2. Solution Consultants: Lance LaCross, CPA Bill Wermes, MBA
IFRS & SOX
Update
Solution Consultants:
Lance LaCross, CPA
Bill Wermes, MBA

3. Today’s Agenda SOX (Sarbanes-Oxley Act)
Background
Was It Worth It?
Latest Update
IFRS (International Financial Reporting Standards)
What Is It?
Will It Effect Me?

4. The Enron Scandal

5. The Scandals of … Enron WorldCom Tyco Arthur Anderson KPMG
HealthSouth Corporation
Drove investors to loss confidence in our regulators and the reliability of publically reported financial information so our government sent a strong message to the marketplace with this act.

6. Sarbanes-Oxley Act - Summary
The Sarbanes-Oxley Act of 2002 (named for its sponsors Senator Paul Sarbanes and Representative Michael G. Oxley) is a law that was passed in response to the previously mentioned financial scandals. The law established new, stricter standards for all US publicly traded companies. It does not apply to privately companies. The Act is administered by the Securities and Exchange Commission (SEC), which deals with compliance, rules and requirements. The Act also created a new agency, the Public Company Accounting Oversight Board, or PCAOB, which is in charge of overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.

7. Key Sections Summary Key Sections
Section 201 Outlines Prohibited Auditor Activities.
Section 302 Describes The CEO's And CFO's New Responsibilities Regarding Corporate Reports.
Section 404 Addresses The Management Assessment Of Internal Controls.
Section 409 Outlines Real Time Disclosure.
Section 802 Describes Criminal Penalties For Altering Documents.
Section 806 Describes Whistleblower Protection.
Section 807 Describes Criminal Penalties For Fraud.

8. Internal Controls = Safety Procedure

9. Section 404 of the Sarbanes-Oxley Act
SEC MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS. (a) RULES REQUIRED- The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall--
(1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
(b) INTERNAL CONTROL EVALUATION AND REPORTING- With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.

10. Sarbanes-Oxley Section 404 IT Controls Top Deficiencies
Common deficiencies found in first year of audits:
Unidentified or unresolved segregation of duties issues
Programmer/developer access to production business transactions
Large number of users with access to “Super” or “Power” User transactions in production

11. Was It Worth It?
Per the SEC, the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.
Actual implementation costs in 2004 were 35 times higher than SEC estimate ($3.185 M)
In 2002, only 3 Congressmen opposed SOX
Now a lot of businessmen & politicians oppose the financial burden it puts on smaller companies
SOX led to the creation of the Public Company Accounting Oversight Board (PCAOB), which was established to oversee public companies' auditors and protect the public's interest by ensuring informative, fair, and independent audit reports.
The PCAOB is actively investigating small business issues (70+% of public companies are considered small).
The SEC and PCAOB are constantly revising their guidance to address some of the concerns Small company i.e. compliance dead lines have been extended.

12. SOX & The Future
Section 404 certification is an annual event. Compliance is an ongoing requirement which will require resources (people / $$$)
Auditors are now more objective because they cannot provide non audit services
Audit partners (not auditor) are rotated every five years
External Reporting is expanded for investors
The SEC and PCAOB are constantly revising their guidance to address some of the ongoing concerns which drives continuous change
CEO & CFO are likely to be more proactive in their financial disclosure due to potential liability
SEC has more power – i.e. blackball officers & directors

13. SOX & The Future cont… The Sarbanes-Oxley Act has many critics:
Opponents state the Act is an over-burdensome piece of regulation, one that has imposed costly and unneeded obligations on issuers. It has driven U.S. companies to exit the public markets and “go private,” and it has deterred non-U.S. companies from raising capital and listing in the United States.
Supporters of Sarbanes-Oxley counter that these arguments are extreme. Yes the benefits of Sarbanes-Oxley are hard to quantify. Little discussion about the costs of not implementing such compliance measures, such as the losses due to fraud, and the loss of investor confidence. The costs of an entity's dysfunction, such as what happened with Enron and a number of other companies, were enormous. Trillions of dollars were lost in market capitalization, and this was a real crisis with respect to investor confidence. The feelings are that is has increased public confidence in the markets and arguably lessened accounting fraud and numbers “manipulation.”
However, there is agreement among all parties that the act needs some adjustment particularly with respect to the burdens it imposes on smaller companies.

