1. Update on US GAAP/IFRS Convergence
New England Regional Council
Fall Conference

2. The Need for Convergence
Net Income Calculations
Around the World
United States
$20,000
United Kingdom
$250,000
Australia
$225,000
Germany
$10,000

3. Current Status of IFRS Adoption
Two-thirds of the G20 countries have adopted IFRS
110 countries are currently committed to IFRS
It is estimated that in a few years 150 countries will commit to IFRS

4. Recent Adopters 2010 – Brazil adopted IFRS
– Canada, Korea and Mexico have required IFRS
China has committed to convergence
India allows IFRS for consolidated financial results only
Japan allows IFRS for selected companies that have consolidated financial statements

5. Top 10 Global Capital Markets
Country Standard Market Cap. ($ in trillions)
Australia IFRS
Switzerland IFRS or US GAAP 0.9
Spain IFRS
Hong Kong IFRS
Germany IFRS
Canada IFRS
France IFRS
UK IFRS
Japan Converging to IFRS 4.7
US US GAAP

6. Failure to Adopt IFRS
Coalition of nations supporting IFRS could break apart. We could go back to the situation before 2000 – fragmentation
The U.S. could be marginalized as the rest of the world moves ahead with the use of IFRS as a global standard

7. Questions That Might Arise
What are the key differences between the standards?
What is the impact on earnings?
What is the estimated cost of conversion?
What is the impact on systems/processes/data collection/consolidation/financial reporting
Who is impacted and what training will they receive?

8. IFRS in the United States
The idea of a single set of global accounting standards remains a goal of the IASB, but there is no indication that the SEC will act soon to have companies adopt IFRS.
The idea of achieving global comparability is being advanced by FASB.
Journal of Accountancy January 10, 2013

9. Private Companies
There are roughly 5,000,000 private companies in the U.S.
In May 2008, the AICPA recognized the IASB as issuing high-quality standards on par with FASB.
They may now use IFRS and it is estimated that 5%-10% of companies do use them.
These are affiliated with foreign companies
They may want to raise capital in foreign markets

10. Public Companies There are about 25,000 public companies.
These companies must follow the SEC’s guidance.
The U.S. companies may not use IFRS
The foreign companies listing on U.S. exchanges are allowed to use IFRS - since 2007

11. The Case for the Decision to Adopt IFRS
Prior to 2001, U.S. GAAP was the gold standard and some thought the world would switch to U.S. GAAP as the international standard
In 2001, the U.S. accounted for 52% of world equity market capitalization

12. By the end of 2009, our share had dropped to 31%.
The world did not need to come to the U.S. to raise capital now.

13. The Road to IFRS in the United States
The FASB and IASB issued a Memorandum of Understanding in 2002
To make their existing financial reporting standards fully compatible as soon as is practical
To coordinate future work programs to ensure that once achieved, compatibility is maintained

14. The Initial SEC Roadmap
Large U.S. companies would voluntarily start using IFRS
Other companies would follow in 2014
The start date has now been moved to 2016

15. Possible Implementation Approaches
Adoption – U.S. adopts all IFRS standards and new standards as issued by the IASB.
FASB plays a diminished role
Only 10 countries have opted for this approach
Canada
Australia
South Africa

16. Possible Implementation Approaches
Endorsement – IFRS are considered separately by FASB as they are issued for being acceptable for use in the U.S.
Most countries follow this approach including the European Union. The EU rejected the standard on financial instruments.
Can we have comparability with this approach?
Many countries have chosen to exclude one or more IFRS.

17. Possible Implementation Approaches
Convergence – The IASB and FASB continue to issue their own standards but work together to achieve nearly identical standards
China and India have adopted this approach

18. An Alternative Approach
Condorsement – The SEC suggested this in This is a framework that
Keeps FASB, but in a different role
Transitions to IFRS over a period of 5-7 years
Incorporates IFRS in to U.S. GAAP over a period of 5-7 years until it is compliant with IFRS as issued by the IASB.

19. Arguments in Favor of Adoption of IFRS
Enhances transparency and comparability among companies globally – IFRS enables investors and other users to more readily assess performance and to make comparisons among companies.
Surveys indicate that IFRS would transform the finance function and create value.

20. Lower costs – IFRS present opportunities for global U. S
Lower costs – IFRS present opportunities for global U.S. companies to lower costs through standardization of financial reporting, centralization of processes, improved controls, and better cash management.

21. Improves liquidity, valuation, and cost of capital – Research appears to show that U.S. companies would benefit financially from adopting IFRS in countries with relatively strict enforcement regimes and where the institutional environment provided incentives for more transparent earnings.

22. AICPA
The AICPA has recommended that the SEC move immediately to allow optional adoption of IFRS by U.S. companies.
It also reports that a majority of its members have at least a basic knowledge of IFRS and support this position.

23. Bumps in the Road for IFRS in the United States
SEC Roadmap Milestones
Sufficient development and application of standards
SEC found a number of areas with no guidance, policy options or industry guidance.
In a study of company reports, many inconsistencies were found and many failures related to compliance with IFRS were noted.

