1. International Financial Reporting Standards Ian P.N. Hague Principal, Accounting Standards Presentation to FMI (Halifax Chapter) January 15, 2009 Own views – not those of AcSB or other staff

2. 2 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

3. 3 The Plan February 13, 2008: “The Canadian Accounting Standards Board (AcSB) has confirmed that use of International Financial Reporting Standards (IFRS) will be required in 2011 for publicly accountable profit-oriented enterprises. IFRS will replace Canada’s current Generally Accepted Accounting Principles (GAAP) for those enterprises. The official changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. ”

4. 4 Who does this apply to? Publicly Accountable Enterprise: Issued, or is in the process of issuing, debt or equity instruments that are or will be outstanding in a public market (i.e. all public companies are PAE’s); or Holds assets in a fiduciary capacity for a broad group of outsiders as its primary business, (i.e. others with large or diverse groups of users, such as a bank, insurance entity, securities broker/dealer, credit union, mutual fund or investment banking entity). Also, Public Sector: GBE/GBTO NOT required for NFPOs Others may choose to adopt IFRSs

5. 5 Public Sector November 2007, PSAB approved amendments to Introduction to PSAB standards: GBEs and GBTOs follow for-profit GAAP – i.e., IFRSs December 2008, decided to reconsider whether ALL such entities should follow IFRSs – ITC, early 2009

6. 6 When is adoption required? Jan 1/ Apr 1 2010 Dec 31 2011/ Mar 31 2012 IFRS Reporting date Opening balance sheet Preparatory period Jan 1/ Apr 1 2011 Jan. 1, 2008  < 12 months  Cdn. GAAP & IFRS

7. 7 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

8. 8 What are IFRSs? A single set of globally converged, high quality accounting standards Regulatory backing – IOSCO, EU, etc. Globally accepted (100+ countries) SEC – 2011 to decide if IFRS mandatory for 2014

9. 9 What are IFRSs? “Principles-based” standards Developed by International Accounting Standards Board (based in London, England) Broad international representation Independent Extensive due process

10. 10 IASB (14) (sets accounting standards) Int’l Finc’l Reporting Interpretations Committee (IFRIC) (14) Standards Advisory Council (SAC) (advises Board) Trustees (22) (appoint Board, IFRIC and SAC) National standard setters IASB structure

11. 11 The standards IFRSs: IFRS IAS IFRIC SIC Developed in accordance with Conceptual Framework Set out recognition, measurement, presentation & disclosure requirements for general purpose F/S Standards EICs Financial Reporting Standards Financial Reporting Interpretations

12. 12 What does it mean to adopt IFRSs? PAEs adopt IFRSs without modification as Canadian GAAP – all Canadian GAAP falls away (for PAEs) Interpretations by IFRIC only Focus of attention becomes on IASB in London

13. 13 Benefits to Canada Access to foreign markets Lower cost of capital – familiar standards Continued principles-based standards – less complexity Efficiencies for international companies BUT: It will take work to get there

14. 14 Challenges Financial information will differ Recognition Measurement Disclosure Significant education required IFRSs are, themselves, changing

15. 15 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

16. 16 First-time adoption of IFRSs Basic Principle: Retrospective treatment of IFRSs in effect at the reporting date Cost benefit to retrospective treatment Optional exemptions – e.g., fair value on transition Exceptions to the principle – e.g., estimates and hedging

17. 17 IFRS 1: Timeline (calendar year entity) Jan. 1, 2010 Dec. 31, 2011 IFRS Reporting date Date of Transition Jan. 1, 2011 First IFRS Financial Statement Opening balance sheet Same accounting policies

18. 18 First IFRS financial statements Reconciliations of the effect of the change from ‘local’ GAAP to IFRS Equity as at Date of transition, and End of latest period presented by the entity in most recent annual financial statements prepared in accordance with its local GAAP Net income for period last presented in most recent annual financial statements Accounting policy disclosures Other disclosures if significant

19. 19 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

20. 20 What will IFRS F/S look like? Similarities Cash Accounts Receivable – except transfers Inventories - except for Agriculture and Construction Contracts Property, Plant and Equipment – revaluation optional Leases – finance lease = capital lease Goodwill and Intangibles – some revaluation Accounts payable Long term debt – presentation: must refinance by balance sheet date

21. 21 IFRS Adoption at changeover Many similarities between IFRSs & Cdn GAAP BUT: Also some major differences Impairment Fair value / Revaluations Securitization Devil is in the details!

