International Financial Reporting
Standards (IFRS)
KPMG LLP




                                        Mike Gaiso
       ...
What Is IFRS?


 An accounting framework similar in character
 and scope to U.S. GAAP

 International Accounting Standard ...
History of International Standard Setting

1973   IASC formed
1998   Core standards completed
2000   SEC review of core st...
Who Uses IFRS?


 Over 130 countries currently require the use of or have
 a policy of convergence with IFRS

 Increased g...
IFRS Implementation Around the World
(2004)




    IFRS or fixed date for implementation                                 ...
IFRS Implementation Around the World
(2009)




    IFRS or fixed date for implementation                                 ...
“Wave II” is Coming


 Korea    2011: IFRS mandatory for listed businesses –
          2009: IFRS permitted
 Japan    Goal...
How Does IFRS Differ from U.S. GAAP?

 IFRS is a less extensive body of literature than is
 U.S. GAAP
   In many instances...
Approaches to Adopting IFRS in U.S.


 The “optional” model

 The “convergence” model

 The “new roadmap” model




      ...
U.S. GAAP – IFRS Convergence Plan

         Norwalk Agreement (September 2002)
            FASB and IASB pledged to make t...
New Memorandum of Understanding:
Plans for Completion by 2011

Areas                                                  Issu...
Recent FASB/IASB Standards Achieving
“High-Level” Convergence

Description                               FASB Issuances   ...
Differences come in all shapes and sizes
  Different levels of detail
      e.g., Revenue recognition

  Different approac...
Proposed Roadmap for Potential Adoption
of IFRS by all U.S. Public Companies

 Progress toward certain “milestones” would ...
Proposed Roadmap for Potential Adoption of
IFRS by all U.S. Public Companies (cont’d.)

 SEC staff to monitor progress in ...
Proposal to Grant Permission to Adopt IFRS
to Limited Number of Companies

 Proposal would allow a small number of U.S. pu...
What Happens in the Meantime?

 Companies should:
   Continue to respond to changes in U.S. GAAP in response
   to the FAS...
Potential Benefits of Adopting IFRS

 Potential Benefits to Domestic Issuers
   Eliminate dual reporting for foreign subsi...
Potential Challenges When Adopting IFRS

 Training                                                                        ...
High-Level Technical Accounting Differences

 Inventory
 Property, plant and equipment
 Pensions
 Leases
 Impairment of lo...
IFRS Difference - Inventory

 LIFO prohibited
 Multiple inventory methods prohibited
 Retail inventory method
    Permanen...
IFRS Difference – Property, Plant and Equipment

   Component depreciation required
   Requirement to review useful lives ...
IFRS Difference – Pensions

 Accounting policy election to record all actuarial gains and
 losses in Other Comprehensive I...
IFRS Difference – Leases

 Lease classification is more subjective – IFRS uses
 indicators rather than criteria
 Sale-leas...
IFRS Difference – Impairment of long-lived assets


   Impairment triggered when carrying amount exceeds
   recoverable am...
IFRS Difference – Shared-based Compensation

  Graded vesting results in front loading expenses—no
  policy election
  Def...
Presenter’s contact details
                         Mike Gaiso
                         KPMG LLP
                        ...
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KPMG On-Screen Enhanced US

