Demystify IFRS: Global Convergence and US GAAP Comparison
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The document discusses the global convergence of accounting standards, specifically the increasing adoption of International Financial Reporting Standards (IFRS) globally. It notes that over 100 countries now require or permit the use of IFRS. The document also discusses differences between IFRS and US GAAP, such as IFRS being more principles-based while US GAAP is more rules-based. The SEC roadmap for potential future adoption of IFRS for US public companies by 2016 is also summarized.
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Demystify IFRS: Global Convergence and US GAAP Comparison
- 1. Demystify IFRS Global Convergence Jean-Charles Hodouin 11/29/2011
- 2. Demystify IFRS Global Convergence Global Convergence ï Necessity of International Harmonization of Financial Regulation ï” Lack of comparison between countries; ï” Lack of comparison between companies; ï” Crisis of market confidence enhanced by recent financial scandals ï Convergence over the years ï” The spread of IFRS use over the last seven years has been nothing short of breathtaking. The global movement really started with the European Commissionâs decision in 2002 to require IFRS for all listed companies in the European Union beginning in 2005; ï” Now, more than 100 countries use IFRS or have plans to adopt IFRS or base their standards on IFRS (USA, Japan, China, âŠ). Even Canada, that has long had a convergence plan with U.S. GAAP, has announced it will adopt IFRS in 2011. Jean-Charles Hodouin â 11/29/2011 2
- 3. Demystify IFRS Global Convergence Since 2001, over 100 countries have required or permitted the use of IFRSs 2001: Formation of the IASC Foundation and IASB 2002: European Union passes regulation to adopt IFRSs 2003: Australia, Hong Kong and New Zealand commit to adoption of IFRSs 2005: In Europe nearly 7,000 listed business in 25 countries switch to IFRSs 2006: IASB and FASB agree roadmap for convergence between IFRSs and US GAAP China adopts accounting standards substantially in line with IFRSs 2007: Brazil, Canada, Chile, India, Japan and Korea all establish timelines to adopt or converge with IFRSs US SEC removes reconciliation requirement for non US companies reporting under IFRSs, and consults on IFRSs for domestic companies. Jean-Charles Hodouin â 11/29/2011 3
- 4. Demystify IFRS Global Convergence CONTENTS ï PART #1 : Reminder of Standard-Setting ï PART #2 : SEC ROADMAP/Milestones ï PART #3 : US GAAP v. IFRS
- 5. Demystify IFRS Demystify IFRS Global Global Convergence Convergence PART # 1 : Reminder of Standard-Setting ï Standard-Setters > In the United States of America > In the Rest of the World > In Europe ï IFRS Standards > Different Types of Standards > Consequences in Europe > Consequences in France Jean-Charles Hodouin â 11/29/2011 5
- 6. Demystify IFRS Global Convergence International Standard-Setting Processes National Global Security Exchange Commission (SEC) International Organisation of Securities Commissions (IOSCO) Supranational National EU Code de commerce Conseil National de la ComptabilitĂ© (CNC) EU Directive Financial Accounting Standards Board (FASB) US GAAP ? International Accounting Standards Board (IASB) CRCE/EFRAG IFRS ComitĂ© dâurgence ComitĂ© de la RĂ©glementation Comptable (CRC) PCG/CRC SociĂ©tĂ©s françaises The IOSCO assembles together the securities regulatory agencies all over the world. It is recognized as the international standard-setter for securities markets. Jean-Charles Hodouin â 11/29/2011 6
- 7. Demystify IFRS Global Convergence Standard-Setting Process in USA Equivalent of IASC Foundation Financial Accounting Foundation (FAF) Equivalent of IASB Financial Accounting Standards Board (FASB) Financial Accounting Standards Advisory Council (FASAC) Equivalent of IFRIC Emerging Issues Task Force (EITF) Equivalent of SAC Jean-Charles Hodouin â 11/29/2011 7
- 8. Demystify IFRS Global Convergence Standard-Setting Process of IASB Equivalent of FAF International Accounting Standards Committee Foundation (IASCF) Equivalent of FASB International Accounting Standards Board (IASB) Standards Advisory Council (SAC) Equivalent of EITF International Financial Reporting Interpretations Committee (IFRIC) Equivalent of FASAC Jean-Charles Hodouin â 11/29/2011 8
