IFRS- What AboutIFRS- What AboutPrivate Companies?Private Companies?

Judith H. O’Dell, ChairJudith H. O’Dell, Chair

Private Company Financial Private Company Financial Reporting CommitteeReporting Committee

October 28, 2008October 28, 2008

OutlineOutline

►About the Private Companies Financial About the Private Companies Financial Reporting CommitteeReporting Committee

► IFRS for Private EntitiesIFRS for Private Entities►Possibilities for U.S. private companiesPossibilities for U.S. private companies

PCFRCPCFRC

►Funded by FASBFunded by FASB►Committee consists of 4 users Committee consists of 4 users

(bankers, VC and surety), 4 preparers (bankers, VC and surety), 4 preparers and 4 practitioners from various size and 4 practitioners from various size companies/firmscompanies/firms

►Makes formal recommendations to Makes formal recommendations to FASBFASB

►Filter is user needs and cost/benefitsFilter is user needs and cost/benefits

PerspectivePerspective

►There are about 17,000 public There are about 17,000 public companies in the U.S.companies in the U.S.

►There are about 22,000,000 private There are about 22,000,000 private entities in the U.S. ranging from sole entities in the U.S. ranging from sole proprietorships to billion dollar plus proprietorships to billion dollar plus companiescompanies

►Accounting standard setting focuses on Accounting standard setting focuses on public companies and needs of public companies and needs of investorsinvestors

Forces Affecting Private Forces Affecting Private Company AccountingCompany Accounting

►Convergence with international standardsConvergence with international standards►Changes in size of FASB BoardChanges in size of FASB Board►FASB emphasis on public co-investor FASB emphasis on public co-investor

needsneeds►SEC plans for U.S. Issuers to report using SEC plans for U.S. Issuers to report using

IFRS in 2014 if milestones metIFRS in 2014 if milestones met►AICPA recognition of IFRS as GAAPAICPA recognition of IFRS as GAAP► Increasing acceptance by users of reports Increasing acceptance by users of reports

with GAAP exceptionswith GAAP exceptions

IFRS for Private EntitiesIFRS for Private Entities

► An IFRS expressly designed to meet the financial An IFRS expressly designed to meet the financial reporting needs of entities that (a) do not have reporting needs of entities that (a) do not have public accountability and (b) publish general public accountability and (b) publish general purpose financial statements for external users.purpose financial statements for external users.

► Users include owners who are not involved in Users include owners who are not involved in managing the business, existing and potential managing the business, existing and potential creditors, and credit rating agencies.creditors, and credit rating agencies.

► Derived from full IFRSs with appropriate Derived from full IFRSs with appropriate modifications based on the needs of users of modifications based on the needs of users of private entity financial statements and cost-benefit private entity financial statements and cost-benefit considerations.considerations.

TimelineTimeline►2/07- Exposure draft issued- 7 languages2/07- Exposure draft issued- 7 languages►6/07- Field tested- 116 companies in 20 6/07- Field tested- 116 companies in 20

countriescountries►11/07- Comment deadline- 162 letters11/07- Comment deadline- 162 letters►11stst QTR 2009- Final document with QTR 2009- Final document with

educational materialseducational materials►See See www.iasb.org for document and for document and

updates on projectupdates on project

Updating and TrainingUpdating and Training

►Document will only be updated every Document will only be updated every two years- users will not have to two years- users will not have to monitor changes in standardsmonitor changes in standards

►Document is only 250-pages self-Document is only 250-pages self-containedcontained

►Has disclosure checklists and sample Has disclosure checklists and sample statementsstatements

►Training materials ready to goTraining materials ready to go

Effect of Private Entities Effect of Private Entities Document in the U.S.Document in the U.S.

►AICPA has recognized IASB as body AICPA has recognized IASB as body authorized to promulgate GAAPauthorized to promulgate GAAP

►Once Private Entities Document is approved Once Private Entities Document is approved by IASB, private companies in the U.S. by IASB, private companies in the U.S. could report using it and it would be GAAPcould report using it and it would be GAAP

►May be applicable to private companies May be applicable to private companies who are U.S. subsidiaries of foreign who are U.S. subsidiaries of foreign companiescompanies

►Would it be more widely adopted?Would it be more widely adopted?