  1. 1. International Financial Reporting Standards (IFRS) KPMG LLP Mike Gaiso Department of Professional Practice May 18, 2009
  2. 2. What Is IFRS? An accounting framework similar in character and scope to U.S. GAAP International Accounting Standard Board’s (IASB’s) goal - for IFRS to become globally-accepted, high- quality financial reporting standards Future of world-wide financial reporting? Can IFRS facilitate lower costs of capital due to improved world-wide capital allocations? ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 2
  3. 3. History of International Standard Setting 1973 IASC formed 1998 Core standards completed 2000 SEC review of core standards: concept release published February 2000 IASC approves new constitution IOSCO review finalized EC proposes that all EU listed companies (some 7,000) should apply IAS by 2005 2001 IASB assumes accounting standard-setting responsibilities from IASC 2002 EU’s decision to adopt IFRS from Jan 1, 2005 2005 First wide-spread use of IFRS 2007 SEC Rule-making and Concept Release on use of IFRS in the U.S. 2008 SEC Proposed Roadmap for Potential Mandatory use of IFRS in the U.S. 2009 and beyond? ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 3
  4. 4. Who Uses IFRS? Over 130 countries currently require the use of or have a policy of convergence with IFRS Increased globalization of capital and trade markets have led to increased pressures to converge or adopt Companies with an international footprint are finding IFRS to be preferable or necessary in many instances Many public U.S. companies are beginning to think about IFRS and the impact it could have on their organizations in the coming years ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 4
  5. 5. IFRS Implementation Around the World (2004) IFRS or fixed date for implementation U.S. GAAP and/or convergence intended Convergence plans No/unknown convergence plans ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 5
  6. 6. IFRS Implementation Around the World (2009) IFRS or fixed date for implementation U.S. GAAP and/or convergence intended Convergence plans No/unknown convergence plans ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 6
  7. 7. “Wave II” is Coming Korea 2011: IFRS mandatory for listed businesses – 2009: IFRS permitted Japan Goal of full convergence by 2011 China Align Chinese GAAP with IFRS by 2011 Israel Required for public companies from 2008 India Convergence with IFRS for public companies for 2011 Brazil Banks to be required to use IFRS starting from 2010 Canada Timeframe set – 2011: Reporting under IFRS for publicly accountable entities ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 7
  8. 8. How Does IFRS Differ from U.S. GAAP? IFRS is a less extensive body of literature than is U.S. GAAP In many instances, IFRS contains similar concepts but does not contain the same amount of detailed implementation guidance as U.S. GAAP Because of less-detailed guidance, there are more circumstances where application of IFRS will require exercise of judgment Judgment will need to be supported by contemporaneous analysis Clear, transparent disclosures of critical accounting policies and estimates ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 8
  9. 9. Approaches to Adopting IFRS in U.S. The “optional” model The “convergence” model The “new roadmap” model ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 9
  10. 10. U.S. GAAP – IFRS Convergence Plan Norwalk Agreement (September 2002) FASB and IASB pledged to make their existing financial reporting standards fully compatible and coordinate future work programs to ensure compatibility is maintained Memorandum of Understanding between FASB and IASB (February 2006) Reiterate commitment to achieve convergence Presents standard setting goals to be accomplished by the end of 2008 Memorandum of Understanding Updated (September 2008) Identifies nine projects for completion by June 2011 ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 10
  11. 11. New Memorandum of Understanding: Plans for Completion by 2011 Areas Issues Financial instruments Simplify hedge accounting, fair value through profit and loss Financial statement New format presentation Lease accounting Lessee obligations on balance sheet Debt and equity distinction Reach consensus on preferred model Revenue recognition Two possible models Consolidation policy SPEs and potential voting interests vs. VIEs Derecognition Developing a common standard Fair value measurement IASB guidance similar to FAS 157 guidance Post retirement benefits Places full obligation on balance sheet and re-examine measurement ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 11
  12. 12. Recent FASB/IASB Standards Achieving “High-Level” Convergence Description FASB Issuances IASB Issuances Share-based payments FAS 123R IFRS 2 Business combinations FAS 141R IFRS 3 (2008) Goodwill and other FAS 142 IAS 36 and IAS 38 intangible assets Long-lived assets held for FAS 144 IFRS 5 sale and discontinued operations Fair value option and FAS 155, FAS 157 and IAS 39 measurement guidance FAS 159 Even though the FASB and IASB worked together on these topics, key differences still remain! ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 12
  13. 13. Differences come in all shapes and sizes Different levels of detail e.g., Revenue recognition Different approach to industry-specific guidance Types of entities vs activities Different concepts/ approaches e.g., no LIFO, possible revaluation of PPE Differences in scope Employee share compensation vs all share-based payments Legacy differences due to effective date and transition Business combinations applied prospectively but from a different date Beware converged standards – there’s always a difference! ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 13
  14. 14. Proposed Roadmap for Potential Adoption of IFRS by all U.S. Public Companies Progress toward certain “milestones” would be part of the Commission’s consideration of whether to require adoption of IFRS by all U.S. public companies Milestones include: Continued improvement in IFRS. In line with the objective of improved IFRS, continuing overall progress on convergence between IFRS and U.S. GAAP IASB accountability and funding stability Development of an IFRS XBRL taxonomy that allows companies to file XBRL-formatted financial statements as effectively as does the U.S. GAAP XBRL taxonomy Education and training of investors, preparers and auditors ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 14
