1. International Financial Reporting Standards Good-bye GAAP? By: Robert W. Ragsdale

2. History International Accounting Standards Committee- IASC (1973-2001) ▫Established in London UK ▫First Meeting June 29, 1973 ▫Pronouncements very broad ▫Original Members Australia, Canada, Germany, Ireland, Japan, Mexico, Netherlands, UK & US ▫Interestingly IASC/FASB came into being around the same time ▫Restructured in May 2000 and renamed…..

3. International Accounting Standards Board (IASB) 2000 to Present 14 Board Members ▫5 Auditors ▫3 Preparers ▫3 Users ▫1 Academic ▫2 Others

4. Stated Objectives “To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their world wide acceptance and observance and “To work generally for the improvement and harmonization of regulations, accounting standards and procedures relating to the presentation of financial statements.”

5. International Accounting Standards Board Issued to date: ▫41 IAS ▫7 IFRS FASB has over 160 SFAS, ARB’s & APB’s which will be ‘codified’ in July 2009

6. Rules vs. Principles IFRS- Principles Based ▫IAS 17, pp8, “A lease is classified as a finance (capital) lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.”

7. Rules vs. Principles SFAS 13 (etal) 4 ‘tests’ (bright lines) for Capitalization ▫Title to leased property to lessee at end of the lease term ▫Bargain purchase option which it is reasonable to assume lessee will exercise at the end of the lease term ▫Lease term 75% or more of economic life of asset ▫Present value of minimum lease payments 90% or more of the fair value of the leased property at the inception of the lease. It is assumed that the lessee will Pay for the asset leased.

8. Rules vs. Principles If Lease terms do not fit any ONE of the criteria, under current GAAP, it may be classified as an operating lease and hence OFF balance sheet financing achieved

9. Sarbanes-Oxley 2002 Requires an exhaustive study by SEC of principles based standards which concluded (9-25-2003) ▫“We have conducted a study of the approach to standard setting and found that imperfections exist when standards are established on EITHER a RULES-based or PRINCIPLES-only basis”

10. Sarbanes-Oxley 2002 As a result of the study: ▫Those involved in the standard setting process more consistently develop standards on a:  Principles-based OR  Objectives-based ▫“Avoid the use of percentage tests (bright-lines) that allow financial engineers to achieve TECHNICAL compliance with the standard while evading the INTENT of the standard”

11. Rules vs. Principles Principles-based standards are sometimes more difficult to implement in practice because little guidance exists for their application. US GAAP only began to be codified in 1938 ▫Accounting Research Board ▫Provide LEGAL cover for U.S. Accountants BY U.S. Accountants (AICPA) Europeans/Asians much less litigious than “deep pocket” American Lawyers/Shareholders

12. Rules vs. Principles One of the subtle flaws in principles based standards ▫Different accountants in different economies and cultures will interpret and apply them differently ▫Defeating the purpose of worldwide GAAP!

13. The Norwalk Agreement Norwalk, Connecticut September 18, 2002 U.S. Standards setter FASB & IASB Agreement to ‘converge’ SFAS with IFRS ▫Agreement guaranteed FASB a significant role in the undertaking. Both organizations agreed to ▫“Make their existing financial reporting standards FULLY compatible as soon as practicable” and ▫“To coordinate the future work programs to ensure that once achieved, compatibility is maintained.” (Memorandum of understanding)

14. Differences between GAAP & IFRS IFRS ▫Does not permit last in first out (LIFO) as an inventory costing method. ▫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) ▫Has a different probability threshold & Measurement objective for contingencies ▫Does not permit curing debt covenant violations after year-end ▫Guidance regarding revenue recognition is LESS extensive than GAAP & Contains relatively little industry-specific instructions.

15. SUM COMPARISONS: Financial ItemUS GAAPIFRS ContingenciesRecognized if estimable & probable Recognized if estimable & “more likely than not” IntangiblesDo not revalue unless impaired Regular revaluation at fair value permitted R& DExpense as incurred unless alternative future use can be proven Research expensed; Development may be capitalized under certain conditions Inventories4 cost flow methods: LCM rules base market value on replacement cost Inventory write-downs with no subsequent reversals Does not allow LIFO LCM bases market value on Net realizable value (Sales price less cost to sell) Both write-down and reversal allowed IFRS 2008- Wiley & Sons, has 14 pages of in-depth comparison

16. SUM COMPARISONS: Financial ItemU.S. GAAPIFRS Preferred StockReported as EquityReported as debt Statement of Cash Flows Dividends paid are classified as financing Interest paid, interest received and dividends received are classified as operating Dividends paid may be either operating or financing Interest paid can be either operating or financing; interest & dividends received can be either operating or investing Joint VenturesInterests accounted for by the equity method Interests accounted for by the equity method or proportional consolidation Financial Instruments No current parallel under GAAP to IFRS “fair value option” but it has been proposed “fair value option “allows ANY financial asset or liability to be designated AT INCEPTION to be accounted for at fair value with changes reported in current earnings

17. SUM COMPARISON Financial ItemU.S. GAAPIFRS PP & EMandatory capitalization of construction period interest costs (only- no ancillary) Mandatory capitalization of construction period interest costs; ancillary costs may also be capitalized Cost of major overhauls generally expensed Cost of major overhauls may be capitalized Impairments recognized in current income If cost method used impairments recognized income; if revaluation employed reversal of revaluation excess of revaluation to current income Intangibles currently carried at cost Revaluation of intangibles permitted

