1. Convergence, and Change
IFRS,
Convergence, and Change
Richard Dinkel
Controller, Koch Industries, Inc.
Member of FASAC

2. Disclaimer
The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Advisory Council or the Financial Accounting Standards Board.
Positions of the FASB are arrived at only after extensive due process and deliberation.

3. IFRS Timeline
2007- SEC eliminates US GAAP reconciliation for IFRS filers
2007- SEC concept release on use of IFRS for US registrants
2008- SEC issues proposed “Roadmap” for adoption of IFRS in the US
2010- SEC issues statement of continued support for convergence between US GAAP and IFRS

4. Convergence and Improvement
FASB and IASB working since 2002 to improve and converge U.S. GAAP and IFRS.
Memorandum of Understanding (MoU)
Identified 9 major accounting areas needing improvement in both U.S. GAAP and IFRS
Completed Business Combinations project in 2007 by issuing FAS 141(R) and 160, and IFRS 3
Remainder of projects still ongoing (slide 8)
In addition, just beginning joint deliberations on De-recognition Project. 4

5. Overall Goal of Convergence
Improved, high-quality, converged standards developed through rigorous due process
Priorities:
Independence
Improvement
Convergence 5

6. Drivers for Timing of Convergence and Improvement Efforts
Financial Crisis underscored importance of global convergence of standards
G-20 has called for FASB/ IASB to “redouble their efforts” to complete their MoU projects by June 2011
SEC awaiting outcome of MoU projects before making decision about IFRS for U.S. public companies 6

7. Drivers for Timing of Convergence and Improvement Efforts
The June 2011 date also is being driven by the IASB because of:
Countries, including Brazil, Canada, India, and Korea, that have announced plans or intentions to adopt IFRS for their listed companies on or around 2011 or 2012
Terms ending for IASB chair Sir David Tweedie and two other IASB board members in mid-2011. 7

8. Current Status of Deliberations & Implications
Five major projects generally on track toward convergence:
Fair Value Measurement
Consolidations
Revenue Recognition
Financial Statement Presentation
Financial Instruments with Characteristics of Equity 8

9. Current Status of Deliberations & Implications
Three major projects not on track toward convergence:
Financial Instruments
Insurance
Leases
Further deliberations required
Target timelines for final standards could be in jeopardy 9

10. FASB/IASB Project Target Dates
Exposure Draft
Final Statement
Financial Instruments
May 2010
March 2011
Fair Value Measurement
October 2010
Consolidations
January 2011
Revenue Recognition
June 2011
Financial Statement Presentation
Financial Instruments with Characteristics of Equity
June 2010
Insurance
Leases

11. Current Status of Deliberations & Implications
This intense level of standard setting is unprecedented
FASB has issued, at most, 4 major standards in one year
In addition, FASB has issued at one time no more than 3 exposure documents proposing significant changes
IASB has issued 9 major standards in its 9-year history. 11

12. Current Status of Deliberations & Implications
Volume and timing of MOU projects
Challenges ability of constituents to provide quality input to due process
Reactions from CFA Institute, FEI, ITAC and others: improvement is primary, speed is secondary.
Challenges preparers’ ability to implement final standards and users’ ability to analyze new financial reports
Joint Invitation to Comment to be issued by both Boards to seek input from constituents regarding effective dates and transition approaches 12

13. Convergence: One Final Key Point
If FASB/IASB achieve convergence on all of these major projects
U.S. GAAP and IFRS will not be completely converged.
Point raised in February 2010 SEC statement
Full IFRS adoption may still not happen
More urgent priorities
Costs of full adoption are high
Mixed support from regulators
Unresolved reporting issues
Convergence conflicts
Private company standards
How to stay converged?? 13

14. MoU Projects

15. Financial Instruments
Problems:
Complexities and inconsistencies within and between U.S. GAAP and IFRS, on:
Classification and measurement,
Impairment
Hedge accounting
In U.S., different impairment approaches for debt securities and loans especially problematic
Financial Crisis pointed to untimely recognition of credit impairment of loans held for collection by financial institutions 15

