FASB and IASB Convergence and IFRS forSMEs Finance Leaders Association Breakfast   Barrett Peterson, C.P.A. April 17, 2010...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>HISTORY OF THE CONVERGENCE EFFORT FLA Buffalo Grove Breakfast Meeting...
Convergence – best case <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
Convergence – Worst Case <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
Convergence – a brief history <ul><li>Norwalk Agreement – 2002 </li></ul><ul><li>2006 Memorandum of Understanding [MOU] – ...
Convergence – common themes <ul><li>Contract focus – the assets and liabilities have a conceptual net position </li></ul><...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>CONVERGENCE – CURRENT PROJECTS FLA Buffalo Grove Breakfast Meeting Ap...
Components of the convergence agenda <ul><li>A Conceptual Framework Project:  A proposed Concept Statement regarding the R...
Components of the convergence agenda <ul><li>The Conceptual Framework Project, comprised of four components: </li></ul><ul...
Components of the convergence agenda <ul><li>Reporting Discontinued Operations, 2010 </li></ul><ul><li>Accounting for Fina...
Components of the convergence agenda <ul><li>Financial Statement Presentation, 2011 </li></ul><ul><li>Insurance Contracts,...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>ACCOUNTING FOR LEASES FLA Buffalo Grove Breakfast Meeting April 17, 2...
Accounting for leases - overview <ul><li>Lease defined  a contract  to convey a right to use a specified asset, for a peri...
Accounting for leases - impact <ul><li>Statement of Financial Position </li></ul><ul><ul><li>Significant increase in asset...
Accounting for leases – accounting & disclosures <ul><li>Lessee Disclosure Requirements – the Lease Obligation “Debt” foot...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FINANCIAL STATEMENT PRESENTATION FLA Buffalo Grove Breakfast Meeting ...
Financial statement presentation <ul><li>March 3, 2010: Joint Boards tentatively decide to indicate their preference for r...
Financial statement presentation <ul><li>Extensive changes to financial statement format, components, presentation, and re...
Financial statement presentation - cohesion <ul><li>Align financial statement categories and line items across all financi...
Financial statement presentation – core elements <ul><li>Statement of  Financial Position </li></ul><ul><li>Statement of  ...
Financial statement presentation - format <ul><li>The Statements of Financial Position, Comprehensive Income, and Cash Flo...
Financial statement presentation – Financial Position format  <ul><li>Statement of Financial Position </li></ul><ul><ul><l...
Financial statement presentation – comprehensive income format <ul><li>Present by section – operating, investing, financin...
Financial statement presentation – cash flows statement format <ul><li>Direct method presentation required </li></ul><ul><...
Financial statement presentation – asset and liability analysis <ul><li>A roll-forward analysis of each significant asset ...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>REVENUE RECOGNITION FLA Buffalo Grove Breakfast Meeting April 17, 2010
Revenue recognition - principles <ul><li>Revenue recognition to reflect a contract-based recognition model.  Under a contr...
Revenue recognition scope – excluded contracts <ul><li>Lease contracts </li></ul><ul><li>Insurance contracts </li></ul><ul...
Revenue recognition – basic approach <ul><li>Identify the contract with the customer </li></ul><ul><li>Identify and separa...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>ACCOUNTING FOR FINANCIAL INSTRUMENTS FLA Buffalo Grove Breakfast Meet...
Financial instruments - definition <ul><li>Cash, evidence of an ownership interest in an entity, or a contract that both: ...
Financial instruments - principles <ul><li>Financial Instruments – This Project </li></ul><ul><li>Financial Instruments wi...
Financial instruments – this project <ul><li>Loans </li></ul><ul><li>Securities </li></ul><ul><ul><li>Common stock, prefer...
Accounting for financial instruments – project publications <ul><li>Joint Boards Documents </li></ul><ul><ul><li>Reducing ...
Financial instruments proposed models – classification  of financial assets <ul><li>FASB model </li></ul><ul><li>IASB mode...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF EQUITY FLA Buffalo Grov...
Financial instruments with characteristics of equity scope exclusions  [March 11, 2010 joint meeting] <ul><li>Interests in...
Financial instruments with characteristics of equity <ul><li>Instruments classified as equity in their entirety </li></ul>...
Financial instruments with characteristics of equity <ul><li>Instruments classified as equity in their entirety – continue...
Financial instruments with characteristics of equity <ul><li>Bifurcated Instruments </li></ul><ul><ul><li>The portion of c...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>CONSOLIDATIONS: POLICY AND PROCEDURES FLA Buffalo Grove Breakfast Mee...
Consolidations: policies and procedures <ul><li>Objective </li></ul><ul><ul><li>Provide comprehensive guidance for consoli...
Consolidations: tentative decisions <ul><li>Control though voting rights </li></ul><ul><ul><li>A reporting entity that hol...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FAIR VALUE MEASUREMENT AND DISCLOSURE  FLA Buffalo Grove Breakfast Me...
Fair value measurement and disclosure <ul><li>The overriding goal is to ensure that fair value has the same meaning in U.S...
Fair value measurement – tentative decisions topics <ul><li>Initial Measurement </li></ul><ul><ul><li>Fair value at initia...
Fair value measurement – application to Liabilities <ul><li>General valuation considerations </li></ul><ul><ul><li>Price <...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>STATEMENT OF COMPREHENSIVE INCOME FLA Buffalo Grove Breakfast Meeting...
Statement of comprehensive income – tentative decisions <ul><li>An entity must display total comprehensive income in a con...
Statement of comprehensive income – tentative decisions - continued <ul><li>Affirmed the income tax effect related to each...
<ul><li>FASB AND IASB CONVERGENCE </li></ul><ul><li>PROJECTS </li></ul>REPORTING DISCONTINUED OPERATIONS FLA Buffalo Grove...
REPORTING DISCONTINUED OPERATIONS - MATERIALS <ul><li>Exposure drafts issued by the two boards on September 25, 2008 </li>...
Reporting discontinued operations – tentative decisions <ul><li>Scope </li></ul><ul><ul><li>The FASB decided  to eliminate...
Reporting discontinued operations – tentative decisions - disclosures <ul><li>Disposal of a component of an entity that me...
<ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>INSURANCE CONTRACTS FLA Buffalo Grove Breakfast Meeting April 17, 2010
INSURANCE CONTRACTS – TENTATIVE DECISIONS topics <ul><li>Scope  - Applicable to all insurance  contracts , not just insura...
Insurance contracts – tentative measurement decisions <ul><li>The measurement should assess the customer contract consider...
Insurance contracts – tentative reinsurance accounting <ul><li>The reinsurer: </li></ul><ul><ul><li>Use the same recogniti...
<ul><li>FASB AND IASB CONVERGENCE  </li></ul><ul><li>PROJECTS </li></ul>CONCLUDING MATERIALS FLA Buffalo Grove Breakfast M...
FASB and IASB convergence projects – one observer’s view <ul><li>Diverged </li></ul><ul><ul><li>Financial Instruments </li...
FASB and IASB convergence projects - IASB projects to watch <ul><li>Contingencies – Exposure Draft,  Measuring Liabilities...
FASB and IASB convergence projects - resources <ul><li>www.fasb.org </li></ul><ul><li>www.iasb.org </li></ul><ul><li>Setti...
IFRS OVERVIEW FLA Buffalo Grove Breakfast Meeting April 17, 2010
Why IFRS? <ul><li>Global Efficiency for Multi-National  Companies </li></ul><ul><ul><li>Financial operations and reporting...
Adopting IFRS – Managing Expectations <ul><li>Expectation </li></ul><ul><li>Global set of high quality standards </li></ul...
Transparency in Accounting Standards FLA Buffalo Grove Breakfast Meeting April 17, 2010
IFRS STRUCTURE <ul><li>Governance and Process </li></ul><ul><ul><li>Governance structure </li></ul></ul><ul><ul><li>Due Pr...
IFRS Standards Literature - Preface <ul><li>Describes IASB’s Objectives </li></ul><ul><li>Describes scope of IFRS </li></u...
IFRS Standards Literature - Framework <ul><li>Contains definitions </li></ul><ul><li>Describes recognition criteria and me...
