I nternational F inancial R eporting S tandards adoption, conversion & project planning

International Financial Reporting Standardsadoption, conversion & project planning Kjeld Verhoeven, 14th October 2009

Introduction • drs.KjeldVerhoeven RA CISA • Partner at FSV Accountants + Adviseurs (NL) • Financial & IT Audit • Multiple IFRS clients • Chairman of the Nexia European Special Interest Group on IFRS • Main objective SIG is “ sharing knowledge and experience between member firms”

Short IFRS survey: Impact Analysis

Agenda • International Financial Reporting Standards • First Time Adoption of IFRS (IFRS1) • First Time Adoption as a project • Personal remarks/conclusions

International Financial Reporting Standards • IASs issued by IASC between 1973 to 2000 • In 2001 IASC replaced by IASB • Since 2001 IASB amended/replaced/proposed IASs into IFRS • Financial statements are not considered to be complying with IFRS if not completely (!!) done • IASB Framework (no standard); guide to resolve issues not covered by standards

Objectives IASC/IASB • Develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world's capital markets and other users make economic decisions

First Time Adoption (IFRS 1) • June 2003 issued • Effective date IFRS statements as of 1 Jan 2004 • Amendments 2005-2008 • Nov 2008 restuctured version of IFRS 1 issued • July 2009 amendment additional exemptions for First Time adopters

IFRS 1; Adjustments required GAAP > IFRS • Derecognition of some old assets and liabilities • Recognition of some new assets and liabilties • Reclassification of assets and liabilities • Measurement principle • Exceptions to measurement principle • Changes to disclosures adjustments at first time adoption recognised directly in equity

Derecognition of old assets and liabilities • The first time adopter should eliminate previous-GAAP assets and liabilities from the opening balance sheet if they do not qualify for recognition under IFRSs. For example: • IAS 38 does not permit recognition of some intangible assets • Accrued liabilities that not meet criteria provisions IAS 37

Recognition of new assets and liabilities • The entity should recognise all assets and liabilities that are required to be recognised by IFRS even if they were never recognised under previous GAAP. For example: • IAS 39 requires recognition of all derivative financial assets and liabilities. • IAS 19 requires an employer to recognise its liabilities under defined benefit plans. • IAS 37 requires recognition of provisions as liabilities. • Deferred tax assets and liabilities would be recognised in conformity with IAS 12

Reclassification of assets and liabilities • The entity should reclassify previous-GAAP opening balance sheet items into the appropriate IFRS classification. • IAS 32 has principles for classifying items as financial liabilities or equity • IAS 10 does not permit classifying dividends declared or proposed after the balance sheet date as a liability at the balance sheet date • If the entity's previous GAAP had allowed treasury stock to be reported as an asset, it would be reclassified as a component of equity under IFRS • Items classified as identifiable intangible assets in a business combination accounted for under the previous GAAP may be required to be classified as goodwill under IAS 22 because they do not meet the definition of an intangible asset under IAS 38. The converse may also be true in some cases.

Measurement of assets and liabilities • The general measurement principle – there are several significant exceptions noted below – is to apply IFRS in measuring all recognised assets and liabilities. Therefore, if an entity adopts IFRS for the first time in its annual financial statements for the year ended 31 December 2009, in general it would use the measurement principles in IFRSs in force at 31 December 2009

Exceptions to measurement principle • Optional exceptions • Business combinations occurred before opening balance sheet date • Fixed and intangible assets carried under cost model • Actuarial gains/losses (IAS 19; Employee benefits) • Accumulated translation reserves (IAS 21) • Mandatory exceptions • Derecognition of financial instruments/hedge accounting (IAS 39)

Changes to disclosures • For many entities, new areas of disclosure will be added that were not requirements under the previous GAAP (perhaps segment information, earnings per share, discontinuing operations, contingencies, and fair values of all financial instruments) and disclosures that had been required under previous GAAP will be broadened (perhaps related party disclosures). • Additional disclosure first time • Disclosure of selected financial data for periods before the first IFRS balance sheet • Disclosures in the financial statements of a first-time adopter • Disclosure of an impending change to IFRS

……now for real GAAP IFRS

First Time Adoption (IFRS 1) as a project Key considerations • For many organizations, implementing IFRS may be a complex process that goes well beyond a simple technical exercise for the finance or accounting function. • Other business areas such as human resources, investor relations, business development and IT departments will likely be involved in the conversion plan. • It places a sizable responsibility on management to be able to communicate effectively to the market in the new language.

First Time Adoption (IFRS 1) as a project More than a technical accounting exercise • IFRS will present unique challenges for senior management, human resources, the treasury and taxation functions, IT and many other areas across the organization beyond the finance and accounting function. • IFRS may impact existing management reporting including budgets, forecasts, performance measures, bonus structures, key performance indicators and debt covenants. • Furthermore, organizations must consider new procedures to ensure that IFRS implications are included in the approval process for all new strategic investments.

First Time Adoption (IFRS 1) as a project Effective implementation, organization and resources • It is easy to underestimate the volume and complexity of the work involved with the implementation of IFRS. Communication and implementation throughout the organization will require careful planning and skilled resources. • Research in Europe and Asia has shown that companies converting to or applying IFRS for the first time will often try to make manual adjustments from local GAAP to IFRS using spreadsheets or similar tools. However, this “quick fix” conversion can often prove to be costly and operationally ineffective in the long run - especially as it can be prone to error, confusion and typically lacks the appropriate internal controls.

Conversion project planning “from fit gap to IFRS proof reporting”

Phase 1 of the conversion proces In Phase 1, the diagnostic stage, we carry out an initial impact analysis and plan the later phases. Preliminary Study (“Diagnostic”) • Define requirement for financial information • Draft project timetable • Overall project organization • Estimate of financial and systems impact • Outline work plan • Estimate of required resources and costs

Phase 2 of the conversion proces Phase 2 consists of the detailed steps necessary to prepare the first complete IFRS financial statements. These steps are typically grouped into project set-up, component evaluation and issues resolution, and financial statement preparation. Project Set-up • Confirm roles and responsibilities • Set up project management office • Create detailed project plan • Set up and train project teams • Communicate project policies • Select champions

Phase 2 of the conversion proces (2) Component Evaluation and Issues Resolution • Prepare component evaluations • Impact analysis and decisions on accounting policies • Identify new data requirements • Identify additional data requirements • Identify and resolve accounting treatment issues Financial Statement Preparation • Prepare IFRS GAAP adjustments • Post adjustments • Systems diagnosis • Identify and calculate important GAAP differences (including documentation and adjusting journal entry calculation/support)

Phase 3 of the conversion proces In Phase 3, we take the information, issues and solutions gathered, and integrate them into your underlying financial systems and processes. Integrate Change • Impact analysis on recurring business • Impact analysis on accounting/finance divisions • Design and document IFRS GAAP reporting procedure • Change plan by business unit • Systems design and development

Personal remarks/conclusions • Time, time & time (be sure about the job you take) • Involvement client (independence issues regarding audit) • Valuation experts (don’t try this at home !!) • External information requirements (time) • Stick to project planning/organization • Be aware of “quick fix solutions” • Feel free to call for ‘knowledge sharing’ => European SIG IFRS for SME

I nternational F inancial R eporting S tandards adoption, conversion & project planning