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Overview of the Global Financial Reporting Environment â€" D ...

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  • In 2002 the FASB and IASB entered into an agreement (dubbed the “Norwalk Agreement”) that set forth each board’s commitment to converging U.S. GAAP and IFRS. This agreement was updated in 2006 and includes a specific work plan targeted at converging a number of major topical areas. Under this plan, the FASB will amend certain U.S. GAAP standards to conform with IFRS and the IASB will amend IFRS to conform with U.S. GAAP. There also are a number of “joint” projects where new standards will be developed. It’s important to keep in mind that convergence is really a process – the result of which are standards that are similar, but not necessarily identical. The major focus has been on converging the general principles versus detailed guidance. The Norwalk Agreement involves several detailed projects over a number of years. There are ten “short-term” projects that are targeted toward completion by 2009. There are several other projects, which are longer term in nature and involve major topics (such as revenues, liabilities, consolidation, leasing). Most of these are “joint” projects. Recent changes to U.S. GAAP related to converge efforts include, FAS 123R, FAS 132R, FAS 151, FAS 153, FAS 154, FAS 158, and FAS 159. FAS 141R is expected soon.
  • It’s important to assess the degree that IFRS already impacts the company. Identify countries that may now have a local IFRS reporting requirement and consider where your company has securities listed internationally. Identify countries in which you operate and determine which countries require/will require IFRS. Also consider where your company may have complex cross-border structures and whether there is an IFRS requirement. Don’t forget to include in your analysis equity investees, and joint ventures. Continually monitor convergence activities globally and locally. Understand what your competition is doing – many industries are now dominated by companies outside the U.S. that now have an IFRS reporting requirement. Having comparable financial reporting evens the playing field and allows investors to have an “apples-to-apples” perspective when comparing results. Understand the impact of differences between IFRS and U.S. GAAP that may affect the company. Consider what standards are used to report into consolidation. If U.S. GAAP is followed locally, adoption of IFRS locally where optional may be easier to adopt. If local GAAP is followed, adoption of IFRS locally where optional should be considered, but may be more difficult. Determine which standards will be most challenging to adopt.
  • It’s important to assess the degree that IFRS already impacts the company. Identify countries that may now have a local IFRS reporting requirement and consider where your company has securities listed internationally. Identify countries in which you operate and determine which countries require/will require IFRS. Also consider where your company may have complex cross-border structures and whether there is an IFRS requirement. Don’t forget to include in your analysis equity investees, and joint ventures. Continually monitor convergence activities globally and locally. Understand what your competition is doing – many industries are now dominated by companies outside the U.S. that now have an IFRS reporting requirement. Having comparable financial reporting evens the playing field and allows investors to have an “apples-to-apples” perspective when comparing results. Understand the impact of differences between IFRS and U.S. GAAP that may affect the company. Consider what standards are used to report into consolidation. If U.S. GAAP is followed locally, adoption of IFRS locally where optional may be easier to adopt. If local GAAP is followed, adoption of IFRS locally where optional should be considered, but may be more difficult. Determine which standards will be most challenging to adopt.
  • Still in exposure draft stage and could change Use example of EU 2005 company. In this scenario, EU requires public companies to report in IAS for periods ended December 31, 2005. Assuming a one-year comparative financial statement, companies will also have to prepare 2004 under IAS. Therefore, the date to convert from local GAAP to IAS will be January 1, 2004.
  • Risks Reduced flexibility in local reporting environment Risk of being out of compliance with key IFRS requirements Consistent use of IFRS among countries allows for more stringent centralized regulation in the future As IFRS becomes global statutory standard, difficult to unwind inconsistent accounting
  • Transcript

    • 1. International Financial Reporting Standards D.J. Gannon, Partner Deloitte & Touche LLP Deloitte/FSA Faculty Consortium May 15, 2008
    • 2. Agenda Company considerations IFRS implementation in the U.S. Current IFRS landscape Wrap up
    • 3. IFRS Landscape
    • 4.  
    • 5. A Point of View
      • Involves a new way of thinking
      • Regulatory perspectives are changing
      • Infrastructure changes are underway
      • IFRS is inevitable in the U.S.