IFRS Standards Literature - Standards <ul><li>Encompasses standards issued by the current IASB [IFRSs]and the predecessor ...
IFRS Standards Literature - Interpretations <ul><li>Authoritative interpretations are issued by the International Financia...
IFRS for SMEs <ul><li>The IASB Standard  International Financial Reporting for Small and Medium-sized Entities  [SMEs] is ...
IFRS for SMEs – Omitted Topics  <ul><li>Earnings per share </li></ul><ul><li>Interim financial reporting </li></ul><ul><li...
IFRS for SMEs – Reduced Options <ul><li>Proportionate consolidation not permitted. </li></ul><ul><li>Revaluation option no...
IFRS for SMEs – Simplified Recognition and Measurement <ul><li>Investments in financial instruments meeting certain criter...
IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full I...
IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full I...
IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full I...
IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full I...
Comparison of Full and SMEs IFRS - Objectives <ul><li>Full IFRS </li></ul><ul><li>Purposes </li></ul><ul><ul><li>Report fi...
Comparison of Full and SMEs IFRS – Required Financial Statements <ul><li>Full IFRS </li></ul><ul><li>Statement of Financia...
Comparison of Full and SMEs IFRS – Financial Instruments <ul><li>Full IFRS </li></ul><ul><li>Four categories of financial ...
Comparison of FULL and SMEs IFRS – Property, Plant, and Equipment <ul><li>Full IFRS </li></ul><ul><li>Accounting policy ch...
Comparison of Full and SMEs IFRS – Investments in Associates and Joint Ventures <ul><li>Full IFRS </li></ul><ul><li>Invest...
Comparison of Full and SMEs IFRS - Intangibles <ul><li>Full IFRS </li></ul><ul><li>Provides an accounting policy choice be...
Comparison of FULL and SMEs IFRS – Defined Benefit Pension Plans <ul><li>Full IFRS </li></ul><ul><li>Actuarial gains and l...
Comparison of Full and SMEs IFRS – Income Taxes <ul><li>Full IFRS </li></ul><ul><li>A deferred tax asset is recognized onl...
Comparison of Full and SMEs for IFRS – Business Combinations <ul><li>Full IFRS </li></ul><ul><li>Transaction costs are exc...
Next Steps - Preparation for Adoption of IFRS <ul><li>Accounting systems </li></ul><ul><ul><li>Data collection procedures ...
Comparison of FULL and SMEs IFRS – Selected Additional Resources <ul><li>IASB Website:  www.iasb.co.uk </li></ul><ul><li>A...
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Bp Presentation, Fasb And Iasb Convergence, And Ofrs For Sm Es, Finance Leaders Association, April 17, 2010, 20100403

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Overview of FASB/IASB convergence projects andf IFRS SME standard, March, 2010

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  • The development of this Standard, over a couple of years, has contained, then dropped, a description of “small and Medium” entities as those with annual revenues under $25 [or$50] Million, assets under $12.5 million, and fewer than 50 employees. 04/17/10
  • Under US GAAP the terms ‘Statement of Financial Position” and “Balance Sheet” are both acceptable. 04/17/10
  • 04/17/10
  • Bp Presentation, Fasb And Iasb Convergence, And Ofrs For Sm Es, Finance Leaders Association, April 17, 2010, 20100403

    1. 1. FASB and IASB Convergence and IFRS forSMEs Finance Leaders Association Breakfast Barrett Peterson, C.P.A. April 17, 2010 Manager, Accounting Standards, Procedures, and Analysis , TTX [email_address] www.linkedin.com/in/barrettpeterson
    2. 2. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>HISTORY OF THE CONVERGENCE EFFORT FLA Buffalo Grove Breakfast Meeting April 17, 2010
    3. 3. Convergence – best case <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    4. 4. Convergence – Worst Case <ul><li>CONVERGENCE – A BRIEF HISTORY </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    5. 5. Convergence – a brief history <ul><li>Norwalk Agreement – 2002 </li></ul><ul><li>2006 Memorandum of Understanding [MOU] – A Roadmap for Convergence: 2006-2008 </li></ul><ul><li>2008 Memorandum of Understanding [MOU] – Progress Report and Timetable for Completion </li></ul><ul><li>2009 (November 5) Update to Memorandum of Understanding and Reaffirmation of Memorandum of Understanding [MOU] </li></ul><ul><li>2010 SEC includes the status of convergence as a consideration in 2011 “roadmap” decision </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    6. 6. Convergence – common themes <ul><li>Contract focus – the assets and liabilities have a conceptual net position </li></ul><ul><li>Assets [rights] and liabilities [performance obligations] a core focus, plus cash flows [much less emphasis on income statement] </li></ul><ul><li>Revenue reflects the increase in the net contract position, either by increases in consideration or satisfaction of performance obligations </li></ul><ul><li>FASB much more focused on fair value measurement; IASB greater use of carrying value/amortized cost </li></ul><ul><li>FASB “recycles” OCI; IASB does not in all cases </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    7. 7. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>CONVERGENCE – CURRENT PROJECTS FLA Buffalo Grove Breakfast Meeting April 17, 2010
    8. 8. Components of the convergence agenda <ul><li>A Conceptual Framework Project: A proposed Concept Statement regarding the Reporting Entity issued March 11, 2010 </li></ul><ul><li>Fourteen Standards Projects, three of which are inactive </li></ul><ul><li>A Research Project, on Financial Instruments: Derecognition </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    9. 9. Components of the convergence agenda <ul><li>The Conceptual Framework Project, comprised of four components: </li></ul><ul><ul><li>Objective and Quality Characteristics </li></ul></ul><ul><ul><li>Reporting Entity: FASB issues a Proposed Statement of Financial Accounting Concepts on March 11, 2010 </li></ul></ul><ul><ul><li>Measurement </li></ul></ul><ul><ul><li>Elements and recognition </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    10. 10. Components of the convergence agenda <ul><li>Reporting Discontinued Operations, 2010 </li></ul><ul><li>Accounting for Financial Instruments, 2010 </li></ul><ul><li>Fair Value Measurement, 2010 </li></ul><ul><li>Statement of Comprehensive Income, 2010 </li></ul><ul><li>Consolidations: Policy and Procedures, 2010 </li></ul><ul><li>Emissions Trading Schemes, 2011 </li></ul><ul><li>Financial Instruments With Characteristics of Equity, 2011 </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    11. 11. Components of the convergence agenda <ul><li>Financial Statement Presentation, 2011 </li></ul><ul><li>Insurance Contracts, 2011 </li></ul><ul><li>Leases, 2011 </li></ul><ul><li>Revenue Recognition, 2011 </li></ul><ul><li>Earnings per Share [not active] </li></ul><ul><li>Income Taxes [not active] </li></ul><ul><li>Postretirement Benefit Obligations including Pensions (phase 2) [not active] </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    12. 12. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>ACCOUNTING FOR LEASES FLA Buffalo Grove Breakfast Meeting April 17, 2010
    13. 13. Accounting for leases - overview <ul><li>Lease defined a contract to convey a right to use a specified asset, for a period of time, for consideration </li></ul><ul><li>Certain items excluded </li></ul><ul><ul><li>Leases of intangible assets </li></ul></ul><ul><ul><li>Leases to explore for natural resources </li></ul></ul><ul><ul><li>Leases of biological assets </li></ul></ul><ul><ul><li>Contracts that represent a purchase (lessee) or sale (lessor) of the underlying asset </li></ul></ul><ul><li>Leases outstanding at time of adoption recorded as an obligation and related asset [lessee], or a receivable and related performance obligation [lessor] </li></ul><ul><li>Recognition when the contract is signed, and presented net in financial statements until delivery </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    14. 14. Accounting for leases - impact <ul><li>Statement of Financial Position </li></ul><ul><ul><li>Significant increase in assets </li></ul></ul><ul><ul><li>Significant increase in debt obligations </li></ul></ul><ul><li>Income Statement – timing of expense recognition </li></ul><ul><ul><li>Depreciation plus interest expense under new standard </li></ul></ul><ul><ul><li>Lease rental expense is straight line amounts as lease </li></ul></ul><ul><ul><li>Amortization life vs. similar asset’s depreciable life </li></ul></ul><ul><li>Financial ratios </li></ul><ul><ul><li>Capitalization ratios </li></ul></ul><ul><ul><li>Interest coverage calculation </li></ul></ul><ul><li>Covenant requirements – debt agreements, leases, and other financial instruments terms </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    15. 