- 9. Demystify IFRS Global Convergence Convergence IFRS â US GAAP ï The IOSCO which approves the standards elaborated by the IASB, is under the influence of the SEC (Securities Exchange Commission). The latter requires for the issuance of financial statements in IFRS in the United States : ï A convergence of the general basic principles between the IFRS and US GAAP. ï Therefore the IFRS, regarding the importance of the American financial markets, are strongly inspired by the US GAAP. ï The scandal of the broker in energy Enron, 7th American market capitalization made become aware to the financial and accounting community the necessity of harmonization of the standards. ï The adoption of the IFRS validated by the European Union in June, 2002 is the direct consequence of the filing for bankruptcy under protection of the chapter 11 of Enron. ï A link between the US GAAP and the IFRS ALSO is inevitable. ï However, the European Union by opting first for the IFRS, took the possibility to intervene as user of these standards, and in the standard-setting process of the IASB. Jean-Charles Hodouin â 11/29/2011 9
- 10. Demystify IFRS Global Convergence Structure of the Set of IFRS Standards Principlesbased Approach IAS/IFRS Standards SIC/IFRIC Interpretations The basic difference between IFRS and US GAAP reflects a difference between the historically rules-based approach underlying U.S. GAAP and the principles-based approach underlying IFRS. Jean-Charles Hodouin â 11/29/2011 10
- 11. Demystify IFRS Global Convergence Standard-Setting in Europe ï Necessity of harmonization in Europe ï” Goal : create a single financial market ; ï” Promote comparative financial information ; ï” Decision not to choose US GAAP ; ï” Adoption of IAS/IFRS Standards ï Result of Adoption ï” Financial Information dedicated to investors. Jean-Charles Hodouin â 11/29/2011 11
- 12. Demystify IFRS Global Convergence Adoption of IFRS in Europe ï European Regulation July 19, 2002; ï This regulation requires from European Countries: ï” Mandatory application of IFRS, for consolidated accounts of public companies (after January 1, 2005). ï” For individual accounts, each European country can opt. Jean-Charles Hodouin â 11/29/2011 12
- 13. Demystify IFRS Global Convergence Adoption of IFRS in France Public Companies Non-Public Companies Establishing Consolidated Accounts Other Companies Consolidated Accounts Mandatory application of IAS/IFRS Option for application of IAS/IFRS Individual Accounts Convergence to IFRS by application of "Preferred method" Convergence to IFRS by application of "Preferred method" NA Regulation 2004-1382 of December 20, 2004 Jean-Charles Hodouin â 11/29/2011 13
- 14. Demystify IFRS Global Convergence PART # 2 : SEC Roadmap/Milestones ï Milestones > Milestones 1 - 4 > Milestones 5 - 7 ï Scenario in USA
- 15. Demystify IFRS Global Convergence SEC Roadmap/Milestones ï Milestones 1- 4 : Issues to be addressed before adoption of IFRS 1. Improvements in accounting standards 2. IASC accountability and funding 3. Improvement in the ability to use interactive data for IFRS reporting: use of XBRL 4. Education and training on IFRSs in the USA 6. SEC decides if/when IFRS will be required for all issuers Milestone 5 5. US issuers meeting specified criteria may use IFRS for calendar 2009 and later year ends. Jean-Charles Hodouin â 11/29/2011 15
- 16. Demystify IFRS Global Convergence SEC Roadmap/Milestones ï Milestones 5 - 7 : transition plan for mandatory use of IFRS 5. Limited early use by eligible entities 6. Anticipated timing of future rule making by the SEC 7. Implementation of mandatory use Milestone 7 7. Large accelerated filers might be required to implement IFRS starting in calendar 2014 Milestone 7 7. Accelerated filers might be required to implement IFRS starting in calendar 2015 Milestone 7 7. Non accelerated filers in calendar 2016 Jean-Charles Hodouin â 11/29/2011 16
- 17. Demystify IFRS Global Convergence Scenario in USA ï Likely scenario and unanswered questions ï” SEC to require full IFRS for US public companies ï” FASB loses jurisdiction over those companies âą Will FASB have a future role and what will that be? ï” What about private companies âą What GAAP will they follow? âą Who will issue it? Jean-Charles Hodouin â 11/29/2011 17
