Introduction to IFRS

1. Introduction to IFRS Slides from Ernst & Young Foundation and KPMG Foundation

2. What is IFRS? • IFRS stands for International Financial Reporting Standards. • As indicated within the title, these standards are aimed at a global practice. • Ultimately, the goal is to achieve a single set of high-quality, common accounting standards used around the world. • These standards are the result of a convergence of international viewpoints. • These standards are for publicly accountable entities. • Small and medium-sized entities (SMEs) that do not have public accountability may use a simplified version of IFRS known as IFRS for SMEs. • IFRS for SMEs has recently been accepted for non-SEC registrants by the AICPA as an acceptable alternative reporting standard to US GAAP; however, it is not yet common practice.

3. Why is it important to learn about IFRS today? • Under IFRS 1, First-time Adoption of International Financial Reporting Standards, there is a variety of exemptions and options that the preparer may elect to utilize in the adoption process that need to be assessed to best position the company. • The IFRS adoption and convergence efforts impact much more than just the accounting function. Additional functions that are impacted include the following: • Information systems • Tax • Treasury • Investor relations • Sales • Human resources • Mergers and acquisitions

4. Why is it important to learn about IFRS today? • Knowledge of IFRS provides an ability to practice accounting in the global marketplace. • Through convergence efforts, US GAAP continues to become more aligned with IFRS. • US practice of IFRS currently exists in the following ways: • Foreign multinationals that report using IFRS have US operations. While some of these entities file IFRS financials with regulators of foreign exchanges, some file with the SEC as foreign private investors (FPIs) under IFRS as well. • US multinational companies have foreign operations that are required to report using IFRS. • Many US companies are making assessments of the potential impact of adopting IFRS and IFRS convergence efforts on their current operations.

5. Why is it important to learn about IFRS today? Given the level of IFRS knowledge expected by US practitioners today, the AICPA is including IFRS in the content specifications for the Certified Public Accountant exam beginning January 1, 2011.

6. IFRS Implementation Around the World (2005) IFRS or fixed date for implementation U.S. GAAP and/or convergence intended No/unknown convergence plans Convergence plans

7. IFRS Implementation Around the World (2009) IFRS permitted or required U.S. GAAP and/or convergence intended No/unknown convergence plans Convergence plans

8. “Wave II” is coming • Korea 2011: IFRS mandatory for listed businesses – 2009: IFRS permitted • Japan Large publicly-traded companies given option to early- adopt IFRS for years ending March 31, 2010 • China Convergence with IFRS with some differences • India Convergence with IFRS for public interest entities for 2011 • Brazil Listed companies and banks required to use IFRS starting from 2010, IFRS to be incorporated into Brazilian GAAP • Canada 2011: Reporting under IFRS for publicly- accountable entities, private companies permitted to use IFRS • Mexico 2012: Working to converge Mexican GAAP with IFRS • U.S. 2015 or 2016 ???

9. Convergence Plan • Norwalk Agreement (September 2002) • FASB and IASB pledged to make their existing financial reporting standards fully compatible and coordinate future work programs to ensure compatibility is maintained • Memorandum of Understanding between FASB and IASB (February 2006) • Commitment to achieve convergence • Sets guidelines on how to approach the task • Outlined standard setting goals to be accomplished by the end of 2008 • Updated Memorandum of Understanding (September 2008, November 2009) • Presents standard setting goals to be accomplished by June 2011

10. Use of IFRS by Foreign Private Issuers • December 2007 • SEC issued final rule permitting foreign private issuers to file financial statements in accordance with IFRS as issued by IASB (SEC Release No. 33-8879) • Financial statements required to contain explicit and unreserved statement of compliance with IFRS as issued by IASB • Audit report required to opine on application of IFRS as issued by IASB • No reconciliation to U.S. GAAP needed

11. SEC Proposed Roadmap for Potential Adoption of IFRS by All U.S. Public Companies • Issued November 2008 • Identified “milestones” to be achieved before IFRS decision • Potential SEC decision in 2011, with potential IFRS adoption beginning with years ending on or after December 15 • 2014 for large accelerated filers • 2015 for accelerated filers • 2016 for other filers

12. Commission Statement in Support of Convergence and Global Accounting Standards (“2010 Statement”) • The 2010 Statement was issued by the SEC on February 24, 2010 • SEC directed the Staff of the Office of the Chief Accountant of the SEC with appropriate consultation with other divisions and offices to develop and execute a Work Plan • The purpose of the Work Plan is to consider specific areas and factors relevant to a SEC determination in 2011 of whether, and if so, when, and how the U.S. should be transitioned to a system incorporating IFRS

13. Is IFRS different than US GAAP? • There are differences between IFRS and US GAAP but they are more alike than different for most commonly encountered transactions. • IFRS is largely grounded in the same principles as US GAAP. • The US and international standard setters are currently working on convergence projects to better align the standards and reduce these differences. = / ?

