Updating IASB – FASB Memorandum of Understanding

1. Updating IASB – FASB Memorandum of Understanding Wayne Upton – IASB Director, International Activities Sue Bielstein – FASB Director The views expressed in this presentation are those of the presenter, not those of the IASB or FASB

2. First, Who are these people? • IASC was founded circa 1972, about the same time as the FASB • A part-time board with limited staff resources • Reorganized in 2001 • A full-time board ( two part-time members) and a greatly expanded professional staff • Members chosen based on criteria similar to those used by the FASB • Board members are not “representatives” of geographical or “background” constituencies

3. Evolution of the IASB – FASB Convergence Program • First step, The Norwalk Agreement • Shared goal: high-quality, compatible standards that can be used for domestic and cross-border financial reporting • Means: converge by eliminating differences in existing standards • Result: a slow process that produced improved standards but often failed to eliminate all differences • The SEC 2005 road map to eliminating the 20-F reconciliation requirement • The 2006 Memorandum of Understanding • Shift in goal: common, high-quality standards • Shift in means: improve and converge -- serving investor needs means the boards converging by replacing weaker standards with stronger, common standards.

4. Business combinations, complete convert standard Consolidations, work aimed at development of converged standards Fair value measurement guidance, to have issued converged guidance Liabilities and equity distinctions, one or more due process documents IFRS 3 and SFAS 141R issued Work continues FASB standard issued; Discussion paper issued by IASB IASB and FASB have both issued initial documents The MoU – setting 2008 goals for 11 major projects

5. Financial statement presentation, one or more due process documents Postretirement benefits, one or more due process documents Revenue recognition, one or more to process documents Derecognition, one or more due process documents Joint initial document expected by summer2008 FASB issued new standard, IASB issued discussion document Joint initial document expected by summer2008 Work proceeding The MoU – setting 2008 goals for 11 major projects

6. Financial instruments, one or more due process documents Intangible assets, agenda decision Leases, agenda decision IASB and FASB issued a discussion paper on reducing complexity, FASB work on simplifying hedge accounting proceeding Boards declined to place this project on their agendas, based in part on investor recommendations Boards agreed to place this project on their agendas; work proceeds The MoU – setting 2008 goals for 11 major projects

7. It’s now 2008 and time to update the MoU • The April 2008 joint Board meeting • Agreement on a June 2011 target for completion of major projects • Building “improved” IFRS as a platform for jurisdictions moving down IFRS in the next few years

8. Why June 2011? • Widespread frustration among constituents about the slow pace of board projects • Sharpening our focus – what improvements in financial reporting are important to investors • Imposing discipline on ourselves • Avoiding potential for doubling up on changes in those jurisdictions adopting IFRS

9. MoU: Plans for Completion by 2011 • Revenue recognition • Two possible models, both based on an asset – liability approach • Key issues • Identifying performance obligations and how they are satisfied • When should the measurement of a performance obligation change for reasons other than performance • Accounting for conditional obligations such as rights of return • Disclosure • Testing

10. MoU: Plans for Completion by 2011 • Fair value measurement guidance • Key issues for the IASB • SFAS 157 exit value, or is there a complementary entry value? • Fair value is more common in IFRS than in US GAAP, several standards will need to be amended • Consolidation policy • Heightened attention brought on by the current banking environment • Key issues • Effective control • Applicability to special-purpose entities and others. Is there a better way to capture the principles inherent in FIN 46R?

11. MoU: Plans for Completion by 2011 • Derecognition • Again, heightened attention brought on by the current environment • Neither IASB nor FASB has the best standard in this area, work proceeds to developing a better approach for the October 2008 joint Board meeting

12. MoU: Plans for Completion by 2011 • Financial statement presentation • Key issues • Presentation, not recognition and measurement • The cohesiveness principle and a new format or all three statements • The role of net income, comprehensive income, and recycling • Initial testing already performed and it will continue during the comment period on the upcoming discussion document

13. MoU: Plans for Completion by 2011 • Postretirement benefits • The IASB discussion paper • Places the full obligation on the balance sheet, but • Argues for including changes in the obligation in net income and/or comprehensive income and examines different approaches to doing so • The “leap frog” phenomenon – IASB project may create new differences • Measurement of so-called cash balance plans • Income statement presentation • No broadly scoped, joint phase 2 project for now

14. MoU: Plans for Completion by 2011 • Lease accounting, a focus on lessee accounting for now. Lessor accounting to wait for revenue recognition. • Key issues • Getting lease obligations on the balance sheet -- operating leases would be reported as an intangible asset and the lease obligation as a liability • Can we focus on the substantive lease term as the unit of account? • Can we address lessee accounting without debating changes to amortization and depreciation accounting? • Can we avoid reconsidering areas in which current lease accounting provides answers, even if those answers are imperfect?

15. MoU: Plans for Completion by 2011 • Financial Instruments • FASB work on hedge accounting • IASB Discussion Paper on reducing complexity • Approaches to classification of financial instruments • Approaches to hedge accounting • Is fair value to only way to eliminate complexity?

