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Major Differences Between US Gaap And IFRS

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Presentation together with Steve Austin (Swenson Advisors) during Accounting Day 2009.

Presentation together with Steve Austin (Swenson Advisors) during Accounting Day 2009.

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  • Thanks a lot for the introduction and welcome to our presentation. Start out with holding up the book and explain that the standard volume is much less than under US-GAAP. True IFRS text is only half of the book. Compared to German GAAP, IFRS is huge. German GAAP is ultra principles based and it would fit in my pocket. There are 195 independent countries in the world. Currently 55% of all countries in the world are using IFRS and this number will go up to 77% very soon. The number of countries where IFRS is mandatory is currently 85, so the difference between the 110 and 85 (25) are countries that permit IFRS as an alternative. The number 110+ is somewhat misleading. The are not all requiring IFRS. North and South of us will be using IFRS very soon. Essentially we will be surrounded by IFRS. The United States is not an island. There is significant cross-border trade going on with Canada and Mexico. San Diego is directly affected by trade with Mexico and we need to be aware of their change to IFRS. Before Canada made the decision to adopt IFRS they had plans to switch to US-GAAP. I want to read to you a few words from IASB Member John Smith from a recent conference organized by the European Commission entitled ‘Financial Reporting in a changing world’: "I believe it is in the interest of the United States to adopt IFRSs in the next five years… The cost to the United States of failing to adopt IFRSs will be high…If it doesn't adopt, the United States will be the outlier and those countries already adopting and committing themselves to IFRSs will not accept a situation where the United States remains outside the system indefinitely, yet has a seat at the table.” The Internet Sources you see on this slide are also great Sources to start learning about IFRS and I will explain them in more detail at the end of this presentation.
  • If you look at this slide it appears that IFRS are very young. That is not the case. The predecessor of the IASB, the IASC was founded in 1973. The FASB was also founded in 1973. I always claim that International Accounting truly started in 1494 when Luca Pacioli published his book ‘Summa de Arithmetica’ which was instantly translated and used in many European Countries. For the first time someone really wrote down standards for Accounting and sheer market forces made them successful - because they made sense. 2002 = Breakthrough Event for IFRS = EU passes regulation to adopt IFRS. Only 3 years later a whole continent is making the shift to IFRS. 25 Countries agree to have one single set of accounting standards. Before this there were 25 countries with 25 different accountings standards. How in the world can you claim to have a common marketplace and then conduct business with 25 different accounting standards? You simply can’t. I have worked there and I once had French GAAP and Italian GAAP in front of me and had to reconcile all this to German GAAP for a German Investor and to US GAAP for an US Investor. In addition the notes were in French and in Italian and a Translater had to come in. This was not fun for anyone involved and you can imagine that the reliability of such an accounting Rollercoaster might not be 100%. After the successful adoption of IFRS in the EU, other countries were motivated to look at IFRS and decided to also go this route. Before the European Union decided to switch to IFRS, US-GAAP was the big thing and everyone thought US-GAAP would become the world standard. The EU decision caught many companies by surprise. Daimler for example was reconciling German GAAP to US-GAAP to get listed in New York. Then they suddenly had to shift from German GAAP to IFRS, but were still listed in New York under US GAAP. In addition came the German Tax Accounting, so Daimler was running 4 sets of different books simultaneously for years. This back and forth needs to be prevented for the U.S. In 2006 the IASB said thank you to the European Union and announced a stable platform period to make it easier for companies to get used to IFRS. No company that is already applying IFRS will be forced to apply new IFRS for the next three years. If the U.S. adopts IFRS it is more than likely that the same will happen again. This will be such a massive switch with thousands of companies affected, that it is the only thing that makes sense. It will greatly facilitate the adoption of IFRS in the U.S. 2007 was the breakthrough event for IFRS in the U.S. Now, IFRS was suddenly relevant within the U.S. and if it is permitted to file your statements under IFRS without a reconciliation to US-GAAP, IFRS can’t be all that bad. Also, the SEC gave a clear sign to the market, that IFRS are an option for the U.S. and that all the years of converge might one day lead to the adoption of IFRS. This is the time when the Big4 started to invest into building up IFRS Knowledge in the U.S.
  • The first bullet point on this slide is not that obvious, because initially the costs of preparing IFRS Financial Statements will be very high and that is one of the main reasons why we see so much opposition to IFRS in the U.S. But if you think about Multinational Corporation, there are situations were there are already cost benefits of switching to IFRS. These companies already deal with IFRS through their subsidiaries all over the world and a shift to IFRS would finally enable them to have a single set of Accounting Standards. In the 1960’s and 1970’s global trade was not as prevalent as it is today. Back then it was not that important to understand foreign financial statements. Today it is, because we live in a truly global economy. If an investor is not able to understand foreign financial statements, he will demand a risk premium for his investment or he will simply walk away. Accounting is the language of business and we need to be able to communicate with each other.
  • READ SLIDE IN FULL . What we see on this slide is the big accounting dream that stands behind IFRS. This is what is possible and why people all over the world are enthusiastic about IFRS . When Europe introduced its plan to change to one single currency, the Euro, there was an uproar in every single country. The French loved their Franc, the Germans had the German Mark, the Italians the Lira and everyone had deep feelings attached to their currencies. Whole countries had referendums against the Euro, hundreds of economics professors signed petitions and published statements against the Euro. At that time Ireland had a much higher GDP growth rate than any other country in the European Union. The professors argued that the local economies and the local inflation rates within the European Union are much too different to make this possible. They clearly said you can’t do that. The answer they received from the European Commission was: Yes, you can. Texas and California are also not identical, yet they share the same currency. In order to achieve something truly great you also have to risk something. The Euro is a huge success story. In November 2008 the Euro surpassed the USD and is now the currency with the highest circulation in cash value. London has recently bypassed the New York Stock Exchange and now has the highest market capitalization in the world.
