The Current State of IFRS

The Current State of IFRS Objectives & Agenda Recognize what IFRS is and when it will become important What is IFRS? Convergence Resources

What is IFRS? IASB Structure Trustee Appointments Advisory Group advises IASC Foundation appoints appoints oversees funds appoints reports reports SAC advises IASB interprets IFRIC creates IFRS high quality, enforceable and global

What is IFRS? IASB Standards and History 1973 International Accounting Standards (IAS) ↓ 2001 SIC Interpretations (SIC) 2001 International Financial Reporting Standards (IFRS) ↓ Present IFRIC Interpretations (IFRIC)

IASB Standards RESEARCH Jurisdictional adoption process Agenda Decision Discussion Paper (DP) (Optional) PROPOSALS PROPOSALS Input from: Advisory Council Working Group International Groups; Analysts; Preparers; Audit technical partners Special interest groups Local standard-setters Regulators Political groups Public Consultation Exposure Draft (ED) Published IFRS Public Consultation Feedback Statement Jurisdictional adoption process IASB two year post-implementation review

What is IFRS? 8 IFRSs in effect at 1 January 2008 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Resources IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments

What is IFRS? 29 IASs in effect at 1 January 2008 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS 8 Accounting Policies, Changes in Accounting Estimates & Errors IAS 10 Events After the Reporting Period IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 18 Revenue

What is IFRS? 29 IASs in effect at 1 January 2008, continued Employee Benefits IAS 20 Accounting for Government Grants and Disclosure of Government Assistance IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 24 Related Party Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 29 Financial Reporting in Hyperinflationary Economies

What is IFRS? 29 IASs in effect at 1 January 2008, continued Interests in Joint Ventures IAS 32 Financial Instruments: Presentation IAS 33 Earnings per Share IAS 34 Interim Financial Reporting IAS 36 Impairment of Assets IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property IAS 41 Agriculture

What is IFRS? 24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008 SIC 7 Introduction of the Euro SIC 10 Government Assistance – No Specific Relation to Operating Activities SIC 12 Consolidation – Special-Purpose Entities SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers SIC 15 Operating Leases – Incentives SIC 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets SIC 25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

What is IFRS? 24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008, continued SIC 29 Service Concession Arrangements: Disclosures SIC 31 Revenue – Barter Transactions Involving Advertising Services SIC 32 Intangible Assets – Web Site Costs IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities IFRIC 2 Members’ Shares in Cooperative Entities and Similar Instruments IFRIC 4 Determining whether an Arrangement contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

What is IFRS? 24 Interpretations of the IFRIC and its predecessor, the SIC, in effect at 1 January 2008, continued IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 11 IFRS 2 – Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements, and their Interaction

What is IFRS? Current State Countries that require or permit IFRSs for domestic entities Countries seeking convergence with, or pursuing adoption of, IFRSs Source: Deloitte – www.iasplus.com

Activity 1 Principles vs. Rules Take 5 minutes to complete Activity 1 Principles vs. Rules Discuss the advantages for a more or less principles-based standard for each category. Category Fewer Rules (more principles-based) More Rules (less principles-based) Clients Regulators Litigation Skill Set Work Satisfaction

Group check IFRS are pure principles-based standards True False

Group check Debrief IFRS are pure principles-based standards True False

Group check U.S. GAAP are not based on sound, accepted accounting principles True False

Group check Debrief U.S. GAAP are not based on sound, accepted accounting principles True False

What is IFRS? Principles vs. Rules Principles Only U.S. GAAP Rules Only IFRS

Financial Statement Comprise: IFRS GAAP Balance sheet Income statement A statement showing either: All changes in equity; or Changes in equity other than those arising from capital transactions with owners and distributions to owners (called a Statement of Recognised Income and Expense (SORIE)) Cash flow statement (no exemptions) Accounting policies and explanatory notes (IAS 1.8) Balance sheet Income statement Statement of comprehensive income. This statement may be combined with the income statement or the statement of changes in stockholders’ equity (SFAS130.22) Statement of changes in stockholders’ equity. Alternatively, disclosure of changes in the separate accounts comprising stockholders' equity (in addition to retained earnings) could be made in the notes to financial statements (APB 12.10) Statement of cash flows (limited exemptions; see Section 2.5) Notes to financial statements