15. Accounting for leases – accounting & disclosures <ul><li>Lessee Disclosure Requirements – the Lease Obligation “Debt” footnote </li></ul><ul><ul><li>Description of leasing activities, including disaggregated data by nature or function </li></ul></ul><ul><ul><li>Use, and amounts reflected, for simplified accounting for short-term leases </li></ul></ul><ul><ul><li>Disclosure of any sale and leaseback transactions </li></ul></ul><ul><ul><li>A maturity analysis of the gross obligation to pay rentals, with a reconciliation of the gross obligation to obligation amounts presented in the financial statements </li></ul></ul><ul><ul><li>A reconciliation between opening and closing balances for its right-of-use assets and its obligation to pay rentals </li></ul></ul><ul><ul><li>A narrative description of its assumptions and estimates on the amortization method used, options, contingent rentals, residual value guarantees, and the discount rate used </li></ul></ul><ul><li>Lessor Transitional Provisions </li></ul><ul><ul><li>Recognize and measure all outstanding leases at initial application using a simplified retrospective approach at the present value of remaining lease payments, discounted at the original rate the lessor is charging the lessee. The performance obligation should be measured on the same basis as the receivable. </li></ul></ul><ul><ul><li>IFRS users should reinstate previously derecognized lease assets at depreciated cost, adjusted for impairments and revaluations. </li></ul></ul><ul><li>Measurement and Initial Recognition – to be done at the inception of the lease </li></ul><ul><li>Lessor Accounting for Residual Value Guarantees </li></ul><ul><ul><li>Include amounts payable in the lease receivable if they can be measured reliably </li></ul></ul><ul><ul><li>Measure the lease receivable using the expected outcome technique </li></ul></ul><ul><ul><li>Reassess the carrying amount of the receivable at each reporting date for new facts or circumstances materially changing the receivable </li></ul></ul><ul><ul><li>Changes to the receivable from changes in residual value guarantees treated as an adjustment to the lessor’s receivable and related performance obligation liability </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    16. 16. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FINANCIAL STATEMENT PRESENTATION FLA Buffalo Grove Breakfast Meeting April 17, 2010
    17. 17. Financial statement presentation <ul><li>March 3, 2010: Joint Boards tentatively decide to indicate their preference for requiring an entity to adopt these changes on a full retrospective basis </li></ul><ul><li>Format designed around sections and categories which are similar – but not identical to - current cash flows statement sections </li></ul><ul><li>Focus substantially emphasizes the sections, and some categories, causing the balance sheet to not balance </li></ul><ul><li>Some emerging difference between FASB and IASB requirements </li></ul><ul><li>from scope </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    18. 18. Financial statement presentation <ul><li>Extensive changes to financial statement format, components, presentation, and related disclosures, based on three core objectives: </li></ul><ul><ul><li>Cohesive presentation of financial information </li></ul></ul><ul><ul><li>Disaggregation of information to make it useful to enable investors to assess the amount, timing, and uncertainty of future cash flows </li></ul></ul><ul><ul><li>Present information to permit users to evaluate liquidity and financial flexibility of the entity to assess its ability to meet financial commitments and invest in business opportunities </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    19. 19. Financial statement presentation - cohesion <ul><li>Align financial statement categories and line items across all financial statements </li></ul><ul><li>Employ a presentation approach based on how management views and directs the business </li></ul><ul><li>Present information about discontinued operations separate from continuing business activities </li></ul><ul><li>Classify assets and liabilities to best reflect how they are used by the entity </li></ul><ul><li>Present meaningful subtotals </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    20. 20. Financial statement presentation – core elements <ul><li>Statement of Financial Position </li></ul><ul><li>Statement of Comprehensive Income , separated into profit and loss/net income and other comprehensive income </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Statement of Changes in Equity </li></ul><ul><li>An analysis presenting a “roll-forward” of all significant asset and liability line items </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    21. 21. Financial statement presentation - format <ul><li>The Statements of Financial Position, Comprehensive Income, and Cash Flows to share a common set of categories: </li></ul><ul><ul><li>Business Section </li></ul></ul><ul><ul><ul><li>Operating Category – the entity’s core purpose, including capital expenditures </li></ul></ul></ul><ul><ul><ul><li>Investing Category – not related to core business, such as available-for-sale securities held by a manufacturer </li></ul></ul></ul><ul><ul><ul><li>Financing arising from operating activities </li></ul></ul></ul><ul><ul><li>Financing Section – how the entity is funded </li></ul></ul><ul><ul><li>Income Taxes </li></ul></ul><ul><ul><li>Discontinued Operations – net of taxes </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Example: FASB Handout </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    22. 22. Financial statement presentation – Financial Position format <ul><li>Statement of Financial Position </li></ul><ul><ul><li>Assets and Liabilities grouped by category – business [operating and investing], financing, income taxes, and discontinued operations. </li></ul></ul><ul><ul><li>Totals by category </li></ul></ul><ul><ul><li>Total Assets and Total of Liabilities and Equity reported, but does not “foot” to “balance” </li></ul></ul><ul><ul><li>Recommend sequence of presentation within section/category by liquidity if appropriate </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    23. 23. Financial statement presentation – comprehensive income format <ul><li>Present by section – operating, investing, financing, income taxes, discontinued operations </li></ul><ul><li>Disaggregate each section by function, or by nature if more informative </li></ul><ul><li>Disaggregate functional amounts by nature to the extent this will enhance usefulness in predicting the entity’s future cash flow </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    24. 24. Financial statement presentation – cash flows statement format <ul><li>Direct method presentation required </li></ul><ul><li>Operating cash flows different – </li></ul><ul><ul><li>Current operating cash flows </li></ul></ul><ul><ul><li>Capital expenditures included </li></ul></ul><ul><ul><li>Investing activities included </li></ul></ul><ul><li>Financing section – Entity debt and equity </li></ul><ul><li>Income taxes section now a component </li></ul><ul><li>Discontinued operations now a component </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    25. 25. Financial statement presentation – asset and liability analysis <ul><li>A roll-forward analysis of each significant asset and liability line item is required, and must distinguish [columns]: </li></ul><ul><ul><li>Changes due to cash inflows and outflows </li></ul></ul><ul><ul><li>Changes from repetitive and routine noncash accruals </li></ul></ul><ul><ul><li>Changes from noncash transactions or events that are nonroutine or nonrepetitive [acquisition or disposition of a business, for example] </li></ul></ul><ul><ul><li>Changes resulting from accounting allocations [depreciation, for example] </li></ul></ul><ul><ul><li>Changes resulting from accounting provisions/reserves [bad debts, obsolete inventory, for example] </li></ul></ul><ul><ul><li>Changes resulting from remeasurements </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    26. 26. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>REVENUE RECOGNITION FLA Buffalo Grove Breakfast Meeting April 17, 2010
    27. 27. Revenue recognition - principles <ul><li>Revenue recognition to reflect a contract-based recognition model. Under a contract, the company </li></ul><ul><ul><li>Obtains rights to consideration (payment) from customers </li></ul></ul><ul><ul><li>Assumes ”performance obligations” to provide goods and services to the customer </li></ul></ul><ul><li>Revenue is recognized when performance obligations are satisfied </li></ul><ul><li>Revenue amounts for each performance obligation based on an allocation of the customer’s consideration </li></ul><ul><li>Performance obligations to be remeasured if subsequently evaluated as “onerous” </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    28. 28. Revenue recognition scope – excluded contracts <ul><li>Lease contracts </li></ul><ul><li>Insurance contracts </li></ul><ul><li>Financial instrument contracts </li></ul><ul><li>Guarantees (other than product warranties) within the scope of other standards </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    29. 29. Revenue recognition – basic approach <ul><li>Identify the contract with the customer </li></ul><ul><li>Identify and separate performance obligations in the contract </li></ul><ul><li>Determine and, if appropriate, allocate the transaction consideration </li></ul><ul><li>Recognize revenue as performance obligations are satisfied </li></ul><ul><li>Record amortizable asset for contract fulfillment costs, subject to impairment, expensed as performance obligations are satisfied </li></ul><ul><li>Expense contract acquisition costs, costs related to satisfied performance obligations, and abnormal amounts of wasted labor, material or other fulfillment costs </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    30. 30. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>ACCOUNTING FOR FINANCIAL INSTRUMENTS FLA Buffalo Grove Breakfast Meeting April 17, 2010
