ifrs 2 key issues to consider now chuong pham, bryan anderson and ere furbino april 9, 2009

IFRS 2Key issues to consider now

Chuong Pham, Bryan Anderson and Ere Furbino

April 9, 2009

2Copyright © 2008 Deloitte Development LLC. All rights reserved.

Caveats

The following discussion and examples do not necessarily represent the official views of Deloitte Tax LLP with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time.


Agenda

Regulatory Update

Journey through an IFRS Conversion Page 15

IFRS 2, Share-Based Payment Page 26


Regulatory Update


IFRS in the U.S.: Recent developments

December 2007– Foreign private issuers can file under IFRS without a reconciliation to U.S. GAAP

November 2008 – SEC issues proposed roadmap and rule changes

– Roadmap describes milestones for the mandatory transition to IFRS starting in 2014

– Proposed rule change permits the largest U.S. companies (by market cap) in IFRS predominant industries an option to adopt IFRS starting in 2009

December 2008– The G-20 adopted, as a medium-term priority, the implementation of a globally consistent set of

accounting standards

January 2009– Mary Schapiro, SEC Chairman, in her Senate confirmation hearing, responded to questions from

Senator Jack Reed, stating that she would carefully review the existing IFRS roadmap and proposed rule and would consider various factors, including the cost of implementation and independence of the IASB

– Paul Volker, chairman of the Economic Recovery Advisory Board under President Obama, reiterated his support for IFRS

February 2009– SEC extends comment period on roadmap from February 19 to April 20, 2009


SEC Roadmap: Milestones to be considered in 2011 before future mandate


SEC Roadmap: Transition milestones and other considerations


SEC’s Proposing Release on early adoption of IFRS

Rationale for giving certain U.S. issuers an option

Identifies categories of U.S. issuers whose use of IFRS would promote comparability with global competitors

Provides information on how to assess eligibility

Instructs issuers to submit their criteria for eligibility to the Division of Corporate Finance and receive a “letter of no objection” permitting the use of IFRS– Process to follow when requesting eligibility


SEC’s Proposing Release on early adoption of IFRS (cont’d)


What’s happening now in the U.S.


Putting principles into action

U.S. GAAP

IFRS


The Road to IFRS in the U.S.


Recent Company Feedback on IFRS


Journey through an IFRS Conversion


IFRS Conversion Approaches

Top-Down– Convert the consolidated financial statements

Bottom Up– Convert statutory/subsidiary financial statements first

Journey is based on a “Top-Down” approach


IFRS Conversion – Project Approach

Systems & Process

Systems & Process

Communication / Training

Communication / Training

Financial StatementsFinancial

Statements

• Compare IFRS to US GAAP• Document differences • Quantification of Differences• Redraft Policies • Coordination with Auditors

• Oversee the System & Process stream of work• Assessment• Development of Roadmap• Short Term Solutions• Long Term Solutions

• Statutory Requirements

• Presentation of Financial Statements

• Disclosures• Adoption Release• Investor information

• WebEx Presentation • Segment Presentations • Training and Communication needs identified

through the system & process assessment• Launch and maintenance of website

Assessment of Differences

Assessment of Differences

17


Begin the Journey Early!

Assessment – Be mindful of “High-level” vs. “detailed” assessment

– Identification of GAAP difference vs. an error

– IFRS 1 election

Documentation– Proving a difference is not material or not applicable

Quantification– Key step to identification of process changes

– Hard to assess impact on organization without concluding on how to calculate the change


Systems & Process

Need to understand current process– Process documentation may be out of date or not present

Summarize expected changes

Develop detailed implementation plan– Short-term fix

– Long-term objectives

Conversion of Systems to IFRS– Develop process to keep US GAAP historical data

– Pushing entries down in to subsystems can be challenging


Current Process – Share Based Payments

Current Process Features

Calculations for RSU, Stock Options, SAR, PRSU and PPRSU are all done using US GAAP Excel templates, entries for PRSU and PPRSU are communicated to the BUs for entry to SAP. Other entries are booked at a corporate level in SASFM

Fair value calculations are performed for newly granted Stock Options only and are done by 3rd Party Provider whenever there is a new grant

`

`

`

INPUT

BU

SIN

ES

S

UN

ITS

CO

RP

OR

AT

E

PROCESSING & ADJUSTMENTS G/L CONSOLIDATION

` `

SBP Data Warehouse

3rd Party Provider

computes fair values for new

grants

Extract PRSU / PPRSU / MSU / DSU information

Extract RSU transactions

TH

IRD

PA

RT

Y

Receive calculated

number from Corporate

USGAAP Template Perform

USGAAP calculations in the template

Send US GAAP numbers

calculated to SBU’s

Book entries to general ledger SAP G/L

SAP G/L

Sta

rt

Extract Grant, Exercised, Expired and Forfeited Stock Options information

End

New Grant?

