IAS Conversion

1. IAS Conversion Project managementand issues to consider 1

2. Topics • Part 1 - Before you even start; • Part 2 - Project management • Part 3 - Pitfalls and experiences 2

3. Legend on Risk Assessments: • Key risk from the point of view of company. May break a conversion project. • Key audit risk. May result in significant errors. Key Risk IAS Key Risk 3

4. Clearing some of the fog… • Listed companies DO NOT change to IAS due to a guideline from the European Community. • IPO Companies seeking to attract international investors are using IAS now; • This not just some outside decision or law that forces companies to do this or that; Part 1 – Before you even start… 4

5. Clearing some of the fog… • Listed companies ARE forced to change because international users of financial statements demand an international framework that is comprehensive and meets reporting and disclosure standards that result in high quality financial statements. That implies: • Reporting standards and practices • Governance standards and practices (*) • Audit standards and practices (*) • Regulatory requirements and review (*)(*) outside scope of this presentation Part 1 – Before you even start… 5

6. Clearing some of the fog… • We can only conclude that the international community does not believe current standards and practices meet the above expectation. Whether we concur with this is not highly relevant. Users of financial statements have already made up their mind. Part 1 – Before you even start… 6

7. The mindset for conversions • “You can’t solve a problem with the same thinking that created it in the first place”; (Albert Einstein) • As result, it is imperative to: • think international when converting to international standards; • look at international guidance, as it helps to understand how and why things need to be accounted for so and so; • allow yourself to forget local practices and local guidance; Part 1 – Before you even start… 7

8. More than an accounting exercise A COMPLEX PROJECT 8

9. Part 2 – Project Management 9

10. Project management • Project management • Overview of a IAS conversion project • IAS conversion aspects of key project management phases. • While included in the general overview, we have excluded detailed generic project management comments such as cost management etc. Part 2 – Project Management 10

11. Project Management applied to an IAS Conversion Project DefinitionPhase Planning StrategyPhase ImplementationPlanningPhase Execute andControl Phase Learning Phase 5 Phases • 1. Set the concept (Accept IAS) • 2. Set a vision,mission statement 1. Generate alternativestrategies 2. Analysis of alternatives 1. Develop tasks 2. Develop network diagram 3. Critical path computations 4. Ressource allocation 5. Spending allocation 6. Bar Charts 7. Does this meet objectives? 1. Execute implement. plan 2. Monitor progress of committees 3. Monitor decision process 4. Bounce decisions up to Main IAS Workgroup 5. Review - approval 1. Project analysis 2. Closing project Steps CEO, CFO, Audit Committee Main IAS Conversion Workgroup Project Manager(s) Players Sub-groups: routine, non routine, training, systems, disclosure Key accounting staff All accounting staff 11

12. Phase 3: (Partial) Example of a project 12

13. Key Risk IAS Phase 1: Definition phase • Step 1: Set, Accept the Concept • IAS, as demanded by users of financial statements; • Ensure that decision makers understand the concept including the mindset; • Ensure CEO buys into the concept, • CEO is the appropriate level of buy in • Avoid a headless chicken project. • Determine members of Conversion Workgroup – Subgroups to be determined later. Part 2 – Project ManagementPhase 1 – Step 1 13

14. Phase 1: Definition phase • Step 2: Set a vision, develop a mission statement (1/2) • Where are the readers? Continental Europe, UK, US, Asia? • Who are the readers? Distribution of shareholdings with institutional investors, fund managers (where – which), small investors. • Best practice disclosures (investor relationship dept.) vs. barebones compliance (comptroller) Part 2 – Project ManagementPhase 1 – Step 2 14

15. Phase 1: Definition phase • Step 2: Set a vision, develop a mission statement (2/2) • Early adoption approach? • What do competitors do? Do we follow the pack or set the standard. Is the latter a different or higher standard? • Where do we go from here? Listing in the US (secondary listing parent). Growth in Asia (often listing of local sub)? Part 2 – Project ManagementPhase 1 – Step 2 15