    31. 31. Financial instruments - definition <ul><li>Cash, evidence of an ownership interest in an entity, or a contract that both: </li></ul><ul><ul><li>Imposes on one entity a contractual obligation either: </li></ul></ul><ul><ul><ul><li>To deliver cash or another financial instrument to a second entity </li></ul></ul></ul><ul><ul><ul><li>To exchange other financial instruments on potentially unfavorable terms with the second entity </li></ul></ul></ul><ul><ul><li>Conveys to that second entity a contractual right either: </li></ul></ul><ul><ul><ul><li>To receive cash or another financial instrument from the first entity </li></ul></ul></ul><ul><ul><ul><li>To exchange other financial instruments on potentially favorable terms with the first entity </li></ul></ul></ul><ul><li>This recursive definition requires a chain of contractual obligations that ends with the delivery of cash or ownership interest in an entity </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    32. 32. Financial instruments - principles <ul><li>Financial Instruments – This Project </li></ul><ul><li>Financial Instruments with Characteristics of Equity – separate project </li></ul><ul><li>Share Based Payments – existing, separate guidance </li></ul><ul><li>Leases – separate project </li></ul><ul><li>Investments in Affiliates – existing, separate guidance </li></ul><ul><li>Benefits Liabilities – existing, separate guidance </li></ul><ul><ul><li>Pensions </li></ul></ul><ul><ul><li>Other Post-retirement </li></ul></ul><ul><ul><li>OPEB </li></ul></ul><ul><ul><li>Compensated Absences </li></ul></ul><ul><li>Insurance Contracts – separate project </li></ul><ul><li>Fair Value – Recognition, Measurement, Disclosures, to the extent applicable to financial instruments – related separate project </li></ul><ul><li>FASB [only] Project: Disclosures about Credit Quality [Finance Receivables] and Allowance for Credit Losses </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    33. 33. Financial instruments – this project <ul><li>Loans </li></ul><ul><li>Securities </li></ul><ul><ul><li>Common stock, preferred stock, debt instruments </li></ul></ul><ul><ul><li>Mutual fund shares </li></ul></ul><ul><ul><li>Investment entities other than mutual funds </li></ul></ul><ul><li>Puts, Calls, Forward Contracts, etc. </li></ul><ul><li>Derivative Contracts </li></ul><ul><li>Hedging Agreements </li></ul><ul><li>Credit Default Swaps </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    34. 34. Accounting for financial instruments – project publications <ul><li>Joint Boards Documents </li></ul><ul><ul><li>Reducing Complexity Discussion Paper, and related Comment Letters and Comment Letter Summary </li></ul></ul><ul><ul><li>Comparison of FASB and IASB models (as of November 2009) </li></ul></ul><ul><li>FASB Documents </li></ul><ul><ul><li>Accounting for Hedging Activities Exposure Draft, and related Hedging Activities Comment Letters and Comment Letter Summary </li></ul></ul><ul><ul><li>Tentative decisions on March 31, regarding impairments, disclosures </li></ul></ul><ul><li>IASB Documents </li></ul><ul><ul><li>IFRS 9: Financial Instruments – dealing with classification and measurement – issued November 12, 2009 </li></ul></ul><ul><ul><li>Exposure Draft, Amortised Cost and Impairment, issued November 5, 2009 with a comment period ending June 30, 2010 </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    35. 35. Financial instruments proposed models – classification of financial assets <ul><li>FASB model </li></ul><ul><li>IASB model </li></ul><ul><li>Fair Value through Net Income (FV-NI) </li></ul><ul><li>Fair value through other comprehensive income </li></ul><ul><li>Amortized cost </li></ul><ul><li>Default Classification </li></ul><ul><ul><li>All instruments measured at fair value with changes in fair value recognized in net income </li></ul></ul><ul><ul><li>Certain changes permitted in OCI </li></ul></ul><ul><li>Fair Value through Net Income (FV-NI) </li></ul><ul><li>Fair value through other comprehensive income (FV-OCI) (limited option) </li></ul><ul><li>Amortised cost </li></ul><ul><li>Default Classification - none </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    36. 36. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF EQUITY FLA Buffalo Grove Breakfast Meeting April 17, 2010
    37. 37. Financial instruments with characteristics of equity scope exclusions [March 11, 2010 joint meeting] <ul><li>Interests in subsidiaries, associates, or joint ventures accounted for under other standards </li></ul><ul><li>Employers’ rights and obligations under employee benefit plans </li></ul><ul><li>Insurance contracts accounted for under other standards </li></ul><ul><li>Share based payment awards accounted for under IFRS 2 [Share-based Payment] and ASC Topic 718 [compensation – Stock Compensation] </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    38. 38. Financial instruments with characteristics of equity <ul><li>Instruments classified as equity in their entirety </li></ul><ul><ul><li>Perpetual instruments – common, preferred/preference </li></ul></ul><ul><ul><li>Preferred shares required to be converted into a specified number of common shares on a specified date or on the occurrence of an event certain to occur </li></ul></ul><ul><ul><li>Mandatorily redeemable and puttable instruments that either </li></ul></ul><ul><ul><ul><li>Require , or permit the holder to require, redemption to allow an an existing group of shareholders, partners, or other participants to maintain control when one of them chooses to withdraw </li></ul></ul></ul><ul><ul><ul><li>Provide that the holder must own the instrument to engage in transactions with the entity or otherwise participate in entity activities, and the instrument’s terms require, or permit the holder or issuer to require, redemption when the holder ceases to engage in transactions or otherwise participate </li></ul></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    39. 39. Financial instruments with characteristics of equity <ul><li>Instruments classified as equity in their entirety – continued </li></ul><ul><ul><li>Contracts that require or may require an entity to issue a specified number of its own perpetual equity instrument in exchange for a specified price [call options, forward contracts to issue shares, rights issues, and purchase warrants] </li></ul></ul><ul><ul><li>Instruments that require an entity to issue a specified number of its own perpetual shares for no further compensation [prepaid forward contact] </li></ul></ul><ul><ul><li>A contract that requires an entity to issue for a specified price, or no future consideration, a specified number of mandatorily redeemable or puttable instruments that will be equity in their entirety when issued </li></ul></ul><ul><ul><li>A contract that requires an entity to issue for a specified price, or no future consideration, a specified number of derivatives that will require the entity to issue a specified number of instruments that will be equity in their entirety when issued. </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    40. 40. Financial instruments with characteristics of equity <ul><li>Bifurcated Instruments </li></ul><ul><ul><li>The portion of convertible debt instruments represented by the option of the holder to convert into a specified number of instruments that will be equity in their entirety when issued should be classified as equity </li></ul></ul><ul><ul><li>Puttable shares that are not classified as equity in their entirety should be separated into liability and equity </li></ul></ul><ul><li>Classified as liabilities [or assets] </li></ul><ul><ul><li>Contracts that require an entity to repurchase its own shares on a specified date or on the occurrence of an event that is certain to occur should be separated into a liability for the amount to be paid and an offsetting debit to equity </li></ul></ul><ul><ul><li>Preferred shares convertible into a variable number of common shares at the holders’ option [usually equity under current US GAAP] </li></ul></ul><ul><ul><li>A freestanding written put option should be presented net as a liability in its entirety </li></ul></ul><ul><ul><li>The portion of convertible debt not classified as equity </li></ul></ul><ul><ul><li>All other mandatorily redeemable instruments </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    41. 41. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>CONSOLIDATIONS: POLICY AND PROCEDURES FLA Buffalo Grove Breakfast Meeting April 17, 2010
