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IFRA US GAAP Convergence

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Convergence Update

Convergence Update

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  • 1. IFRS- IFRS-US GAAP Convergence or Keep Them Separated? FICPA Jacksonville, FL May 14, 2009 Neal J. Hannon Senior Consultant, XBRL Strategies The Gilbane Group Cambridge, MA 401-225-6082 401-225- neal@gilbane.com
  • 2. Session WIKI
  • 3. International Financial Reporting Standards
  • 4. International Accounting Standards: Brief History • IASC started 1973: – Volunteer, part-time, met 3X/year part- – Issued IASs 1-41 + interpretations 1- • Restructured 2001: – Full-time IASB based in London Full- – 14 members – Issues IFRSs • Old IASs (most revised by IASB) remain in force
  • 5. Potential for IFRS as the Global Accounting Standard • 113 countries require or permit IFRS • Market capitalization of exchange listed companies in the European Union, Australia, and Israel comprises 26% of global market capitalization • Market capitalization of exchange listed companies in those countries plus Brazil and Canada totals 31% of global market capitalization • SEC believes that the benefits of moving towards IFRS are attainable only if IFRS represents a single set of high-quality accounting standards, which can be accomplished with IFRS as issued by the IASB
  • 6. 113 countries, including the members of the European Union and much of Asia, have already adopted and implemented IFRS. Israel, Chile and South Korea are set for 2009, Brazil for 2010, and Canada for 2011.
  • 7. IFRS Or is it?
  • 8. • AICPA, Big-4, and major US Big- multinationals favor use of IFRSs but support is wavering. • Designation of IASB under AICPA Rules 202- 202-203 (May 2008) – Potential for use of IFRS for Private Entities when it is finished early 2009 • FASB favors convergence; SEC is in comment period on IFRS roadmap • IFAC stands behind high quality global standards
  • 9. Why global accounting standards?
  • 10. • Enhanced worldwide comparability for investors • Enhanced quality of reporting – Some national GAAPs are weak or outdated • Possibly a lower cost of capital for companies adopting IFRSs • More company-friendly US securities company- market for foreign listings
  • 11. • Reduced reporting costs – For instance, multinational with subs applying many GAAPs • No need to develop and maintain national standards • For audit firms and companies: Easier movement of auditors and accountants across borders
  • 12. Past SEC Policy Considerations Regarding IFRS • SEC has long expressed its support for a single set of high-quality global accounting standards (e.g., SEC Release 33-6807 – November 14, 1988) • Convergence of U.S. GAAP and IFRS as issued by IASB (predominant approach) 2002 Norwalk Agreement 2006 Memorandum of Understanding • SEC allows foreign private issuers to file IFRS financial statements without reconciliation to the U.S. GAAP (SEC Release 33-8879) • 2007 Concept Release – whether U.S. issuers should be permitted, but not required, to use IFRS in their filing with the SEC 12
  • 13. US vs. the World? The stated objective of the 2002 “Norwalk Agreement” between FASB and the IASB is the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. Clearly, this approach says let’s make both sets of standards better, not choose one set over the other.
  • 14. ROADMAP FOR THE POTENTIAL USE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS BY U.S. ISSUERS
  • 15. 2011 Roadmap Milestones • Improvements in Accounting Standards • Accountability and Funding of the IASC Foundation • Improvement in the Ability to Use Interactive Data for IFRS Reporting • Education and Training • Limited Early Use of IFRS Where This Would Enhance Comparability for U.S. Investors • Anticipated Timing of Future Rulemaking by the Commission • Implementation of the Mandatory Use of IFRS
  • 16. Ernst & Young Comment on 2009 IFRS Draft Taxonomy Currently the IFRS taxonomy is not complete as it does not contain IFRS common practice or industry concepts. The taxonomy does not contain descriptions or definitions of concepts.