      • Convergence landscape is changing
      • Timelines are accelerating
      • IFRS may already be applicable
      • Impacts and potential benefits beyond accounting
      • Pro active assessment of impact
      Fundamental Changes in the Financial Reporting Environment Movement Toward Global Standards Significant Impact on Companies
    • 6. The Global Move Towards IFRS Europe 2005 Australia 2005 Canada 2009/11 South Africa 2005 United States (2011?) Brazil 2010 China 2007 India 2011 Chile 2009 Japan (?) Current or anticipated requirement or option to use IFRS (or equivalent)
    • 7. IFRS Today and Tomorrow
        • Today IFRS is used in over 100 countries:
          • Required across all EU countries, starting in 2005
          • Brazil, Canada and India have announced mandated use
          • Ongoing convergence efforts between FASB and IASB
        • By 2011, it is expected that:
          • All major countries will have adopted IFRS to some extent
          • China and Japan will be substantially converged to IFRS
          • U.S. public companies will likely have the option of using either IFRS or U.S. GAAP
      Accounting Standards Used by Global Fortune 500
    • 8. Regulatory Developments
        • Considerable movement towards mutual recognition of financial reporting frameworks between the U.S. and the EU
          • U.S. GAAP in EU - Equivalence Initiative
          • IFRS in U.S. - IFRS “Roadmap”
        • SEC developments
          • Elimination of U.S. GAAP reconciliation for Foreign Private Issuers using IFRS effective for 12/31/07 year ends
          • Concept release allowing U.S. companies a choice of IFRS is gathering support
          • IFRS “roadmap” on use in the U.S. expected this year
        • Ongoing evolution of regulatory practices
          • Greater cooperation amongst regulators on IFRS application issues including agreed upon work plans
    • 9. Ongoing Convergence Efforts
        • IASB and FASB reaffirm convergence efforts
          • Updating of the “Norwalk Agreement”
        • Focus is on the process and converging general principles
          • Less focus on converging details
        • Involves several projects
          • “Short-term” convergence projects
          • Joint conceptual framework projects
          • Other Joint convergence projects
          • Other IASB projects
        • Future prospects
    • 10. IFRS Implementation in the U.S.
    • 11. Drivers of Interest in IFRS External Drivers Internal Drivers
      • Centralized and standardized processes – Ability to streamline a disjointed financial reporting process
      • Consistency in reporting – Implementation of uniform accounting policies & procedures for statutory and consolidated financials
      • Greater efficiency – Availability and more efficient usage of resources, reducing costs
      • Better information – Improved internal controls resulting in better financial information at the statutory and consolidated levels
      • Regulatory – SEC may allow or require U.S. companies to report in IFRS
      • Competition – May adopt IFRS achieving a competitive advantage
      • Capital markets – Easier access to capital markets, lowering the cost of capital
    • 12. Recent Deloitte Survey: Would You Consider Adopting IFRS?
    • 13. A Perspective on IFRS
        • Will require a change in mindset
          • More of a focus on “thinking” about the answer
        • Less detailed guidance to consider
          • More of a focus on the “substance” of transactions
          • Evaluate whether the accounting presentation reflects the “economic reality”
        • Grater use of professional judgment
          • More of a focus on the “process” around making judgments
          • CIFR recommendations
        • Impact on risk
          • Possibility of “second-guessing” by regulators?
          • Will litigation increase?
    • 14. What We’re Doing at Deloitte
        • Established an IFRS project management office
          • Focused resources to help coordinate and lead firm-wide response to IFRS
          • Coordination and oversight of strategic IFRS activities
          • Deloitte Learning actively involved and driving training effort
        • Plan underway to provide IFRS training needed for DTT accreditation to an estimated 1,500 professionals in 2008
          • Focus on level of convergence between IFRS and U.S. GAAP
          • Based on current assignment to IFRS clients
          • Scheduled seminars in the Spring and Fall
        • Course to highlight IFRS (and explain future changes) has been developed for all professionals
        • Three to five-year plan under development to address long-term training implications for professionals
    • 15. Impact on Academia
        • When should IFRS be taught?
          • Students in the system today
          • New students coming into the system
        • What will the movement to IFRS mean for curriculum?
          • Not just about accounting
          • Greater need to understand other disciplines
        • How will the approach to testing and certification change?
