Standard Setting Seminar

1. Standard Setting Seminar Peter Berridge Mike Kimeda Roy Park Manish Pathak Alison Sherk

2. Seminar Outline • Importance and Type of Standards • Historical Context and Challenges • Accounting Organizations & Standard Setting Process: • Canada • US • International • Enforcement and Oversight • SOX and Bill 198 • Rules vs. Principle based Accounting • Harmonization • Class Discussion

3. Accounting Standards • Common set of standards and procedures specifying how transactions & other events should be treated: • Generally Accepted Accounting Principles (GAAP) • Developed by an authoritative accounting body, or become accepted over time as appropriate because of its universal application • Needed: • To make informed decision • For comparability of financial statements across companies and time

4. Types of Accounting Standards • Explanatory • How financial statements were developed • Measurement • How numbers were calculated • eg. asset valuation, income assessment, depreciation method, inventory value etc. • Disclosure • What information should be disclose for reader’s own judgement • Presentation • How information should be displayed on financial statements

5. Stakeholders • Various with coinciding and conflicting needs: • Investors • Creditors • Managers/Corporations • Industry Associations • Government

6. Accounting Theory Bookkeeping to financial reporting Maturation of financial reporting 1930’s - Historical cost-matching model Information value perspective Standard Setting 1930’s – Rule making bodies emerge National organizations mature 1970’s – International standards proposed Drive toward harmonization Historical Development

7. Factors Influencing Development • Why regions differed in speed of development… • Political environment • Maturity of economy • Speed of adapting GAAP or other principles • Monitoring & enforcement capabilities • Regulatory strength • Corruption • Recent business issues • Ownership structure

8. Development Issues • Factors effecting standards development… • Fragmentation of international effort • Different approaches • Rules based • Standards based • Committee approach • Uniformity a global issue

9. More Development Issues • Factors affecting standards development… • Impact of technology • Capital markets – sophistication, speed, complexity • Changing economies – resource to knowledge • Accountability improvements

10. Today’s Challenges • Globalization of companies and capital markets • Impact of technology • Greater access to information • Potential for real-time or continuous reporting • Changing nature of economy • Shift from manufacturing & resource extraction to “knowledge based economy” • Need relevant model for measuring & reporting assets not currently recognized on BS • Increased requirement for accountability • More sophisticated investors • Shift to holistic reporting: strategic vision, non-financial metrics, etc.

11. Accounting Organization and Standard Setting Process Canada

12. Accounting Organizations in Canada

13. Accounting Structure in Canada

14. AcSB • Authority to develop and establish standards • Objectives: • Serve public interest • Encourage input from all stakeholders • Bring objectivity in the consideration of issues • Respond in a timely manner

15. 1 2 Agenda Proposal Topics identified Vote on decision to proceed with proposal Standard Setting Process 4 3 Exposure Draft Released for public comment: CA Magazine AcSB Website

16. 5 4 Re-Exposure Draft Feedback Repeat steps 3 and 4 Considers comments & meets with interested parties Continued… 6 Final Approval & Issuance Published in CICA Handbook, updated quarterly

17. Monitoring & Enforcement • Canada Business Corporations Act & Securities Legislation: • Companies required to prepare financial statements in according with GAAP

18. Monitoring & Enforcement Accountants Securities Commission Auditors Bill 198 (Similar to SOX) Overseen Provincially; power to de-list companies Licensed provincially

19. Accounting Organization and Standard Setting Process United States

20. Accounting Organizations in US

21. Financial Accounting Foundation FASB GASB Staff and Task Force Financial Accounting Standards Advisory Council Governmental Accounting Standards Advisory Council Organization Organizations

22. FASB • Develops broad accounting concepts and financial reporting standards • GAAP • Although SEC has the authority to be the national standard setter, their policy states that FASB will officially develop these standards • Focus is on relevance, reliability, comparability and consistency

23. Decisions – How Topics are Added Factors to be considered • Pervasiveness of the issue—troublesome issues • Alternative solutions - solutions to improve financial reporting • Technical feasibility - developing a technically sound solution • Practical consequences - a generally accepted solution • Convergence possibilities - opportunity to amalgamate standards • Cooperative opportunities - support for other standard setters • Resources – adequate resources from FASB or others to complete the project

24. Due Process for FASB • Receives request/recommendations for new projects • Board meetings to discuss requests/recommendations • Take vote to decide whether to accept – majority wins • Deliberate issue at Public Board meeting • Board issues exposure draft • Public roundtable on review of Exposure Draft • Board evaluates public comments, and re-deliberates at public Board meeting • Statement of Interpretations issued if majority votes to approve standard

25. Accounting Organization and Standard Setting Process International

26. International Organization Structure

27. International Accounting Organizations

28. IASB • Members appointed by International Accounting Standards Council (IASC) • Solely responsible for setting international accounting standards • Meetings with the SAC, IFRIC, and IASB working groups to work on agenda items • Use a “comply or explain” approach to standard setting