    42. 42. Consolidations: policies and procedures <ul><li>Objective </li></ul><ul><ul><li>Provide comprehensive guidance for consolidation of all entities, including entities controlled by voting or similar interests. </li></ul></ul><ul><li>Definition of control </li></ul><ul><ul><li>A reporting entity controls another entity when the reporting entity has the power to direct the activities of that other entity to generate returns for the reporting entity. </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    43. 43. Consolidations: tentative decisions <ul><li>Control though voting rights </li></ul><ul><ul><li>A reporting entity that holds more than half of the voting rights in an entity meets the power element of the control definition, in the absence of other arrangements or circumstances </li></ul></ul><ul><li>Control Otherwise </li></ul><ul><ul><li>A reporting entity with less that half of the voting rights in an entity that has the legal or contractual ability to direct those activities meets the power element of the control definition </li></ul></ul><ul><li>Options and convertible instruments </li></ul><ul><ul><li>A reporting entity should assess all the facts and circumstances associated with options or convertible instruments when assessing whether it has the power through voting rights to direct the activities of an entity that significantly affect the returns </li></ul></ul><ul><li>Agency relationships (including kick-out rights) </li></ul><ul><ul><li>No decisions have yet been reached </li></ul></ul><ul><ul><li>Principal vs. agent </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    44. 44. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>FAIR VALUE MEASUREMENT AND DISCLOSURE FLA Buffalo Grove Breakfast Meeting April 17, 2010
    45. 45. Fair value measurement and disclosure <ul><li>The overriding goal is to ensure that fair value has the same meaning in U.S. GAAP and IFRS </li></ul><ul><li>Establish how to calculate fair value, not when </li></ul><ul><li>Key documents </li></ul><ul><li>FASB Statement 157 [issued 2006], now ASC Topic 820 </li></ul><ul><li>ISAB Exposure Draft, issued May, 2009 which is largely consistent with U.S. GAAP, including the fair value input hierarchy [3 level] </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    46. 46. Fair value measurement – tentative decisions topics <ul><li>Initial Measurement </li></ul><ul><ul><li>Fair value at initial recognition </li></ul></ul><ul><ul><li>Recognition of day one gains or losses </li></ul></ul><ul><li>Subsequent Measurement </li></ul><ul><ul><li>Fair value defined as an exit price </li></ul></ul><ul><ul><li>The Principal (or Most Advantageous) Market </li></ul></ul><ul><ul><li>Market Participants </li></ul></ul><ul><ul><li>Application to Assets – consider highest and best use [“in use” valuation premise] for nonfinancial assets only; not applicable to liabilities or financial assets </li></ul></ul><ul><ul><li>Financial Assets in a Market That Is Not Active </li></ul></ul><ul><ul><li>Application to Liabilities </li></ul></ul><ul><ul><li>The Asset or Liability subject to the standard </li></ul></ul><ul><ul><li>Valuation Techniques </li></ul></ul><ul><ul><li>Level 2 Inputs </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    47. 47. Fair value measurement – application to Liabilities <ul><li>General valuation considerations </li></ul><ul><ul><li>Price </li></ul></ul><ul><ul><ul><li>Quoted price of an identical liability instrument when traded as an asset </li></ul></ul></ul><ul><ul><ul><li>Quoted price for similar liability instruments when traded as an asset </li></ul></ul></ul><ul><ul><ul><li>An income approach [present value], or market approach [an “entrance price” for a new identical instrument] </li></ul></ul></ul><ul><ul><li>Market participant transferee has the knowledge and the ability to fulfill an identical obligation </li></ul></ul><ul><li>Nonperformance risk </li></ul><ul><ul><li>Included in the determination of fair value </li></ul></ul><ul><ul><li>Will clarify what, in addition to credit risk, comprises nonperformance risk </li></ul></ul><ul><li>Restrictions on the transfer of a liability - no additional adjustment if considered in other inputs </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    48. 48. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>STATEMENT OF COMPREHENSIVE INCOME FLA Buffalo Grove Breakfast Meeting April 17, 2010
    49. 49. Statement of comprehensive income – tentative decisions <ul><li>An entity must display total comprehensive income in a continuous statement of comprehensive income </li></ul><ul><li>A continuous display of comprehensive income must display two sections – profit and loss or net income, and comprehensive income </li></ul><ul><li>The components of each section must be reported consistently </li></ul><ul><li>Affirms the existing option to present each component net of related income taxes, or before income taxes with a section for aggregated income tax effects presented separately </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    50. 50. Statement of comprehensive income – tentative decisions - continued <ul><li>Affirmed the income tax effect related to each component of comprehensive income may be displayed on the face of the statement, or in the notes to the financial statements </li></ul><ul><li>Decided not to change guidance regarding items required to be presented contained in other standards </li></ul><ul><li>The FASB affirmed that reclassification between OCI and net income should be reported in the same level of detail as originally reported </li></ul><ul><li>The IASB affirmed that the components of OCI that are not reclassified upon derecognition should be presented together, and the components that reclassified upon derecognition should be presented together </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    51. 51. <ul><li>FASB AND IASB CONVERGENCE </li></ul><ul><li>PROJECTS </li></ul>REPORTING DISCONTINUED OPERATIONS FLA Buffalo Grove Breakfast Meeting April 17, 2010
    52. 52. REPORTING DISCONTINUED OPERATIONS - MATERIALS <ul><li>Exposure drafts issued by the two boards on September 25, 2008 </li></ul><ul><ul><li>FASB: Amending the Criteria for Reporting a Discontinued Operation </li></ul></ul><ul><ul><li>IASB: Discontinued Operations </li></ul></ul><ul><li>Existing literature </li></ul><ul><ul><li>FASB ASC Topic 205-20: Presentation – Discontinued Operations </li></ul></ul><ul><ul><li>IFRS 5, Non-current Assets Held for Sale and Discontinued Operations </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    53. 53. Reporting discontinued operations – tentative decisions <ul><li>Scope </li></ul><ul><ul><li>The FASB decided to eliminate the existing scope exceptions to Subtopic 205-20 [identified in 360-10-15-5] which include certain intangibles, equity method financial instruments, deferred tax assets, and others </li></ul></ul><ul><li>Definition of a discontinued operation: a component that has been disposed, or classified as held-for-sale, and </li></ul><ul><ul><li>Represents a separate major line of business or geographical area of operations </li></ul></ul><ul><ul><li>Is part of a single plan of disposal </li></ul></ul><ul><ul><li>Is a business that meets the criteria to be classified as held for sale on acquisition </li></ul></ul><ul><li>Presentation – presented in a separate section on the face of an entity’s financial statements </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    54. 54. Reporting discontinued operations – tentative decisions - disclosures <ul><li>Disposal of a component of an entity that meets the definition of a discontinued operation </li></ul><ul><ul><li>Profit or loss, plus major income and expense items, including impairments, depreciation, interest, and amortization </li></ul></ul><ul><ul><li>The major classes of cash flow (operating, investing, and financing) </li></ul></ul><ul><ul><li>Reconciliation of the major classes of assets and liabilities classified as held for sale in the notes to total assets and liabilities classified as held for sale presented separately on the face of the statement of financial position </li></ul></ul><ul><ul><li>A reconciliation of the profit and loss presented in the notes to the after-tax profit or loss from discontinued operations in the statement of comprehensive income </li></ul></ul><ul><li>Disposal of a component of an entity that does not meet the definition of a discontinued operation </li></ul><ul><ul><li>A somewhat reduced version of the disclosures for disposals that meet the definition </li></ul></ul><ul><li>Disposals of long-lived assets that are not components of an entity </li></ul><ul><ul><li>Amounts not separately in the statements of financial position, or a reconciliation </li></ul></ul><ul><li>Continuing involvement and continuing cash flows </li></ul><ul><ul><li>The nature of the continuing activities; the expected period of continued involvement; the amount of the continuing cash flows; amounts in continuing operations after disposal that had previously been eliminated as intra-entity transactions </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    55. 55. <ul><li>FASB AND IASB CONVERGENCE PROJECTS </li></ul>INSURANCE CONTRACTS FLA Buffalo Grove Breakfast Meeting April 17, 2010
