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.
2. Demystify IFRS
Global
Convergence
Global Convergence
Necessity of International Harmonization of Financial
Regulation
Lack of comparison between countries;
Lack of comparison between companies;
Crisis of market confidence enhanced by recent financial scandals
Convergence over the years
The spread of IFRS use over the last seven years has been nothing
short of breathtaking. The global movement really started with the
European Commission’s decision in 2002 to require IFRS for all listed
companies in the European Union beginning in 2005;
Now, more than 100 countries use IFRS or have plans to adopt IFRS
or base their standards on IFRS (USA, Japan, China, …). Even
Canada, that has long had a convergence plan with U.S. GAAP, has
announced it will adopt IFRS in 2011.
Jean-Charles Hodouin – 11/29/2011
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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 – 11/29/2011
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5. Demystify IFRS
Demystify IFRS
Global
Global
Convergence
Convergence
PART # 1 : Reminder of Standard-Setting
Standard-Setters
> In the United States of America
> In the Rest of the World
> In Europe
IFRS Standards
> Different Types of Standards
> Consequences in Europe
> Consequences in France
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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 Comptabilité
(CNC)
EU Directive
Financial Accounting
Standards Board
(FASB)
US GAAP
?
International
Accounting Standards
Board
(IASB)
CRCE/EFRAG
IFRS
Comité
d‘urgence
Comité de la
Réglementation
Comptable (CRC)
PCG/CRC
Sociétés françaises
The IOSCO assembles together the securities regulatory agencies all over the world. It is recognized as the
international standard-setter for securities markets.
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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
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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
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9. Demystify IFRS
Global
Convergence
Convergence IFRS – US GAAP
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 :
A convergence of the general basic principles between the IFRS and US GAAP.
Therefore the IFRS, regarding the importance of the American financial markets, are
strongly inspired by the US GAAP.
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.
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.
A link between the US GAAP and the IFRS ALSO is inevitable.
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.
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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.
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11. Demystify IFRS
Global
Convergence
Standard-Setting in Europe
Necessity of harmonization in Europe
Goal : create a single financial market ;
Promote comparative financial information ;
Decision not to choose US GAAP ;
Adoption of IAS/IFRS Standards
Result of Adoption
Financial Information dedicated to investors.
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12. Demystify IFRS
Global
Convergence
Adoption of IFRS in Europe
European Regulation July 19, 2002;
This regulation requires from European Countries:
Mandatory application of IFRS, for consolidated accounts
of public companies (after January 1, 2005).
For individual accounts, each European country can opt.
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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
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15. Demystify IFRS
Global
Convergence
SEC Roadmap/Milestones
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.
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16. Demystify IFRS
Global
Convergence
SEC Roadmap/Milestones
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
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17. Demystify IFRS
Global
Convergence
Scenario in USA
Likely scenario and unanswered questions
SEC to require full IFRS for US public companies
FASB loses jurisdiction over those companies
• Will FASB have a future role and what will that be?
What about private companies
• What GAAP will they follow?
• Who will issue it?
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18. Demystify IFRS
Global
Convergence
Scenario in USA
Potential applicability to all US companies and more:
Subsidiaries of public companies
Subsidiaries of foreign companies
Investee where investor uses IFRS
Potential acquisition targets of IFRS acquirers
Potential sale to domestic or foreign buyer using IFRS
Considering an IPO in the future
Foreign lender that wants IFRS financial statements
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Imports goods and a major supplier wants IFRS
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20. Demystify IFRS
Global
Convergence
Purpose of the Financial Statements
Provide relevant information on :
Financial Position
Profitability
Change in
Financial Position
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Economic
information useful
for decision maker
• Balance Sheet
• Income Statement
• Project of a statement called
« Information on global income »
• Statement of Cash Flows
• Statement of Change in Equity
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21. Demystify IFRS
Global
Convergence
Investor is the First User
Investors
Personnel
Lenders
Suppliers and
other Creditors
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Clients
Users
Federal and State
Agencies
Public
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22. Demystify IFRS
Global
Convergence
Standards of Presentation of
Financial Statements
Objectivity
Principle
IAS 1
IAS 7
IAS 8
Prudent
Principle
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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
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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
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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 – Business Combination
Financial Instruments
Provisions, Contingent Liabilities and Contingent Assets
Agriculture
Insurance Contracts
Matching
Non-current Assets Held for Sale
Principle
Mineral Resources
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24. Demystify IFRS
Global
Convergence
Main Differences
What are the differences between IFRS and U.S. GAAP?
For good reason: Understanding and addressing these
differences is central to the company’s financial reporting.
As noted earlier, the basic difference is the rules-based
approach underlying U.S. GAAP v. the principles-based
approach underlying IFRS.
• IFRS allows more choices, elections, alternatives
Is the
information
relevant?
Requires greater exercise of judgment
Is the
information
liable?
• Is US system/culture/infrastructure ready for this?
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25. Demystify IFRS
Global
Convergence
Main Differences
Cash :
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 entity’s cash management (IAS7).
Inventories
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.
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26. Demystify IFRS
Global
Convergence
Main Differences
Revenue Recognition :
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.
Extraordinary Items :
IFRS prohibit reporting items as extraordinary while U.S.
GAAP permits reporting items as extraordinary in the income
statement, albeit under very limited circumstances.
Major inspection or overhaul costs
Generally under IFRS, these costs are accounted for as part
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27. Demystify IFRS
Global
Convergence
Main Differences
Leases :
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.
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.
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28. Demystify IFRS
Global
Convergence
Main Differences
Borrowing Costs :
U.S. GAAP mandate capitalization of borrowing costs for qualifying
assets,
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.
Development Costs :
They are capitalized if certain criteria determined under IAS 38 are
met.
Under US GAAP, development are expensed except for certain
website development costs and certain costs associated with
developing internal use software.
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29. Demystify IFRS
Global
Convergence
Main Differences
Revaluation of intangible assets :
U.S. GAAP prohibit generally to revaluate intangible assets,
Whereas it is permitted under IFRS only if the intangible asset trades
in an active market.
Basis of Consolidation Policy :
Control (look to governance) is required under IFRS.
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.
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30. Demystify IFRS
Global
Convergence
Main Differences
Fair Value :
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.
FASB’s recent Statement no. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, for instance,
provides for a fair value option that the statement’s summary
calls “similar, but not identical, to the fair value option in IAS
39.”
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 – 11/29/2011
within a class of assets, it must revalue all items within the
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31. Demystify IFRS
Global
Convergence
Main Differences
Fair Value (continued) :
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.
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.
Obviously, if the two sets of standards result in reflecting
different assets and asset valuations, one can also expect
Jean-Charles Hodouin – 11/29/2011
they will result in a difference in reported income or retained
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33. Demystify IFRS
Global
Convergence
Webography
On the Web :
SEC Roadmap
• http://www.sec.gov/rules/proposed/2008/33-8982.pdf
IASB Web Site
• http://www.iasb.org/Home.htm
IAS PLUS (Deloitte)
• http://www.iasplus.com/usa/ifrsus.htm
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