29. IASB 6 Step Process • Set the Agenda • Project Planning • Development and Publication of Discussion Paper • Development and Publication of Exposure Draft • Development and Publication of an International Financial Reporting Standard (IFRS) • Procedures after an IFRS is issued

30. Enforcement of US and International Standards • National commissions used to ensure that publicly available financial reporting information is compliant • National standard setters are involved in the standard setting process • Countries responsibility to ensure that companies are in compliance

31. Principle vs. Rule Based

32. Rules-Based Accounting • Proliferation of rules • Many complaints that the rules are too detailed and too complex • Too difficult to stay current for both preparers and auditors • ‘Check-box’ mentality • Too many exceptions

33. Principle-Based Accounting • Requires professional judgment • Exercise in good communication; more than just compliance • Reduction of form-over-substance accounting • Fewer exceptions • Fewer conflicting rules • Simpler standards • IASB and other major standards already using the principles

34. International Accounting Standards (IAS) • Advantages • Help firms compete on equal terms to raise capital on the world markets • Financial statements that better represents the state of a company • Only in certain cases • Decrease in litigation for the US • Increase in comparability and consistency • Reduces the reporting costs for multi-national firms

35. International Accounting Standards (IAS) • Disadvantages • Increased litigation • Reduction in comparability and consistency • Different good-faith judgments • Different interpretations • How many disclosures will there be? • Harder to enforce a principles based systems because of the different interpretations • Can take more time (already long) • National differences with the International Community

36. Challenges of IAS • National taxation • IAS primarily serves the world markets which may have different priorities than the taxation authorities • Who is going to police the IAS? • Principle-based standards leading to rules-based in order to increase consistency and comparability • US must be a part of this initiative for it to be a true IAS (largest capital market) • SEC will not endorse IAS if not as rigorous as US GAAP

37. SEC Staff Study – July 25, 2003 • Recommends accounting standards should be principle-based standards with the following characteristics: • Improved and consistently applied conceptual framework • Clearly stated accounting objective of the standard • Sufficient detailed and structured for it to be operationalized consistently • Minimal use of exceptions to the standard • Avoiding the use of percentage tests • Compliant, but not intent of standard • FASB has already started applying the ‘objectives-oriented’ approach on a prospective basis

38. SEC Staff Study – July 25, 2003 • Operationalizing will take time requiring the following: • Newly developed standards that articulate the objectives and avoids exceptions, bright-lines, and excessive details • Addressing the deficiencies and inconsistencies of the framework • Ensuring new standards are in-line with the conceptual framework • Addressing current standards that are rules-based • Redefining the GAAP hierarchy • Continuing to converge the US, foreign, and international standards

39. Harmonization

40. What is Harmonization? • Harmonization refers to the convergence between differing accounting standards • For Canada this means harmonizing Canadian, US and International rules • For the USA this mean adoption of a more principles based approach

41. Why is Harmonization Important? • Daimler-Benz DM 1.1 billion difference: • January - June 1993 • DM 168 million PROFIT under German GAAP • DM 949 million LOSS under US GAAP • Difference attributable to variation in accounting standards • Roche Group estimated it would save US$100 million annually by producing one set of books • Harmonization is one of the most important, dynamic accounting topics today (really!) • It is a priority of FASB, IASB and AcCSB

42. Benefits of Harmonization • Lowered costs of reporting for international organizations • Single standard improves understand-ability for users • Compatibility of reports in different counties • High quality standards for countries that can not create their own standards

43. Disadvantages of Harmonization • Lowering of standards to a compromise position for jurisdiction with highest levels • High costs of changing from current standards • Differing legal and tax backgrounds make common rules less relevant • Does it benefit users?

44. Australian Experience • Australia has made an exerted effort to adopt IAS • Political positioning from ASE to accept IAS for ASE’s financial gain • NO feedback from users as to advantages from adoption of IAS

45. Australian vs International Standards OZ Standards International Standard

46. Options for Canada • Adopting US GAAP and eliminating CDN-GAAP • Adopting IAS and eliminating CDN-GAAP • Maintaining CND-GAAP • Abandon the field and let the market decide • Status Quo: wait until the market is more clear

47. Position of Loblaws • Loblaws responded to an AcSB request for comment on the direction Canada should take. • Pushing for AcSB to actively push international accounting standards with FASB and IASB • Concerned about US style rules • Concerned about differential rules for private and public companies

48. Canadian Direction • AcSB published its strategic plan Jan 4, 2006 • Approaching different strategies for different users: publicly traded companies, private companies, not-for-profit Public companies: • Reporting rules will converge with IFRS • CDN GAAP will cease to exist • AcSB will work with IASB and FASB to eliminate differences between US GAAP and IFRS

49. Canadian Direction Not-Publicly Accountable Enterprises: • Need to determine who the “users” of financial reports are • Recognizes that needs are very different from public companies • No clear strategy on how to proceed • Continuation of Canadian GAAP Not For Profit Enterprises • Will follow same rules as for-profit companies • Will research how to create rules • Will develop standards specific to NFPE’s

50. Conclusions