overview of IFRS in the AmericasIFRS continues to propagate and flourish in the Americas.
• Mixed implementation models in the region – public companies, statutory convergence, financial institutions, updated standards
• Increased interest and movement towards adoption of IFRS for SMEs (Caribbean, Central and South America)
• Public sector converging with international standards in many parts of the region
• Regional connectivity and collaboration• Standard Setting – GLASS• Capital Markets Integration (MILA, Brain)
Regional connectivity, cross border capital flows, regional capital markets integration, and the rise of multilatinas continue to drive a strong business case for IFRS.
Brazil2010
Argentina2012
Chile 2009-2011
Mexico2012
Canada2011
Peru 2011
Ecuador2010-2012
ColombiaConvergence Plan
United States???
Venezuela2011 SME
Bolivia 2013
Guatemala2009
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 4
Case Study – IFRS Convergence in Brazil Regulatory Milestones
2005 • Comitê de Pronunciamentos Contábeis – CPC
• Central Bank Communicado 14.259 – Financial Institutions
• CVM 457 – Listed Companies• SUSEP Circular 357 – Insurance Companies• Law 11.638 (Dec 2007) – sets convergence path for BR GAAP /
Statutory accounting with IFRS and expands scope of statutory audits
• MP 449 / Law 11.941 – Transitional Tax Regime• First Wave – CPC New Standards
• CPC/IFRS for SME• CMN Resolution 3.786 – Financial Institutions
• First Year Full IFRS Reporting
2006
2007
2008
2009
2010
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 6
Case Study – IFRS Convergence in Brazil IFRS Convergence Timeline
2008 2009 2010 2011
CPC Phase 1 11.638
CPC Phase 2Major Convergence (effective 2010)
CPC Phase 3Ongoing Convergence
Transitional Tax RegimeOptional
Transitional Tax Regime Mandatory (pre2008 Statutory Methods)
Statutory Accounting
Tax
Listed Companies
Financial Institutions
Full IFRSOptional
Full IFRSMandatory
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 7
IFRS/CPC SME IFRS for SME Optional (beginning in 2009)
15 CPCs
+40 CPCs, OCPCs, ICPCs
We are here.
IFRS Transition Date IFRS Reporting Date
Brazilian accounting standards are substantially converged with IFRS in 2010.
Case Study – IFRS Convergence in Brazil CPC vs. IFRS Standards
• New BR GAAP (CPC) standards have been issued in line with their respective IFRS-IASB standards, with only a few minor differences/modifications:‒ Simplified / eliminated certain options available under IFRS-IASB (e.g., revaluation)
‒ Specific transition rules that facilitate consistency with transition rules under IFRS 1 ‒ Equity method of accounting (instead of cost or fair value) for subsidiaries when
presenting individual financial statements for statutory purposes
• Memorandum of understanding between Brazil and the IASB ensures that the CPC will continue to issue new BR GAAP standards in line with IASB
• CPC and the application of the RTT significantly decouples tax and statutory accounting (e.g., depreciation methods)
• CPC serves as official accounting records applicable to most organizations(electronic tax filings, distributable reserves and dividends, thin capitalization rules, transfer pricing)
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 8
Case Study – IFRS Convergence in Brazil Phase 2 Results – IBrX Companies
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 9
Inventories
Provisions / Contingencies
Asset Retirement Obligations
Biological Assets
Financial Instruments
Service Concessions
Revenue Recognition
Fixed Assets
Deemed Cost on Transition
Consolidation/ Investments Associates / JVs
Capitalized Interest
Dividends
Employee Benefits
Financial Statement Presentation
Initial Adoption CPC/IFRS
Business Combinations
Income Taxes
0 5 10 15 20 25 30 35 40 45 50
Number of Companies Reporting Adjustments
Source: Deloitte Research summarized from Company ReportingIncludes only companies reporting for first time in 2010 (approximatley 80 companies)Excludes Phase 1 topics including stock options, certain financial instruments, leasing and functional currency implemented in 2008.