14. Latest News

15. Everyone Is Talking About It

16. Everyone Is Writing About It
Opening Comment - The financial arena is ever changing with IFRS growing in its use/requirement across the world & eventually the US. CFO Magazine of May 2008 has the CFO of Eaton and article title of “Good Bye” GAAP. US FASB codification is starting to simplify its structure. The January Illinois CPA Society magazine Insight is highlighting IFRS concept coming to America. The February issue of AICPA Journal of Accountancy talks about what it takes to move to the next step of this project

17. IFRS vs. GAAP
IFRS – International Financial Reporting Standards by IASB (International Accounting Standards Board) GAAP – Generally Accepted Accounting Principals by FASB (Financial Accounting Standards Board)

18. But Why Be Concerned about IFRS?
How can global investors, regulatory agencies, etc compare financial information/statements on a global basis if it is based on different rules, etc. It is like comparing … TO

19. IFRS Compared to GAAP = Apples vs. Oranges
Both are in the fruit family but a different variety - having major differences: color, skin, taste, purpose & texture

20. But if everyone is using IFRS (a Worldwide Standard) for their Financial Reporting…
Than it is like comparing Apples (Macintosh) vs. Apples (Granny Smith) Both in the fruit family and in the same variety - having minor differences: color, taste & texture – Easier comparison

21. IFRS vs. GAAP
IFRS – International Financial Reporting Standards by IASB (International Accounting Standards Board) IFRSs are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. Vs GAAP – Generally Accepted Accounting Principals by FASB (Financial Accounting Standards Board) GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements

22. Why Is Everyone Talking About IFRS?
The SEC Is Mandating It?
Your Competitors Are Doing It
Your CPA Thinks It Is A Great Idea

23. The SEC Is Mandating It

24. The SEC Is Mandating It
International Corporations preparers no longer must reconcile to US GAAP
Will it replace US GAAP?
The SEC has announced a timeline (2014) for potential adoption
2005 – EU Accepts it
US listed companies have the option to use IFRS
2009 – New SEC Chairman – “Now my agenda”
SEC will access results
2014: This would be the earliest year that the SEC would require U.S. large accelerated filers to convert their financials to IFRS.
2015: Earliest year the SEC would require U.S. accelerated filers to convert to IFRS.
2016: Earliest year the SEC would require U.S. non-accelerated filers, including smaller U.S. public companies to convert to IFRS.

25. SEC Update

26. Your Competitors are Doing It
Today more than 113 countries permit or require IFRS
By 2012 every major capital market will have adopted IFRS except the US (last to the dance)
We are a globally driven environment who will need to have a common standard in place

27. World Market Acceptance

28. Your Competitors are Doing It cont…
2011
2014?
2012
2011
2012
2010
2012
2009

29. Your CPA Thinks it is a Great Idea
AICPA – Appendix A Rule 2003
In 1973 FASB was set as the sole standard setter
IASB (International Accounting Standards Board) is designated as an acceptable principles creation organization
Continuous Convergence between IASB & FASB for a common “standard”
There are more than 15,000 SEC registered companies in the USA

30. History – Timeline of IASB
1973: Foundation of the International Accounting Standards Committee (IASC) in London as the result of an agreement between accountancy bodies in nine countries
1998: Completion of 39 ‘core’ international accounting standards (IASs). The number of IASC members passes one hundred
2001: The IASB assumes the standard-setting responsibilities from IASC and is overseen by the IASC Foundation (established in 2001)
2002: The EU Parliament confirms the endorsement process by which IFRSs will become the sole set of standards for EU listed companies
2005: Adoption of IFRSs for listed companies in the EU
2006: The US FASB and the IASB publish a Memorandum of Understanding detailing a roadmap to convergence
2007: US SEC publishes a proposal to eliminate reconciliation requirement for foreign private issuers using IFRSs

31. IFRS Timeline

32. Why Not Use GAAP as the Global Standard?
US GAAP Is Too Detailed
The Rest Of The World Would Not Accept Detailed Rules
IFRS Is Already Widely Accepted Through Out The World

33. Is Success In The Detail?

34. Convergence Process Between IASB & FASB
On Going Effort
Final IFRS
Standard?

35. Convergence Process Between IASB & FASB
Agenda Alignment
Full Joint Projects
Modified Joint Projects
Short term:
Projects of Narrower areas of difference
Long term:
Projects of “Big Ticket”
Not just convergence for the sakes of convergence, but also improvement

