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Practical Implications of a Transition to IFRS Joel O snoss. Bogota Colombia. August 31, 2011. Background Benefits and challenges Best practices Some high-level advice Final thoughts. Agenda. Background. Background: Status of IFRS Usage. IFRS is widely spread across the globe.
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Practical Implications of a Transition to IFRSJoel Osnoss Bogota Colombia August 31, 2011
Background • Benefits and challenges • Best practices • Some high-level advice • Final thoughts • Agenda
Background: Status of IFRS Usage IFRS is widely spread across the globe • Required of public companies in 100+ countries • Used by more than 40% of the global Fortune 500 • More coming on-line 2011 through 2012 including • Argentina, Mexico, India, Korea • IFRS for SMEs • Starting to see interest from private entities • Basis for statutory reporting in some countries
Transition in the US Current Landscape • SEC issued a statement in February 2010 • Supports one set of global accounting standards • IFRS is best positioned • Initiated a “Work Plan” • Staff Paper issued May 26, 2011 • Possible IFRS “incorporation” over 5 to 7 years • Possible earlier option to adopt • On track to make decision later this year • Japan may decide based on SEC’s decision • Non-US companies that file with the SEC are already permitted to use IFRS
Background: IFRS Overview • Key characteristics of IFRS • Principles-based approach that places greater emphasis on interpretation and application of principles, with a particular focus on the spirit of the principle being applied • The standards necessitate the assessment of the substance of transactions and an evaluation of whether the accounting presentation reflects the economic reality • Focus on the need for professional judgment in arriving at accounting conclusions • Greater use of fair value as a measurement basis placing emphasis on obtaining reliable measurements • More extensive disclosure requirements
Background: Putting principles into action • More comparability under IFRS will impact investor expectations… U.S. GAAP Other GAAPs IFRS 7
Benefits / Challenges Benefits and challenges can be considered from the following different perspectives: • Technical accounting and financial reporting • Process and statutory reporting • Technology infrastructure • Organizational
Benefits and challenges of IFRS implementation Technical accounting and financial reporting • Benefits: • Enhanced comparability— Global investors want the comparability of a single set of accounting standards • Easier access to capital – IFRS is a “global passport” • Easier M&A – No need to reconcile buyer and seller • Challenges: • Robust financial reporting requirements – IFRS requires additional disclosure; may be more restrictive in certain areas • Objective application — Cultural bias can be an issue • Moving target — Additional complexities due to changes in IFRS • But it goes beyond accounting and financial reporting…
Beyond accounting and financial reporting… Process and statutory reporting • Benefits: • Standardized reporting — Streamline management reporting, including bonus systems; transform statutory and tax reporting • Reduction in consolidation adjustments – Conformed IFRS policies reduce the number of adjustments needed • Internal controls – Opportunity to improve controls / processes Benefits • Challenges: • Policies of overseas group entities – The extent of accounting policy alignment if some subsidiaries have adopted IFRS • Management and internal reporting – Aligning internal and external reporting may require significant effort • Internal controls — Changes to processes and systems could impact control effectiveness
Beyond accounting and financial reporting (continued)… Technology infrastructure • Benefits: • Integrated systems — Opportunity to reduce the number of ledgers and systems being used • Update legacy systems — Gain efficiencies by replacing disjointed legacy systems with enterprise-wide systems Benefits • Challenges: • Dual reporting — Maintaining multiple accounting frameworks during transition • IFRS compatibility — Current or planned systems may not be “IFRS ready”
Beyond accounting and financial reporting (continued)… Organizational • Benefits: • Efficient use of resources — Consistent accounting policies can lead to cost savings through shared services, greater mobility of accounting personnel and standardized reporting • Access to capital markets — IFRS facilitates easier access • Tax and treasury — Consider strategic tax alternatives, cash tax impacts, and opportunities to enhance subsidiary distributable reserves Benefits • Challenges: • Cooperation — Potential difficulties in achieving convergence of non-controlled interests • Employee commitment — Significant training and communication is often required • Contracts — Impact on debt covenants, bonus and compensation arrangements, revenue contracts, etc. • Taxes – impact on tax structures, potential loss of benefits and volatility in tax provisions and the effective tax rate Challenges