  • This slide is the Macro Economics of IFRS. It is very abstract and it does not directly affect you, yet it contains important and true statements. The number of Foreign Listings in the U.S. is declining. For German Companies a listing in the U.S. has proven to result in very high compliance costs due to SoX and very high legal risks. Siemens was found liable for corruption and had to settle with the SEC in the Billion Dollar range. How do you explain these issues at home to your German shareholders? IFRS could be a way to make the U.S. Capital Market more attractive again. The last bullet point is highly relevant for third world countries. There is a free high quality of the shelf solution that will establish an immediate international recognition. How much better is that compared to developing your own standards?
  • This shows the micro economics of IFRS and these arguments also make a lot of sense. IFRS is understood around the world and it will provide easier access to financing. Theoretically lenders are willing to reduce their risk premiums under IFRS. All of these benefits are substantial and have to be considered if people complain about the high costs of adopting IFRS.
  • Besides the global benefits and the company specific benefits there are a couple of other benefits. ARB 43 – issued in 1953 (Restatement and Revision of Accounting Research Bulletins) ARB 51 – issued in 1959 (Consolidated Financial Statements) These standards are older than most of us in the room, certainly myself. If you want to have an international career or if there is a recession in one country, as an accountant or auditor you are now much more flexible. You can work anywhere in the world. That is maybe also one reason why the Big4 are pro IFRS. They can rotate their employees through countries wherever the demand is highest.
  • I want to talk for a moment about the difference between rules-based (US-GAAP) and principles-based standards (IFRS) The last point is interesting because it will affect the business model of the Big4. Under IFRS there is a huge professional judgment issue. Professional judgment requires work experience and can only be developed over time. This means that audits under IFRS will likely require more manager hours compared to audits under US-GAAP and that associates need stronger supervision, training and guidance.
  • The last point sounds extreme, but it is exactly what happened with Accounting for Derivatives . Standardsetting was simply not able to keep up with the never ending variety of new financial products that were introduced. There is a simpler way to illustrate the difference between Rules-based and Principles-based Standards. If I am raising my child principles based and you are all raising your child rules based, your child will get creative and will tell you how they did not break your ever increasing rules. My child will know the difference between right and wrong in any situation and it would certainly have a good idea of what daddy would think about their decision.
  • In respect to the guidance, IFRS is not meant to have strong guidance. Oftentimes you have to make up your own mind of what represents a fair presentation and what reflects the substance of a transaction. Also, IFRS are not fully developed yet. The IASB is still working on it and it will take a few more years until all the old IAS Standards are updated. The current IFRS Framework is over 20 years old and will be updated soon. Let’s have a look at the accounting scandals in more detail.
  • As you can see there was not enough space here to contain all of these accounting scandals under US-GAAP. Essentially this slide is just an embarrassment. The range of fraud that happened within these companies is sheer unbelievable and this topic would be a great presentation all by itself.
  • Compared to the prior slide it is pretty empty on this slide… IFRS have been around for quite a few years now. There should be more on this slide, but there is really nothing. A trader for Société Générale (SG) concealed from management that he was making huge bets with the bank’s money. At 31 December 2007, these fraudulent trades had an unrealized gain of EUR 1.5 billion. However, when the fraud was exposed in January 2008, the market had taken a turn for the worse and resulted in a realized loss of EUR 6.4 billion. In its annual report, SG quotes the ‘true and fair’ provision of IFRS which provides that ‘in the extremely rare circumstances in which management concludes that compliance with the rules would be so misleading that it would conflict with the objective of financial statements’ a company can depart from these rules (IAS 1.19). In the past, this provision has been rarely used within IFRS. In moving the loss from 2008 - when it actually occurred and was realized - to 2007, SG has created an uproar in accounting circles and raised questions about whether IFRS can be consistently applied in the countries around the world. IASB Member John Smith said: ‘There is nothing true about reporting a loss in 2007 when it clearly occurred in 2008.’ SG said that its two auditing firm, Ernst&Young and Deloitte&Touche approved of this accounting, as did French regulators. If you look at other Presentations and Articles you will find more examples for Accounting Scandals under IFRS. People seriously quote Parmalat, Alstom, Vivendi, Adecco and Royal Dutch as IFRS related Accounting Scandals. That is not the case. That all happened BEFORE the transition to IFRS. There is the idea that all accounting in Europe is automatically IFRS. You have to be very careful with that. Overall there is a lot of incorrect information out there on IFRS. I will talk more about good sources for IFRS Information later on.
  • Read Slide Managers use internal reporting for their purposes and external reporting is different from the information that managers have. In certain areas IFRS merges internal with external reporting. Under IFRS, External Reporting becomes more relevant for decision making.
  • 1) German Daimler and Dutch Unilver are examples for this 2) Sempra Energy and General Electric 3) Nestle and BMW
  • Proactive smaller entities could publish audited IFRS Financial Statements on a voluntary basis and could receive low-cost automatic ratings through XBRL Filings, potentially leading to a lower cost of capital.
  • Out of the 180 comment letters only three are from the actual Users of Financial Statements = Analysts. All other comment letters have been written by companies, academia and standard setting bodies around the world. So, the people that we do all this for, are not participating in the process and don’t show a high interest in it. This is quite remarkable and surprising.
  • The first group are those U.S. companies that operate in an industry where the majority of their competitors are already using IFRS and where Investors would have a benefit if the U.S. company would also report under IFRS. There is no more requirement to present U.S. GAAP Financial Statements. This requires the written approval of the SEC. Large accelerated Filers = public float of at least USD 700 million Accelerated = public float of at least USD 75 million Overall, the bigger the company, the more relevant the topic. For most companies in the U.S., IFRS will not be a requirement until 2016. However, we are already in mid-2009 and it makes sense to get informed now.