Comparison of IFRS and US GAAP IFRS GAAP A finance lease is not determined by a bright lines test. Instead, IAS 17 lists factors normally indicating a finance lease, including any of the following (IAS 17.10): Transfer of ownership by end of lease term Lessee has option to purchase asset on such favourable terms such that option exercise is reasonably certain at inception Lease is for major part of asset's life, even if no purchase option exists Present value of minimum lease payments at inception amounts to at least substantially all of the fair value of the leased asset Leased assets are specialised such that only the lessee can use them without major modification A capital lease is one that meets one or more of the following criteria (SFAS 13.7): Lease transfers ownership of the property to the lessee by the end of the lease term Lease contains a bargain purchase option Lease term is equal to 75 percent or more of the estimated economic life of the leased property.* Present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at the inception of the lease over any related investment tax credit retained by the lessor and expected to be realized by the lessor.* For the lessor to classify a lease as a capital lease, the following additional criteria must also be met (SFAS 13.8):

What is IFRS? Principles vs. Rules Industry accounting not adequately addressed Insurance contracts Extractive activities No IFRS equivalent In absence of a standard that specifically applies, Management should use judgment Should not conflict with IFRS May also consider other GAAP

The Current State of IFRS Objectives & Agenda Recognize what IFRS is and when it will become important Communicate key points about IFRS to your clients What is IFRS? Convergence Resources

Convergence Definition Where transactions or events are the same or similar, the accounting should be the same, or there should be enough transparency in the disclosures to allow the reader to understand the differences. (Plus a continuing effort by standard setters to reduce differences between systems over time.)

Convergence Movement toward one set of standards - benefits Investor confidence and understanding Lower risk premium Lower cost of capital

Convergence Movement toward one set of standards - benefits Greater transparency Greater credibility Greater comparability between companies wherever they are Greater cross-border capital flows Most efficient allocation of capital Thriving economies

Convergence Movement toward one set of standards - obstacles National pride Endorsement process Legal issues Standard setters Language <<Speaker (host, expert, auditor)>>: <<Replace with narrative script for this character>> <<Speaker (host, expert, auditor)>> : <<Replace with narrative script for this character>> Note: Add "Click the flashing button when you are ready to continue" to the scrip in when you want to pause the program for class discussion or activites.

Group check Which of the following is most correct? U.S. GAAP and IFRS are already converged U.S. GAAP and IFRS are not converged but will be eventually U.S. GAAP and IFRS will never be converged U.S. GAAP and IFRS are sufficiently converged to be acceptable in the U.S. capital markets <<Speaker (host, expert, auditor)>>: <<Replace with narrative script for this character>> <<Speaker (host, expert, auditor)>> : <<Replace with narrative script for this character>> Note: Add "Click the flashing button when you are ready to continue" to the scrip in when you want to pause the program for class discussion or activites.

Group check Debrief Which of the following is most correct? U.S. GAAP and IFRS are already converged U.S. GAAP and IFRS are not converged but will be eventually U.S. GAAP and IFRS will never be converged U.S. GAAP and IFRS are sufficiently converged to be acceptable in the U.S. capital markets Debrief answer

Convergence U.S. Convergence – FASB/IASB 2002 Norwalk Agreement 2006 Memorandum of Understanding (MOU) 2008 Memorandum of Understanding (MOU) Debrief answer

Convergence U.S. Convergence – FASB/IASB FASB adopts IASB standard Fair value option (SFAS 159) Research and development assets acquired in a business combination (SFAS 141 – revised 2007) IASB adopts FASB standard Borrowing costs (IAS 23 – revised 2007) Segment disclosures (IFRS 8)

Convergence U.S. Convergence - FASB/IASB Short–term convergence Short-term projects deferred Government grants Impairment To be examined by the FASB To be examined by the IASB Income taxes (joint project) Investment properties Joint arrangements (joint ventures) Research and development Subsequent events

Convergence U.S. Convergence – FASB/IASB Major joint projects Consolidations Derecognition Fair value measurement Financial instruments Financial statement presentation Leases Liabilities and equity distinctions Post-employment benefits (including pensions) Revenue recognition

Convergence U.S. Convergence – FASB/IASB Conceptual Framework – joint project Mentioned in the 2008 MOU; however no specific timetable Major joint projects will take account of ongoing Conceptual Framework projects

Convergence U.S. Convergence - SEC Roadmap – 7 milestones Improvements in accounting standards Funding and accountability of IASCF Improved ability to use XBRL for IFRS Education and training on IFRS in the U.S. Limited early use by select few Anticipated future rulemaking Potential implementation sequence – FYE on or after 15 December Large Accelerated Filers 2014 Accelerated Filers 2015 Non-Accelerated Filers 2016

What’s your opinion? Within the next few years the FASB will be irrelevant and should disband True False

Convergence U.S. Convergence - SEC Policy issues International Organization of Securities Commissions (IOSCO) August 2007 Proposing Release 2000 Concept Release April 2005 Roadmap December 2007 Final Rule March 2007 Roundtables July 2007 Proposing Release December 2007 Roundtables

