IFRS Conference

1. 1 Maverick IFRS Conference An Investor�s Commentary June 25, 2008

2. 2 Maverick

3. 3 Maverick �Synthetic instrument� accounting: Not a thing of the past (although banned by IAS 39) Some provisions in IFRS, primarily derecognition, evaluate continuing involvement and explicitly impose substance over form accounting requirements Sale of bond with total return swap that returns all of the economics of the bond to the seller Repos, i.e., sales of securities concurrent with agreements to repurchase those securities at a fixed price However�.

4. 4 Maverick �Synthetic instrument� accounting: Not a thing of the past (although banned by IAS 39) Company A + 600,000 shares of Company Z + Total return swap = Portfolio of Debt securities + Gain on �sale� of equity securities Company B + Portfolio of Debt securities + Total return swap = 600,000 shares of Company Z

5. 5 Maverick Fair value � Can these approaches to fair valuing inventory in an acquisition be acceptable? Acquired inventory Builder�s land with planning approvals Builder�s unpermitted land Measured at The price the acquirer would pay in order to get the margins the acquirer desires (vs. current replacement cost) Acquiree�s cost Any incremental value for the replacement cost of the portfolio over the cost of the individual properties is allocated to goodwill.

6. 6 Maverick In some cases the problem lies clearly with the standards

7. 7 Maverick Fair value for all financial instruments: We have waited far too long Reporting all financial instruments at fair value through P&L: Increases relevance of financial statements Reduces financial reporting complexity Improves comparability IFRS needs to provide guidance on: The appropriate approaches to determining fair value The required disclosures that will enable investors to determine: Degree of judgment/discretion in the values assigned Realized vs. unrealized changes in value Hedging gains and losses�amounts and locations

8. 8 Maverick What Investors Really Want Comprehensive financial reporting that satisfies the information needs of the residual risk bearer�the common share owner�because if they are satisfied, then the needs of other providers of capital will be satisfied. Compliance with the standards and an enforcement mechanism that ensures compliance at the highest level. Enabling a level playing field to be established at the lowest common denominator is harmful to all capital markets participants Fair value for all financial instruments through P & L as soon as possible and full fair value financial statements ultimately Elimination of: accounting options, �True and Fair� override Quarterly reporting of results with complete set of financial statements Total remodel of financial statements � See the CFA Institute�s Comprehensive Business Reporting Model (http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2007.n6.4818)

9. 9 Maverick Other examples

10. 10 Maverick Restructuring: Vague criteria for recording charges results in implementation bias Restructuring charges are recorded prior to having: The ability to implement the plan All significant terms established Employee acceptance of termination offers One company has had annual accruals for voluntary termination benefits for employees who had not yet accepted. These staff restructuring accruals have been accumulating over several years: 27% of 2005 charge and 22% of 2006 charge recorded prior to employee acceptance and had not reversed by the end of 2006 What makes those charges expenses of 2005 or 2006 when the individuals have not ceased work and the company is not obligated to any individual to make those payments? This company also had reversals of opening accrual balances of 8% to 26% in each of the last 3 years

11. 11 Maverick Impairment: Big Bath impairment charges and large, discretionary impairment reversals Often see reversals of 10% or more of original accruals An example of a Big Bath in the works: Original impairment charge announced at �1.3 Billion Regional or business details not provided Reasonableness of amount was assured Within a month the sale of a business unit was announced and �800 Million of the charge disappeared

12. 12 Maverick Degree of choice in reporting undermines comparability and relevance of financial statements Pension costs: IAS 19 does not specify where in P&L pension cost components should be reported Most companies choose to report either all components of pension expense as part of operating profits or net interest expense and return on assets as a component of financing costs. If choice consistently applied, even though non-comparable results are reported, the required disclosure enables analysts to conform results across companies (though not all companies provide the required disclosure) Some companies report only interest expense on pensions as a component of finance costs and report the return on pension assets as an operating item, improving margins.

13. 13 Maverick Not all choices in reporting can be compensated for and resulting non-comparability undermines relevance IFRS 3�issued in January 2008 Continues the troubling practice of providing choices in accounting for transactions/events, in this case how non-controlling interest would be measured.