  • READ BOLD STATEMENTS
  • READ BOLD STATEMENTS
  • READ ALL
  • Shapiro is stating the obvious. Everyone familiar with IFRS knew these issues already and the IASB is actively working towards solving them. The IASB created a new Monitoring Board, significantly enhancing the IASB’s public accountability. The Monitoring Board comprises the IOSCO, the SEC and the Japanese Financial Services Agency.
  • The SEC currently has three objectives. These are enforcement, enforcement and enforcement.
  • How relevant is Mary Shapiro if the Group of twenty announces that they want to see IFRS implemented? Paul Volcker is one of the economic advisors for President Obama. Volcker served on the IASB for years and is obviously very much pro IFRS. Will Shapiro act against Obama’s interest?
  • READ ALL QUOTES I now have listed a few citations from comment letters to the Roadmap and I simply want to read through these comments.
  • READ FULL SLIDE
  • READ THEIR FIRST COMMENT. This is how they start their letter. If you get a letter that starts with ‘we do not live in an ideal world’, don’t expect it to get any better. READ REST
  • READ FULL STATEMENT This sounds like a fair solution. That’s the american way. Let the market figure it out and we will know what is best. But this is not always good. It is sometimes good to have industry standards. Do you remember the big fight between blue ray dvd and HD (High Density) DVD and how many resources were burned along the way? Consumers were insecure of what technology to buy and if the product they chose might end up being the losing one. For how long do you want to have two sets of Accounting Standards?
  • The U.S. had the luxury of a long convergence process and there is really not all that much different to IFRS when you compare it to other countries that made the shift to IFRS. The “I“ in IFRS stands for International. There are other countries in the world. It is not appropriate to just cater to the U.S. How do you evaluate if the 7 Milestones have been accomplished? When will IFRS be high quality enough for the SEC to approve them? How do you measure this quality or is this more of a subjective and political decision?
  • READ FULL SLIDE
  • READ FULL SLIDE
  • A Significant Part of the Stimulus Package will go towards renewing America’s Infrastructure, Roads, High Speed Railway System and Electricity Grid. In Accounting there is a very similar process going on. When you came here this morning you have likely used the I8 and while you where driving you were likely not thinking about is happening underneath you. Under the I8 and under all Highways there is a huge amount of infrastructure, pipes for water and gas, cables for communication and electricity. It is crowded and without that infrastructure underneath the surface we are not able to have a modern live above the surface. Right now all of these pipes and wires are getting replaced with new ones and the names of these new pipelines and wires are: IFRS XBRL International Auditing Standards If you do not pay close attention to this new infrastructure you are at risk that you might not be able know how to use it. These changes all make a lot of sense and they might get implemented quicker than you think. Europe was quite surprised about its rapid move to IFRS. There is a high speed train coming through and it is a much nicer view if you are sitting inside this train. If the U.S. is procrastinating on IFRS, it will get more difficult down the road. Right now the U.S. can be part of the process and influence IFRS, later on it will be a take or leave deal. IFRS does not need the U.S. any more. The title of this conference is ‘Building Foundations’ and sometimes it is necessary to reevaluate the foundation you are standing on. America was always a country of great innovation and now is the time to make important changes towards a new foundation. With that I pass it over to Steve. Thank you very much. NEXT SLIDE.
  • The Framework is really the basis and you will find components of the Framework in many Standards. If you understand the Framework, IFRS will make sense to you much quicker compared to starting with individual standards. There are certain beliefs within IFRS that repeat themselves over and over again, discounting all future cash flows that relate to the company, to provide a fair presentation and true and fair view, fair value, Impairment testing with revaluation, etc.... Last Point is particularly important. Don’t constantly compare IFRS to US GAAP. Accept it as something fresh and new. Only this way you are able to come to the correct conclusions.
  • This is obviously the main website for IFRS which is full of content. What I find most interesting is the Project Timetable. There you can see the upcoming Discussion Papers, Exposure Drafts and IFRSs.
  • The AICPA has invested a lot of money and effort into this website. AICPA should be busy with U.S. GAAP. Instead they are developing IFRS Websites. That is another clear sign that IFRS is a serious thing. What I liked on this website was the IFRS Email Newsletter. This Newsletter is really good and subscribing to this newsletter alone will keep you updated on IFRS and greatly improve your IFRS Knowledge over time.
  • All Big 4 firms have IFRS Information and Websites at this point. Deloitte was the first that invested heavily into IFRS and they still have the upper hand. The IFRS E-Learning Tools are just wonderful. They are very interactive and very entertaining and I can only recommend these E-Learning Modules.
  • Explain Certificate Program.
  • If you work in academia you can get very cheap access to E-IFRS through the International Association for Accounting Education and Research (25 Dollars).

Transcript

  • 1. Major Differences in U.S. GAAP & IFRS and Latest Developments Accounting Day Town & Country Convention Center May 18, 2009 | Track A | 9:15am - 11:10am Stephen G. Austin, CPA, MBA Swenson Advisors, LLP Norbert Tschakert, Ph.D., CPA, MBA San Diego State University
  • 2. Disclaimer
    • The views expressed in this presentation
    • are those of the presenters and are
    • not official positions of
    • Swenson Advisors, LLP
    • or San Diego State University.
    Accounting Day 2009
  • 3. Presentation Outline
    • Introduction to International Financial Reporting Standards (IFRS)
    • Current Relevance of IFRS in the U.S.
    • SEC Roadmap to IFRS and Projected Impact of IFRS on the U.S.
