Download - Ifrs presentation global convergence 2011
Jean-Charles Hodouin
Demystify IFRS Global Convergence
11/29/2011
2Jean-Charles Hodouin – 11/29/2011
Demystify IFRS Global
ConvergenceGlobal 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.
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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.
Demystify IFRS Global
Convergence CONTENTS
PART #1 : Reminder of Standard-Setting
PART #2 : SEC ROADMAP/Milestones
PART #3 : US GAAP v. IFRS
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Convergence PART # 1 : Reminder of Standard-SettingDemystify IFRS
Global Convergence
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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ConvergenceInternational Standard-Setting Processes
Code de commerce
National Global Supranational National
International Organisation of Securities Commissions
(IOSCO)
Financial Accounting Standards Board
(FASB)
International Accounting Standards
Board(IASB)
Security Exchange Commission
(SEC)
EU
Sociétés françaises
IFRS
?
PCG/CRC
Conseil National de la Comptabilité
(CNC)EU Directive
US GAAP
Comité de la Réglementation
Comptable (CRC)CRCE/EFRAG
Comitéd‘urgence
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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ConvergenceStandard-Setting Process in USA
Financial Accounting Standards Board (FASB)
Financial Accounting
Foundation (FAF)
Emerging Issues Task Force (EITF)
Financial Accounting Standards Advisory
Council (FASAC)
Equivalent of IASC
Foundation
Equivalent of IASB
Equivalent of IFRIC
Equivalent of SAC
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ConvergenceStandard-Setting Process of IASB
International Accounting Standards Board (IASB)
International Accounting Standards Committee
Foundation (IASCF)
International Financial Reporting Interpretations
Committee (IFRIC)
Standards Advisory
Council (SAC)
Equivalent of FAF
Equivalent of EITF
Equivalent of FASB
Equivalent of FASAC
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ConvergenceConvergence 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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Convergence
Principles-based
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.
Structure of the Set of IFRS Standards
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ConvergenceStandard-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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Convergence
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.
Adoption of IFRS in Europe
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ConvergenceAdoption of IFRS in France
Regulation 2004-1382 of December 20, 2004
Consolidated Accounts
Individual Accounts
Public CompaniesMandatory
application of IAS/IFRS
Convergence to IFRS by application of
"Preferred method"
Non-Public Companies Establishing Consolidated Accounts
Option for application of
IAS/IFRS
Other Companies NA
Convergence to IFRS by application of
"Preferred method"
PART # 2 : SEC Roadmap/Milestones
Milestones
> Milestones 1 - 4
> Milestones 5 - 7
Scenario in USA
Demystify IFRS Global
Convergence
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ConvergenceSEC 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
Milestone 55. US issuers meeting specified criteria may use IFRS for calendar 2009 and later year ends.
6. SEC decides if/when IFRS will be required for all issuers
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ConvergenceSEC 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 77. Accelerated filers might be required to implement IFRS starting in calendar 2015
Milestone 77. Non accelerated filers in calendar 2016
Milestone 77. Large accelerated filers might be required to implement IFRS starting in calendar 2014
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ConvergenceScenario 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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ConvergenceScenario 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
Imports goods and a major supplier wants IFRS
Exports goods and a major customer wants IFRS
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Convergence PART # 3 : US GAAP v. IFRS
Financial Statements in IFRS
> Purpose of the Financial Statements
> Presentation of the Financial Statements
Main Differences
Demystify IFRS Global
Convergence
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Convergence
• Statement of Cash Flows• Statement of Change in Equity
Change in Financial Position
• Balance Sheet
• Income Statement• Project of a statement called
« Information on global income »
Financial Position
Profitability
Provide relevant information on : Economic information useful for decision maker
Purpose of the Financial Statements
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ConvergenceInvestor is the First User
Investors
Personnel
Lenders
Clients
Public
Federal and State Agencies
Suppliers and other Creditors
Users
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Convergence
Standards of Presentation of Financial Statements
IAS 1 Presentation of Financial Statements IAS 7 Cash Flow Statements IAS 8 Net Profit or Loss for the Period, Fundamental
Errors and Changes in Accounting Policies IAS 10 Events After the Balance Sheet Date IAS 14 Segment Reporting IAS 24 Related Party Disclosures IAS 33 Earnings Per Share IAS 34 Interim Financial Reporting IFRS 1 First-time Application of IFRS IFRS 8 Operating Segments
ComparabilityFair
presentation
Objectivity Principle
Prudent Principle
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Convergence
Standards of Accounting and Evaluation
IAS 2 Inventories IAS 11 Construction Contracts IAS 12 Income Taxes IAS 16, 36, 38, 40 Assets and Depreciation IAS 17 Leases IAS 18 Revenue IAS 19, IFRS 2 Employee Benefits
IAS 20 Government Grants IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 23 Borrowing Costs IAS 26 Accounting and Reporting by Retirement Benefit Plans IAS 27 ,28 ,31 ,IFRS 3 Consolidation – Business Combination
IAS 32, 39, IFRS 7 Financial Instruments IAS 37 Provisions, Contingent Liabilities and Contingent Assets IAS 41 Agriculture IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale IFRS 6 Mineral Resources
Matching Principle
Conservative Concept
Measurement
Consistency Principle
Materiality Principle
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Convergence
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
Requires greater exercise of judgment
• Is US system/culture/infrastructure ready for this?
Main Differences
Is the information relevant?
Is the information
liable?
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Convergence
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.
Main Differences
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Convergence
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
of an asset. Whereas they are expensed under US GAAP.
Main Differences
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Convergence
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.
Main Differences
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Convergence
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.
Main Differences
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Convergence
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.
Main Differences
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Convergence
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 within a class of assets, it must revalue all items within the same class.
Main Differences
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Convergence
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 they will result in a difference in reported income or retained earnings.
Main Differences
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Convergence
Questions
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ConvergenceWebography
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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Convergence
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