Possibilities for U.S. Privates Possibilities for U.S. Privates When Public Companies Go When Public Companies Go

IFRSIFRSAssume Public Companies are on IFRSAssume Public Companies are on IFRS

1.1. IFRS with Private Entities OptionIFRS with Private Entities Option

2.2. U.S. Adapted version of Private EntitiesU.S. Adapted version of Private Entities

3.3. IFRS with differential reportingIFRS with differential reporting

4.4. Separate U.S. Private Co GAAP- RevisedSeparate U.S. Private Co GAAP- Revised

5.5. Separate U.S. GAAP- Maintained and Separate U.S. GAAP- Maintained and Updated for Private CompaniesUpdated for Private Companies

Model 1 – IFRS with Model 1 – IFRS with Private Entities Option Private Entities Option

► IFRS is already recognized by AICPA as IFRS is already recognized by AICPA as GAAP in the U.S. GAAP in the U.S.

►U.S. private companies have the option U.S. private companies have the option of following IFRS for Private Entities of following IFRS for Private Entities when adopted by IASB when adopted by IASB

► If not, then they may elect to follow If not, then they may elect to follow IFRS or another comprehensive basis of IFRS or another comprehensive basis of accounting (e.g., cash-basis, tax-basis.) accounting (e.g., cash-basis, tax-basis.)

Model 1 in OperationModel 1 in Operation

► IFRS for Private Entities is set by the IFRS for Private Entities is set by the IASB and updated only periodicallyIASB and updated only periodically

►FASB exists to provide input into the FASB exists to provide input into the IASB standard setting process IASB standard setting process

►U.S. private company constituents U.S. private company constituents would influence the standard setting would influence the standard setting process through the channels process through the channels established by the IASB and FASBestablished by the IASB and FASB

Model 1- ProsModel 1- Pros►Simplified, self-contained set of Simplified, self-contained set of

accounting principles developed for accounting principles developed for private companies private companies

►Based on IFRS, possesses a level of Based on IFRS, possesses a level of comparability with U.S. public company comparability with U.S. public company financial statements and international financial statements and international companies companies

►Allows for comparability of private Allows for comparability of private company financial statements across company financial statements across borders borders

Model 1- Pros Cont.Model 1- Pros Cont.

► Time and effort to prepare private company Time and effort to prepare private company financial statements reducedfinancial statements reduced

► No effort required to develop differential standards No effort required to develop differential standards for private companies in the U.S. for private companies in the U.S.

► Greater emphasis on principle-based standards and Greater emphasis on principle-based standards and the need for professional judgment, less reliance on the need for professional judgment, less reliance on detailed rulesdetailed rules

► Certain differential standards, thought to be needed Certain differential standards, thought to be needed for private companies in the U.S., may already be for private companies in the U.S., may already be addressed in the IFRS for Private Entities addressed in the IFRS for Private Entities

Model 1- ConsModel 1- Cons► IFRS-based accounting provides little benefit to IFRS-based accounting provides little benefit to

private companies and is mostly useful to public private companies and is mostly useful to public companies that need to operate internationally companies that need to operate internationally

► Positions taken on some important technical Positions taken on some important technical issues in IFRS for Private Entities may not find issues in IFRS for Private Entities may not find general acceptance in the U.S. private company general acceptance in the U.S. private company marketplace marketplace

► Conversion to IFRS for Private Entities would Conversion to IFRS for Private Entities would cause significant increases in costs and workloadcause significant increases in costs and workload

► Conversion costs outweigh benefitsConversion costs outweigh benefits

Model 1- Cons Cont.Model 1- Cons Cont.► Preparers, users and practitioners who work with private Preparers, users and practitioners who work with private

company financial statements are unfamiliar with IFRS. company financial statements are unfamiliar with IFRS. The learning curve would be difficult-- this will changeThe learning curve would be difficult-- this will change

► Considered a “dumb-downed” approach and second Considered a “dumb-downed” approach and second classclass

► More principles-based -- may not be adequate in the More principles-based -- may not be adequate in the litigious U.S. marketplacelitigious U.S. marketplace

► When a private company has an issue that is not When a private company has an issue that is not addressed under IFRS for Private Entities, inconsistent addressed under IFRS for Private Entities, inconsistent accounting can occur, reducing comparabilityaccounting can occur, reducing comparability

► Loss of industry-specific accounting guidance Loss of industry-specific accounting guidance

Model 2-U.S. Adapted Model 2-U.S. Adapted Version of Private Entities Version of Private Entities

DocumentDocument

The IFRS Private Entities Document The IFRS Private Entities Document isis

tailored to suit the needs of privatetailored to suit the needs of private

company financial reporting company financial reporting constituentsconstituents

in the U.S. in the U.S.

