IFRS – Will the Global Accounting Experiment Succeed?

1. IFRS – Will the Global Accounting Experiment Succeed? Sir David Tweedie Chairman - International Accounting Standards Board - 2001– 2011 President – The Institute of Chartered Accountants of Scotland

2. The Objective • Taking Stock • Adoption Update • The Path Forward • Summary 2

3. The Objective The IFRS Foundation and the IASB are dedicated to developing and sustaining a single set of globally accepted accounting standards: • Aimed at providing high-quality, transparent and comparable information for investors and other users of financial information • Providing the world’s integrated capital markets with a common language for financial reporting • Promoting capital market stability through the transparency and integrity of financial reporting • Taking appropriate steps with regulators and standard-setters to help promote consistent application of standards 3

4. Why Global Standards are Needed • Accounting standards evolved nationally because companies borrowed and investors invested only in their home country • Globalisation is inconsistent with multiple, national or regional accounting languages that hinder comparability • Corporations must consolidate global network of operations • Investors seeking diversification and return increasingly invest outside domestic markets 4

5. Why Global Standards: Benefits to Capital Markets Transparent financial markets and free trade require a high-quality, single, global accounting language • Credibility of local market to foreign investors • Greater cross-border investment • Efficient capital allocation • Comparability across political boundaries • Facilitates global education and training 5

6. Why Global Standards:Benefits to Companies In the long run, global standard benefit companies – especially multi-nationals • Lower cost of capital • Integrated IT systems • Easier consolidation • One set of books • Assist in raising capital overseas • Understand financial statements of overseas suppliers, customers, subsidiaries 6

7. A Decade of Progress 7

8. Status of Global Standard Use • Since 2001: Companies in over 100 countries are now required or permitted to use IFRSs • Recent new joiners: Brazil, Canada, Korea, Mexico, Russia • Japan: IFRS permitted for international companies; 2012 decision on mandatory adoption may be delayed; progress toward IFRS adoption continues as more large companies move away from US GAAP • 2012: After ten years, convergence work with FASB winds down with significant new high quality standards for revenue recognition, leasing, impairment, classification & measurement 8

9. The World is Getting Smaller Over 100 countries require or permit the use of IFRSs for listed companies Source: IASplus/Deloitte 9

10. US investors, companies depend on cross-border capital flows Growing cross-border holdings of US companies and investors Source: US treasury 10

11. Why Global Standards:Non-US Markets Have Grown The Globalisation of Capital Markets: Domestic Market Capitalisation Source: World Federation of Exchanges in $US trillions USA Americas (excluding USA) Europe, Africa and Middle East China Asia (excluding China) (52%) 11

12. US is Key Piece of Global Puzzle(July 2010) (source: Fortune Global 500) 12

13. After 2013, remaining non-IFRS (listed companies) (source: Fortune Global 500) 13

14. The Objective • Taking Stock • Adoption Update • The Path Forward • Summary 14

15. Factors Behind Success Organisational governance and structure supporting high quality standards • High quality standards: Internationally, users recognise IFRS as high quality – supported by academic research • Independent board: A transparent and independent standard setting process assures quality is maintained • Internationally accepted: EU decision to adopt IFRSs served as catalyst for broad adoption across Asia, Oceania, Africa, Americas • Convergence with the US: Close cooperation with FASB has led to higher-quality standards and a significant reduction in differences between the two sets of standards 15

16. Corporate Governance – Three Tier Model US Model Global Model Securities and Exchange Commission (SEC) Public accountability to securities regulators Monitoring Board FAF Trustees Overseen by Trustees IFRS Foundation Trustees (5/22 US) Financial Accounting Standards Board Independent standard-setter International Accounting Standards Board Independent and publically accountable 16

17. Key Challenges Ahead The ultimate goal of global standards is still not fully achieved and there are challenges ahead… • Pending decisions on IFRS adoption for major economies like Japan, China, India and the US • Consistency and high-quality implementation of IFRSs across jurisdictions • On-going need to always evaluate, enhance and then implement improvements to IFRS organisation and process 17

18. The Objective • Taking Stock • Adoption Update • The Path Forward • Summary 18

19. IFRS – FASB Convergence Process Convergence is not the end point 19

20. What has been accomplished to date? • Nonmonetary exchanges • Inventory accounting • Accounting changes • Business combinations • Non controlling interests • Share-based payments • Segment reporting • Borrowing costs • Conceptual Framework – objective and qualitative characteristics • Joint ventures 20

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23. Conceptual Framework Issues • The objectives of financial reporting • Qualitative characteristics • Definitions of assets and liabilities • Recognition • Measurement • Presentation and disclosure 23

24. Debit = Asset or Expense 24

25. Debit = Asset or Expense or Whatsit 25

26. Role of Valuation • Value inherent in asset/trading Fair value • Value in productive ability Cost 26

27. Income Profit and Loss Account • Trading activities Other Comprehensive Income Long-term Non Trading Gains and Losses • Cross holdings • Revaluation of buildings • Changes in pension fund surpluses and deficits 27