Obtain FV calculations from

Towers Perrin

Yes

NoReview US GAAP numbers received

and prepare consolidated entries

in SAS FM

Extract SAR transactions

PRSU / PPRSU?

Yes

No

20


# Revised Process Features Owner1 The changes to the template which are required for IFRS have already been incorporated into the Share Based Payment spreadsheet currently used for us

CGAAPJohn Doe

2 3rd Party Provider will need to adjust the Fair Value calculation to an accelerated method from the straight line method currently used and perform the fair value calculation quarterly instead of annually

3rd Party Provider

3 The SAR FV calculation template will need to change to adopt a FV calculation from intrinsic value currently used John Doe

4 PRSU & PPRSE expense continues to be booked at the BU level John Doe comm. to BU’s

5 DTA numbers are calculated in the IFRS template (The template already calculates the required numbers) and entries will be booked at a consolidated level in SAP G/L by Corporate.

John Doe

6 The calculation of deferred payroll tax is carried out within the IFRS template (The template already calculates the required numbers) and entries will be booked at a consolidated level in SAP G/L by Corporate.

John Doe

7 Future-state automation of the IFRS calculations may involve performing the IFRS calculations in SBP Data Warehouse John Doe

Revised Process – Share Based Payments`

`

`

INPUT

BU

SIN

ES

S

UN

ITS

CO

RP

OR

AT

E

PROCESSING & ADJUSTMENTS G/L CONSOLIDATION

` `

SBP Data Warehouse

3rd Party Provider computes fair values for new grants

Extract PRSU / PPRSU/ MSU /

DSU information

Extract RSU transactions

TH

IRD

P

AR

TY

Receive calculated number from

Corporate

Send number to be booked at

BU’s

Book entries to general ledger SAP G/L

SAP G/L

Sta

rt

Extract Grant, Exercised, Expired and Forfeited Stock Options information

End

IFRS TemplatePerform IFRS

calculations and send to director of consolidation team

New Grant?

Obtain IFRS FV calculations from

3rd Party Provider

Yes

No

Review IFRS numbers received

and prepare consolidated entries

DTA Accural Calulcation

1

Extract SAR transactions

FV Calculation (in IFRS template)

HR Obtain information on Grants for FV

calc

Payroll Implication

Payroll Calculation

No

Yes

PRSU / PPRSU

Yes

No

2

4

5

6

3

7

21


There are a number of accounting changes which impact the calculation of Share Based Payments (SBP). These changes impact Stock Options, SARs, RSUs, PRSUs and PPRSUs. All of the changes for Share Based Payment impact at the corporate level, there is not direct impact on the Business Units.

• Grade Vesting : This change has no implication on the process however [3rd Party Provider] will need to be informed of the change for the Fair Value calculations. (There will be change in the process as company will have to now calculate expense on accelerated method then straightl-ine method.)

• Fair Value / Intrinsic Liability: The templates used for the SAR calculations will need to be updated to reflect the accounting change on conversion to IFRS. (not applicable to US company as USGAAP/IFRS has same treatment for liability plan)

• Forfeiture – Actual vs. Estimated : For Stock Options and SARs currently the Company does not accrue for forfeiture estimate and recognized as vested. Under IFRS, the Company will be required to estimate the number of equity instruments expected to vest and then revised estimate as required. This will add an additional process to the current workflow. (no difference between IFRS and US GAAP)

• DTA : All SBP types are affected by this change. This results in an additional process and journal entry for the accrual.

• Payroll Taxes : Currently payroll taxes are expensed as incurred, i.e. at the time of exercise. Under IFRS the Company should accrue for Payroll tax during the award life. The accrual process is additional step to the current workflow.

IFRS Process & Systems Impact

John Doe: Corporate Accounting Owner

Business Unit: Corporate

Business Area: Share Based PaymentsBusiness

Unit & Area

Summary – Share Based Payments

22


• Spreadsheets containing the adjustments required for IFRS have already been developed. Further updates to the spreadsheets may be required to remove US GAAP as a step within the calculations.

• Third Party providers need to be informed of the calculated changes that are required, initial communication has already been held a formal communication should be made

Overview

Implementation Plan – Share Based Payments

Technology

Process

Organization

Comments

Validation of IFRS Templates

Investigation into use of SBP Warehouse for automated calculations

Template Training

Process investigation for SBP Warehouse

Third Party Communication

The Updated IFRS excel calculation templates have already been developed

Templates to be reviewed and approved by the Company for ongoing use

Potential to use the SBP Data Warehouse to automate processes to be investigated.