    56. 56. INSURANCE CONTRACTS – TENTATIVE DECISIONS topics <ul><li>Scope - Applicable to all insurance contracts , not just insurance companies </li></ul><ul><li>Recognition </li></ul><ul><li>Measurement </li></ul><ul><ul><li>Measurement Objective </li></ul></ul><ul><ul><li>Risk Adjustment [IASB, separate; FASB, included in the composite residual margin] </li></ul></ul><ul><ul><li>Non-performance by the Insurer </li></ul></ul><ul><ul><li>Day 1 Differences </li></ul></ul><ul><ul><li>Unbundling </li></ul></ul><ul><ul><li>Deposit Floor </li></ul></ul><ul><ul><li>Policyholder Behavior </li></ul></ul><ul><ul><li>Participating Features [IASB, include in measurement; FASB recognize a liability] </li></ul></ul><ul><ul><li>Residual margin [expected premiums less expected claims and a risk adjustment] determined at inception reflected on basis of time, or expected benefits and claims if different from ratable over time </li></ul></ul><ul><li>Derecognition </li></ul><ul><li>Reinsurance </li></ul><ul><li>Acquisition Costs – Expense when incurred, unlike US GAAP </li></ul><ul><li>Presentation </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    57. 57. Insurance contracts – tentative measurement decisions <ul><li>The measurement should assess the customer contract considering the elements below to measure the combination of rights and obligations arising from an insurance contract, which should be updated each reporting period: </li></ul><ul><ul><li>The unbiased, probability-weighted average of future cash flows expected to arise as the insurer fulfills the obligation </li></ul></ul><ul><ul><li>Incorporation of the time value of money </li></ul></ul><ul><ul><li>A risk adjustment for the effects of uncertainty about the amount and timing of future cash flows, including the uncertainty that arises from having to fulfill the net obligation arising from the insurance contract </li></ul></ul><ul><ul><li>An amount that eliminates any gain at inception of the contract </li></ul></ul><ul><ul><li>A component of the contract that is not interdependent with other contract components should be unbundled </li></ul></ul><ul><ul><li>A deposit floor should not be used, although policyholder withdrawals would be including in estimating the expected contractual cash flows </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    58. 58. Insurance contracts – tentative reinsurance accounting <ul><li>The reinsurer: </li></ul><ul><ul><li>Use the same recognition and measurement approach for the reinsurance contracts is issues as all other insurers use for the insurance contract they have issued </li></ul></ul><ul><ul><li>Should charge the income statement ceding commissions for proportional reinsurance contracts in a manner consistent with the treatment of acquisition costs </li></ul></ul><ul><li>The cedent [entity reinsuring its contract obligations]: </li></ul><ul><ul><li>Recognize and measure its reinsurance asset using the same recognition and measurement approach it uses for the reinsured portion of the underlying insurance contracts is has issued </li></ul></ul><ul><ul><li>Should not derecognize the related direct insurance liabilities unless the obligation specified in the insurance contract is (legally) discharged, cancelled, or expired </li></ul></ul><ul><ul><li>Should not offset reinsurance balances against related direct reinsurance balances (balance sheet and income statement) unless legal requirements for offsetting are met </li></ul></ul><ul><ul><li>Should credit to the income statement ceding commissions for proportional reinsurance contracts in a manner consistent with the treatment of acquisition costs </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    59. 59. <ul><li>FASB AND IASB CONVERGENCE </li></ul><ul><li>PROJECTS </li></ul>CONCLUDING MATERIALS FLA Buffalo Grove Breakfast Meeting April 17, 2010
    60. 60. FASB and IASB convergence projects – one observer’s view <ul><li>Diverged </li></ul><ul><ul><li>Financial Instruments </li></ul></ul><ul><li>Semi – converged </li></ul><ul><ul><li>Fair Value Measurements </li></ul></ul><ul><ul><li>OCI recycling </li></ul></ul><ul><li>Converged </li></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>Revenue Recognition </li></ul></ul><ul><ul><li>Consolidation </li></ul></ul><ul><ul><li>Financial Statement Presentation </li></ul></ul><ul><ul><li>Statement of Comprehensive Income – except OCI recycling </li></ul></ul><ul><ul><li>Financial Instruments With Characteristics of Equity </li></ul></ul><ul><ul><li>Discontinued Operations </li></ul></ul><ul><ul><li>Insurance Contracts </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    61. 61. FASB and IASB convergence projects - IASB projects to watch <ul><li>Contingencies – Exposure Draft, Measuring Liabilities in IAS 37 , Issued January 2010 </li></ul><ul><ul><li>Recognition threshold – existence of obligation </li></ul></ul><ul><ul><li>Measurement – probability weighted </li></ul></ul><ul><li>Post-employment Benefits </li></ul><ul><ul><li>FASB has focused on disclosures recently, IASB on recognition </li></ul></ul><ul><ul><li>Treatment of actuarial gains and losses, including “recycling” of this OCI item </li></ul></ul><ul><ul><li>IASB deliberations regarding “assumed rate of return on plan assets” </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    62. 62. FASB and IASB convergence projects - resources <ul><li>www.fasb.org </li></ul><ul><li>www.iasb.org </li></ul><ul><li>Setting the Standard on www.cfodirect.pwc.com </li></ul><ul><li>www.iasplus.com </li></ul><ul><li>www.KPMGInstitutes.com </li></ul><ul><li>See “Issues” on www.ey.com </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    63. 63. IFRS OVERVIEW FLA Buffalo Grove Breakfast Meeting April 17, 2010
    64. 64. Why IFRS? <ul><li>Global Efficiency for Multi-National Companies </li></ul><ul><ul><li>Financial operations and reporting efficiency </li></ul></ul><ul><ul><li>Reduce risk of errors </li></ul></ul><ul><ul><li>Increased control over financial reporting </li></ul></ul><ul><li>High Quality set of Standards </li></ul><ul><ul><li>Facilitate global financial system </li></ul></ul><ul><ul><li>Common language for global business transactions including joint ventures, outsourcing, financing </li></ul></ul><ul><li>Uniform/Comparable, Transparent </li></ul><ul><ul><li>“ Principles Based” </li></ul></ul><ul><ul><li>Globally consistent and comparable for investors </li></ul></ul><ul><ul><li>Minimize cost of capital </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    65. 65. Adopting IFRS – Managing Expectations <ul><li>Expectation </li></ul><ul><li>Global set of high quality standards </li></ul><ul><li>Increased comparability </li></ul><ul><li>Increased transparency </li></ul><ul><li>More resistant to fraud </li></ul><ul><li>Principles based standards superior to rules based </li></ul><ul><li>Minimize cost of capital </li></ul><ul><li>US GAAP too complex </li></ul><ul><li>Challenge </li></ul><ul><li>US GAAP recognized as high quality </li></ul><ul><li>Fewer rules, and more judgments likely to decrease as much as increase comparability </li></ul><ul><li>Transparency affected by country specific cultural norms, legal practices, and business and ownership structures </li></ul><ul><li>Fraud has occurred in IFRS countries as well as under US GAAP, although more frequently under US GAAP </li></ul><ul><li>Difference exaggerated: US standards are principles based with a substantial number of rules; IFRS are principles based with far fewer [but some] rules </li></ul><ul><li>US already enjoys the world’s lowest cost of capital. Likely to aid other countries. </li></ul><ul><li>Rules and legal structures make US complex; judgments make IFRS complex </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    66. 66. Transparency in Accounting Standards FLA Buffalo Grove Breakfast Meeting April 17, 2010