28. The Major Projects • Crisis (MoU) • Financial Instruments • Fair value measurement • Consolidation • Derecognition • Other (Non MoU) • Insurance contracts • Other (MoU) • Revenue Recognition • Leases • Post-retirement benefits • Financial statement presentation • Liability / Equity IASB working to reach as much convergence as possible on three remaining MoU projects 28

29. Pensions $ Deficit 1000 Less 10% of liabilities 400 600 Spread over 10 year working life Deficit per accounts - $60m 29

30. Leases – Equipment Leases 2008 2009 2010 • Total Annual leasing volume $644bn $557bn $617bn • N. America 21% 34% 35% • Europe 49% 38% 34% • Asia 19% 20% 24% • Rest of world 11% 8% 7% 30

31. Decision on US Incorporation SEC Staff Paper released in May 2011 detailed a formal path to US adoption through an incorporation mechanism • US companies minimise implementation costs using phased approach • FASB stops writing new standards – preventing divergence • Existing, converged standards are incorporated into GAAP • IASB active projects will be completed, then incorporated • FASB incorporates remaining, non-converged standards over 5-7 years • FASB remains the US national standard setter with responsibility of endorsing new standards as they are issued “Incorporation of IFRSs into national GAAP” is the path used by virtually all other countries 31

32. Final SEC Staff Report • Published July 2012 • Provides comprehensive assessment of preparedness of US, but little new information • Reflects an SEC overwhelmed with rulemaking • Important to note: • No decision, not a ‘no’ decision • Conclusions broadly consistent with recently completed strategy and governance reviews • With political will, the challenges of transition can be overcome 32

33. What happens Next? • Both boards have concluded that convergence has served its purpose, now approaching diminishing returns • IASB dedicated to completing the three MoU projects, but in transition to a new agenda • Ambiguous posture by the US may slow global standard momentum: • Risk of IASB and FASB divergence • Continued uncertainty for business community • However: • Momentum behind IFRS as global standards is irreversible • The endpoint will be global accounting standards 33

34. The Objective • Taking Stock • Adoption Update • The Path Forward • Summary 34

35. Changing Standard Setting • Deadlines can be effective - but quality paramount • More time taken does not mean better standards • World and standard setting has changed since financial crisis • Proactive engagement reaches outside the traditional financial reporting community • Globally consistent answers must be reached – “similar” is not good enough • New ways of working – technology and cooperation improve efficiency • Support for post-implementation reviews 35

36. Future Agenda Issues • Old Standards • Agriculture • Share-based payments • Income taxes • Pensions • Associates • Post-implementation review • Segments • Business combinations • Government grants • Intangibles • Foreign currency translation • Performance reporting • Disclosure framework • Other • Extractive activities • Common control 36

37. Principle-Based Standards • No exceptions • Core principles (objectives) • No inconsistencies • Tied to conceptual framework • Judgement • Minimum guidance Principles Rules 37

38. Preparing for the Next 10 Years IFRS Foundation Trustee Strategy Review Reflecting on progress of past ten years and acknowledging there are challenges ahead, the review prepares for IFRS as the global standard. • Independence must be maintained –Monitoring Board, Trustees, IASB structure is appropriate • Global adoption, and not convergence, is the goal • IFRSs should provide a faithful representation of an entity’s financial position and performance – underpinning the transparency / integrity of financial reporting and capital market stability 38

39. Preparing for the Next 10 Years • Vested interest in consistent application of IFRSs requires taking appropriate steps with regulators and standard-setters to identify differences • National carve-outs can be best eliminated and consistency of application improved through successful due process in the standard-setting process and post-implementation reviews • Funding of IFRS must maintain independence in standard-setting while providing organisational accountability • Significant progress has been made to migrate away from voluntary contributions on a global basis 39

40. Monitoring Board: Governance reviewKey conclusions • Reaffirmed support for three-tier structure: • Monitoring Board: Public accountability • Trustees: Governance and oversight • IASB: Independent standard-setter • Clearer delineation of responsibilities across three tiers 40

41. Key conclusions - continued • Monitoring Board membership • Permanent membership criteria to be assessed based on ‘use of IFRSs’ • Membership to be expanded, to include major emerging markets plus rotating seats • Greater transparency in Monitoring Board activities and closer dialogue with Trustees and IASB • Trustees and Monitoring Board will coordinate future actions 41

42. The Objective • Taking Stock • Adoption Update • The Path Forward • Summary 42

43. Goal of Global Accounting Language is Close • G20 adoption represents 90% GDP; 80% trade; 2/3 of population • IASB dedicated to developing and sustaining high quality, globally accepted standards – • Consultation and transparency are critical to setting new agenda • IASB/IFRSF accepts and is prepared for the responsibility of being the global standard setter • Japan and Asia to become more assertive – if adopt IFRS! 43

44. Questions? 44