1. International Financial Reporting Standards (IFRS) Transition Prepared by L. Murphy Smith Professor of Accounting Texas A&M University For permission to use or adapt this presentation, please contact Dr. Smith, Lmsmith@tamu.edu

2. IFRSs are now accepted or required in more than 100 countries. International Financial Reporting Standards (IFRSs) are shooting down the competition (other GAAPs)

3. Why do we need IFRSs and financial reporting comparability?  Expanding world trade  Proliferation of multinational corporations  Increasing role of global capital markets  Increased foreign direct investment  Growth of multinational political organizations  A way to minimize costs

4. Why Does GAAP Differ Among Countries?  Political/Legal System  Sources of Capital  Inflation  Taxation  Culture  Accidents of History  Business Complexity Stop & Reflect: Is there one GAAP that works best everywhere?

5. Key Problems that Cause Resistance to IFRSs  Agreeing on who will create the rules  How different the rules will be from current national GAAP  Costs of changing GAAPs  National sovereignty

6. International Financial Reporting Standards (IFRSs)  IFRSs are the accounting standards published by the International Accounting Standards Board (IASB).  The IASB was established in 2001 by its forerunner, the International Accounting Standards Committee, which itself was established in 1973.  In the past decade, the IFRSs went from being little used to what is now the world’s dominant set of accounting standards.  Leading accounting experts anticipate that IFRSs will be accepted for financial reporting, in place of US GAAP, for all companies listed in US stock market, as early as 2016.

7. Major Contributions of the IASB  Harmonizing accounting standards and disclosures to meet the needs of the world’s capital markets.  Providing an accounting foundation for underdeveloped or newly industrialized countries to use as the accounting profession emerges in those countries.  Advancing compatibility of domestic and international accounting requirements.

8. Principles-Based Versus Rules-Based  IFRSs are often referred to as being principles- based.  US GAAP is said to be more rules-based.  This has led to about 25,000 pages of US GAAP versus about 2,000 pages of IFRSs.  With fewer pages and less detail, IFRSs still address all major accounting issues, from financial statement presentation to business combinations. Stop & Reflect: Which is better, rules- based or principles-based?

9. FASB – IASB Working Together  In October 2002, the FASB and the IASB issued a memorandum of understanding (referred to as the Norwalk Agreement or MoU) formally announcing their commitment to converging U.S. GAAP and IFRSs.  In recent years, both the FASB and IASB have issued rules that converge (or almost converge) their accounting standards with the standards of the other body.  For example, the IASB essentially conformed to U.S. GAAP for pooling and accounting for goodwill with the issuance of IFRS 3, Business Combinations.  The FASB conformed to IFRS when it issued SFAS 151 on Inventory, SFAS 153 on Like-Kind Exchanges, and SFAS 154 on Accounting Changes.

10. If Everyone Adopts IFRSs, it’s Still Not a Perfect World  Uniformity in accounting standards is a gigantic step toward understanding financial statements prepared in different nations; however, uniformity alone is not a total solution.  Environmental factors such as culture, language, legal system, and economic conditions affect how any GAAP, including IFRS, is applied.  For example, regarding environmental factors, the litigation environment affects conservatism in financial reporting.  For a company located in a nation where there is a high risk of investor lawsuits, such as the US, there will be a different perspective on conservatism than in a nation that is less litigious.  Thus, IFRS will be applied differently depending on the national culture. Properly evaluating investment opportunities in any country requires that the investor understand the culture of that country.

11. Take-Away Points  IFRSs are the accounting standards published by the International Accounting Standards Board (IASB).  IFRSs are now accepted or required in more than 100 countries.  Leading accounting experts anticipate that IFRSs will be accepted for financial reporting, in place of US GAAP, for all companies listed in US stock market, as early as 2012 or 2013.  Since IFRSs are regarded as more principles-based as opposed to the more rules-based US GAAP, ethical character and professional judgment will be even more critical (if that is possible) in an IFRS- based financial reporting environment.  Be sure you’re right, then go ahead.