    67. 67. IFRS STRUCTURE <ul><li>Governance and Process </li></ul><ul><ul><li>Governance structure </li></ul></ul><ul><ul><li>Due Process </li></ul></ul><ul><li>Standards Literature Comprised Of: </li></ul><ul><ul><li>Preface to IFRS </li></ul></ul><ul><ul><li>IASB Framework </li></ul></ul><ul><ul><li>Standards – full IFRS </li></ul></ul><ul><ul><li>Interpretations – full IFRS </li></ul></ul><ul><ul><li>IFRSs for SMEs – Adopted July, 2009, Effective immediately </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    68. 68. IFRS Standards Literature - Preface <ul><li>Describes IASB’s Objectives </li></ul><ul><li>Describes scope of IFRS </li></ul><ul><li>Describes IASB’s due process procedures </li></ul><ul><li>Describes policies on effective dates </li></ul><ul><li>Describes format used in Standards </li></ul><ul><ul><li>Principles in bold – “Black” </li></ul></ul><ul><ul><li>Guidance not bolded type – “Gray” </li></ul></ul><ul><li>Identifies English as the official language of IFRS </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    69. 69. IFRS Standards Literature - Framework <ul><li>Contains definitions </li></ul><ul><li>Describes recognition criteria and measurement concepts for: </li></ul><ul><ul><li>Assets and liabilities </li></ul></ul><ul><ul><li>Income and expenses </li></ul></ul><ul><li>Required to be considered for resolving accounting issues not directly addressed by a standard [by IAS 8.11] </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    70. 70. IFRS Standards Literature - Standards <ul><li>Encompasses standards issued by the current IASB [IFRSs]and the predecessor IASC [IASs] still outstanding </li></ul><ul><li>The IASB has issued 9 IFRSs </li></ul><ul><li>The predecessor IASC issued 41 IASs, of which 29 are still outstanding. The remainder have been superseded by IFRSs or withdrawn. </li></ul><ul><li>Similar to US GAAP, IFRS Standards are primarily by topic. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    71. 71. IFRS Standards Literature - Interpretations <ul><li>Authoritative interpretations are issued by the International Financial Reporting Interpretations Committee [IFRIC] when approved by the IASB, and the predecessor Standing Interpretations Committee [SIC] </li></ul><ul><li>IFRIC has issued 18 interpretations, 15 of which remain in effect </li></ul><ul><li>SIC issued 31 interpretations, 11 of which remain in effect </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    72. 72. IFRS for SMEs <ul><li>The IASB Standard International Financial Reporting for Small and Medium-sized Entities [SMEs] is a separate standard from the “full” IFRS standards and interpretations. Standard is 232 pages vs. 2,700 pages for full IFRS. Examples and implementation guide an additional 65 pages. </li></ul><ul><li>Small and Medium Size entities is a misleading title. The distinction is based on the absence of public accountability. Entities are SMEs, regardless of size, if they have no publically held debt or equity securities outstanding and do not hold funds for others in a fiduciary capacity as a regular part of their business operations. </li></ul><ul><li>IFRS for SMEs differs from full IFRS in that: </li></ul><ul><ul><li>Certain full IFRS topics are omitted </li></ul></ul><ul><ul><li>Options under full IFRS are replaced with a single, simpler option </li></ul></ul><ul><ul><li>Many principles for recognizing assets, liabilities, income, and expenses are simplified. </li></ul></ul><ul><ul><li>Required disclosures are significantly fewer and simpler many resulting from the omitted and simplified items. </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    73. 73. IFRS for SMEs – Omitted Topics <ul><li>Earnings per share </li></ul><ul><li>Interim financial reporting </li></ul><ul><li>Segment reporting </li></ul><ul><li>Special accounting for assets held for sale </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    74. 74. IFRS for SMEs – Reduced Options <ul><li>Proportionate consolidation not permitted. </li></ul><ul><li>Revaluation option not permitted for either property, plant, and equipment, or intangible assets. </li></ul><ul><li>Investments in financial securities carried at amortized costs except equities with a readily identifiable market value which are carried at fair value with changes recorded in profit and loss. </li></ul><ul><li>Investment property measurement is driven by circumstances rather than a choice between the cost and fair value models. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    75. 75. IFRS for SMEs – Simplified Recognition and Measurement <ul><li>Investments in financial instruments meeting certain criteria are measured at cost or amortized costs. All others measured at fair value through profit and loss. </li></ul><ul><li>All research and development costs expensed as incurred. </li></ul><ul><li>Goodwill and other indefinite life intangibles always amortized over estimated useful life or ten years. </li></ul><ul><li>Investments in joint ventures at cost unless there is a published price, in which case fair value is required. </li></ul><ul><li>Borrowing costs must be recognized as expenses </li></ul><ul><li>Annual review of PPE lives, residual value, and depreciation method NOT required. </li></ul><ul><li>For defined benefit post-employment plans: </li></ul><ul><ul><li>Recognize all past service costs immediately in profit and loss </li></ul></ul><ul><ul><li>Recognize all actuarial gains and losses immediately in profit and loss or other comprehensive income – through SoRIE. No “corridor” amortization option. </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    76. 76. IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full IFRS Preface Preface 1. Small and Medium Sized Entities 2. Concepts and Pervasive Principles IASB Framework, IAS 1, Presentation of Financial Statements 3. Financial Statement Presentation IAS 1 4. Statement of Financial Position IAS 1 <ul><li>Statement of Comprehensive Income and Income Statement </li></ul>IAS 1 <ul><li>Statement of Changes in Equity and Statement of Comprehensive Income and Retained Earnings </li></ul>IAS 1 <ul><li>Statement of Cash Flows </li></ul>IAS 7, Statement of Cash Flows 8. Notes to the Financial Statements IAS 1 <ul><li>Consolidated and Separate Financial </li></ul><ul><li>Statements </li></ul>IAS 27, Consolidated and Separate Financial Statements 10. Accounting Policies, Estimates and Errors IAS 8, Accounting Polices, Changes in Accounting Estimates and Errors
    77. 77. IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full IFRS 11& Basic Financial Instruments and Other 12 Financial Instruments Issues IAS 32, Financial Instruments: Presentation IAS 39, Financial Instruments: Recognition and Measurement IFRS 7, Financial Instruments: Disclosures 13 Inventories IAS 2, Inventories 14 Investments in Associates IAS 28, Investments in Associates 15 Investments in Joint Ventures IAS 31, Investments in Joint Ventures 16 Investment Property IAS 40, Investment Property 17 Property, Plant and Equipment IAS 16, Property, Plant and Equipment 18 Intangible Assets Other than Goodwill IAS 38, Intangible Assets 19 Business Combinations and Goodwill IFRS 3, Business Combinations 20 Leases IAS 17, Leases 21 Provisions and Contingencies IAS 37, Provisions, Contingent Liabilities and Contingent Assets
    78. 78. IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full IFRS 22 Liabilities and Equity IAS 1, IAS 32 23 Revenue IAS 11, Construction Contracts IAS 18, Revenue 24 Government Grants IAS 20, Accounting for Government Grants and Disclosure of Government Assistance 25 Borrowing Costs IAS 23, Borrowing Costs 26 Share-based Payment IFRS 2, Share-based Payment 27 Impairment of Assets IAS 2, IAS 36, Impairment of Assets 28 Employee Benefits IAS 19, Employee Benefits 29 Income Tax IAS 12, Income Taxes 30 Foreign Currency Translation IAS 21, The Effects of Changes in Foreign Exchange Rates 31 Hyperinflation IAS 29, Financial Reporting in Hyperinflationary Economies
    79. 79. IFRS for SMEs Compared to Full IFRS FLA Buffalo Grove Breakfast Meeting April 17, 2010 Section in the IFRS for SMEs Full IFRS 32 Events after the End of the Reporting Period IAS 10, Events after the Reporting Period 33 Related Party Disclosures IAS 24, Related Party Disclosures 34 Specialized Activities IAS 41, Agriculture IFRS 6, Exploration for and Evaluation of Mineral Resources 35 Transition to the IFRS for SMEs IFRS 1, First-time Adoption of International Financial Reporting Standards