2009 Reported Profits
15-20%(average)
2009 Reported Equity
10-15%(average)
IFRS is benefiting companies beyond just accounting
IFRS is improving the efficiency of the capital markets
IFRS is changing how our business is viewed by the market
IFRS is influencing the decisions of investors
64
65
71
78
21
16
17
15
19
12
20
Yes No opinion No
IFRS is already impacting the business environment.Case Study – IFRS Convergence in Brazil
Factors being influenced by the adoption of IFRS(%)
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 10
Financial instruments
Net income
Analyst training/understanding
Company processes
Information integrity
Asset valuation
Internal Controls
Management and control systems
Financial statement transparency
34
36
42
38
39
42
47
4958
Accounting Operational Market
As a result of IFRS adoption, companies are not only benefiting from a single, global financial language, they have strengthened their operational and financial processes.
Case Study – IFRS Convergence in Brazil
Positive Impacts of IFRS Adoption to Date(%)
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 11
Case Study – IFRS Convergence in Brazil
IFRS Investments and Efforts (%)
Implementation/modification of systems
Identification of IFRS resources
Training of IFRS resources
Information production (including comparatives)
Understanding IFRS
16
18
26
32
3436
167
18
16
7
Less than R$200 mil
R$200 mil to R$500 mil
R$ 500 mil to R$ 1 million
R$ 1 million to R$ 2 million
More than R$ 2 million
Don´t know / no response
Investments Principal Efforts
A large percentage of companies invested over R$500 thousand in IFRS conversion activities.
41% > R$ 500 mil
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 12
56% of companies admitted that they thought their IFRS conversion process could have been more efficient.
Case Study – IFRS Convergence in Brazil
Better communication with the market
Better project management
Better / more timely counsel from specialists
Better evaluation of accounting impacts
Better evaluation of system impacts
Better / sooner training
Start sooner
15
20
20
30
35
40
70
IFRS Inefficiencies – What could have been better? (%)
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 13
Companies are focused on people, process and technology to reduce IFRS reporting cycle times.
Case Study – IFRS Convergence in Brazil
Post-conversion priorities (%)
Increase the quality of market communications
Improve quality of financial statement disclosures
Improve technical accounting ability of the company
Improve information systems to reduce IFRS close cycle times
36
52
58
60
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 14
Case Study – IFRS Convergence in Brazil Perspectives – Key Success Factors
• Decision and commitment – “IFRS for All”
• Stakeholder support, participation and input
• Central role of the CPC - composition, charter and communication
• Tax “neutrality”
• IFRS part of broader financial reporting and corporate governance changes‒ New public company listing and annual reporting requirements‒ New statutory audit requirements‒ Migration to international auditing standards
• Favorable economic “moment” – providing additional incentives‒ International interest and global investment in Brazil‒ Solid financial system in the wake of the financial crisis‒ Capital markets in expansion
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 15
Case Study – IFRS Convergence in Brazil Perspectives - Macro Challenges
• Application of IFRS in the local legal/regulatory environment‒ Coordination between regulators‒ Tax neutrality – application and future uncertainty
• Consistency in the application of standards‒ Principles vs. rules – significant cultural and operational change‒ Industry-specific issues and interpretations (e.g., real estate, concessions)
• Transition – upgrading people, processes and systems
• Quality of financial statement disclosures and alignment with other reporting requirements/initiatives – regulatory scrutiny
• Dissemination of IFRS for SMEs
• Continued and proactive participation in global IFRS “ecosystem”
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 16
The Road to IFRS MaturityCase Study – IFRS Convergence in Brazil
Maturity
Quality
Effectiveness
Eff
icie
ncy
Today
Investors
Regulators
Standard Setters
Analysts
Suppliers of Credit
Board of Directors
Auditors
Stakeholder Influence
Full Realization of IFRS Benefits
Where are we? Where do we want / need to be?