36. Convergence Process Between IASB & FASB
Short Term
Fair Value Option (FASB) completed
Segment Reporting (IASB) completed
Joint Ventures (IASB) final standard in 2009 …
Long Term
Financial Statement Presentation (Joint) DP (Discussion Paper) issued in Q42008
Leases (Joint) Discussion Paper issued in Q12009
Liabilities & Equity ED (Exposure Draft) in 2009

37. IASB Project Example

38. Convergence Process Between IASB & FASB
“ Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP. The goal is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved. Because of these ongoing convergence projects, the extent of the specific differences between IFRS and U.S. GAAP is shrinking.”
However ….

39. Convergence Process Between IASB & FASB
There Are Still Major Differences:
IFRS does not permit Last In First Out (LIFO) as an inventory costing method.
IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.
IFRS has a different probability threshold and measurement objective for contingencies.
IFRS does not permit curing debt covenant violations after year-end.
IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction.
Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail.

40. High Level Differences Areas:
Financial Statement Presentation
Consolidations, Joint Ventures, and Equity Method Investees
Business Combinations
Inventory
Intangible Assets
Long-Lived Assets
Impairment of Assets
Leases
Financial Instruments
Foreign Currency Matters
Income Taxes
Provisions & Contingencies
Revenue Recognition
Share Based Payments
Employee Benefits other than Share-based Payments
Segment Reporting
Earnings Per Share
Interim Financial Reporting

41. High Level Differences cont…
Financial Statement Presentation:
The opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS and is prepared at the date of transition, which is the beginning of the earliest period for which full comparative information is presented in accordance with IFRS. For example, preparing IFRS financial statements for the three years ending December 31, 2011, would have a transition date of January 1, That would also be the date of the opening IFRS balance sheet.
IAS-1 requires that the opening IFRS balance sheet:
Include all of the assets and liabilities that IFRS requires;
Exclude any assets and liabilities that IFRS does not permit
Classify all assets, liabilities and equity in accordance with IFRS; and
Measure all items in accordance with IFRS.

42. High Level Differences cont…
Inventory:
IAS-2 - the objective of this Standard is to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognized. This Standard provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realizable value. I t also provides guidance on the cost formulas that are used to assign costs to inventories.
For example inventory using LIFO is prohibited under IFRS. Techniques for the measurement of the cost of inventories, such as the standard cost method, may be used for convenience if the results approximate to cost. Companies on LIFO for US GAAP would have to support multiple inventory costing methods resulting in changes, not only to the General Ledger but also as well to the inventory management, project tracking, and procurement systems to support multiple cost basis capabilities.

43. High Level Differences cont…
Fixed Assets:
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognized in relation to them.
Fixed Assets requires componentization of fixed assets and permits revaluation to fair value
Requires new depreciable lives, asset categories, etc., as well as modification to front- end systems (real estate, property management) to track costs at lower levels of detail

44. Key Challenges …

45. Key Challenges - Time

46. Key Challenges Principles vs. Rules – Mindset Change
Hidden Differences – More Than Expected
Integration Into Education/Budget
Policy Issues i.e. LIFO Accounting
Education
Investors, Employees (current & future), etc.
And …?

47. Transition for US Corporations from GAAP to IFRS
Financial Statements:
Based on the current proposed roadmap published by the SEC, companies would need to be able to produce financials under both US GAAP and IFRS for a minimum of three (3) years
For some companies, the time period may be longer due to stand alone US GAAP reporting requirements for statutory reporting, debt covenant reporting to banks, etc.

48. Transition for US Corporations from GAAP to IFRS – Costs?
Expenses to determine the effects of adopting IFRS
Systems/ IT changes
Multi GAAP Capability / IFRS Complaint
Potentially higher cost of accounting staff –
Restatement of 2 prior years
Internal Experience
Outside consultants & auditors who understand IFRS
Possible cost of switching to an audit firm with proper experience in IFRS reporting

49. Transition for US Corporations from GAAP to IFRS
Information Technology Considerations:
IFRS is accounting driven but it will drive major changes to IT systems as well as business processes and personnel
Current experience indicates that IT costs are generally over 50 percent of the cost of IFRS conversion
Organizations benefit when they identify and integrate the efforts of the IT team early in the IFRS conversion process
Depending on the system complexities associated with the conversion to IFRS, experience from other global conversion efforts indicates that the IT system conversion component of an overall IFRS conversion can take months or longer.
IT efforts will comprise a mix of short and long term projects within the organization s overall IFRS project
The IFRS conversion effort provides opportunities for achieving synergies with other IT projects and strategic initiatives, such as an ERP implementation or major upgrade