    • Overview of Convergence Process
    • Major Differences between U.S. GAAP and IFRS
    • Dependency of IFRS on Business Ethics and Corporate Governance
    • IFRS Business Opportunities for CPAs
    • Implications for Businesses and Audit Committees
    • IFRS Resources, Self-Study Opportunities and SDSU IFRS Curriculum
    Accounting Day 2009
  • 4. 1) Introduction to IFRS Accounting Day 2009
  • 5. IFRS Are a Reality
    • The globalization of business and finance has led to the successful mass adoption of IFRS in more than 110 countries.*
    • The Chairman of the IASB, Sir David Tweedie, expects that 150 countries will mandate or allow IFRS within the next three years.
    • Canada , India and Japan will adopt IFRS in 2011.
    • Mexico will adopt IFRS by 2012.
    Both of our neighbors are adopting IFRS. Because of the comparable period requirement under IFRS 1 (First time adoption of IFRS), companies in both countries are currently working on the transition to IFRS. * www.iasb.org , www.ifrs.com , www.iasplus.com
  • 6. Milestones in IFRS History
    • 2001 Formation of the IASC Foundation and the IASB
    • 2002 EU passes regulation to adopt IFRS for listed entities in 2005
    • FASB and IASB sign ‘The Norwalk Agreement’ in which they commit to reduce differences between US GAAP and IFRS, initiating the conversion efforts
    • 2005 Nearly 7,000 listed entities in Europe adopt IFRS
    • 2006 IASB announces ‘three years stable platform period’ - entities that have already adopted IFRS do not need to implement new IFRS until 2009
    • 2007 SEC removes reconciliation requirement for non-U.S. entities reporting under IFRS
    • 2008 SEC proposes roadmap for potential mandatory adoption of IFRS by U.S. Filers
    • 2009 New SEC Chairman Mary Shapiro is reluctant to fully support roadmap to IFRS. In April, the Group of Twenty supports IFRS as one important step towards reforming the Financial System
  • 7. Main Reasoning for Global Accounting Standards
    • Global Accounting Standards improve the functioning of global capital markets by providing better information to investors and other users of financial statements.
    • Decrease the costs of preparing and interpreting financial statements
    • Decrease cost of capital
    Accounting Day 2009
  • 8. Robert Herz Chairman FASB
    • “ If you were to look back from the year 2020 to the year 2001 you would say ‘What chaos!’ and ‘What inefficient capital markets!’ People will look back and say, ‘How did those people get along then?’ It will be like we now say, ‘How did people get along without cell phones?’ When you are in the middle of it, it is always difficult. It is important just to keep on towards that end goal.”
    KPMG: International Financial Reporting Standards: Views on a financial reporting revolution, 2006, p. 23, www.kpmg.com
  • 9. Benefits to Capital Markets
    • Enhanced worldwide comparability for investors
    • More efficient capital allocation
    • Enhanced credibility of local markets to foreign investors
    • More company-friendly US securities market for foreign listings
    • No need to develop and maintain national standards
    • Investors viewed European IFRS adoption positively
    Accounting Day 2009
  • 10. Benefits to Companies
    • Lower cost of capital
    • Supports raising capital overseas
    • Easier consolidation (one set of books)
    • Easier cross-border acquisitions
    • Encourages integrated IT Systems
    • Understand the financial statements of overseas suppliers, customers, subsidiaries
    Accounting Day 2009
  • 11. Other Benefits
    • Some U.S. GAAP are outdated and IFRS can enhance the quality of reporting
    • Easier movement of auditors and accountants across borders
    • Facilitates global education and training
    Accounting Day 2009
  • 12. The Strengths of Rules-Based Standards
    • + Increased verifiability for auditors and regulators
    • + Increased comparability among financial statements
    • + Reduced opportunities for earnings management through the use of judgments
    • + Improved communication of standard setters’ intentions
    • + No requirement for a very strong ‘professional judgment’ on the part of accountants and auditors
    Accounting Day 2009
  • 13. The Weaknesses of Rules-Based Standards
    • - Increases the overall complexity of applying a given principle
    • - Management can structure transactions to meet the form of the rules while not conforming to the underlying substance (form over substance)
    • - Can drastically depart from the underlying principle
    • - The Business landscape is dynamic and ever changing, rules are not able to keep pace
    • - Rules can be obsolete by the time they are issued
    Accounting Day 2009
  • 14. View of IFRS in the U.S.
    • Common IFRS Prejudice in the U.S. :
    • IFRS do not have strong guidance
    • and will lead to chaos and accounting scandals.
    Accounting Day 2009
  • 15. Some Accounting Scandals Under U.S. GAAP
  • 16. Accounting Scandals Under IFRS 2007 - controversial use of overriding principle in IAS 1 to provide a ‘true and fair view’ on financial statements. … Yes, there are likely more to come, but so far things look very good. … How is this possible? … Because of the (intended) lack of guidance, IFRS force accountants to think about properly displaying the substance of transactions, resulting in more meaningful Financial Statements. Accounting Day 2009
  • 17. Michael Hughes KPMG Global Head of Audit
    • “ IFRS brings more discipline and more rigor. Companies say that if IFRS continue to base themselves on economic realities then they look at their own businesses differently and it helps them manage themselves better. Companies need to feel the figures are equally relevant for decision-making.”
    KPMG: International Financial Reporting Standards: Views on a financial reporting revolution, 2006, p. 26, www.kpmg.com
  • 18. 2) Current Relevance of IFRS in the U.S. Accounting Day 2009
  • 19. Relevance of IFRS in the U.S…
    • IFRS are used by SEC foreign registrants without reconciliation to US GAAP
    • IFRS are used by foreign subsidiaries of U.S. -based multi-nationals
    • IFRS are used by U.S. subsidiaries of non-U.S. multi-nationals for the purpose of consolidation
    Accounting Day 2009
  • 20. … is Likely to Grow in the Future
    • SEC taking steps to allow U.S. companies to adopt IFRS (SEC Roadmap to IFRS)
    • Within a few weeks the IASB will issue a new IFRS:
    • “ IFRS for Non-publicly Accountable Entities (NPAEs)”
    • This single IFRS will likely be a milestone in worldwide IFRS Adoption and is viewed to have a similar significance as the Adoption of IFRS in the European Union in 2005.