16. Phase 2: Planning strategy phase • Step 1: Generate alternative project strategies • Alternate vision / mission strategies; • US GAAP and or IAS • Early adoption • Options within IAS • In-house vs. outsourced implementation; • Centralized or decentralized approach. Part 2 – Project ManagementPhase 2 – Step 1 16

17. Phase 2: Planning strategy phase • Step 2: Analysis of alternatives • Do the alternatives meet performance, cost, time and scope requirements? • Are SWOT and risks acceptable? • Are the consequences OK? Part 2 – Project ManagementPhase 2 - Step 2 17

18. Phase 3: Planning implementation phase • Step 1: Develop tasks to be done – what, who, how long, resources • Step 2: Develop network diagram – What can be done first, what next, what in parallel (*) • Step 3: Critical path computations – forward pass, backward pass, (*) • Step 4: Resource allocation (*)(*) Outside scope of presentation Part 2 – Project ManagementPhase 3 Overview 18

19. Phase 3: Planning implementation phase • Step 5: Spending allocation (*) • Step 6: Bar charts (*) • Step 7: Does the above still meet the performance, cost, time and scope requirements? Are risks acceptable?(*) Outside scope of presentation Part 2 – Project ManagementPhase 3 Overview 19

20. Develop tasks to be done • Action 1: Understanding the requirements; • Action 2: Understanding the transactions to be accounted for; • Action 3: Set up subgroups (reporting to main working committee); • Action 4: Understand how differences can impact the statements; • Action 5: Set out tasks to be done; Part 2 – Project ManagementPhase 3 - Step 1 - Overview 20

21. Develop tasks to be done Key Risk IAS • Action 1: Understanding the requirements • Accounting: all conversion workgroup members need fair level of IAS knowledge. Some members (marketing) may need to be trained. Experts supplement that fair level. • Reporting: • Periods; financial statements (2-3 years) vs. MD&A and regulator reporting (often 5 years) • Can they still amend certain agreements before opening balance? • Scrutinize disclosures, understand what is needed and what it implies. Part 2 – Project ManagementPhase 3 - Step 1 - Action 1 21

22. Key Risk Develop tasks to be done: • Action 2: Understand the transactions (1/3) • Clients often presume they know the transactions. • Some transactions are not recent • People may have left the firm • People may have moved into other positions, other departments • Even when the knowledge is accurate, it is only accurate in relation to the current accounting treatment. The client most likely never analyzed IAS decision criteria in those transactions, as those criteria simply did not exist or were not relevant at that time. Part 2 – Project ManagementPhase 3 - Step 1 - Action 2 22

23. Key Risk Develop tasks to be done: • Action 2: Understand the transactions (2/3) • Study the facts; too much time is wasted discussing accounting treatments of a wrong fact pattern. • Identify the non-recurring transactions to look at: • Leases and sale & lease back, joint ventures, Control vs. significant influence both at inception and subsequent changes, SPEs, key contract clauses, employment benefits, business combinations, discontinued operations, impairments, restructurings, (deferred) taxes, financial instruments… Part 2 – Project ManagementPhase 3 – Step 1 – Action 2 23

24. Key Risk Develop tasks to be done: • Action 2: Understand the transactions (3/3) • Identify the recurring processes to look at: • Estimations, revenue recognition, financial instruments, LT contracting 24

25. Develop tasks to be done • Action 3: Set up sub group working committees • Working groups to be further detailed in sub-groups. Assign tasks to these sub-groups for execution and control. • Recurring vs. non-recurring transactions, training, disclosures, system requirements • Set reporting structure (timing, scope) into main working committee. Part 2 – Project ManagementPhase 3 – Step 1 – Action 3 25

26. Key Risk Develop tasks to be done • Action 4: Understand how differences can impact the statements • Design tasks so as to understand the accounting and reporting impacts of the differences • Push back into opening balances? • Hindsight knowledge issue? • One off impact or multiple periods? • Equity or net income? • Where does it hit the financials? Ratios, covenants, classification difference with previous statements. Keep track of key ratios and benchmarks. Part 2 – Project ManagementPhase 3 – Step 1 – Action 4 26