14. Is IFRS better than US GAAP? • It cannot be stated that IFRS is better (or of higher quality) than US GAAP nor that US GAAP is better (or of higher quality) than IFRS. Neither set of standards is perfect. • This is evidenced by the convergence efforts where changes are being made to both sets of standards and are not one-sided. • Some could say that the international standard setters have had the following advantages in their standard setting: • Being able to obtain a greater amount of global perspective. • Being able to draw upon the latest standards. • Being able to remedy perceived problems identified in practice. • Having an annual improvement process to enhance the clarity and consistency of IFRS, which continues to consider more current thinking and practice. • Being able to focus more intently on a principles orientation.

15. Is IFRS better than US GAAP?Principles Based vs. Rules Based • As mentioned previously, both US GAAP and IFRS are largely grounded in the same principles. • As a general rule, however, IFRS standards are broader with less rules and limited interpretive guidance. • The international standard setters prefer to leave implementation of the principles embodied in the standards to preparers and auditors and its interpretive body. • US GAAP contains underlying principles as well but is more specific and rules oriented with far more “bright lines,” comprehensive implementation guidance and industry interpretations.

16. Is IFRS better than US GAAP? The following example is a simple illustration of a principles-oriented approach compared to a rules-oriented approach. Principles oriented: • Your parents tell you to do your best to get good grades. • If you do not get good grades, they will consider the substance of your reasons. Rules oriented: • Your parents tell you to get a 3.2 GPA or above. • They provide you with 15 contingencies that might justify acceptance of anything lower than a 3.2 GPA.

17. Who are the international standard setters? International Accounting Standards Board (IASB): • The IASB develops IFRS. • The IASB is an independent group of 15 full-time members. • The board intends to expand to 16 members by 2012. • These members are appointed by the trustees.

18. What is the structure of the international standard setters? Monitoring Board IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council International Accounting Standards Board (IASB) IFRS and IFRS for SMEs Information provided by www.IFRS.org

19. What is the structure of the international standard setters? Monitoring Board The IFRS Foundation is a not-for-profit organization that oversees the development of the IASB’s international reporting standards for general financial statements. IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council International Accounting Standards Board (IASB) IFRS and IFRS for SMEs Information provided by www.IFRS.org

20. What is the structure of the international standard setters? Monitoring Board This group assists in nominating and appointing individuals to IFRS Foundation trustee positions. IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council International Accounting Standards Board (IASB) IFRS and IFRS for SMEs Information provided by www.IFRS.org

21. What is the structure of the international standard setters? Monitoring Board IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council International Accounting Standards Board (IASB) The IFRS Advisory Council is the IASB’s forum for consultation with representatives from user groups, preparers, financial analysts, academics, auditors, regulators and professional accounting bodies. IFRS and IFRS for SMEs Information provided by www.IFRS.org

22. What is the structure of the international standard setters? Monitoring Board IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council International Accounting Standards Board (IASB) The IFRS Interpretations Committee releases interpretations (IFRICs) on newly identified financial reporting issues not dealt with in an IFRS and unsatisfactory or conflicting interpretations in areas without appropriate authoritative guidance. IFRS and IFRS for SMEs Information provided by www.IFRS.org

23. What is the history of IFRS? Proposal to create an accountants’ international study group • In 2000, the initial 14 members are appointed to the IASB. • In 2002, the IASB begins promulgating standards as IFRS from IAS. The SIC becomes the IFRIC. The European Union endorses IFRS for 2005 adoption. • In 2002, the Norwalk Agreement is executed between the IASB and FASB. • In 2005, the SEC published a roadmap (Roadmap) for elimination of a US GAAP reconciliation for FPIs. • In 2006, the FASB and IASB published a Memorandum of Understanding, to set forth priorities in their joint work program. The IASC expands. 1960s 1970s 1980s 1990s 2000s • In 1994, the IASC Advisory Council is formed to provide oversight of IASC. • In 1997, the Standards Interpretations Committee (SIC) is formed • In 1999, the IASC is restructured to form a new board: the IASB. • FASB agrees to work on a joint earnings-per-share project. • In 2007, the SEC eliminated the US GAAP reconciliation for FPIs. • In 2008, the SEC published a proposed Roadmap anticipating the mandatory adoption of IFRS in the US. • In 2009, the FASB and IASB reaffirmed their commitment to the MOU. • In 2010, the SEC established a Work Plan for its 2011 IFRS adoption decision. • The IASC is formed in 1973. • The IASC begins promulgating International Accounting Standards (IAS). For more details regarding the history of IFRS, see the appendix of the Ernst & Young publication, US GAAP vs. IFRS: the basics.