Determine need to dual run US GAAP & IFRS templates

No organizational impact is anticipated

Communications are focused on corporate because of no impact on Business Units

Formal communication required for third parties

Target Date

US GAAP Requirements

Validation of IFRS Templates

x/x/xx

x/x/xx

x/x/xx

x/x/xx

x/x/xx

x/x/xx

x/x/xx

x/x/xx

Streamlining of IFRS template

-2 m -1 m +1 m +2 m +3 m +4 m0

23


Communications and Training

Creating IFRS Company Web-page– Blog for Q&A

– Excellent avenue to post materials, presentations, draft policies

Training needs may vary depending on issue and number of people impacted

– Share based payment may not impact that many individuals

– Revenue or cost changes tend have significant enterprise wide impacts

Impact on Internal Budget/Forecast– How will the accounting change impact my budget?


Financial Statements

IFRS 1 disclosures– Describe accounting differences between US GAAP and IFRS applicable to

the Company

General disclosure differences– No major SBP disclosure differences

– Redrafting of significant / critical accounting policies

– Changes in financial statement presentation Income Statement and Other Comprehensive Income Equity


Observations / Lessons Learned

Resource Constraints– Presumably you are already too busy, how do you “free” up time for IFRS?

Lack of rules, detailed guidance – Mind shift to principles based thought process is difficult– IFRS 1 adoption impact on retained earning

Easy to delay/shorten planning phase– Hard to spend $$ in planning during recession – Belief that the issues are simple and easy fixes

Not enough Communication – If you don’t communicate early and often, others will and the message is usually not

accurate

Patience & Flexibility– New facts or unexpected issues will arise– Previous decisions revisited or changed entirely


Share Based Payment


Classification of Awards

Award Features US GAAP IFRS

Redemption for cash at the employee’s option after 6 months

Equity

(FAS 123(R).31)

Liability

Net settlement to satisfy minimum tax withholding obligation

Equity

(FAS 123(R).35)

Depends on facts

Awards granted by a subsidiary but settled in parent company stock

Equity Liability

(IFRIC 11)

Vesting condition other than service, performance or market condition

Liability Equity (IFRS 2.21A)

Number of shares issuable is variable Liability Equity

(IFRS 2.BC110)


29

Awards with Graded Vesting Features

US GAAPAccounting policy choice: An entity may choose to measure graded vesting share-based payment awards as either a single award (Single Life Method) or, in substance, as multiple awards (Multiple Life Method).

Multiple life method requires estimation of valuation assumptions for each tranche.

Holding other input assumptions constant, estimating an expected life of each tranche will cause the overall value of the award to decline slightly.

Estimating volatility for each tranche may have a significant impact on valuation.

IFRSMultiple Life Method: Determine option value based on separate valuations of each tranche. (Paragraph IG11 of IFRS 2)


Graded Vesting Example– Upward Sloping Volatility

Number of Tranches 3

Stock Price $10.00

Strike Price $10.00Dividend Yield (%) 0.00%Risk free rate (%) 3.33%Volatility (%) 35.0%Contractual Term (Years) 10.00

GAAP-123(R) Value $3.23IFRS 2 Value [1] $3.07

Difference ($) -$0.16

Difference (%) -5.06%

Notes

Inputs Volatility Term Structure

[1] Under IFRS 2, the expected term for plain-vanilla options is estimated for each individual tranche. The IFRS value shown is the weighted-average value of each of the individual tranches. The overall weighted-average expected life is set equal to the expected life assumed under GAAP. We have assumed that the expected life of each tranche is equal to a fixed amount of time plus the individual tranche's vesting period, such that the weighted-average expected life of the tranches is equal to the expected life under GAAP.

Summary 0%

10%

20%

30%

40%

50%

60%

70%

1 2 3 4 5 6 7

Expected Term (Years)

Vo

lati

lity


Expense for Awards with Graded-Vesting

US GAAPAn entity has an accounting policy choice to either

(1) recognize a charge on an accelerated basis (similarly to the method under IFRSs) or

(2) amortize the entire grant on a straight-line basis over the longest vesting period.

IFRSA compensation charge is recognized on an accelerated basis by treating each separately vesting portion of an award as a separate grant.

• Accounting differences between U.S. GAAP and IFRSs will arise for an entity that adopts the straight-line method under U.S. GAAP for awards with graded vesting.