27. Key Risk IAS Key Risk Develop tasks to be done • Action 5: Set out tasks to address the above understandings (1/2) • How much wood can a woodchuck chuck? • Know the other time constraints (closings, budgeting period, system upgrades…) • Outside resources? • How much knowledge is centered around few people? Surprisingly important! Part 2 – Project ManagementPhase 3 – Step 1 – Action 5 27

28. Key Risk IAS Develop tasks to be done • Action 5: Set out tasks to address the above understandings (2/2) • Training • Accounting manual • System requirements • Management reporting system (segment reporting) or accuracy of cost accounting allocation • Required to handle two, likely three accounting frameworks. Part 2 – Project ManagementPhase 3 – Step 1 – Action 5 28

29. We are now jumping to Phase 4 Execute and Control. Other phases are more generic project management and outside the scope of this seminar 29

30. Key Risk IAS Key Risk Phase 4: Execute and Control Phase • Progress and decision reporting • Timing sub-group period meeting • Bounce up to main working committee for decisions • Avoid decision taking at levels of mid management • Progress and decision template (next slide) Part 2 – Project ManagementPhase 4 30

31. Phase 4: Execute and Control Phase Current company practice (method and disclosure) Accounting regulations (summary) Extent of issue(amount, subsidiaries concerned, frequency) Potential application difficulties (availability of information, confidentiality, ...) Expected milestone dates • Event • Ascertain extent of issue in subsidiaries • Quantify correctly entry • Completion of disclosures Date 31

32. Part 3: Pitfalls and experiences Key Risk Key Risk IAS 32

33. Pitfalls, experiences • Buy in issues • Valuable time is often wasted when decisions should be made at the top but are not being submitted to the top for a variety of reasons; • Resource constraints require top level priority setting; • Some decisions (deconsolidation, financial instruments, business acquisitions) are potentially very significant. Make sure top management understands what is at stake, why there could be a change. Part 3 - Pitfalls and experiences 33

34. Pitfalls, experiences • International Practice vs. International Standards: • International Practice. That concept is not defined. Term is often used, even more often abused. • Every conversion has its local interpretation issues. Often it is just local accounting. Most often outsiders do not understand the rationale, thus it goes against the very expectation of an international accounting framework. • See mindset discussion Part 3 - Pitfalls and experiences 34

35. Pitfalls, experiences • The framework of IAS (IFRS): • When a client starts to refer to the framework to support a treatment, expect trouble. • International Guidance: • Allow yourself to forget local guidance. • Look at international guidance. Part 3 - Pitfalls and experiences 35

36. Pitfalls, experiences • Transactions: • Presuming things are the same (in local accounting and IAS) is a recipe for failed conversion; • Look at the facts; then look again! • Accounting is easy, getting to the facts not • Analyze all the criteria of IAS; Part 3 - Pitfalls and experiences 36

37. Pitfalls, experiences • Disclosures: • Include disclosures requirements in tasks to be done. • Analyze disclosures. • Compare with existing statements. • Compare with IAS statements of other companies. Part 3 - Pitfalls and experiences 37

38. Pitfalls, experiences • Changes of accounting policies vs. New policies: • Change in accounting policy • Change in estimate • Change in assumption of estimate • Use of hindsight knowledge 38

39. Results of failed conversion: “IAS lite” • The shades of IAS lite: • Full IAS compliance • Compliance with national standards “that comply with IAS” • Compliance with IAS, with exceptions specified in accounting policies • Compliance with IAS, with exceptions specified in notes but not in the accounting policies 39

40. Results of failed conversion: “IAS lite”: • The shades of IAS lite: • Accounting policies “are based on IASs” or “comply with the principles in IASs” • Accounting policies are “based on the principles in IASs”, with specific exceptions • IAS applied only when there are no equivalent national standards • IAS used only for selected items • IAS applied only when there are no equivalent national standards 40

41. Results of failed conversion: “IAS lite” • The shades of IAS lite: • IAS used only for selected items • Reconciliation from national GAAP to IAS • Summary IAS financial statements that imply that these financial statements are “IAS financial statements” • Disclosure of policies that do not comply with IAS, but without any quantification 41

42. End Part III 42