16. Criteria to distinguish between types of financial instruments (‘classification’) Identification and quantification of impairment Transfers between measurement categories of financial instruments Would not be required Would not be required Would not be required Thinking about the fair value and financial instruments

17. Hedge accounting Fair value hedge accounting—no measurement mismatches between financial instruments. There may be other recognition and measurement mismatches (eg those relating to non-financial instruments); in such circumstances, there will be demand for fair value hedge accounting.Cash flow hedge accounting—there will be demand for hedge accounting for exposures to changes in expected future cash flows. Thinking about the fair value and financial instruments

18. Identification and separation of embedded derivatives Not applicable for financial instruments. May still be required for other items (eg non-financial instruments with embedded derivatives). Thinking about fair value and financial instruments

19. MoU: Plans for Completion by 2011 • Distinguishing Liabilities and Equity • Issues for the IASB • Narrow view of equity? • Consistency with concepts? • Application to puttable shares? • Issues for the IASB and FASB • Reaching consensus on a preferred model (considering carefully constituent views) • Presentation in the statement of income? • Earnings per share implications?

20. MoU: What about short-term convergence? • Differences are narrow but the possible changes are often significant and contentious • Some question whether the benefits justify the resources • Projects often took many years to complete • The scopes were often narrow, addressing some but not all differences • Two scope recommendations • Complete projects in process (earnings per share, joint ventures, income taxes) • Defer work on all others (investment property, impairment of long-lived assets, research and development) • Allocate Board time and staff resources to other, higher priority improvements • Income taxes – a possible change in approach • FASB would propose to replace FAS 109 with the revised IAS 12

21. A U.S. PerspectiveWhat Exactly is the End Goal? “Common,” “high-quality” financial reporting by listed companies (perhaps others) around the world That system requires several elements Single set of high-quality accounting standards established by a single, independent standard setter Mechanisms for consistent application and interpretation internationally Common, high-quality disclosures outside of financial statements and a common delivery system High-quality auditing standards and practice Common approach to regulation and enforcement Accounting standards have been leading the way

22. Accounting standards internationally Over 100 counties have or will adopt IFRS, but “As adopted” versions of IFRS National flavors due to application differences Accounting standards in the U.S. Active convergence program with IASB Active dialog with other standard setters around the world FASB actively improving/maintaining other US GAAP Addressing weaknesses (e.g., derecognition, consolidation) On-going interpretative function Less focus (but some progress) on common auditing standards and practices and cooperative efforts between securities regulators and PCAOB and international counterparts A U.S. PerspectiveWhere are we now?

23. A U.S. PerspectiveWhere should we be going? Internationally? In U.S.?

24. A U.S. PerspectiveWhat’s needed internationally Address national/regional endorsement mechanisms that produce “as adopted” versions of IFRS More consistent application of IFRS to avoid “national flavors” Further strengthen IFRS IASB to fill in major gaps (e.g., insurance, extractive industries, rate regulation?) Improve major areas (e.g., per FASB – IASB MOU) Strengthening IASB as a global standard setter Funding — ongoing efforts by IASC Foundation Trustees Staffing Governance/Oversight — proposed regulatory “monitoring body” Structure? (e.g., having multiple locations?) Improve coordination of global regulatory review and enforcement

25. A U.S. PerspectiveWhat’s needed in the US? • Decide on an end game: • “Mutual recognition” for foreign filers only • With continued convergence over many years • Without convergence (perhaps competition between standards) • Two-GAAP System for U.S. Registrants • With continued convergence over many years • Without convergence (perhaps competition between standards) • A single set of hiqh-quality international standards • Each path has very different implications: • Standard setters, preparers, auditors, investors, regulators, educators • Overall system costs and complexity

26. FASB and FAF View of End GameSingle Set of Quality International Standards Preferred by investors — enhances comparability, reduces analytical complexity Consistent with globalization of capital markets Would bring U.S. into alignment with most other international capital markets (Europe, Australia, China, Russia, Japan, Korea, Canada, India, etc.) Avoids added costs and complexity of a two – GAAP system for an extended period We advocate a well planned “improve and adopt” approach to transitioning U.S. to IFRS Improvement through continued joint projects between IASB and FASB in major areas Directly adopt other parts of IFRS

27. U.S. Adoption of IFRS?A complex, multi-year effort Requires consideration of many issues Private company reporting (IFRS, IFRS-SME, US GAAP?) Role of FASB Implications for company systems, internal controls, data gathering Education, training, CPA exams, etc. Possible changes to contracts, regulatory requirements, state laws Evaluating SEC accounting and disclosure requirements (both within and without the financial statements First time adoption issues XBRL FAF/FASB Forum to consider those and other issues 27

28. A US PerspectiveSummary Thoughts • FASB Remains Committed to Convergence • Single set of high-quality common standards • Goal is improved reporting, not convergence for the sake of convergence • Significant Resources Devoted to this Effort • Convergence Considerations Embedded in our Process • Uncertainty about the path forward in the US • Which end state scenario? • When and how will it be decided? • When might it be implemented? • Who will be impacted (public companies, private companies, NFPs)? • One thing is certain – there will be change

29. Questions and comments Expressions of individual views by members of the IASB, FASB and their staff are encouraged. The views expressed in this presentation are those of the presenters. Official positions of the IASB or the FASB on accounting matters are determined only after extensive due process and deliberation.