22. 22 Impairment Identify impairment indicators (B/S date) If impairment indicators exist, determine recoverable amount (discounted cash flows) Write-down to recoverable amount Monitor for impairment indicators Write-down to fair value Identify cash generating unit If impairment indicators exist, determine recoverable amount (undiscounted cash flows) Identify asset group

23. 23 Looking for impairment Impairment Indicators Proactive review at each reporting date to assess whether there is any indication that an asset might be impaired External information Internal information

24. 24 Reversal of impairment loss All impaired assets other than goodwill Look for indicators of reversal (B/S date) Mirror of external and internal indicators of impairment Calculate new recoverable amount and perform impairment test Recognize reversal if appropriate Only if change in estimates since last impairment loss

25. 25 Fair value in existing IFRSs compared to Canadian IAS 16: Property, Plant and Equipment – optional FV IAS 17: Leases - similar IAS 18: Revenue - similar IAS 19: Employee Benefits - similar IAS 20: Government Grants - similar IAS 21: Foreign Exchange - similar IAS 32: Financial Instruments: Presentation - similar IAS 33: Earnings per Share - similar IAS 38: Intangible Assets – optional FV IAS 39: Financial Instruments: Recgn. & Meas. - similar IAS 40: Investment Property – optional FV IAS 41: Agriculture - additional IFRS 2: Share-based Payments - similar IFRS 3: Business Combinations - same IFRS 4: Insurance Contracts – additional IFRS 7 – Financial Instruments: Disclosure - same

26. 26 Fair value guidance in IFRSs Limited guidance today in IAS 32, 39 & 41 Recent guidance issued on fair value in inactive markets Active project to develop consistent fair value guidance

27. 27 Property, plant & equipment Property plant and equipment (IAS 16) Options for measurement Cost Revaluation Model Both less accumulated depreciation and accumulated impairment losses

28. 28 Property, plant & equipment When to revalue? As frequently as necessary to ensure that the carrying value of the revalued assets and the current values are not materially different Therefore, frequency depends on volatility of asset value Revalue all assets of same class at same time

29. 29 Property, plant & equipment Changes in value Increase = credit to revaluation surplus (in equity) Decrease = charge to income statement

30. 30 Property, plant & equipment Revaluation after initial recognition Asset Revalued Previous Downward Previous Upward Increase to Equity as ‘revaluation surplus” Decrease to Income Increase to income = previous downward. Excess to equity in re- valuation surplus. Decrease to revaluation surplus. Excess to income Statement. UpwardsDownwards Yes No

31. 31 Property, plant & equipment Depreciation Charge for depreciation against income even in revaluation model Portion of revaluation reserve also transferred to retained earnings When asset disposed of, any remaining balance in revaluation reserve moved to retained earnings

32. 32 Investment property Options for measurement Cost (but must disclose FV) Fair value method (not revaluation method) Gains and losses directly to income statement No depreciation

33. 33 Property, plant & equipment / Investment property 28% of EU companies with investment property used FV method [ICAEW, 2007] 4% of EU companies used revaluation for buildings – none for P&E [ICAEW, 2007]

34. 34 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

35. 35 Majority of IFRSs remain unchanged through 2011 Inventories Accounting Policies & Accounting Changes Events after the Balance Sheet Date Property Plant & Equipment Government Grants Foreign Currency Borrowing Costs Associates Hyperinflation Interim Reporting Impairment ?? Intangible Assets Investment Property Agriculture Business Combinations Extractive Activities Segments

36. 36 How do we get there? Convergence before changeover Business combinations [IFRS 3/IAS 27] – 2011 Earnings per share [IAS 33] – 2010? Joint ventures [IAS 31] – 2011 Credit Environment? – 2010/11?

37. 37 IASB changes expected IASB changes before 2011 Financial instruments disclosures – 2009 Fair value measurement (how not when) – 2010 Liabilities – 2010 Income taxes – 2010 Emissions trading – 2010 2009 probably effective 2011 2010 probably effective 2012

38. 38 IASB isolated changes Isolated changes Related Party Disclosures Discontinued Operations Group Cash-settled Shared-based Payment First-time Adoption

39. 39 Changes expected in 2011 Financial statement presentation Insurance contracts Liabilities & equity Leases Employee benefits Revenue recognition Likely to be effective in 2013. Might not be available for early adoption?

40. 40 IASB Projects in longer term Reducing complexity in financial instruments Extractive activities Common control transactions Government grants Intangible assets Conceptual framework

41. 41 Planning Evaluate the effects for your organization More than a technical exercise – creates opportunities and challenges Need to thoroughly assess accounting policies Start thinking in terms of IFRSs More than just accounting User relations Performance measures Covenants, etc.

42. 42 Agenda What is changing and when? The IASB First-time Adoption Some similarities and differences Planning for the change Resources

43. 43 Find out more: IFRS resources IASB web site – www.iasb.org IFRSs on AcSB website – www.acsbcanada.org What’s changing when? Canada/IFRS GAAP Comparisons – 2 levels of detail Bulletins, Implementation Plan, etc. Major firms – Newsletters, webcasts, publications, illustrative financial statements

44. 44 Find out more: Training CICA/PICAs Three-day in-depth course One-day overview of differences Web-based learning Major Accounting Firms – self-study (e.g., www.iasplus.com)

45. 45 Conclusions Biggest changes to financial reporting in recent years Creates challenges and opportunities Be prepared for both

46. 46 Questions/comments? ian.hague@cica.ca