  • 21. 3) SEC Roadmap to IFRS and Projected Impact of IFRS on the U.S. Accounting Day 2009
  • 22. Introduction to SEC Roadmap to IFRS
    • TITLE: ‘Roadmap For The Potential Use Of Financial Statements Prepared In Accordance With International Financial Reporting Standards By U.S. Issuers.’
    • AGENCY: Securities and Exchange Commission
    • ACTION : Proposed rule
    • PAGES: 165
    • PUBLICATION DATE: 11/14/2008
    • COMMENT DEADLINE: Extended to April 20, 2009
    • COMMENT LETTERS: >180 comment letters received
    Accounting Day 2009
  • 23. SEC IFRS Roadmap: Proposed Phased Approach
  • 24. Milestones to be Achieved for the Potential Use of IFRS by U.S. Issuers
    • 1. Improvements in Accounting Standards
    • A Memorandum of Understanding between FASB and IASB outlines projects expected to be completed through 2011
    • 2. Accountability and Funding of the IASC Foundation
    • IASCF must develop an independent and reliable funding mechanism
    • 3. Improvement in the Ability to Use Interactive Data (XBRL) for IFRS Reporting
    • SEC will evaluate IFRS XBRL Taxonomy
    • 4. Education and Training
    • The SEC will consider the state of preparedness of U.S. issuers, auditors, users and educators
  • 25. Milestones to be Achieved for the Potential Use of IFRS by U.S. Issuers, Cont.
    • 5. Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors
    • For large U.S. companies in industries in which IFRS is the most-used set of standards globally
    • 6. Anticipated Timing of Future Rulemaking by the Commission
    • The SEC will decide about mandatory use of IFRS in 2011. The main criteria will be, if IFRS will benefit investors & the public interest
    • 7. Implementation of the Mandatory Use of IFRS
    • Staged transition as mentioned in proposed phased approach
  • 26. Former SEC Chairman Christopher Cox versus Successor Mary Shapiro
    • COX: “An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions.”
    • SHAPIRO: “When it comes to international accounting standards, it’s critical that these standards are converged in a way that does not kick off a race to the bottom. American investors deserve and expect high standards of financial reporting, transparency, and disclosure - along with a standard setter that is free from political interference and that has the resources to be a strong watchdog. At this time, it is not apparent that the IASB meets those criteria, and I am not prepared to delegate standard-setting or oversight responsibility to the IASB.”
  • 27. Summary of Shapiro’s Concerns
    • Pace of timeline
    • Independence of IASB
    • Cost of IFRS Adoption
      • Shapiro’s concerns are all valid, but they are not new. These concerns have been known and they will be properly addressed.
    Accounting Day 2009
  • 28. SEC has Problems of its Own
    • Credit crisis and undiscovered fraud schemes partly due to lack of oversight and failure of SEC.
    • SEC’s current focus is on enforcement and internal restructuring. SEC is self-consumed and overstrained with in-house problems that are not quickly to solve.
    • As a result, SEC has little room for ‘other’ issues. IFRS is not viewed as urgent.
    Accounting Day 2009
  • 29. Shapiro’s Comments Result in Planning Uncertainty which will Lead to Timing Problems
    • From a company perspective, it is difficult to commit to IFRS without the relevant agency (SEC) showing commitment. In a worst case scenario, an early IFRS adopter would have to revert to U.S. GAAP.
    • Transition to IFRS is a PROCESS , not a shift.
    • Lessons learned in the European Unions :
      • Required effort was underestimated
      • Starting late caused costs to increase
      • Company-wide ‘holistic’ approach better than supplemental approach (Excel adjustments)
    Accounting Day 2009
  • 30. Strong International Support for IFRS
    • At their April 2, 2009 London Summit, the Leaders of the Group of 20 agreed as part of their Declaration to Strengthen the Financial System…
    • “… to call on the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards.”
    Accounting Day 2009
  • 31. Strong International Support for IFRS, Cont.
    • Robert L. Bunting, former Chairman of the AICPA and President of the International Federation of Accountants (IFAC) supports IFRS in an interview with the JofA on April 21, 2009.
    • “ Market, rather than political forces will drive the use of global standards in the U.S. A significant portion of U.S. companies will be reporting under IFRS no matter what the SEC decides… There is nothing the SEC can do to keep that from happening unless they commit to the same language that the rest of the world will be operating in.”
    • “ The SEC’s proposed roadmap for the adoption of IFRS is doable as are the roadmaps for Canada, China and Japan.”
    Accounting Day 2009
  • 32. Comment Letter - AICPA (American Institute of Certified Public Accountants)
    • “ The U.S. financial reporting system will take substantive, definite steps to ready itself for IFRS only when the SEC sets a date certain on requiring companies to adopt IFRS.”
    • “ Certain of the “milestones” in the Roadmap are critical
    • for an SEC decision on IFRS while certain
    • other ones are not.”
    • “… , IFRS cannot be viewed in a vacuum - the auditing, regulatory, and litigation environment in the U.S. must adopt to allow for adoption of IFRS.”
    Accounting Day 2009
  • 33. Comment Letter – NASBA (National Association of State Boards of Accountancy)
    • “ In an ideal world, a single set of accepted accounting standards set by an international regulatory organization could be globally accepted. However, we do not live in an ideal world…”
    • “… jurisdictional variants of IFRS have become the norm and are likely to continue into the future. There is simply no assurance that all countries embracing IFRS will apply the standards in the same way to achieve comparability - the chief benefit argued for a single set of standards.”
