IFRS and GAAP Convergence Update

IFRS and GAAP Convergence Update Presented March 15, 2012 at Main Line Association for Continuing Education by Joel Wagoner, MBA, CPA, CMA, CFM Assistant Professor of Accounting Arcadia University

IFRS and GAAP Convergence Update Questions: Is the SEC going to require us to use IFRS? If so, when? Why aren’t we hearing as much about this as we did a few years ago? Are we going to have to learn IFRS? What will become of the FASB if we adopt IFRS?

IFRS and GAAP Convergence Update The potential conversion to IFRS has been a concern in the Accounting profession since the Securities and Exchange Commission first published their “roadmap” for conversion in 2008.

IFRS and GAAP Convergence Update Few would disagree with the desirability of a single set of financial reporting standards and accounting principles. The question: How do we go from our divergent sets of principles, GAAP and IFRS, to a single set of high-quality standards?

IFRS and GAAP Convergence Update The FASB and IASB have been working towards the convergence of American and International standards since 2002.

IFRS and GAAP Convergence Update Under a current Memorandum of Understanding (agreed to by both boards in 2006), the FASB and IASB will work together to ultimately resolve all significant differences between GAAP and IFRS.

IFRS and GAAP Convergence Update The SEC released Publication 33-9109 in 2010, supporting “a single set of high-quality globally accepted accounting standards.”

IFRS and GAAP Convergence Update Shortly afterward, the SEC published a work plan to determine whether to require American publicly traded corporations to present their financial statements in accordance with International Financial Reporting Standards (IFRS.)

IFRS and GAAP Convergence Update The work plan “addresses [six] areas of concern that were highlighted by commenters” on the 2008 roadmap: 1 – Sufficient development and application of IFRS for the U. S. domestic reporting system;

IFRS and GAAP Convergence Update 2 – The independence of standard setting for the benefit of investors;

IFRS and GAAP Convergence Update 3 – Investor understanding and education regarding IFRS;

IFRS and GAAP Convergence Update 4 – Examination of the U. S. regulatory environment that would be affected by a change in accounting standards;

IFRS and GAAP Convergence Update 5 – The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies;

IFRS and GAAP Convergence Update 6 – Human capital readiness.

IFRS and GAAP Convergence Update In a progress report dated October 29, 2010, the SEC stated that a decision on whether or not to require IFRS in America would depend in part on the progress that the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) are making towards the convergence of American Generally Accepted Accounting Principles (GAAP) and IFRS.

IFRS and GAAP Convergence Update The two boards responded to the progress report by establishing an ambitious agenda for 2011. As time allows, later in this presentation we will review the current status of the items on their agenda.

IFRS and GAAP Convergence Update Five weeks later, on December 6, 2010, SEC Deputy Chief Accountant Paul Beswick suggested a different approach in an address to the AICPA National Conference on Current SEC and PCAOB Developments: “Condorsement”.

IFRS and GAAP Convergence Update Paul Beswick: “U. S. GAAP would continue to exist. The IASB and the FASB would finish the major projects in their MOU (Memorandum of Understanding). The FASB would not begin work on any major new projects in the normal course.”

IFRS and GAAP Convergence Update “Rather, a new set of priorities would be established where the FASB would work to converge existing U. S. GAAP to IFRS over a period of time for standards that are not on the IASB’s agenda.”

IFRS and GAAP Convergence Update “This is not meant to be an MOU2 but rather would entail making sure that, on a standard by standard basis, existing IFRS standards are suitable for our capital markets.”

IFRS and GAAP Convergence Update “At the same time, the FASB would have a process where they would consider new standards issued by the IASB for incorporation into U. S. GAAP and then integrate such standards into the U. S. codification.”

IFRS and GAAP Convergence Update Six months after Mr. Beswick’s speech, on May 26, 2011, the SEC issued a work plan “Exploring a Possible Method of Incorporation” in which they further explained the concept of “condorsement”.

IFRS and GAAP Convergence Update “Condorsement” is a combination of the words “convergence” and “endorsement”.

IFRS and GAAP Convergence Update “Convergence” is described as when “jurisdictions maintain their local standards but make efforts to converge those bodies of standards with IFRS over time.”

IFRS and GAAP Convergence Update “Endorsement” is when “jurisdictions incorporate individual IFRS’s into their local body of standards. . .The degree of deviation from IFRS as issued by the IASB can vary under this approach.”

