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US GAAP versus International Financial Reporting Standards
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US GAAP versus International Financial Reporting Standards



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  • 13/05/10 Source: http://www.iasb.org.uk
  • 13/05/10
  • 13/05/10 When applying their selected IFRS accounting policies to prepare the opening balance sheet, management must: recognise all assets and liabilities required by IFRS – for example finance lease assets and liabilities not recognise assets and liabilities not permitted by IFRSs, for example many internally generated intangible assets, regulatory assets and liabilities reclassify assets, liabilities and equity as required by IFRSs, for example convertible preference shares split into their debt and equity components. measure all items in accordance with IFRSs, for example employee benefit obligations, deferred taxes, etc. However, there are certain exemptions that management may choose to apply and certain exceptions that they must apply. We will discuss these later in the presentation.
  • 13/05/10
  • 13/05/10


  • 1. Moving to IFRS October 13, 2008  *connectedthinking
  • 2. Today’s Agenda:
      • IFRS Overview
      • Similarities and Differences
      • Impact on Regulated Entities
  • 3. 1. IFRS Overview
  • 4. The Global Revolution
      • More than 100 countries require, permit, or are converging to IFRS
      • All major capital markets changing…except the US
      • Countries converging to IFRSs with the goal of adoption
      • Countries that require or permit IFRSs
      • Countries with no current plan to adopt
      • IFRS
      • Australia
      • Switzerland
      • IFRS
      • Spain
      • IFRS
      • Hong Kong
      • IFRS
      • Germany
      • IFRS 2011
      • Canada
      • IFRS
      • France
      • IFRS
      • UK
      • IFRS 2011
      • Japan
      • US GAAP
      • US
    Top 10 Global Capital Markets
  • 5. Catalysts of the US transformation
      • Creation of IASB in 2001
      • October 2002 Norwalk Agreement
      • Convergence was the pathway to create one global set of high-quality standards which are robust and transparent
      • April 2005 SEC “roadmap” – goal to eliminate reconciliation
      • Reports on competitiveness of the US capital markets
      • SEC roundtable discussions in March and December 2007
      • Focus on simplicity in US financial reporting
      • August 2008 SEC Open Meeting for IFRS roadmap in the US
      • September 2008 SEC announced roadmap to conversion
  • 6. When might the transition to IFRS occur in the US? 2008 2010 2009 2012 2014 2007 2011 2013 2015 March 2007 SEC roundtable on US GAAP reconciliation for IFRS filers July 2007 SEC proposal eliminating US GAAP reconciliation for IFRS filers August 2007 SEC concept release on use of IFRS for US registrants November 15, 2007 Reconciliation eliminated for IFRS filers January 2010-2011 Voluntary application of IFRS permitted for certain US registrants Proposed roadmap targets potential mandatory adoption in 2014 Reasonable timeline for the US transition to IFRS December 2007 SEC roundtable on IFRS in the US Summer 2008 Roadmap to be issued During 2011 the SEC will reconvene to decide whether a mandatory conversion date should be set
  • 7. SEC Proposed Roadmap for Potential Use of IFRS by US Issuers
      • Mandatory adoption beginning in 2014 using a “phase-in” approach
      • SEC will reconvene in 2011 to assess whether:
        • Key milestones have been achieved
        • Mandatory adoption date should be set for all issuers
        • The option to early adopt should be expanded to a larger population
  • 8. SEC Proposed Roadmap for Potential Use of IFRS by US Issuers
      • Early adoption permitted as early as fiscal years ending on or after December 15, 2009. Eligibility based on:
        • Size of the company: must be among the largest 20, measured by market capitalization, in the industry group
        • IFRS must be used by the majority of the largest 20 companies in that industry group
      • Potential early adopters would need to obtain a letter of no objection from SEC
      • SEC estimated that at least 110 companies in 34 different industries would be eligible for early adoption
      • Two potential disclosure alternatives for companies electing to early adopt IFRS
  • 9. History of international standard setting IASC Foundation 19 trustees SAC 50 members IFRS High quality, enforceable and global IASB 14 members IFRIC 12 members Appoint Govern Fund Appoint Appoint Interpret Advise Create 1 Trustee 1 Member
  • 10. Objectives of International Accounting Standards Board
    • Goal of IASB:
      • Formulate and publish IFRS/IAS
      • Promote IFRS world-wide acceptance and observance
      • Support improvement and harmonization of accounting standards and regulations
      • Being truly independent
    • IASB has no power to enforce
      • The power to enforce lies in the hands of national authorities
  • 11. 2. Similarities and Differences
  • 12. Regulatory Assets and Liabilities: No Equivalent to FAS 71 in IFRS
      • Costs associated with price increases are recognized as incurred
      • Refunds to customers are recognized as refunded
      • Financial reporting does not reflect the regulatory environment
      • Equity component of AFUDC cannot be capitalized
      • Cost of removal cannot be recognized until incurred
      • Impact is additional volatility that does not exist under US GAAP:
        • Commodity costs
        • Storm costs
        • Derivative MTM
  • 13. Utility Plant and Equipment: Componentization IAS 16 Property, Plant and Equipment
      • IFRS requires componentization:
        • Significant components of a large asset are separately capitalized and depreciated
      • Reporting under IFRS requires more detailed analysis of depreciable lives by component