    • “ Principles-based IFRS can be “engineered” to reach a desired result, regardless of the economics of a transaction… NASBA further notes that “engineering” is an ethical issue and not a technical issue, and that ethical issues cannot be solved with technical solutions.”
    • “ NASBA recommends to the Commission that the Roadmap be withdrawn due to the concerns previously discussed. To eliminate uncertainty for the U.S. issuers, investors, creditors and other members of the public, NASBA also recommends that the Commission’s withdrawal take place as early as possible.”
    Accounting Day 2009
  • 34. Comment Letter – AAA (American Accounting Association)
    • “ Financial statements based on IFRS provide good financial reports that are equivalent to those based on U.S. GAAP. We favor giving U.S. companies the choice of using U.S. GAAP or IFRS in their financial reports and hope that other jurisdictions around the world would exploit the advantages of giving choice to their own registrants. This will lead to a gradual and partial adoption of IFRS in the U.S.”
    Accounting Day 2009
  • 35. Comment Letter – IDW (Institut der Wirtschaftspruefer)
    • “ We are not convinced that staggering the transaction in the manner proposed is necessarily the optimal way… given the convergence project and resultant increasing similarities between U.S. GAAP and IFRS the transition ought to be less onerous for U.S. issuers than was the case for German companies, who faced significant challenges in converting to IFRS from a substantially different German GAAP.”
    • “ True IFRS convergence ought to involve due consideration of other major national GAAP and also be open to new ideas rather than being restricted to existing U.S. GAAP.”
    • “… criteria by which the Commission plans to evaluate these factors are not clear… In not indicating a firm commitment, but essentially “holding the door open” the SEC makes the prospect of electing for the early use of IFRS significantly less attractive; issuers are unlikely to be prepared to try IFRS for a limited period, especially if they might subsequently need to revert back to U.S. GAAP either voluntarily or at the insistence of the SEC. We therefore urge the SEC to bring forward its decision and indicate a firm commitment to the transition to IFRS, rather than merely introducing the “possibility” of IFRS adoption.”
    Accounting Day 2009
  • 36. Comment Letter Summary
    • Many of the comment letters have been written by special interest groups and they are not necessarily representative of the view in the U.S. Two surveys conducted by KPMG in January 2009 show a strong support for IFRS among executives, a survey by Grant Thornton conducted in April 2009 shows a 50/50 ‘support’ for IFRS.*
    • The frequently used argument that adopting IFRS during the current recession causes unbearable costs, is likely incorrect. The SEC Roadmap to IFRS includes a very generous phased-in approach towards adopting IFRS resulting in adoption of IFRS for most companies in 2016 at the earliest.
    *KPMG’s Executive Report of Findings on the Proposed IFRS Roadmap, www.kpmg.com . April 30, 2009 Press Release on www.grandthornton.com
  • 37. Comment Letter Summary, Cont.
    • The U.S. has a very unique business history
    • IFRS do not match this business history
    • U.S. needs to change in several areas (legal, regulation, corporate governance) to get ready for IFRS
    • Implementing IFRS in the U.S. might be more challenging than in other countries due to country specific environment
    • Conversion project between FASB and IASB will greatly facilitate adoption of IFRS in the U.S.
    • U.S. has a broad base of accounting professionals (CPA’s) that will be able to support the adoption of IFRS
    Accounting Day 2009
  • 38. Projected Impact of IFRS on U.S.
    • SHORT-TERM :
      • NEW rules, judgments and perspective on financial reporting
      • Confusion, change, chaos?
    • LONG-TERM:
      • Accountants know a single set of global standards and become experts at making the required judgments
      • Mobility of people, information, capital
      • Comparability, confidence, clarity!
    Accounting Day 2009
  • 39. The Need for Change and a New Foundation
    • ‘ Change’ was the leading theme of President Obama’s election campaign. Obama now uses the term ‘Foundation’ more and more often to emphasize the need for disruptive change.
    • Foundation : ‘A basis upon which something stands or is supported.’ (Merriam Webster Online Dictionary 2009)
    • Adoption to changing environments is a key skill for survival. The U.S. has procrastinated on necessary changes and reforms and is now under pressure to adopt at a much quicker pace.
    Accounting Day 2009
  • 40.
    • "In a time of drastic change,
    • it is the learners who inherit the future. 
    • The learned find themselves equipped to
    • live in a world that no longer exists.”
    • Eric Hoffer
    Accounting Day 2009
  • 41. 4) Overview of Convergence Process Accounting Day 2009
  • 42. What is International Convergence?
    • Does not mean “ merged ” identical standards
      • Means to an end, not an end itself
      • Recognition of equivalence between IFRS and U.S. GAAP
    • Common financial language
    • IASB and FASB joint MOUs
      • Other standard setters involvement
    • Convergence goes beyond the U.S. and EU (IASB)
      • Canada, Japan, China, India, Israel, Korea and more …
    Accounting Day 2009
  • 43.  
  • 44. More Advantages to Convergence
    • Financial reporting that is not easily understood by global users is unlikely to bring new business or capital to a company
    • Why is this the case?
      • Transparency and comparability
      • Growing economies access to the following (all which stimulate growth):
        • Global capital markets/global economies
        • Promote private investment across borders
        • Global access to financial institutions
    Accounting Day 2009
  • 45. More Advantages to Convergence, Cont.