18. SUM COMPARISON Financial ItemU.S. GAAPIFRS Business Combinations & Consolidation ManyMany subtle technical differences Special consolidation requirements apply to variable interest entities (Vies’) (Thank you Enron) Vies’ not addressed by IFRS (because they did not experience Enron) No promulgated rules governing “parent company only” financial statements, but use of the equity method is currently acceptable In “parent company only” financials, the investment in subsidiaries, equity investees and joint ventures may be presented at cost or under rules for investments in securities, but the equity method cannot be used in those circumstances

19. SUM COMPARISON Financial ItemU.S. GAAPIFRS Business Combinations & Consolidation Not necessary to conform parent & subsidiary accounting policy Need to conform parent & Subsidiary accounting policies Minority interest in consolidated subsidiary may be presented in liabilities, equity or separate line item Minority interest included in equity Goodwill not amortized; tested for impairment & adjusted Similar to US GAAP but difference in impairment testing methods Purchased in process R&D expensed Purchased in process R & D capitalized Negative goodwill from acquisition credited to carrying value of nonfinancial assets acquired with excess treated as gain. Negative goodwill from acquisition credited to gain immediately

20. WHEW!!! Remember Wiley IFRS (1-877-762-2974) has 14 pages of comparisons!!!

21. Effects of IFRS on Tax Practice A company’s conversion to IFRS may affect: ▫Calculation of tax liabilities ▫Effective tax rates ▫Deferred tax balances ▫Unrecognized tax benefits ▫Compensation & Employee benefit plans ▫Planning ▫Accounting for taxes ▫Technology systems ▫Provision & Compliance processes ▫Internal training needs Source J of A Mar ‘09

22. Schedule of Convergence- Requires IFRS Europe & Central AsiaAmericasAsia- Pacific Africa/ Middle East ArmeniaGermanyPortugalBahamasAustraliaEgypt AustriaGreeceRomaniaBarbadosBruneiJordan BangladeshHungaryRussiaCosta RicaNepalKenya BelgiumIrelandSloveniaDominican RepublicSingaporeKuwait BulgariaItalySpainEcuadorTaiwanMalawi CroatiaKyrgyzstanSwedenGuyanaMauritius CyprusLatviaSwitzerlandHaitiOman Czech RepublicLithuaniaTajikistanHondurasTunisia DenmarkLuxembourgUkraineJamaica EstoniaMacedoniaUnited KingdomPanama FinlandMaltaPapua New Guinea FranceNetherlandsPeru GeorgiaNorwayTrinidad & Tobago

23. Schedule of Convergence- Converging with IFRS Europe/Central Asia AmericansAsia-PacificAfrica/ Middle East MoldovaArgentinaNew ZealandIran UzbekistanBrazilChina/ Hong KongIsrael CanadaIndiaPakistan Cayman IslandsIndonesiaSouth Africa ChileJapanZimbabwe GuatemalaSouth Korea MexicoMalaysia UruguayPhilippines VenezuelaThailand United States

24. SEC Roadmap for IFRS Recognition Implementation The ‘Cox’ (Rep Christopher Cox) SEC Chairman ▫“The currently proposed timetable would allow the largest U.S. Companies to begin reporting their 2009 results in IFRS. ▫Large, accelerated filers in 2014 ▫Other accelerated filers in 2015 ▫Smaller companies in 2016 ▫Companies would have to provide statements from the previous three years in IFRS.  Cost/benefit choice for non-mne’s- IFRS, 1 st time converters) at that time, for comparability purposes.

25. SEC Roadmap for IFRS Recognition Implementation SEC Chairwoman Mary Schapiro ▫It remains to be seen what the new ‘madam’ chairwoman’s feelings on these issue are ▫What affect the current economic malaise will have on the timing ▫BUT….. Implementation is pretty much assured!!

26. SEC Roadmap for IFRS Recognition Implementation Deadline for IFRS Implementation roadmap comments, originally scheduled for Feb 19 extended to Apr 20 New Chairwoman, Mary Schapiro has expressed concern with SEC’s current roadmap for transitioning U.S. public companies to IFRS.

27. SEC Roadmap for IFRS Recognition Implementation Potential problems include: ▫Lack of consistency in the application of IFRS, ▫The cost inherent in the switch and ▫IASB’s independence, or lack there of. The Roadmap is available at: ▫www.sec.gov/rules/proposed/2008/33-8982.pdf

28. Additional IFRS Resources AICPA> www.ifrs.comwww.ifrs.com IFAC’s > www.ifac.orgwww.ifac.org IASB’s> www.iasb.orgwww.iasb.org FASB’s > www.fasb.orgwww.fasb.org Canadian Institute of Chartered Accountants >www.cica.ca CICA Accounting Standards Board> www.acsbcanada.orgwww.acsbcanada.org Chartered Accountants of Scotland’s > www.icas.org.ukwww.icas.org.uk Chartered Accountants in England > www.icaew.comwww.icaew.com Chartered Accountants in Australia > www.charteredaccountants.com.auwww.charteredaccountants.com.au International organization of Securities Commissions > www.IOSCO.orgwww.IOSCO.org Securities & Exchange Commission > www.sec.govwww.sec.gov SEC Roadmap > www.sec.gov/spotight/ifrsroadmap.htmwww.sec.gov/spotight/ifrsroadmap.htm Deloitte > www.deloitte.comwww.deloitte.com KPMG > www.kpmgifrsinstitute.comwww.kpmgifrsinstitute.com Pricewaterhousecoopers> www.pwc.blogs.com/ifrswww.pwc.blogs.com/ifrs Ernst & Young> www.ey.com

29. QUESTIONS ? ? ? ? ? ? ? ?

30. By: Robert W. Ragsdale, CPA Slides can be found at: http://providence.imanet.org