- 18. Demystify IFRS Global Convergence Scenario in USA ï Potential applicability to all US companies and more: ï” Subsidiaries of public companies ï” Subsidiaries of foreign companies ï” Investee where investor uses IFRS ï” Potential acquisition targets of IFRS acquirers ï” Potential sale to domestic or foreign buyer using IFRS ï” Considering an IPO in the future ï” Foreign lender that wants IFRS financial statements Jean-Charles Hodouin â 11/29/2011 ï” Imports goods and a major supplier wants IFRS 18
- 19. Demystify IFRS Demystify IFRS Global Global Convergence Convergence PART # 3 : US GAAP v. IFRS ï Financial Statements in IFRS > Purpose of the Financial Statements > Presentation of the Financial Statements ï Main Differences Jean-Charles Hodouin â 11/29/2011 19
- 20. Demystify IFRS Global Convergence Purpose of the Financial Statements Provide relevant information on : Financial Position Profitability Change in Financial Position Jean-Charles Hodouin â 11/29/2011 Economic information useful for decision maker âą Balance Sheet âą Income Statement âą Project of a statement called « Information on global income » âą Statement of Cash Flows âą Statement of Change in Equity 20
- 21. Demystify IFRS Global Convergence Investor is the First User Investors Personnel Lenders Suppliers and other Creditors Jean-Charles Hodouin â 11/29/2011 Clients Users Federal and State Agencies Public 21
- 22. Demystify IFRS Global Convergence Standards of Presentation of Financial Statements Objectivity Principle IAS 1 IAS 7 IAS 8 Prudent Principle Jean-Charles Hodouin â 11/29/2011 IAS 10 IAS 14 IAS 24 IAS 33 IAS 34 IFRS 1 IFRS 8 Fair presentation Comparability Presentation of Financial Statements Cash Flow Statements Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies Events After the Balance Sheet Date Segment Reporting Related Party Disclosures Earnings Per Share Interim Financial Reporting First-time Application of IFRS Operating Segments 22
- 23. Demystify IFRS Global Convergence Measurement Materiality Principle Standards of Accounting and Conservative Evaluation Concept IAS 2 IAS 11 IAS 12 IAS 16, 36, 38, 40 IAS 17 IAS 18 IAS 19, IFRS 2 IAS 20 IAS 21 IAS 23 IAS 26 IAS 27 ,28 ,31 ,IFRS 3 IAS 32, 39, IFRS 7 IAS 37 IAS 41 IFRS 4 IFRS 5 IFRS 6 Jean-Charles Hodouin â 11/29/2011 Consistency Principle Inventories Construction Contracts Income Taxes Assets and Depreciation Leases Revenue Employee Benefits Government Grants The Effects of Changes in Foreign Exchange Rates Borrowing Costs Accounting and Reporting by Retirement Benefit Plans Consolidation â Business Combination Financial Instruments Provisions, Contingent Liabilities and Contingent Assets Agriculture Insurance Contracts Matching Non-current Assets Held for Sale Principle Mineral Resources 23
- 24. Demystify IFRS Global Convergence Main Differences ï What are the differences between IFRS and U.S. GAAP? For good reason: Understanding and addressing these differences is central to the companyâs financial reporting. ï” As noted earlier, the basic difference is the rules-based approach underlying U.S. GAAP v. the principles-based approach underlying IFRS. âą IFRS allows more choices, elections, alternatives Is the information relevant? ï Requires greater exercise of judgment Is the information liable? âą Is US system/culture/infrastructure ready for this? Jean-Charles Hodouin â 11/29/2011 24
- 25. Demystify IFRS Global Convergence Main Differences ï Cash : ï” U.S. GAAP exclude bank overdraft from cash. Under IFRS, bank overdraft can be included in cash if they form an integral part of an entityâs cash management (IAS7). ï Inventories ï” IFRS permit an entity to reverse inventory write-downs (LCM) in certain situations, whereas U.S. GAAP does not. IFRS also require the recognition of certain development costs that U.S. GAAP do not recognize. In valuing inventory under IFRS, LIFO is prohibited. Jean-Charles Hodouin â 11/29/2011 25
