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.



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.


Convergence CONTENTS

PART #1 : Reminder of Standard-Setting

PART #2 : SEC ROADMAP/Milestones

PART #3 : US GAAP v. IFRS



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



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.



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



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



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.



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



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.



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



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


Convergence



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



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



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?



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



Convergence PART # 3 : US GAAP v. IFRS

Financial Statements in IFRS

> Purpose of the Financial Statements

> Presentation of the Financial Statements

Main Differences


Convergence



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



ConvergenceInvestor is the First User

Investors

Personnel

Lenders

Clients

Public

Federal and State Agencies

Suppliers and other Creditors

Users



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



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



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?



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



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



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



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



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



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



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



Convergence

Questions



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



Convergence

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ifrs presentation global convergence 2011

Economy & Finance

charles hodouin

based approach

implement

income statement

european union

accelerated

leased property

united states