50. SEC - Cost Estimate
“ We estimated that the cost of IFRS transition under Proposal A would be 0.125% of revenue for the U.S. issuers that would be eligible to use IFRS accounting, and would be approximately 0.13% of revenue under Proposal B to reflect the additional U.S. GAAP reconciliation disclosure We used a higher percentage of revenue to take into account our different filing obligations in the U.S., which require, among other things, issuers to include three years of audited financial statements, and our requirement related to internal controls over financial reporting.” SEC Quote
So a $1B organization estimate = $1,300,000.
But you must remember that not too long ago the SEC made an estimate for a mandated enterprise-wide project that ended up costing companies millions of dollars in auditing fees. That project — the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.

51. Addressing IFRS Challenges with QAD Solutions
For Global Manufacturing Companies, the typical areas concerned will center on choices to be made in the areas of:
First-time adoption (IFRS 1) Reporting
Segment Reporting (IAS 14, recently superseded by IFRS 8)
Inventory Valuation (IAS 2)
Fixed Assets Valuation (IAS 16)
Revenue Recognition (IAS 18)
Foreign Exchange rates (IAS 21)

52. Addressing IFRS Challenges with QAD Solutions
Where some ERP vendors can only handle the multi-GAAP and reporting requirements by using separate consolidation or BI solutions, w e have embedded these capabilities in the core product suite. Some examples include:
Combination of Local GAAP and IFRS, also supporting the first time adoption
QAD Enterprise Applications allow combining reporting both on Local GAAP as well as on IFRS standards through the application ‘adjustment layers’ (EE). This approach allows for separately recording and tracking of the differences between the GAAPs.  
Segment reporting
IFRS 8 applies when a company has parts of the business operating in different business segments. QAD EE support multiple analytical segments (e.g. subaccount and SAF’s) that can be used to support segment reporting. In some cases there might be a need to reallocate general costs and revenues to the appropriate segments. QAD EE introduces an allocation module for this, streamlining the automation of this process
Inventory Valuation
IAS 2 concerns inventory valuation and recommends costing inventory by either specific identification, FIFO or weighted average. The standard cost inventory method may be used, provided that results after incorporation of variance reconcile back to one of the above. QAD Enterprise Applications supports both standard and average costing.

53. Addressing IFRS Challenges with QAD Solutions
Fixed Assets
QAD Enterprise Applications provide for the different ways to treat the lifecycle of a Fixed Asset from acquisition, revaluation through dismissal. QAD Enterprise Applications supports putting in place multiple depreciation books for an asset, allowing complying with both Local GAAP and IFRS valuation requirements.
Foreign Exchange Rates
QAD Enterprise Applications provide powerful tools for multi-currency activities, translating foreign currencies to functional currency at the moment of transaction and supporting the recognition of realized and unrealized exchange gains and losses at the moment of reporting.
Others
The above list is far from complete. QAD Enterprise Applications have many built-in provisions for internal controls that make reconciliation and reporting easier. QAD Enterprise Edition introduces an even more extensive set of these internal controls and extra functions.

54. QAD Solution – 2009 EE
QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance
Accounting Layers

55. QAD Solution – 2009 EE
QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance
Supplementary Analysis Fields (SAF)

56. QAD Solution – 2009 EE
QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance
Periodic Costing
Periodic revaluation of item costs based on all inventory/shop floor transactions occurred during that period supporting following calculation methods:
Weighted Average (WAVG)
FIFO
LIFO
Generation of GL Transactions for all related transactions based on new calculated item cost
Complete versus standard costing plus adjustments
Inventory Valuation based on WAVG, FIFO LIFO calculated item unit costs
Absorption of Indirect costs
Absorption of expenses (Freight, Insurance, …)

57. QAD Solution – 2009 EE
QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance
Allocations

59. SEC Final Decision, If Yes – When?
What Next?
SEC Final Decision, If Yes – When?

60. Today’s US Date - Moving Target

61. What Next?
The Clock is ticking…

62. Reminder
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