16. Financial Instruments
Proposed Solution:
Fewer/ simpler classification and measurement approaches
Two “buckets”: FV (mandatory for derivatives and trading instruments; default for other items) and FV/OCI (optional, based on business model, for other assets and liabilities, such as many loans and core deposits)
Fair value information on the balance sheet for most financial instruments
Exceptions: short-term trade receivables and payables; in certain circumstances, own debt
Amortized cost information also reported for FV/OCI items 16

17. Financial Instruments
Proposed Solution (cont’d):
Income statement puts non-credit-related FV changes of FV/OCI assets in OCI, rather than Net Income
Consistent with approach taken in FSP FAS and 124-2
Improvements to impairment accounting, to develop single overall approach applicable to debt securities as well as loans
Simplified criterion to qualify for hedge accounting, leading to more consistent and transparent application 17

18. Financial Instruments
Companies Affected:
All; greater effect on financial institutions
Challenges to Convergence:
IASB currently has reached different conclusions in their proposed model, highlighted in table on following slide. We may or may not be able to reconcile these differences
While many users in the U.S. favor the more prominent display of FV information on the balance sheet, for loans, deposits, etc., banks and bank regulators generally oppose such change

19. Financial Instruments
Area
FASB
IASB
Main Classification Categories
Fair value through net income
Fair value through other comprehensive income (FV- OCI)
Amortized cost
Credit Impairment
Based on past events and existing conditions and their implications for the collectibility of the financial asset(s)
Recognized in net income
Impairment recognized based on expected credit losses over the life of the financial asset
Hedge Accounting
Bifurcation by risk allowed for financial items
Qualitative assessments required at inception (quantitative may be necessary)
Reasonably effective threshold
Currently deliberating issues with a plan to issue and exposure draft in the second half of 2010

20. Fair Value Measurement
Problem:
US GAAP and IFRS not yet converged; FASB took the lead on improving this area a few years ago with Statement 157
Statement 157: how to, not when to, measure fair value
The IASB exposed Statement 157 with some fairly minor suggested modifications
Both FASB and IASB have since issued additional guidance in this area in response to Financial Crisis
Proposed Solution:
One global definition of fair value and approach to measurement and disclosure of fair value

21. Fair Value Measurement
Companies Affected:
All, with greater effect on financial institutions; overall, will cause relatively insignificant changes when compared to current U.S. GAAP
Challenges to Convergence:
No significant differences regarding how to measure fair value
More significant differences relate to when to use fair value (see Financial Instruments Project) 21

22. Consolidations Problems:
Inconsistent guidance between U.S. GAAP and IFRS, especially on consolidation of variable interests (securitizations/ structured entities)
Consolidation requirements for voting interests may lead to non-economically-representative consolidation decisions, in certain situations:
Effective control rather than contractual control
Options, convertible instruments, agency relationships

23. Consolidations Proposed Solution: Companies Affected:
Overall consolidation standard for both variable interest and voting interest entities identifying the party, if any, with power over and benefits from the key economic activities of the entity
Will result in fewer activities off-balance sheet
FASB already tightened de-recognition and consolidation guidance for variable interests (VIEs), through FAS 166 and 167, bringing it closer to IFRS and setting stage for convergence
Companies Affected:
All 23

24. Consolidations Challenges to Convergence:
Potential differences between Boards about how to evaluate effective control of voting interest entities (IASB: ability to control concept vs. FASB: ability to control with historical evidence view)
Banks fought recent changes to U.S. GAAP (SFAS 166 and 167), but bank regulators eased transition by phasing-in recognition for regulatory capital purposes 24

25. Revenue Recognition Problems: Proposed Solution:
U.S. GAAP: in 200+ standards (now codified), inconsistent, developed piecemeal
IFRS: very limited guidance, permitting “anything goes application” or need look to U.S. GAAP to apply IFRS
Proposed Solution:
Common principle, based on satisfaction of performance obligations, that can be applied consistently across various industries and transactions and better reflect the underlying economics of revenue transactions