- 26. Demystify IFRS Global Convergence Main Differences ï Revenue Recognition : ï” Reflective of its principles-based approach, IFRS guidance regarding revenue recognition is less extensive than U.S. GAAP. IFRS, for example, does not have specific guidance for software revenue recognition. ï Extraordinary Items : ï” IFRS prohibit reporting items as extraordinary while U.S. GAAP permits reporting items as extraordinary in the income statement, albeit under very limited circumstances. ï Major inspection or overhaul costs ï” Generally under IFRS, these costs are accounted for as part Jean-Charles Hodouin â 11/29/2011 26
- 27. Demystify IFRS Global Convergence Main Differences ï Leases : ï” Under the prescriptive rule of FAS 13, the lease is equal to 75% or more of the estimated economic life of the leased property. However, if the beginning of the lease term falls within the last 25% of the total estimated economic life of the leased property, including earlier years of use, this criterion shall not be used for purposes of classifying the lease. ï” Under the descriptive principles IAS 17, the lease term is for the major part of the economic life of the asset even if title is not transferred. Jean-Charles Hodouin â 11/29/2011 27
- 28. Demystify IFRS Global Convergence Main Differences ï Borrowing Costs : ï” U.S. GAAP mandate capitalization of borrowing costs for qualifying assets, ï” but IFRS have permitted an entity to elect whether to capitalize or expense borrowing costs for qualified assets, provided the entity is consistent in its approach. Reflective of the convergence movement, IFRS will use the U.S. GAAP approach after Jan. 1, 2009. ï Development Costs : ï” They are capitalized if certain criteria determined under IAS 38 are met. ï” Under US GAAP, development are expensed except for certain website development costs and certain costs associated with developing internal use software. Jean-Charles Hodouin â 11/29/2011 28
- 29. Demystify IFRS Global Convergence Main Differences ï Revaluation of intangible assets : ï” U.S. GAAP prohibit generally to revaluate intangible assets, ï” Whereas it is permitted under IFRS only if the intangible asset trades in an active market. ï Basis of Consolidation Policy : ï” Control (look to governance) is required under IFRS. ï” Under US GAAP, approach depends on the type of entity. For voting interest entities, look to majority voting rights. For variable interest entities, look to a risk and rewards model whereby an entity is consolidated by the primary beneficiary. Jean-Charles Hodouin â 11/29/2011 29
- 30. Demystify IFRS Global Convergence Main Differences ï Fair Value : ï” Even where the use of U.S. GAAP and IFRS result in the same assets appearing on a balance sheet, the values attributed to those assets may be different. ï” FASBâs recent Statement no. 159, The Fair Value Option for Financial Assets and Financial Liabilities, for instance, provides for a fair value option that the statementâs summary calls âsimilar, but not identical, to the fair value option in IAS 39.â ï” IFRS permit an entity to regularly revalue property, plant and equipment to fair market value. An entity cannot pick and choose under IFRS, however, and if it revalues one item Jean-Charles Hodouin â 11/29/2011 within a class of assets, it must revalue all items within the 30
- 31. Demystify IFRS Global Convergence Main Differences ï Fair Value (continued) : ï” IFRS provides for crediting increases in values to a revaluation reserve in the equity section of the balance sheet while decreases in values are treated as expenses (Income statement) to the extent the decreases exceed any previous revaluation increases. ï” For investment property, both GAAP and IFRS approve of a historical cost based method with depreciation and impairment, but IFRS also permit an entity to account for the property on the basis of fair market value, recognizing changes in value as profit or loss. ï” Obviously, if the two sets of standards result in reflecting different assets and asset valuations, one can also expect Jean-Charles Hodouin â 11/29/2011 they will result in a difference in reported income or retained 31
- 32. Demystify IFRS Global Convergence Questions Jean-Charles Hodouin â 11/29/2011 32
- 33. Demystify IFRS Global Convergence Webography ï On the Web : ï” SEC Roadmap âą http://www.sec.gov/rules/proposed/2008/33-8982.pdf ï” IASB Web Site âą http://www.iasb.org/Home.htm ï” IAS PLUS (Deloitte) âą http://www.iasplus.com/usa/ifrsus.htm Jean-Charles Hodouin â 11/29/2011 33