• Improve quality of financial information
• Increase comparability
• Facilitate access and lower cost of capital
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 17
Best Practices & Lessons LearnedChallenges – Global Themes
Initial adoption of IFRS• Resource constraints• Overall timing considerations• General financial reporting – quality and completeness of disclosures• Increased scrutiny by regulators• Comparability within industries and local benchmarks• Statutory implementations – visibility and consistency• Upgrading people, processes and systems
Ongoing application of IFRS• Keeping up with unprecedented number of new standards• Principles vs. rules
‒ Need for interpretative guidance for new standards‒ Principles-based standards are good, but what about MY issue?‒ Concern over lack of bright-line rules
Anticipating future developments in IFRS
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 19
Best Practices & Lessons LearnedDealing with the Challenge of IFRS Adoption
High Level - Governance
• Tone at the Top - involve leadership at earliest stage, designate a steering committee
• Project Management Team - establish a cross-functional project management team
• Communication - establish lines of communication among various functions within the organization
• Coordination of Initiatives - consider planned technology changes, finance transformation, major transactions, and other related initiatives with an eye towards efficiency and synergy
• Roadmap to success - plan in advance to achieve a cost-effective and sustainable implementation
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 20
Best Practices & Lessons LearnedDealing with the Challenge of IFRS Adoption
Detail Level
• Assessments — Have we identified and prioritized areas of impact and determined long lead-time items? Have we evaluated implications for planned or possible future transactions?
• Statutory Reporting — if multinational, where are we already using IFRS and how has it been applied? Where else will we / can we use IFRS?
• General Financial Reporting – Have we adequately identified our information and reporting needs? Have we aligned them with other reporting requirements? How are we preparing the market and managing expectations?
• IFRS Workshop — Have we discussed impacts with key members of Management? The Board? The Audit Committee?
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 21
Best Practices & Lessons LearnedDealing with the Challenge of IFRS Adoption
Detail Level
• Tax — Have we adequately assessed all tax impacts?
• Process and Systems – Have we evaluated our short and long-term process and system requirements for IFRS? How should our internal controls be enhanced in response to IFRS changes (e.g., new financial reporting risks, spreadsheets)?
• Resources — Have we developed internal and external resource estimates? Have we initiated internal training and awareness programs? Have we coordinated sufficiently with external specialists – auditors, actuaries, valuation experts? What are our longer-term resource needs post implementation?
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 22
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Case Study – IFRS Convergence in Brazil Convergence Snapshot
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 26
Statutory Accounting
• Law 11.638 requires that large private entities (Assets > R$300 million or Revenues > R$240 million) are required to prepare annual financial statements using Brazilian statutory accounting practices (contained in Law 6.404/76 and amended by Law 11.638) and are required to have their financial statements audited annually
• Accounting Principles Committee (Comitê de Pronunciamentos Contabeis – CPC) charged with re-writing Brazilian accounting standards in accordance with IFRS (convergence) and developed a phased workplan beginning in 2008
• CPC version of IFRS for SME´s issued and effective for 2009
Tax
• Law 11,941/09 introduced a Transitional Tax Regime (RTT) and will remain in force until the publication of a law that treats the tax effects of new accounting methods and criteria - Law 11.638 – goal is “fiscal neutrality”
• Tax bases under RTT use 2007 statutory accounting methods
Listed Companies
• Listed companies are required to report consolidated financial statements in accordance with IFRS beginning in 2010
Financial Institutions
• Financial institutions regulated by BACEN and insurance companies regulated by SUSESP have similar 2010 IFRS mandates for their consolidated financial statement requirements – however some exceptions (e.g., comparability)
Case Study – IFRS Convergence in Brazil CPC vs. IFRS Standards
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 27
CPC Phase I (2008) CPC Phase 2 – Major Convergence (2009/2010)