  • 17. Limited Early Use of IFRS • Roadmap: SEC to decide in 2011 mandated use of IFRS for U.S. issuers • The proposed rules allow limited early use of IFRS by certain U.S. issuers • The “early use” proposal has been somewhat controversial; respondents have proposed other alternatives Option to use IFRS should be extended to all U.S. issuers SEC should require IFRS for all U.S. issuers (no option for anyone – even early adopters) Continue convergence project without mandatory use of IFRS
  • 18. Anticipated Timing of Future Rulemaking by SEC • Review milestones in 2011, determine if mandatory IFRS starts in 2014 • Use U.S. GAAP during 2012, 2013, and the first three quarters of 2014 • 2014 financial report would show financial statements using IFRS for 2012, 2013, and 2014 • SEC directed the Office of Chief Accountant to undertake a study and report to the SEC on the implications for investors and other market participants of the use of IFRS
  • 19. Implementation of Mandatory Use of IFRS • All U.S. issuers adopt IFRS at same time • Staged transition Large accelerated filers must adopt for financial statements for 2014 Accelerated filers must adopt for financial statements for 2015 Non-accelerated filers must adopt for financial statements for 2016
  • 20. The FASB’s participation in the evolution of the international accounting system has been guided by the belief that, ideally, the ultimate goal is the worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting. We continue to support that goal. Robert Hertz, Chairman, Financial Standards Board Letter to the SEC, March 11, 2009
  • 21. Decisions about the role that a single set of high-quality global accounting standards plays in investor protection and the efficiency and effectiveness of capital formation and allocation involve complex, multidimensional and perhaps controversial issues that require careful, measured, and comprehensive study and analysis.
  • 22. FASB’s Comment To the SEC on IFRS ….134 pages
  • 23. IFRS and US GAAP considered high quali
  • 24. No significant macroeconomic effect
  • 25. Additional discretion not likely to result in major differences
  • 26. Jurisdictional effect on accounting standards
  • 27. Standards just one factor in comparability of financial reports
  • 28. Large multinationals may achieve limited cost savings
  • 29. Adopting IFRS in US involves substantial costs disproportionate with smaller firms
  • 30. Maintaining status quo might result in additional costs for firms,
  • 31. Political challenges for US Congress to designate international standard setting body
  • 32. • IFRS and US GAAP considered high quality • No significant macroeconomic effect • Additional discretion not likely to result in major differences when IFRS applied • Jurisdictional effect on accounting standards • Standards just one factor in comparability of financial reports
  • 33. • Large multinationals may achieve limited cost savings • Adopting IFRS in US involves substantial costs disproportionate with smaller firms • Maintaining status quo might result in costs for firms, investors • Political challenges for US Congress to designate international standard setting body
  • 34. Convergence Still On • Sep 11, 2008 FASB, IASB To Complete Major Convergence Projects by 2011, Says MoU FASB expects to release proposals in 2008 on Subsequent Events and Income Taxes. • Similar to the ‘improve and adopt” approach described by FASB Chairman Robert Herz in interviews and Senate testimony • Other matters noted in 2008 MoU Update: Conceptual Framework: Work is ongoing on the boards’ joint conceptual framework projects. • FASB and the IASB recognize the need for due process • Work Programs Include Other Matters: – The boards “remain committed to completing the MoU projects because they represent a significant step toward the goal of a common set of high quality standards.”
  • 35. Joint Technical Plan and Project Updates
  • 36. Some observers argue that adoption of IFRS, rather than convergence, may be the better route. “Adoption would eliminate quot;the arbitragequot; between the two standards that has caused politicians to exert undue influence over what should be an independent standard-setting process” DJ Gannon, a Deloitte & Touche partner specializing in international accounting and reporting. CFO.com, April 17, 2009
  • 37. In a perfect world, with full resources and free from outside influence, quot;when could we get convergence?,quot; Goldschmid asked Herz. quot;Ten to fifteen years,quot; the FASB chairman replied.
  • 38. “We have been accelerating [the convergence effort,” says IASB chairman Sir David Tweedie, who reports that only nine major areas are left where differences have to be reconciled. “We’re both working to scrap our existing standards and write joint new standards,” he adds. “We hope to finish by 2011, so by then, the answers you’ll get on U.S. GAAP and IFRS will be very similar. And that, as the U.S. has said, is going to make it easier for them to change.”
  • 39. CFOs on IFRS: Forget about It
  • 40. “Converting to IFRS is a solution without an underlying problem” Melissa Sungela, vice president, corporate controller, and chief accounting officer for Great Atlantic & Pacific Tea Co.