24. How are international standards set? Agenda Research Discussion paper (DP) • Input is received from: • IFRS Advisory Council • Working Group • International groups such as analysts, preparers, audit technical partners • Special interest groups • Local standard setters • Regulators • Political groups Public consultation Exposure draft (ED) Public consultation Feedback statement IFRS Post-implementation meetings Information provided by www.IFRS.org

25. Plan the project, and develop and publish the DP • IASB decides whether to conduct the project alone, or jointly with another standard setter. • A DP is not mandatory, but is quite typical. The purpose is to explain the issue, and solicit early comments from constituents. • A DP includes: • Comprehensive overview • Possible approaches • Preliminary views Information provided by www.IFRS.org

26. Develop and publish the ED • Mandatory step, it is the main vehicle for consulting the public. • Unlike a DP, an ED sets out a specific proposal in the form of a proposed standard. • The development of an ED begins with the IASB considering: • Issues on the basis of staff research and recommendations. • Comments received on any DP. • Suggestions made by the IFRS Advisory Council, working groups and accounting standard setters, and those arising from public education sessions. Information provided by www.IFRS.org

27. Develop and publish the standard • After resolving issues arising from the ED, the IASB considers whether it should expose its revised proposals for public comment. The revised proposal would be in the form of a second ED. • In considering the need for re-exposure, the IASB: • Identifies substantial issues that emerged during the comment period on the ED that it had not previously considered. • Assesses the evidence that it has considered. • Evaluates whether it has sufficiently understood the issues and actively sought the views of constituents. • Considers whether the various viewpoints were aired in the ED and adequately discussed and reviewed in the basis for conclusions. Information provided by www.IFRS.org

28. A comparison of standard-setting processes • The IASB standard-setting process is almost identical to that of the FASB. The following are steps the FASB takes to create a standard: • The FASB receives requests/recommendations for possible projects and reconsideration of existing standards from various sources. • The FASB Chairman decides whether to add a project to the technical agenda, subject to oversight by the Foundation and after consultation with FASB members. • The FASB deliberates the various issues identified at one or more public meetings. • The Board issues an ED. In some projects, a DP may be issued to obtain input at an early stage that is used to develop the ED. • The FASB staff analyzes comment letters, public roundtable discussion and any other information. • The FASB redeliberates the proposed provisions at public meetings. • The FASB issues an Accounting Standards Update describing amendments to the Accounting Standards Codification. . Information provided by www.fasb.org

29. How are the US and international standard setters working together? • The FASB and IASB have been working together on convergence since 2006. • The following is a list of the major convergence efforts being focused on at this time : • Consolidation • Fair value measurement • Financial instruments • Financial statement presentation (presentation of OCI) • Leases • Revenue recognition • The aggressive timeline and the total coverage of the projects under convergence will have a significant impact on US accounting practice over the next several years.

30. What is the outlook for IFRS adoption?Timing • SEC Chairman, Mary Shapiro, stated in December 2010 that the SEC would allow a minimum of four years to adjust if it mandates the use of IFRS. This would mean the use of IFRS in 2015 at the earliest. • Other timing factors being contemplated by the SEC: • Use of all standards by all users at once which is referred to as the big bang approach. • Staggered or conditional use of the standards and variation by user group including the potential of early adoption. • A separate convergence project is focused on the implementation timing of standards that result from the major convergence projects currently underway.

31. What is the outlook for IFRS adoption?Potential method of mandated use of IFRS by the SEC • The SEC decision to mandate the use of IFRS is generally described as a decision to adopt IFRS. However, there are several manners in which the US could move forward to IFRS that are not considered to be adoption in the pure sense. • In October 2010, the SEC provided a progress report identifying that most jurisdictions do not fully adopt IFRS with no mechanism for making changes to the standards. Rather most jurisdictions follow either a convergence or endorsement approach. • Adoption: A jurisdiction practices under IFRS as issued with no modifications. • Convergence: A jurisdiction practices under national standards with efforts to converge differences with IFRS standards over time. • Endorsement: A jurisdiction reviews each IFRS standard as issued and determines whether the standard should be endorsed for practice with or without modification.

32. Conversion Issues • http://www.pwc.com/us/en/open-university/ifrs/index.jhtml