IFRS and GAAP Convergence Update “Condorsement” would be an approach in which the FASB “would facilitate the transition process (to IFRS) over some defined period of time (e.g., five to seven years).”

IFRS and GAAP Convergence Update “At the end of this period, the objective would be that a U. S. issuer compliant with U. S. GAAP should also be able to represent that it is compliant with IFRS. . .”

IFRS and GAAP Convergence Update “Incorporation of IFRS. . .would have the objective of achieving the goal of having a single set of high-quality, globally accepted accounting standards, while doing so in a practical manner that could minimize both the cost and effort needed to incorporate IFRS. . .”

IFRS and GAAP Convergence Update “For the endorsement part of the framework, the FASB would continue to participate in the development and improvement of accounting standards. . .”

IFRS and GAAP Convergence Update “However, the manner of participation. . .would differ considerably from the FASB’s current standard-setting role. . .”

IFRS and GAAP Convergence Update “. . .[T]he FASB would participate in the process for developing IFRS, rather than serving as the principal body responsible for developing new accounting standards or modifying existing standards under U. S. GAAP.”

IFRS and GAAP Convergence Update “The FASB would play an instrumental role in global standard setting by providing input and support to the IASB in developing. . .standards; by advancing the consideration of U.S. perspectives in those standards; and by incorporating those standards, by way of an endorsement process, into U.S. GAAP.”

IFRS and GAAP Convergence Update “The FASB would continue to promulgate U.S. GAAP primarily through its endorsement of standards promulgated by the IASB.”

IFRS and GAAP Convergence Update “[D]ue to the FASB’s participation in the IASB’s standard setting process, the FASB should be in a position to readily endorse (i.e., incorporate directly into U.S. GAAP) the vast majority of the IASB’s modifications to IFRS.”

IFRS and GAAP Convergence Update “However, the FASB would retain the authority to modify or add to the requirements of the IFRSs incorporated into U.S. GAAP. . .”

IFRS and GAAP Convergence Update “If IFRS is incorporated into the U.S. financial reporting system, the Commission (SEC) would maintain its oversight over the FASB. . .”

IFRS and GAAP Convergence Update The SEC emphasizes that the work plan describing “Condorsement” “is not intended to suggest that the Commission has determined to incorporate IFRS or that the discussed framework is the preferred approach or would be the only possible approach.”

IFRS and GAAP Convergence Update Here is a brief status update of the joint projects that the FASB and IASB have been collaborating on under the Memorandum of Understanding.

Statement of Comprehensive Income The FASB published Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income in June, 2011.

Statement of Comprehensive Income Net income and comprehensive income must either be presented on the same report, or on consecutive reports.

Fair Value Measurement The FASB published Accounting Standards Update 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value measurement and Disclosure Requirements in U. S. GAAP and IFRSs.

Fair Value Measurement The two boards sought to “ensure that fair value has the same meaning” in GAAP as in IFRS, “other than minor necessary differences in wording or style.”

Fair Value Measurement The amendments in ASU 2011-04 “explain how to measure fair value. They do not require additional fair value measurements and are not intended to establish valuation standards or affect valuation practices outside of financial reporting.”

Fair Value Measurement “The Board (FASB) does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.”

Revenue Recognition On November 14, 2011, the FASB reissued a Proposed Accounting Standards Update (what we used to call an “exposure draft”) on Revenue Recognition (Codification Database Topic 605.)

Revenue Recognition The FASB and IASB had received almost 1,000 comments in response to an earlier version of the Proposed Accounting Standards Update (Exposure Draft). The earlier version had been released in June, 2010.

Revenue Recognition “[R]evenue recognition requirements in. . .GAAP differ from those in. . .[IFRS], and both sets of requirements are considered to be in need of improvement.”

Revenue Recognition GAAP “comprises broad revenue recognition concepts and numerous requirements for particular industries or transactions that can result in different accounting for economically similar transactions.”

Revenue Recognition “Although IFRSs provide less guidance on revenue recognition, the two main revenue recognition standards, IAS 18, Revenue, and IAS 11, Construction Contracts, can be difficult to understand and apply to transactions beyond simple.”

Revenue Recognition The objective of the Revenue Recognition project is to “clarify the principles for recognizing revenue and to develop a common revenue standard for U. S. GAAP and IFRSs that would:

IFRS and GAAP Convergence Update