  • 41. “We believe some companies that are eligible for early-adoption early- would not even consider such an option if they use the LIFO inventory method and would incur a significant income-tax income- penalty …. for IFRS reporting,” Chevron vice president/comptroller Mark Humphrey
  • 42. quot;Conversion to IFRS could lead to confusion and reduced marketplace confidence in financial statements at a time when confidence in the U.S. financial markets is already lowquot; Patrick Mulva, controller for ExxonMobil.
  • 43. “We have significant concerns with the roadmap and therefore encourage the commission to focus on convergence as a means to developing the highest quality globally accepted accounting standards at a lower cost and with less risk than the proposed mandatory conversion to IFRS,” Boeing vice president and corporate controller, Robert Pasterick
  • 44. IFRS is a relatively new body of literature and has not been tested to the same extent as U.S. GAAP Boeing's vice president and corporate controller, Robert Pasterick
  • 45. speed-versus- speed-versus-quality
  • 46. “there will be pressure to cut the US loose …
  • 47. “there will be pressure to cut the US loose” from the process. The US must get on or get off the train - Goldschmid
  • 48. Principles Vs. Rules Rule: 55 Drive safely Principle: MPH Limit
  • 49. Voices of Note The question about whether the world is going to global standards is no longer ‘if,’ but ‘when’. Switching to IFRS significantly reduces the cost of accounting and financial reporting for multi-national companies, which would otherwise have to translate and reconcile records prepared under various country-specific standards. KPMG Chairman and CEO Timothy P. Flynn
  • 50. Voices of Note “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,” said SEC Chairman Christopher Cox. “The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors’ increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan. Clearly setting out the SEC’s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.”
  • 51. Voices of Note • Meanwhile the IASB at the dawn of the 21st Century began to add meat to but left out many of the bright line rules. Hence it generated a reputation for principles- based standards instead of rules-based its milk toast quot;politically correctquot; starter-set of international standards. In many instances it copied FASB standards. – Bob Jensen, Professor emeritus Trinity University. www.trinity.edu/rjensen
  • 52. Voices of Note • quot;We should start off [a financial reporting standard] with the core principle, which is really the 'true and fair' core of the standard.quot; Sir David Tweedie, Chairman IASB. • “The idea of true and fair in accounting is little more than faith-based accounting, and most certainly not the appropriate starting point for any process of developing high-quality accounting standards.” Tom Selling (www.accountingonion.com)
  • 53. Voices of Note • On accounting, SEC Chairman Cox has unveiled a roadmap where US companies would switch from US GAAP to IFRS by 2014. Unthinkable only two years ago! A dramatic signal indeed. Following the EU's lead, the US is indicating it also wants to choose global standards. One set, in sight, at last. And of course we need to strengthen the governance of the IASB. That is why we are working hard with some of our major counterparts to install new, strengthened oversight mechanisms. Charles McCreevy, European Commissioner for Internal Market 14 September 2008.
  • 54. Voices of Note • A precipitous move away from U.S. Generally Accepted Accounting Principles will undermine the U.S. regulatory system, and thereby quot;put in jeopardy the thing that gives the U.S. a competitive advantage. All research shows that the U.S. is unique in its regulation. No [country] is as effective . . . . We have the lowest cost of capital in the world. Do we really want to give that up?” Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board
  • 55. During her confirmation hearings, Schapiro expressed concern about the pace of accounting conversion proposed by her predecessor, noting, quot;I will not be bound by the existing roadmap that's out for public comment,quot; and expressing reservations about quality of IFRS and the independence of the International Accounting Standards Board, which writes those rules. Mary Schapiro, SEC chairwoman as reported by CFO.com
  • 56. Voices of Note By the logic of others, which I can’t explain, fuzzy lines in accounting standards have come to be exalted as “principles-based” and bright lines are disparaged as “rules- based.” Tom Selling, author of The Accounting Onion blog
  • 57. It is important to note that conversion to IFRS will require the retroactive restatement of certain historical periods presented within a company’s first set of IFRS based financial statements. Those restated periods could show a host of changes to a company’s key metrics, bottom-line bottom- performance and financial position. Source: PriceWaterhouseCoopers, September 2008
  • 58. What Are the Major Differences?