    • Cross-border accountability and audit issues
      • Understandability
      • Improve the quality of financial reporting
      • IASB and AICPA convergence of auditing standards
      • Mergers and acquisitions
      • Reduction of audit costs
    • International benefits for multi-national companies
      • Improve internal reporting (parent/subsidiaries)
      • Quality of management reporting and group decision making
    Accounting Day 2009
  • 46. Convergence Considerations
    • Principles versus Rules
      • Generally, U.S. standards are developed on principles
        • Interpretive guidance adds many bright lines (to name a few):
          • Emerging Issues Task Force (EITFs)
          • AICPA (SOPs, Industry Guides)
          • FASB (Staff Positions and Interpretations)
          • SEC (Staff Accounting Bulletins)
        • IFRS are strictly principles based
          • Very limited interpretations by IFRIC
          • “ Non agenda ” items as discussed in the “ green book ”
        • The “ spirit ” of a U.S. GAAP “ rule ” and an IFRS principle may be the same but result in a different answer
    Accounting Day 2009
  • 47. Convergence Considerations, Cont.
    • Impact and considerations on human capital
      • Create a project team (all levels of organization as this impacts most, including project management)
      • Hire external consultants to assist with project
      • Develop training program for all levels
      • Revise performance targets for individuals and company
      • Develop a project plan with timelines to meet established deadlines
    Accounting Day 2009
  • 48.
    • Impact and considerations on processes and systems
      • Develop new internal accounting and reporting guidelines (manuals)
      • Evaluate new IT system needs/controls
      • Evaluate and implement controls over conversion and changes in current control processes and structure
      • Develop transition plan
      • Embed IFRS reporting in systems to avoid manual processes, when possible
    Convergence Considerations, Cont. Accounting Day 2009
  • 49. IFRS and the PCFRC
    • Private Company Financial Reporting Committee (PCFRC)
      • 4 CPAs in practice
      • 4 financial statement preparers
      • 4 users of financial statements
      • “ The PCFRC is part of a broad initiative by the Financial Accounting Standards Board ( “ FASB ” or “ the Board ” ) and the AICPA to further improve the FASB ’ s current standard-setting process to better meet the financial reporting needs of private companies and the users of their financial statements. The PCFRC considers user needs and conducts cost-benefit analysis to make formal recommendations to FASB about existing and prospective GAAP. Under protocols set up with the FASB, the Board must consider all recommendations, and decisions made concerning those recommendations becoming a part of the Board minutes. ”
  • 50. MOU Process
    • Three year projects between IASB and FASB
    • First MOU
    • Second MOU
    • Third MOU
    • More to come?
    Accounting Day 2009
  • 51. “ Breaking News”
    • Recent IFRS Thought Leader Comments on Convergence
    • FAF White Paper March 2009
    • SEC Chairperson Mary Shapiro April 2009
    • FASB Chairperson Robert Herz April 2009
    Accounting Day 2009
  • 52. 5) Major Differences between U.S. GAAP and IFRS Accounting Day 2009
  • 53. Some Examples of Differences: #1 Intangibles U.S. GAAP (8 GAAP sources) IFRS (2 IFRS sources)
    • Acquired intangible assets recognized at fair value
    • Recognized if a) probable to have future economic benefit and b) measured reliability
    • Cost allocated to individual assets
    • Initial measurement is at cost
    • Finite lives amortized over the period
    • M&A intangibles at fair value
    • Examples:
    • - Advertising costs
    • - Computer software costs
    • - Website developments
    • - R&D
    • - Start-up costs
    • - FAS141R
    • Revaluation made on a regular basis
  • 54. Some Examples of Differences: #2 Revenue *Subject to current MOU process/revisions U.S. GAAP* (8+ GAAP sources) IFRS* (2 IFRS sources)
    • 4 Criteria:
    • Persuasive evidence
    • Delivery
    • Fixed/determinable pricing
    • Collectability assured
    • Other considerations
    • Sale of goods (5 criteria):
    • Transfer of risk and rewards
    • No continuing management involvement
    • Measurement reliability
    • Probable economic benefit
    • Cost incurred/to be incurred measured reliably
    • Right of return
    • Rendering of service (4 criteria):
    • Reliable measurement
    • Probably economic benefit
    • Stage of completion reliably measured
    • Cost/cost to be incurred reliably measured
    • Multiple deliverables
    • Software revenue
    • Franchise revenue
    • Real estate revenue
    • Long-term contracts
  • 55. Some Examples of Differences: #3 Accounting Standards U.S. GAAP (FAS 154) IFRS (IAS8)
    • Accounting principle
    • Retroactive application
    • Period specific effect
    • Cumulative effect
    • Accounting policy
    • Only if results in reliable and more relevant information for B/S, P/L, C/F
    • Voluntary retro
    • New accounting policies applied to carrying value of assets and liabilities
    • Accounting estimate
    • Period of change or
    • Period of change and future periods
    • No restatements
    • Accounting estimate
    • Same as U.S. GAAP
    • Error corrections
    • PPA
    • Error corrections
    • PPA
  • 56.
    • Many different concepts
      • Methodologies for impairment of PP&E, intangibles
      • Revaluation accounting
      • Recovery of impairments under IFRS
      • Recognition and measurement of provisions (including restructurings)
      • More detailed disclosures under IFRS (vs. U.S. GAAP private company)
    IFRS vs. U.S. GAAP Concepts Accounting Day 2009
  • 57. 6) Dependency of IFRS on Business Ethics and Corporate Governance Accounting Day 2009
  • 58. Key Ethics Considerations when Adopting IFRS
    • Judgment Considerations
      • Legacy accounting models
      • U.S. views of materiality
      • SOX impact on U.S. versus the world ’ s governance
      • U.S. “ legalism ” mindset (rules-based thinking)
      • Wide range of “ basis ” for judgment internationally – cultural differences
      • Global fraud/corruption considerations
    Accounting Day 2009
  • 59. Consistency Risks
    • The application of IFRS particularly in the early years may well result in diverse accounting treatments and disclosures for identical transactions.