26. Revenue Recognition Companies Affected: Challenges to Convergence:
All, but greatest effect on software and construction companies
Challenges to Convergence:
Nothing significant between the Boards 26

27. Financial Statement Presentation
Problem:
The ability of users to predict cash flows associated with a company would be enhanced greatly if the basic financial statements (balance sheet, income statement, cash flow statement) related to each other more cohesively and presented more disaggregated information
Proposed Solution:
A consistent format across statements, classifying items into business and financing categories, with a further disaggregation of business into operating and investing activities

28. Financial Statement Presentation
Proposed Solution (cont’d):
Required use of the direct method for presentation of operating cash flows
Disaggregation of reported items by function and nature to facilitate prediction of cash flows
Together all of these changes should help improve communication between preparers and users 28

29. Financial Statement Presentation
Statement of financial position
Statement of comprehensive income
Statement of cash flows
DIRECT
Business
Operating assets and liabilities
Investing assets and liabilities
Operating income and expenses
Investing income and expenses
Operating cash flows
Investing cash flows
Financing
Financing assets
Financing liabilities
Financing asset income
Financing liability expenses
Financing asset cash flows
Financing liability cash flows

30. Financial Statement Presentation
Companies Affected:
All business entities (not-for-profit entities have been scoped out)
Challenges to Convergence:
Differences in approaches by Boards for disaggregating expenses by nature
FASB: in segment note
IASB: at consolidated level in notes, pending post-implementation review of IFRS 8
Preparers have expressed concerns about implementation costs, especially about direct method for presenting operating cash flows 30

31. Financial Instruments with Characteristics of Equity
Problem:
Inconsistent classification and measurement of hybrid financial liabilities with similar characteristics; vast rules-based literature (especially in U.S.) leading to structuring opportunities
Proposed Solution:
Replace complex inconsistent literature with one set of coherent classification requirements that define equity based on two principles
Ownership of the entity
Settlement with a specified number of ownership instruments

32. Financial Instruments with Characteristics of Equity
Companies Affected:
All companies
Challenges to Convergence:
Nothing significant between the Boards 32

33. Insurance Problems: Proposed Solution:
Lack of a standard in IFRS for insurance contracts
U.S. guidance is unique and industry-specific
Industry practice of excessive deferrals of contract acquisition costs
Proposed Solution:
Common, high-quality standard for recognition, measurement, presentation, and disclosure of insurance contracts, with contract acquisition costs expensed when occurred (similar to what is done for regulatory purposes) 33

34. Insurance Companies Affected: Challenges to Convergence:
The Boards have tentatively reached different conclusions on numerous fundamental issues
Definition of insurance, measurement of liability, unbundling of contracts, accounting for acquisition costs and participating contracts
U.S. insurance industry generally has different views about the model than other major global insurers 34

35. Leases Problems: Proposed Solution:
Off-balance sheet presentation of leased assets and related financing
A bright-line distinction, especially in U.S. GAAP, between on- and off-balance sheet transactions, leading to structuring opportunities
Proposed Solution:
For lessees, lease obligations recognized on balance sheet as liabilities, along with a corresponding asset (using a “right to use” approach) 35

36. Leases Proposed Solution (cont’d): Companies Affected:
Also looking at lessor accounting, to achieve consistency with model in Revenue Recognition Project
Companies Affected:
All; key industries affected include retailers, banks (branch offices), big equipment lessees (such as airlines and hospitals) 36

37. Leases Challenges to Convergence:
Differences between the Boards on approach to lessor accounting:
FASB: performance obligation approach, which recognizes revenue over lease term.
IASB: de-recognition approach that results in more up-front revenue
Leasing industry opposed to pattern of income recognition in lessee model and to performance obligation approach to lessor revenue recognition 37

38. Conclusions 38

39. Conclusions Proposed changes are unprecedented
Politics may be impactful
Uncertainty still abound
FASB objectives are independence, improvement, and convergence—in that order
Thus, due process is crucial
Not too early to start planning 39

40. Questions? 40