  15. 15. Proposed Roadmap for Potential Adoption of IFRS by all U.S. Public Companies (cont’d.) SEC staff to monitor progress in achieving milestones If sufficient progress is made, the staff could recommend that the Commission adopt final rules requiring use of IFRS by all U.S. public companies Roadmap proposes Commission consideration in 2011 Possible dates for required adoption and phase-in period: Large accelerated filers, calendar 2014 financial statements Accelerated filers, calendar 2015 financial statements Remaining filers, calendar 2016 financial statements ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 15
  16. 16. Proposal to Grant Permission to Adopt IFRS to Limited Number of Companies Proposal would allow a small number of U.S. public companies to begin preparing financial statements in accordance with IFRS as early as for years ending on or after December 15, 2009 Criteria (or “screens”) to qualify: Peer-group companies, as determined by SIC code or another common industry-classification scheme, report financial information using IFRS more than any other basis of accounting. Peer-group defined as 20 largest companies in the industry based on market capitalization U.S. company is one of the 20 largest companies The SEC staff estimates that at least 110 U.S. public companies would meet these requirements These companies represent approximately 14 percent of U.S. market capitalization ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 16
  17. 17. What Happens in the Meantime? Companies should: Continue to respond to changes in U.S. GAAP in response to the FASB/IASB convergence initiative Start making impact assessments and readiness assessments and engaging in scoping exercises Begin developing preliminary project management plans and identifying key leaders with respect to the company’s conversion effort Determine the degree and timing of required education for current personnel Start identifying what additional outside resources may be required ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 17
  18. 18. Potential Benefits of Adopting IFRS Potential Benefits to Domestic Issuers Eliminate dual reporting for foreign subsidiaries using IFRS locally Comparability of financial information with international competitors Easier access to foreign capital markets Potentially lower cost of capital Increased flexibility in choosing accounting policies that match the economic substance of particular transactions ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 18
  19. 19. Potential Challenges When Adopting IFRS Training Accounting policy selection issues IT system changes Divergent management, Changes to policies, income tax and inter-group procedures and controls reporting bases Contractual and legal Corporate governance issues obligations Risks of short-term financial Different type of professional reporting quality shortfalls judgment Increased risk of Communications misstatement, error, omission with stakeholders and and fraud analysts A learning curve Compensation plans and performance measurement ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 19
  20. 20. High-Level Technical Accounting Differences Inventory Property, plant and equipment Pensions Leases Impairment of long-lived assets Stock-based compensation ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 20
  21. 21. IFRS Difference - Inventory LIFO prohibited Multiple inventory methods prohibited Retail inventory method Permanent markdowns (i.e., different LCM approach) Regular review to determine that method approximates cost ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 21
  22. 22. IFRS Difference – Property, Plant and Equipment Component depreciation required Requirement to review useful lives and depreciation method annually ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 22
  23. 23. IFRS Difference – Pensions Accounting policy election to record all actuarial gains and losses in Other Comprehensive Income (not subject to recycling) Vested benefits are expensed at time of plan amendment Apply defined benefit model to all post-employment benefits, not just post-retirement benefits ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 23
  24. 24. IFRS Difference – Leases Lease classification is more subjective – IFRS uses indicators rather than criteria Sale-leaseback criteria less restrictive thereby more likely to recognize “day one” gain when leaseback is operating No detailed guidance on “build-to-suit” arrangements ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 24
  25. 25. IFRS Difference – Impairment of long-lived assets Impairment triggered when carrying amount exceeds recoverable amount Impairment losses may be reversed One impairment model applied to all long-lived assets and generally applied at the CGU level. Contrasts with US GAAP: FAS 144 -- depreciable assets (asset group level, undiscounted cash flow “screen”) FAS 142 – indefinite-lived intangibles (individual asset level, fair value) FAS 142 – goodwill (reporting unit level, fair value) ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 25
  26. 26. IFRS Difference – Shared-based Compensation Graded vesting results in front loading expenses—no policy election Deferred tax assets based on intrinsic value with periodic true up Classification of equity vs. liability differs e.g., six month put is liability-classified under IFRS Treatment of remeasurement for liability-classified awards may differ when compensation cost is capitalizable ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 26
  27. 27. Presenter’s contact details Mike Gaiso KPMG LLP (212) 909-5397 mgaiso@kpmg.com www.kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. ©2008 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in the U.S.A. 27
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