24. 2. Independent funding of the IASC Foundation and the standard setting process – Funding for the foundation is approximately 50% from companies that must report using IFRS.

25. Other SEC Roadmap Milestones
Education and training of investors relating to IFRS
Effect on U.S. regulatory environment
Impact on users
Human capital readiness

26. Other Major Challenges
Differences between IFRS and U.S. GAAP are significant – U.S. GAAP has a longer history and is more comprehensive than IFRS.
IFRS do not cover many areas existing in U.S. GAAP. We have industry-specific accounting standards, how will IFRS incorporate them?
Studies have shown that differences in financial results between U.S. GAAP companies and IFRS companies have increased.

27. Some U.S. standards that differ from IFRS may be difficult to change – As an example IFRS does not allow LIFO inventory valuation method. This difference will cause U.S. companies to suffer a greater cash tax burden. Only a change in the IRS regulations or an act of Congress can deal with this issue.

28. IASB needs strengthening as an independent, global standard setter – IASB needs stability of funding as well as the means to enforce compliance in countries where IFRS are adopted only as they suit local reporting traditions.

29. Continued existence of European IFRS undermines global comparability – Since IFRS are principles-based and do not provide great detail, there is room for each country to apply them in their own way. At times, European regulators simply ignore aspects of IFRS.

30. Significant changes to the U.S. reporting infrastructure are needed
Train and educate issuers, regulators, auditors, and investors about IFRS
Transition auditing standards
Adjust regulatory and contractual arrangements
Assess impact on nonpublic companies

31. U.S. accountants and educators need to adapt to IFRS – unprecedented changes in curriculums at colleges and universities and a substantial increase in professional education for those already in practice are required.

32. Elimination of U. S. GAAP for U. S
Elimination of U.S. GAAP for U.S. companies contradicts the general sentiment for maintaining control in the United States – The influence of FASB, the SEC, and other U.S. organizations would be limited or nonexistent.

33. Differences Between IFRS and U.S. GAAP
Rules-Based Standards – Perceived to be the dominant approach of FASB, attempts to anticipate all or most of the application issues, U.S. GAAP is approximately 17,000 pages.
Principles-Based Standards – Stated as the dominant approach of IASB, rely on broad statements of objectives and principles to be followed, IFRS is approximately 2,500 pages.

34. Income Measurement
U.S. GAAP emphasizes measurement of items on the income statement, the matching principle, revenues and expenses are recorded as earned or incurred and the balance sheet effects are the result of these recognitions.
IFRS emphasizes the measurement of assets and liabilities on the balance sheet at fair value.

35. U.S. GAAP – Industry Practice
Revenue Recognition
U.S. GAAP – Industry Practice
IFRS - Judgment
Persuasive evidence of an arrangement exists
Product is delivered or service performed
Seller’s price to the buyer is fixed or determinable
Collectability is reasonably assured
16 standards, 24 interpretations, and other documents
There are probable future economic benefits
Revenue can be measured reliably
Costs can be measured reliably
Significant risk and rewards of ownership are transferred
Managerial involvement is not retained as to ownership or control
2 standards and 3 interpretations

36. Inventories U.S. GAAP IFRS Values inventory at lower of cost or market
This differs from IFRS in three ways:
Market is defined as net replacement value not fair value – IFRS
Does not recognize increases in market above cost – IFRS
Prohibits the reversal of write-downs if replacement costs subsequently increase but IFRS do not
Prohibits the use of LIFO
The IRS may/will not let companies use LIFO on tax returns if they are not using it for financial reporting purposes
Increased tax cost – large barrier to adoption

37. Property, Plant, and Equipment
U.S. GAAP
IFRS
Component Depreciation
Allowed but rarely used
Revaluation
No upward revaluation
Component Depreciation
Required
Revaluation
Asset can be valued at cost or revaluation to its market value – either above or below cost

38. Impairment U.S. GAAP IFRS
Requires impairment testing at reporting unit level
Impairment Test
Compares undiscounted cash flows to carrying value
If undiscounted cash flows is greater than carrying value then we compute PV of future cash flows an compare to carrying value
Requires impairment testing at the cash-generating unit level
Impairment Test
Compares carrying value with recoverable amount

39. Intangible Assets
Under IFRS, if an intangible asset is previously written down, it may be revalued upward if there is an increase in fair value
U.S. GAAP does not allow any write-up once an asset is written down

40. Research and Development Costs
U.S. GAAP
IFRS
Costs are expensed as incurred
Research costs are expensed but development costs are capitalized and amortized when technical and economic feasibility can be demonstrated

41. Commitments and Contingencies
U.S. GAAP
IFRS
Do not record commitments
Contingent assets and liabilities are recognized when they are probable
Commitments are recognized when an entity has demonstrable commitment for a future payment or transfer of assets
Same as U.S. GAAP except only contingent liabilities may be recognized

42. Balance Sheet Presentation
U.S. GAAP
IFRS
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Liabilities
Equity
Long-Term Assets
Current Assets
Equity
Long-Term Liabilities
Current Liabilities

43. Proposed Financial Statement Presentation