Observations Lessons learned • Overall approach was to minimize differences from local GAAP • Variety of performance measures were used • Increased disclosure in financial statements • Judgments made and risk disclosures • Use of IFRS 1 exemptions • Business combinations, CTA and pension exemptions widely used • Significant impact on results • Asset impairments, “split accounting” and components were significant issues • Effort was underestimated • Lead time from announcement to reporting date was short • Late start often resulted in escalation of costs, especially after transition date • Some companies did not achieve “business as usual” state for IFRS reporting • Often a lack of a holistic approach, taking collateral effects into consideration • Hard to get it right the first time • Several companies are only now starting to explore benefits from IFRS implementation The EU experience
Illustrative adoption timeline Reporting Date Transition Date Step 5 • Transition to IFRS • Interim Reporting • Investor Communications Step 4 • Transition to IFRS • Interim Reporting • Investor Communications Step 3 • Local GAAP and IFRS opening balance • Investor Communications • Audit Procedures • Change Standards • Local GAAP and IFRS opening balance • Investor Communications • Audit Procedures • Change Standards • Statutory Implementation • Select Exemptions • Prepare IFRS Opening Balance sheet • “Dry Runs” Step 2 • Statutory Implementation • Select Exemptions • Prepare IFRS Opening Balance sheet • “Dry Runs” IFRS Competence • Targeted Statutory Implementation • System and Process redesign Step 1 • Targeted Statutory Implementation • System and Process redesign • Awareness • Assessment • Planning • Initial Training • Roadmap • Awareness • Assessment • Planning • Initial Training • Roadmap Alignment with other initiatives and training for appropriate personnel Rationalization and standardization of statutory reporting
Potential near-term action steps • We have identified the following areas where companies can get started:
Some High-Level Advice Prepare for Macro-implications • IFRS is global • Regulators are communicating and cooperating • SEC; European Securities and Markets Authority (ESMA); International Organization of Securities Commissions (IOSCO) • Analysts and investors will expect consistency and transparency • Industry participants are communicating • Your financial statements may be read and understood anywhere • Decisions made in London can be felt in Peru • Standards based on principles: • Require discipline over judgments • Necessitate robust disclosure around judgments • Do not permit the ability to say “tell me where it says I can’t do this!”
Some High-Level Advice Implement a Judgment Framework • Discipline over principles-based accounting • A balanced approach to accounting and disclosure • Committee on Improvements to Financial Reporting (CIFiR) Recommendations: • Analyze business purpose and substance of transactions • Identify all relevant accounting research • Consider alternatives based upon investor needs • Seek input from multiple individuals with expertise • Consistent application of accounting judgments based upon reliable assumptions and estimates
Some High-Level Advice Areas Most Subject to Judgment: • Revenue recognition • Provisions • Business combinations • Consolidation • Impairment of assets • Employee benefits • Financial instruments
Some High-Level Advice Prepare for new IFRSs • Monitor IASB meetings • Share information within your industry • Stay abreast of current publications/ thought pieces • Participate in IASB outreach activities • Comment letters • Roundtables • Field testing • Communication is critical (internal and external)
Some High-Level Advice Monitor Continuing Developments • Pace of standard-setting unprecedented • Stakeholders expressed concern over due process • The IASB and FASB pressured to re-expose • Revenue recognition and leasing will be re-exposed • Insurance and parts of financial instruments likely re-exposed • Target completion dates updated • Recently issued IASB proposals • Defer mandatory effective date of IFRS 9 to 2015 from 2013 • Agenda consultation • Effective dates of major projects could be 2015 or 2016
Final Thoughts to Leave You With IFRS is Going to Be the Universal Accounting Language • IFRS is the global passport to capital • There is a global focus on IFRS by regulators • Prepare now to adopt properly • Set the “tone at the top” of the organization • Implement a judgment framework • Follow IASB activities and get involved • A global perspective is essential to a successful implementation