  • 59. Major Differences US GAAP - IFRS • Revenue recognition • Expense recognition: share-based payments • Financial liabilities and equity • Consolidation • Assets—nonfinancial assets • Assets—financial assets
  • 60. Major Differences US GAAP - IFRS • Liabilities—taxes • Liabilities—other • Financial liabilities and equity • Derivatives and hedging • Consolidations • Business combinations • Other accounting and reporting topics
  • 61. What If IFRS starts 12-31-11? • Preparing IFRS financial statements for the three years ending December 31, 2011, would have a transition date of January 1, 2009. That would also be the date of the opening IFRS balance sheet. – IFRS 1 requires that the opening IFRS balance sheet: – Include all of the assets and liabilities that IFRS requires; – Exclude any assets and liabilities that IFRS does not permit; – Classify all assets, liabilities and equity in accordance with IFRS; and – Measure all items in accordance with IFRS. • These general principles are followed except where one of the optional exemptions or mandatory exceptions does not require or permit recognition, classification and measurement in accordance with IFRS.
  • 62. IFRS Resources • Comprehensive list: www.iasplus.com/resource/0808aaaifrsresour ces.pdf • Growing Resource: ficpa- ficpa-ifrs.wikispaces.com
  • 63. IFRS Resources • Deloitte – iGAAP 2009 – A Guide to IFRS Reporting (2nd ed., 2,100 pages) – iGAAP 2008 Financial Instruments: IAS 32, IAS 39 and IFRS 7 Explained (4th ed., 851 pages). – www.iasplus.com – IFRS e-Learning e- – IFRSs in your Pocket 2008
  • 64. IFRS Resources • Ernst & Young – Ernst & Young International GAAP 2009 (2 volumes) – www.ey.com/ifrs – New academic resource center launched Fall 2008 • Grant Thornton – http://faculty.gtexperience.com
  • 65. IFRS Resources • KPMG – KPMG IFRS Institute • www.kpmgifrsinstitute.com/ – KPMG faculty portal • www.kpmgfacultyportal.com – KPMG IFRG website • www.kpmgifrg.com – IFRS publications library • www.kpmgifrg.com/pubs/index.cfm
  • 66. IFRS Resources • PricewaterhouseCoopers – IFRS reporting website • www.pwcglobal.com/ifrs – IFRS Pocket Guide 2008 – ’IFRS Ready’ toolkit for educators • www.pwc.com/faculty – PWC IFRS Blog • http://pwc.blogs.com/ifrs/
  • 67. IFRS Resources • US SEC Global Accounting Page – www.sec.gov/spotlight/ifrsroadmap.htm • IASB – www.iasb.org – Subscriptions and e-IFRS e- – Webcasts of meetings • World Accounting Report – www.i-financial.com/ www.i-
  • 68. IFRS Academic Resources • IAAER – www.iaaer.org – Offers very low-cost academic subscription to low- eIFRS (from IASB) • Includes all IFRSs and other educational materials of the IASB $25 (academician) and $20 (student) • Normal price from IASB $400 • Base 2009 standards are now free
  • 69. IFRS Resources • AICPA – IFRSs on CPA Exam: • www.cpa-exam.org www.cpa- – New IFRS website • www.ifrs.com • Canadian Institute of CAs – IFRS Transition Page: • www.cica.ca/index.cfm?ci_id=39166&la_id=1
  • 70. IFRS Resources • European Commission – Accounting: • http://ec.europa.eu/internal_market/accounting/index_en.htm – This includes links to: • EU accounting news • IFRS news and information • EU IFRS-related committees IFRS- • EU IFRS directives and regulations
  • 71. IFRS Resources for Educators • Textbooks – some recent ones: – Nobes and Parker – Roberts, Weetman and Gordon – Choi and Meek – Holt, Mirza and Orrell – Alfredson, Leo, Picker, Pacter et al • Histories of the IASC: – Camfferman and Zeff – Kirsch
  • 72. Credit for IASB history and IASB Resources: Stephen Zeff, Rice University and Paul Pacter, IASB Credit for SEC roadmap slides to Professor Herschel Mann Texas Tech University
  • 73. Thank you. Questions and comments? Details at: ficpa-ifrs.wikispaces.com ficpa- Neal J. Hannon Senior Consultant, XBRL Strategies The Gilbane Group Cambridge, MA 401-225-6082 401-225- neal@gilbane.com