Topic CPC IFRS Topic CPC IFRS Topic CPC IFRS
Structural FrameworkStructural Framework - Complement
Agriculture CPC 29 IAS 41
Impairment of Assets CPC 01 IAS 36 Business Combinations CPC 15 IFRS 3 Revenue CPC 30 IAS 18
Effects of Changes in Foreign Exchange Rates
CPC 02 IAS 21 Inventory CPC 16 IAS 2Non-current Assets held for Sale and Discontinued Operations
CPC 31 IFRS 5
Cash Flow Statements CPC 03 IAS 7 Construction Contracts CPC 17 IAS 11 Income Taxes CPC 32 IAS 12
Intangible Assets CPC 04 IAS 38 Investments in Associates CPC 18 IAS 28 Employee Benefits CPC 33 IAS 19
Related Party Disclosures CPC 05 IAS 24 Interests in Joint Ventures CPC 19 IAS 31Exploration for and Evaluation of Mineral Assets
CPC 34 IFRS 6
Leasing CPC 06 IAS 17 Borrowing Costs CPC 20 IAS 23Consolidated and Separate Financial Statements
CPC 35/36 IAS 27
Government Grants CPC 07 IAS 20 Interim Financial Statements CPC 21 IAS 34First Time Adoption of IFRS (2010) and CPC Phase 2
CPC 37/43 IFRS 1
Transaction Premium and Costs Associated with the Issuance of Debt/Shares
CPC 08 IAS 39 Segment Reporting CPC 22 IFRS 8 Financial Instruments - Phase II CPC 38/39/40
IAS 32/39 IFRS 7
Statement of Value Added CPC 09 N/AAccounting policies, changes, corrections of errors
CPC 23 IAS 8 Earnings per Share (2010) CPC 41 IAS 33
Share-based Payments CPC 10 IFRS 2 Subsequent events CPC 24 IAS 10Financial Reporting in Hyperinflationary Economies (N/A)
CPC 42 IAS 29
Insurance Contracts CPC 11 IFRS 4Provisions, Contingent Liabilities and Contingent Assets
CPC 25 IAS 37 Interpretations (15) ICPC IFRIC
Present Value Measurements CPC 12 N/APresentation of Financial Statements
CPC 26 IAS 1 Orientations (5) OCPC N/A
Initial Application of Law 11,638 Accounting Changes
CPC 13 N/A Fixed Assets CPC 27 IAS 16 Updates/Corrections CPC XX(R) N/A
Financial Instruments - Phase I CPC 14 IAS 32/39 Investment Property CPC 28 IAS 40
Case Study – IFRS Convergence in Brazil Impacts and Challenges
Topic CPC Observations & Challenges
Business Combinations
CPC 15
• Allocation of purchase price and goodwill at FMV• Goodwill no longer amortized• Transaction costs expensed• Recognition and measurement of non-controlling interests• Contingent consideration (e.g., earn-outs) measured at FMV• Negative goodwill recognized in income • Deferred tax implications
Fixed Assets CPC 27ICPC 10
• Revaluation option NOT permitted• Estimated useful lives and residual values updated annually – no longer
acceptable to simply use tax rates• Component depreciation required if material• Capitalized borrowing costs (CPC 20)• Deemed cost encouraged (but optional) on transition • Application of RTT to depreciation
Biological Assets
CPC 29
• All biological assets recorded at FMV with changes to the income statement
• FMV assumptions and models• Potential for earnings volatility
Share-Based Awards
CPC 10
• Awards measured at FMV at grant and recognized to expense (either immediately or over vesting period)
• FMV considerations for complex awards• Recognition (push-down) of parent awards
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 28
Case Study – IFRS Convergence in Brazil Impacts and Challenges
Topic CPC Observations & Challenges
Financial Instruments
CPC38 39 40
• Classification• FMV measurement considerations• Hedge accounting• Disclosure requirements
Leases CPC 6ICPC 4
• Capital/Finance lease classification is required for qualifying leases• Other contracts (production, power purchase agreements) may be
considered leases
Employee Benefits
CPC 33 • Option to charge directly to equity or expense through income
Real EstateICPC 02OCPC 01/03
• Implications for revenue recognition on construction contracts (as work progresses or upon delivery)
• Investment property permitted to be valued at FMV (ICPC 10)
Concession Contracts
ICPC 01OCPC
• Significant impacts to energy, sanitation and highways• Regulatory assets / liabilities
General Financial Reporting
Public Companies
• Statement of Cash Flow• Statement of Value Add • Presentation - classification• First-time adoption – reconciliations / restatements• Segment Reporting• Alignment with new public company annual reporting requirements
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 29
• Developed in partnership with Brazilian Institute of Investor Relations (IBRI)
• Electronic questionnaires made available to public companies with investor relations departments during the period April-June 2011
• Study based on responses from 46 companies supplied by representatives of Investor Relations
SummaryThe Survey
• Transformation of Investor Relations
• Impacts and Benefits of IFRS
• Communicating IFRS with the Market
• IFRS Conversion Efforts
• The future with IFRS
Method Analysis
More information available at www.deloitte.com.br
© 2011 Deloitte Touche Tohmatsu. Todos los derechos son reservados. 31