Income Taxes

Areas US GAAP IFRSDeferred tax Deferred tax is based on GAAP

expenseDeferred tax is based on expected tax deduction under applicable tax law

Income statement impact

Deferred tax benefit is recorded as reduction in tax expense and trued up (through APIC pool or P/L) when tax benefit is realized

Deferred tax benefit is recorded as reduction in tax expense up to IFRS expense times tax rate (limit not applicable to liability awards)

ISO and ESPP

Cannot record a DTA based on anticipated deduction

Initial reaction is to follow FAS 123R

• Deductible amount, calculation methodology, and timing will need to be tracked for each jurisdiction at each reporting date

• Tax expense will vary independently from book expense resulting in an increase in effective tax rate volatility


Deferred Tax Example

Grant date January 1, 2007 Options granted 1,000 Grant-date fair value $10 Exercise price $23 Vesting 4-year cliff FMV at 12/31/2007 $25 Tax rate 40%

GAAP Deferred Tax Asset: GAAP Expense x tax rate

(1,000 * $10 * ¼) * 40% = $1,000

IFRS Deferred Tax Asset: Intrinsic value at reporting date x tax rate

(1,000 * ($25-$23) *1/4) * 40% = $200


Impact on Effective Tax Rate


Payroll Taxes

US GAAPLiability is recognized when the taxes are levied (e.g., on exercise of an option). (Issue 00-16).

IFRSLiability is recognized over vesting period, subject to re-measured at each balance sheet date until settlement.(IAS 37 and IAS 19).

• Fair value or intrinsic value?• Application of Social Security wage base• Application of estimated forfeiture rate


Overview of Differences and Implications

Key PotentialDifferences

Potential Implications

Financial Statement

Process/Systems

Other

Award Classification

Measurement

Expense

Tax Accounting

Payroll taxes

Differences in timing, amount and volatility in compensation expense recognition

Differences in tax effects on balance sheet, income statement and effective tax rate

Process and data capture around tranche-by-tranche measurement and expense amortization

Process and data capture for income and payroll tax accounting based on applicable law

Tracking employee mobility for tax accounting

Program design due to differences in classification, measurement and financial performance metrics

Impact on cash tax deduction, chargeback and transfer pricing arrangements

Sh

are Ba

sed

Pay

men

ts


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Copyright © 2008 Deloitte Development LLC. All rights reserved.


IFRS resources

Tools and/or publication Description

IFRS Insights Newsletter Periodic newsletter covering a spectrum of key issues for U.S. companies related to IFRS. http://www.deloitte.com/dtt/article/0,1002,cid%253D214443,00.html

Deloitte IFRS Courses IFRS e-learning modules, available online for freehttp://www.iasplus.com/dttpubs/elearning.htm

IAS Plus Website Leading online IFRS resource.http://www.iasplus.com/index.htm

IFRS in your Pocket 2008 Details information about the IASB, use of IFRS around the world, summaries of IFRS standards and other useful IASB information.http://www.iasplus.com/dttpubs/pocket2008.pdf

Presentation and Disclosure Checklist

Checklist incorporating all of the presentation and disclosure requirements of Standards. http://www.iasplus.com/fs/2007checklist.pdf

Model Financial Statements Model financial statements illustrating the presentation and disclosure requirements of IFRS. http://www.iasplus.com/fs/2007modelfs.pdf

First-Time Adoption: A Guide to IFRS 1

Application guidance for the “stable platform” standards effective in 2005. http://www.iasplus.com/standard/ifrs01.htm

Share-Based Payment: A Guide to IFRS 2

Guidance on applying IFRS 2 to many common share-based payment transactions. http://www.iasplus.com/dttpubs/shbased.pdf

Business Combinations: A Guide to IFRS 3

Supplements the IASB’s own guidance for applying this Standards http://www.iasplus.com/dttpubs/ifrs3.pdf


Panelists' Contact Information

Chuong PhamTax Director | Global Employer Services Deloitte Tax, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA

Tel/Direct: +1 212 436 6649 | Fax: +1 212 653 6065 | Mobile: +1 973 270 8219 [email protected] | www.deloitte.com

Bryan AndersonSenior Manager | Global IFRS and Offerings Services Deloitte & Touche, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA

Tel/Direct: +1 212 436 4914 | Fax: +1 212 653 5982 | Mobile: + 1 203 293 5196 [email protected] | www.deloitte.com

Ere FurbinoSenior Manager | Global IFRS and Offerings Services Deloitte & Touche, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA

Tel/Direct: +1 212 436 5186 | Fax: +1 212 653 4708 | Mobile: + 1 917 288 9216 [email protected] | www.deloitte.com

ifrs 2 key issues to consider now chuong pham, bryan anderson and ere furbino april 9, 2009

Documents

deloitte development

ifrs conversionpage

existing ifrs roadmap

ifrs predominant industries

early adoption of ifrs

rule changes roadmap

sec issues

sec chairman