    80. 80. Comparison of Full and SMEs IFRS - Objectives <ul><li>Full IFRS </li></ul><ul><li>Purposes </li></ul><ul><ul><li>Report financial position </li></ul></ul><ul><ul><li>Report performance </li></ul></ul><ul><ul><li>Report changes in financial position </li></ul></ul><ul><li>Attributes </li></ul><ul><ul><li>Accrual basis </li></ul></ul><ul><ul><li>Going concern </li></ul></ul><ul><ul><li>Understandability </li></ul></ul><ul><ul><li>Relevance </li></ul></ul><ul><ul><li>Reliability – requires prudence </li></ul></ul><ul><ul><li>Comparability </li></ul></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Purposes </li></ul><ul><ul><li>Report financial position </li></ul></ul><ul><ul><li>Report performance </li></ul></ul><ul><ul><li>Report cash flows </li></ul></ul><ul><li>Attributes </li></ul><ul><ul><li>Relevant </li></ul></ul><ul><ul><li>Reliable </li></ul></ul><ul><ul><li>Comparability </li></ul></ul><ul><ul><li>Complete </li></ul></ul><ul><ul><li>Prudence </li></ul></ul><ul><ul><li>Reflect substance over form </li></ul></ul><ul><ul><li>Accrual basis </li></ul></ul><ul><ul><li>Presumes going concern </li></ul></ul><ul><ul><li>Materiality </li></ul></ul><ul><ul><li>Timeliness </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    81. 81. Comparison of Full and SMEs IFRS – Required Financial Statements <ul><li>Full IFRS </li></ul><ul><li>Statement of Financial Position [required name] </li></ul><ul><li>Statement of Income or Comprehensive Income </li></ul><ul><li>Statement of Changes in Equity. If SoRIE used for comprehensive income, equity changes required in notes. </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Notes to Financial Statements </li></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Statement of Financial Position – may be called “Balance Sheet” </li></ul><ul><li>Statement of Income or Comprehensive Income </li></ul><ul><li>Statement of Changes in Equity. A combined statement of income and retained earnings permitted if earnings and dividends are the only activity </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li>Notes to Financial Statements </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    82. 82. Comparison of Full and SMEs IFRS – Financial Instruments <ul><li>Full IFRS </li></ul><ul><li>Four categories of financial instruments </li></ul><ul><ul><li>Financial assets or liabilities at fair value through profit and loss </li></ul></ul><ul><ul><li>Held-to-maturity investments </li></ul></ul><ul><ul><li>Loans and receivables </li></ul></ul><ul><ul><li>Available-for-sale assets </li></ul></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Two topics in IFRS for SMEs </li></ul><ul><ul><li>Basic financial instruments, generally reflected at amortized cost. </li></ul></ul><ul><ul><li>Complex financial instruments generally reflected at fair value through profit and loss. </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    83. 83. Comparison of FULL and SMEs IFRS – Property, Plant, and Equipment <ul><li>Full IFRS </li></ul><ul><li>Accounting policy choice between historical cost and revaluation models. </li></ul><ul><li>Component depreciation required. </li></ul><ul><li>Annual review of useful life, residual value, and depreciation rate required. </li></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Historical cost model only. Revaluation model not permitted. </li></ul><ul><li>Component depreciation required only if major parts of a PP&E item have “significantly different patterns of consumption of economic benefits”. </li></ul><ul><li>Review of useful life, residual value, and depreciation rate only if there is a significant change in the asset or its use. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    84. 84. Comparison of Full and SMEs IFRS – Investments in Associates and Joint Ventures <ul><li>Full IFRS </li></ul><ul><li>Investments in associates </li></ul><ul><ul><li>Accounted for by equity method </li></ul></ul><ul><ul><li>Cost and fair value models not permitted except in separate company statements </li></ul></ul><ul><li>Investments in joint ventures </li></ul><ul><ul><li>Proportionate consolidation or </li></ul></ul><ul><ul><li>Equity method </li></ul></ul><ul><ul><li>Cost and fair value models not permitted </li></ul></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Investments in associates or jointly controlled entity may be accounted for by: </li></ul><ul><ul><li>The cost model [less any impairments] </li></ul></ul><ul><ul><li>The equity method </li></ul></ul><ul><ul><li>The fair value model through profit and loss </li></ul></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    85. 85. Comparison of Full and SMEs IFRS - Intangibles <ul><li>Full IFRS </li></ul><ul><li>Provides an accounting policy choice between the cost model and the revaluation model </li></ul><ul><li>Useful life either finite or indefinite. Indefinite life intangibles, including goodwill, are not amortized, but an annual impairment test is required. </li></ul><ul><li>Some development costs are capitalized. </li></ul><ul><li>Some borrowing costs are capitalized. </li></ul><ul><li>IFRS for SMEs </li></ul><ul><li>The cost model is required and the revaluation model is prohibited. </li></ul><ul><li>All intangible assets are amortized over their useful life or ten years. </li></ul><ul><li>All research and development costs expensed as incurred. </li></ul><ul><li>All borrowing costs expensed as incurred. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    86. 86. Comparison of FULL and SMEs IFRS – Defined Benefit Pension Plans <ul><li>Full IFRS </li></ul><ul><li>Actuarial gains and losses </li></ul><ul><ul><li>Choice to recognize immediately in profit and loss, or </li></ul></ul><ul><ul><li>Recognize immediately in comprehensive income without ever going through profit and loss, or </li></ul></ul><ul><ul><li>Deferred and amortized through profit and loss over estimated service life [corridor approach]. </li></ul></ul><ul><li>Calculation of liability </li></ul><ul><ul><li>Unit credit method required. </li></ul></ul><ul><li>Recognition of past service cost </li></ul><ul><ul><li>Immediately if vested </li></ul></ul><ul><ul><li>Over remaining vesting period for unvested amounts </li></ul></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Actuarial gains and losses </li></ul><ul><ul><li>Choice to recognize immediately in profit and loss, or </li></ul></ul><ul><ul><li>Recognize immediately in other comprehensive income </li></ul></ul><ul><ul><li>Deferral and amortization [corridor approach] not permitted. </li></ul></ul><ul><li>Calculation of liability </li></ul><ul><ul><li>Use unit credit method, or simplify calculation by ignoring: </li></ul></ul><ul><ul><ul><li>Future salary increases </li></ul></ul></ul><ul><ul><ul><li>Future service of current employees </li></ul></ul></ul><ul><ul><ul><li>Possible in-service mortality </li></ul></ul></ul><ul><li>Recognize past service cost immediately in profit and loss. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    87. 87. Comparison of Full and SMEs IFRS – Income Taxes <ul><li>Full IFRS </li></ul><ul><li>A deferred tax asset is recognized only if it is probable there will sufficient future profit to realize the tax asset. </li></ul><ul><li>No specific guidance on uncertain tax positions. In practice a liability established at either the single best estimate or a probability weighted average amount of all possible outcomes. </li></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Recognize a valuation allowance to reduce the net asset to an amount more likely than not to be realized. </li></ul><ul><li>Recognize the effect of the possible outcomes of a review by tax authorities using the probability weighted average of all possible outcomes. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    88. 88. Comparison of Full and SMEs for IFRS – Business Combinations <ul><li>Full IFRS </li></ul><ul><li>Transaction costs are excluded from acquisition costs. </li></ul><ul><li>Contingent consideration is recognized in acquisition costs regardless of the probability of payment. </li></ul><ul><li>IFRS for SMEs </li></ul><ul><li>Transaction costs are included in acquisition costs. </li></ul><ul><li>Contingent consideration is included as part of the acquisition costs if it is probable the amount will be paid and the amount can be measured reliably. </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    89. 89. Next Steps - Preparation for Adoption of IFRS <ul><li>Accounting systems </li></ul><ul><ul><li>Data collection procedures for information and attributes not currently captured </li></ul></ul><ul><ul><li>Redesign of sales contracts and procedures </li></ul></ul><ul><ul><li>Software requirements </li></ul></ul><ul><li>Loan, lease , outsourcing, and other contract covenants – IFRS “aware” </li></ul><ul><li>Tax planning </li></ul><ul><li>Business unit and corporate metrics – dashboard revisions </li></ul><ul><li>Incentive [cash, stock] compensation plan provisions – base and award factors included in computations </li></ul><ul><li>Documentation of controls over financial reporting, and other processes </li></ul><ul><li>Staff training needs – identify and arrange </li></ul><ul><li>Timing to provide two years of comparable basis data in the year of adoption </li></ul><ul><li>Development of plan for conversion including resources required </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010
    90. 90. Comparison of FULL and SMEs IFRS – Selected Additional Resources <ul><li>IASB Website: www.iasb.co.uk </li></ul><ul><li>AICPA’s IFRS website: www.ifrs.com </li></ul><ul><li>AICPA IFRS for SMEs tool: http://wiki.ifrs.com/ </li></ul><ul><li>Deloitte website: www.iasplus.com </li></ul><ul><li>PWC website: www.pwc.com/usifrs </li></ul><ul><li>Books from Wiley – available from Wiley and on Amazon.com, where they are less expensive </li></ul>FLA Buffalo Grove Breakfast Meeting April 17, 2010

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