      • Components may be more detailed than currently required by FERC
  • 14. Utility Plant and Equipment – Impairment IAS 16 Property, Plant and Equipment
      • IFRS tests for impairment in one step:
        • Impairment loss is recognized when carrying value is greater than recoverable value (DCF or fair value)
      • US GAAP tests for impairment in two steps:
        • First compare the carrying value to undiscounted cash flows
        • If step one fails, then measure impairment
      • Impairments are more likely under IFRS
      • IFRS allows reversal of impairment loss, which is prohibited under US GAAP
  • 15. Lease Accounting: Determining Capital (Finance) Leases IAS 17 Leases
      • IFRS provides guidelines of different indicators of financing leases based on the substance of a transfer of risks and rewards
      • US GAAP provides specific rules for determining capital leases
      • Although the guidelines in each standard are similar, the specific rules under US GAAP (e.g., 90% and 75%) can lead to different answers than the principles based approach under IFRS
  • 16. Provisions: Loss Contingencies and Provisions IAS 37 Provisions, Contingent Liabilities and Contingent Assets
      • IFRS recognizes losses when the following three criteria are met:
        • There is a present obligation as a result of a past event
        • There is a probable outflow of economic benefit
        • A reliable estimate can be made
      • Probable is defined as more likely than not
      • When an estimate is a range with no point being more probable, must record the midpoint of the range
      • Long term liabilities must be discounted to present value, if material
  • 17. Income Taxes: Uncertain Tax Positions IAS 12 Income Taxes
      • IFRS uses “best estimate” approach to recording uncertain tax positions
      • IFRS allows measurement of uncertain tax positions:
        • At the individual uncertainty or group of related uncertainties
        • At the total tax liability to each taxing authority
      • US GAAP moved farther away from IFRS with the adoption of FIN 48
  • 18. Derivative Accounting: Overview IAS 39 Financial Instruments: Recognition and Measurement
      • Measurement criteria and terminology broadly consistent between US GAAP and IFRS
      • Shared concepts of embedded derivatives, hedge accounting (and effectiveness ranges) and NPNS (Own Use)
  • 19. Consolidation and Special Purpose Entities: IAS 27, Consolidation and Separate Financial Statements SIC 12, Consolidation – Special Purpose Entities
      • IAS 27 focuses on voting power as the indicator of control
      • SIC 12 provides several substance based indicators of control
        • Activities being conducted on behalf of entity
        • Entity has decision-making powers
        • Entity has rights to obtain majority of benefits
        • Entity retains majority of ownership risks
  • 20. Emission Trading Current Joint Project between IASB and FASB
      • IFRIC 3, Emission Rights, was withdrawn
        • Defined Emission allowances as intangible assets measured at fair value
        • Required recognition of income for grants on a systematic basis
      • Broadly defined project expected to cover
        • Cap and trade schemes
        • Baseline and credit schemes
        • Renewable energy certificates
  • 21. 3. Impact on Regulated Companies
  • 22. Impact on Earnings and Rate Base
      • Certain costs will change under IFRS
        • Pension and OPEB costs
        • Capital leases vs. operating leases
        • Loss contingencies
        • Stock based compensation
      • Timing of certain costs
        • No deferral of over/under recovery
        • Depreciation
      • Capitalized assets may differ
        • No equity AFUDC
        • Impact of componentization
        • Differing capitalized asset rules
        • Revaluation option
  • 23. Financial Reporting Process and Control Considerations
      • Need to ensure that IFRS policies have adequate processes and controls
      • Transition to IFRS will be subject to Sarbanes Oxley 404 evaluation
      • Need to evaluate the most efficient method of incorporating multiple GAAPs into financial reporting processes
      • Significant system enhancements may be required
  • 24. Other considerations
      • Conversion to IFRS will involve significant costs
        • Project costs
        • System costs
      • Regulated companies likely to maintain multiple ledgers
        • IFRS
        • FERC Uniform System of Accounts
  • 25. 4. Questions?
  • 26. Contact Information
      • Michael (Casey) Herman
    • 312-298-4462
      • [email_address]
      • Danah Al-Husaini
      • 617-530-4824
      • [email_address]
  • 27. www.pwc.com This document is protected under the copyright laws of the United States and other countries as an unpublished work. This document contains information that is proprietary and confidential to PricewaterhouseCoopers LLP and shall not be disclosed outside the recipients company or duplicated, used or disclosed in whole or in part by the recipient for any purpose other than to evaluate this document. Any other use or disclosure in whole or in part of this information without the express written permission of PricewaterhouseCoopers LLP is prohibited. PricewaterhouseCoopers has taken all reasonable steps to ensure that information contained herein has been obtained from reliable sources and that this publications is accurate and authoritative in all respects. However, it is not intended to give legal, tax, accounting or other professional advice. If such advice or other expert assistance is required, the competent professional should be should be sought. This document is not intended to establish legal relationship between PwC and First Energy. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2008 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. Design: 0800359_ass 