          • Objective versus subjective analysis
          • Focus on problem solving and decision making process
    • 16. Deloitte IFRS University Consortium
        • Dedicated to helping to bring IFRS to the classroom
          • Focus on providing solutions
        • Open to any institution
          • No cost to institutions
          • Simply agree to participate and provide feedback
        • Activities and benefits
          • Providing input in the direction, goals and resources available from the consortium
          • Participation in periodic webcasts and sharing of best practices used in the classroom
          • Involvement in defining the academic needs to be addressed by the development of materials
          • Access to the support and guidance from Deloitte professionals
          • Access to Deloitte IFRS information resources, publications and training sessions.
        • Register at USDeloitteIFRSUniversityConsortium@deloitte.com
    • 17. Company Considerations
    • 18. From Current State to End State Chart Key: US GAAP IFRS Current State End State Migration to IFRS Corporate Reporting Statutory Reporting Merge corporate and statutory IFRS reporting Standardize IFRS to US GAAP adjustments Local Local Corp Subs Subs Subs Subs Subs IFRS Local Local Local Local
    • 19. Key Impacts of IFRS Implementation
      • Tax structures
      • Treasury and cash management
      • Legal and debt covenants
      • People issues, including education and training, compensation structures
      • Internal communications
      • External and shareholder communications
      Organizational Issues Technology Infrastructure
      • General ledger and chart of account structure, including performance metrics
      • Global consolidation
      • Sub-system issues related to configuration and data capture
      • Capabilities to manage multiple GAAP accounting during transition
      Process and Statutory Reporting
      • Internal controls and processes, including documentation and testing
      • Management and internal reporting packages
      • Global reporting packages
      • Statutory reporting, including “opportunities” around IFRS adoption
      Technical Accounting
      • Overall approach to IFRS implementation
      • First time adoption policy considerations, including reporting dates and use of exemptions
      • Ongoing policy considerations, including alternatives and approach to “principles”
    • 20. First-time Adoption of IFRS – Overview of IFRS 1
        • Applicable when an entity makes its first explicit and unreserved reference to IFRS
        • Generally apply retrospectively all IFRS effective at reporting date
          • Certain exemptions can be elected
          • Some exceptions that must be followed
        • Only requires one year of comparative financial information
        • Transition adjustments recognized in retained earnings
        • Must explain effect of transition to IFRS
    • 21. IFRS 1 Considerations
      • Identify areas where extensive disclosures will be required
      • Reconciliation of equity and income
      • Distinguish between policy changes, estimate changes and error corrections
      • Narrative discussion adjustments
      • Asset impairment
      • Deemed cost
      • Recognize all assets and liabilities required under IFRS (internal development costs)
      • Derecognize all assets and liabilities not permitted under IFRS (post acquisition restructuring)
      • Measure assets, liabilities and equity (impairment of assets)
      • Reclassify items (deferred tax items)
      • Identify key dates
      • Identify differences between existing accounting policies and IFRS and determine IFRS policies
      • Determination of estimates under IFRS
      • Elect and apply optional exemptions
      • Apply mandatory exceptions
      Disclosures Opening Balance Sheet Overall
    • 22. Thoughts on The EU Experience Lessons Learned Observations
      • Effort was often underestimated
      • Late start often result in escalation of costs, especially after transition date
      • Many companies did not achieve “business as usual” state for IFRS reporting
      • Often a lack of a holistic approach, taking collateral effects into consideration
      • Hard to get it right the first time
      • Several companies are only now starting to explore benefits from IFRS implementation (“one standard reporting”)
      • Overall approach generally was to minimize differences from local GAAP
        • Variety of performance measures
      • Increased disclosure in financial statements
        • Judgments made
        • Risk disclosures
      • Significant impact on results
        • Asset impairments
        • “ Split accounting”
        • Components approach
        • Deferred income taxes
        • Derivatives
    • 23. Wrap Up
    • 24. Summary
        • IFRS has become a dominant force globally and is coming, sooner or later, to the U.S.
        • The movement to IFRS will result in a new way of thinking
        • A significant number of U.S. companies are planning IFRS adoption
        • Now is the time to begin addressing the impact of IFRS
    • 25. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.