Convergence Rest of the world Country Status Europe Required (as adopted by EU) Argentina Required starting 2011 (awaiting approval) Australia and New Zealand National standards described as IFRS equivalent Include unreserved statement of compliance Brazil Required starting 2010; optional before Canada Required starting 2011 Chile Required starting 2009 China Must use Accounting Standards for Business Enterprises, which are close but not exactly IFRS. Companies listed in Hong Kong have choice of IFRS or HK FRS India

Convergence Rest of the world, continued Country Status Japan Japanese GAAP to converge to IFRS by 2011 South Korea Required starting 2011; permitted 2009 Mexico Permitted Peru Required Russia Required for banks Singapore Singapore IFRS – changed several IFRSs and did not adopt others South Africa Switzerland Turkey Uruguay Must use IFRS in existence at 19 May 2004 USA Not permitted; concept release out for comment

Convergence Application Jurisdictional variations Different interpretations Small and Medium-sized Entities (SMEs)

What’s your opinion? Choose either View A or View B View A View B The SEC should allow market forces to determine when to allow IFRS in the U.S. The SEC should decide what is best for the U.S. markets and mandate IFRS when it is ready <<Speaker (host, expert, auditor)>>: <<Replace with narrative script for this character>> <<Speaker (host, expert, auditor)>> : <<Replace with narrative script for this character>> Note: Add "Click the flashing button when you are ready to continue" to the scrip in when you want to pause the program for class discussion or activites.

Activity 2 Are companies ready for IFRS? Take 2 minutes to complete Activity 2 Are companies ready for IFRS? Discuss the characteristics of a company that is unprepared to adopt IFRS and one that is prepared. Unprepared Company Prepared Company

Activity 2 Debrief Unprepared Client Prepared Client Waits until the switch to IFRS is mandatory Has the accounting staff prepare excel spreadsheets to support top-level adjustments to its U.S. GAAP statements Misses some items that are caught at the last minute by the GT audit team Disclosures are so poorly written it gets several comment letters from the SEC on its late filing Budgets for a project to evaluate what will change if it switches to IFRS Project team includes accounting, reporting, operations and IT Produces pro forma statements two years prior to changeover Highlights how reported results will change Allows better evaluation of transition options Highlights needed changes in information requirements & IT

Next Steps What you need to know Whether and when to switch to IFRS Required Competition Cost / benefit Future developments

How will movement to IFRS impact Financial Reporting? Concerns: Data collection Potential impact on tax liability Potential increased volatility in reporting Potential change in patter of earnings Potential increased financial disclosures

How will movement to IFRS impact Financial Reporting? Benefits: Potential cost savings Opportunity to review and improve process Potential impact on tax liability Increased access to funds and markets

Top Twenty Issues to Consider 1 IAS 1 Presentation issues: judgments and estimates 2 IAS 1 Presentation issues: primary statement formats 3 IAS 36 Impairment disclosures 4 IFRS 3 Goodwill justification disclosure 5 IFRS 3 Other business combination issues and disclosures 6 IFRS 7 Financial instruments: disclosures 7 IAS 12 Deferred tax accounting and disclosure 8 Accounting policies general messages 9 Accounting policies specific problems: revenue 10 Accounting policies specific problems: financial instruments 11 IFRS 1 Explanation of transition to IFRS 12 IFRS 5 Non-current assets held for sale and discontinued operations 13 IAS 14 Segment information 14 IAS 37 Provisions disclosure 15 IAS 39 Financial instruments: recognition and measurement 16 Standards in issue not yet effective 17 Operating items and exceptional items 18 Comparative information 19 IAS 19 Employee Benefit Disclosures 20 Detail counts don't forget

The Current State of IFRS Objectives Agenda Recognize what IFRS is and when it will become important Communicate key points about IFRS to your clients What is IFRS? Convergence Resources

Grant Thornton Resources IFRS Resource Center http://www.grantthornton.com/portal/site/gtcom/menuitem.91c078ed5c0ef4ca80cd8710033841ca/index561b974be30c92e309882716712c24c3.html?vgnextoid=bb444cfadd5d3110VgnVCM1000003a8314acRCRD

For additional information, visit these Web sites: AICPA International Financial Reporting Standards (IFRS) – An AICPA Backgrounder at www.ifrs.com For the latest information on the status of IFRS and educational opportunities visit www.ifrs.com IASB Memorandum of Understanding with the FASB: http://www.iasb.org/Current+Projects/Memorandum+of+Understanding+with+the+FASB.htm IFRS summaries: http://www.iasb.org/IFRS+Summaries/IFRS+and+IAS+Summaries+English+2008/IFRS+and+IAS+Summaries+English.htm FASB Overview of International Activities: http://www.fasb.org/intl/ SEC International Financial Reporting Standards Road Map: http://www.sec.gov/spotlight/ifrsroadmap.htm