    Accounting Day 2009
  • 60. PCAOB Concerns Accounting Day 2009
  • 61. PCAOB Member Argues Against IFRS Capitulation
    • PCAOB member Charles Niemeier , in remarks to the New York State Society of CPAs:
      • The misconception that IFRS is better than GAAP because it is principle-based
      • IFRS is not more principle-based, in his view, just “ younger ”
      • Accounting under IFRS is more variable, not more principled, he explained
      • He urged the IASB to introduce more comparability in the information that is reported for investment purposes
      • He quoted a European asset manager who noted that IFRS “ scope for interpretation … remains colossal ”
  • 62. 7) IFRS Business Opportunities for CPAs Accounting Day 2009
  • 63. Public and Private Company CFO/Controller Considerations
    • Understand the key components of IFRS
    • Develop company-wide strategy and timelines
    • Monitor IASB/FASB/SEC developments and adjust timelines
    • Assess the cost/benefit for start date
    • Interview consultants
    • Assess project management software
    • Assess “foreign sub” needs
    • Ethics/compliance risk assessment
    Accounting Day 2009
  • 64. CPA/Public Accounting Considerations
    • Educate your audit/tax professionals
    • Identify client needs and timing for implementation deadlines
    • Develop thought leadership materials
    • Watch the SEC Roadmap
    • Look for early adopters
    • Look now for U.S. subsidiaries of foreign entities
    • Address with your clients:
      • Project management
      • Change management
      • Legacy accounting
      • Cost benefits
      • Software tools
      • Training materials
    • Audit risk assessment
  • 65. 8) Implications for Businesses and Audit Committees Accounting Day 2009
  • 66. Audit Committee IFRS – What’s Coming Around the Corner
    • Audit Committee training
    • Judgment risks
    • Alternative implementations – EU/US
    • Educate entire BOD and corporate counsel
    Accounting Day 2009
  • 67. 9) IFRS Resources, Self-Study Opportunities and SDSU IFRS Curriculum Accounting Day 2009
  • 68. Preparing for IFRS – First Steps
    • Understand the IFRS Framework
    • Learn foundational concepts
    • Learn how to make ‘professional judgments’
    • Participate in the process
    • Do not apply IFRS from a US GAAP perspective
    • Adopt a global perspective
  • 69.
  • 70.
  • 71.
  • 72. Self-Study Opportunities
    • 1) Certificates
    • Institute of Chartered Accountants of England and Wales offers ‘Certificate in IFRS’, www.icaew.com
    • 2) Continuing Education
    • The International Financial Reporting Standards: An Overview www.cpa2biz.com (AICPA, 2 CPE)
    • International Versus U.S. Accounting: What in the World is the Difference? www.cpa2biz.com (AICPA, 10 CPE)
    • Are You Ready for IFRS? Moving Beyond the Basics, www.cpa2biz.com (AICPA, 18 CPE)
    • 3) E-Learning Modules
    • www.deloitteifrslearning.com
    • www.ey.com/ifrs
    • 4) Email Newsletters
    • www.ifrs.com
    • 5) Webcasts
    • www.ifrs.com
    • www.kpmgifrsinstitute.com
  • 73. SDSU IFRS Curriculum
    • Currently, Universities in the U.S. are starting to implement IFRS into their curriculums.
    • Since 2005 the Charles W. Lamden School of Accountancy at San Diego State University offers courses in International Accounting, employing experienced IFRS Professionals from Europe and Russia.
    • Other SDSU Accounting Courses include at least a brief comparisons to IFRS. IFRS has been included into undergraduate classes.
    • SDSU Open University invites professionals to participate in classes to earn credits towards a ‘Certificate in Accounting’. This can also include courses in IFRS.
    Accounting Day 2009
  • 74. Selected IFRS Internet Resources
    • International Accounting Standards Board ( www.iasb.org )
    • American Institute of Certified Public Accountants ( www.ifrs.com )
    • Deloitte ( www.iasplus.com )
    • Deloitte ( www.deloitteifrslearning.com )
    • KPMG ( www.kpmgfacultyportal.com )
    • PricewaterhouseCoopers ( www.pwc.com/faculty )
    • Ernst & Young ( www.ey.com/ifrs )
    • European Commission ( http://ec.europa.eu/internal_market/accounting/ias_en.htm )
    • European Financial Reporting Advisory Group ( www.efrag.org )
    • The Federation of European Accountants ( www.fee.be )
    • The Committee of European Securities Regulators ( www.cesr-eu.org )
    • Chartered Accountants of Canada ( www.cica.ca )
    • The Institute of Chartered Accountants of England and Wales ( www.icaew.com )
    • International Association for Accounting Education and Research ( www.iaaer.org )
    • Association of Chartered Certified Accountants ( www.accaglobal.com )
    • Financial Accounting Standards Board ( www.fasb.org )
  • 75. Selected IFRS Internet Resources, Cont.
    • Chartered Financial Analyst Institute ( www.cfainstitute.org )
    • Securities and Exchange Commission ( www.sec.gov )
    • SEC Roadmap to IFRS ( http://www.sec.gov/spotlight/ifrsroadmap.htm )
    • American Institute of Certified Public Accountants ( www.aicpa.org )
    • Public Company Accounting Oversight Board ( www.pcaobus.org )
    • International Auditing and Assurance Standards Board ( www.ifac.org/IAASB )
    • UN Conference on Trade and Development ( www.unctad.org )
    • International Organization of Securities Commissions ( www.iosco.org )
    • Financial Stability Forum ( www.fsforum.org )
    • XBRL International ( www.xbrl.org )
    Accounting Day 2009
  • 76. Thank You! Accounting Day 2009 Stephen G. Austin, CPA, MBA Firm managing Partner Swenson Advisors, LLP [email_address] Phone: 619-237-3400 Norbert Tschakert, Ph.D., CPA, MBA Charles W. Lamden School of Accountancy San Diego State University [email_address] Phone: 619-594-3736