Model 2 in OperationModel 2 in Operation

► An accounting board in the U.S. would need to exist An accounting board in the U.S. would need to exist to adapt the IFRS Private Entities standard to suit to adapt the IFRS Private Entities standard to suit the needs of U.S. private company constituents and the needs of U.S. private company constituents and develop changes to the literature to reflect needs develop changes to the literature to reflect needs and circumstances in the U.S. private company and circumstances in the U.S. private company marketplace. marketplace.

► A funding mechanism would need to be identified A funding mechanism would need to be identified for this board and effort.for this board and effort.

► Private company constituents would influence the Private company constituents would influence the standard setting process by commenting to this standard setting process by commenting to this board and to the IASB on proposed standards. board and to the IASB on proposed standards.

Model 2- ProsModel 2- Pros

► Needs of U.S. private company financial Needs of U.S. private company financial reporting constituents are prioritized and reporting constituents are prioritized and incorporated incorporated

► Linkage to IFRS for Private Entities, resulting in Linkage to IFRS for Private Entities, resulting in some comparabilitysome comparability

► Simplified, self-contained set of accounting Simplified, self-contained set of accounting principles developed for private companiesprinciples developed for private companies

► Avoid current problem of GAAP requirements Avoid current problem of GAAP requirements that lack relevance/decision usefulness for usersthat lack relevance/decision usefulness for users

Model 2- Pros Cont.Model 2- Pros Cont.

► Condensation and simplification would Condensation and simplification would provide a more manageable referenceprovide a more manageable reference

► Advanced starting point Advanced starting point ► Places greater emphasis on principle-based Places greater emphasis on principle-based

standards and the need for professional standards and the need for professional judgment, with less reliance on detailed judgment, with less reliance on detailed rules rules

►Maintain certain industry-specific accounting Maintain certain industry-specific accounting guidanceguidance

Model 2- ConsModel 2- Cons

Same as Model 1 but:Same as Model 1 but:►Confusion will result trying to Confusion will result trying to

incorporate U.S. differential standards incorporate U.S. differential standards into the IFRS for Private Entities into the IFRS for Private Entities

►Diminished ability to compare U.S. Diminished ability to compare U.S. private companies with those in other private companies with those in other countries, especially if a large number countries, especially if a large number of differences are allowedof differences are allowed

Model 3- IFRS with Model 3- IFRS with Differences for Differences for

Private CompaniesPrivate Companies

IFRS is modified to suit the needs of IFRS is modified to suit the needs of private company financial reporting private company financial reporting constituents by deleting some constituents by deleting some requirements or embedding different requirements or embedding different treatments in the standards.treatments in the standards.

Model 3 in OperationModel 3 in Operation

► An accounting board in the U.S. would need to exist An accounting board in the U.S. would need to exist to rule on differential standards for private to rule on differential standards for private companies companies

► Board would continue to maintain the literature, Board would continue to maintain the literature, modifying IFRS as necessary to reflect the needs of modifying IFRS as necessary to reflect the needs of users of U.S. private companies users of U.S. private companies

► A mechanism would need to be identified to fund this A mechanism would need to be identified to fund this board and their workboard and their work

► Private company constituents would influence the Private company constituents would influence the standard setting process by commenting on standard setting process by commenting on proposed IFRS standards and proposed differential proposed IFRS standards and proposed differential standards standards

Model 3- ProsModel 3- Pros

► Strong linkage to IFRS- so a level of comparability Strong linkage to IFRS- so a level of comparability with U.S. public company financial statements and with U.S. public company financial statements and international companies international companies

► Applies an approach already undertaken with U.S. Applies an approach already undertaken with U.S. GAAP- some differences for privatesGAAP- some differences for privates

► Minimizes possible confusion stemming from two Minimizes possible confusion stemming from two sets of GAAP in the U.S. sets of GAAP in the U.S.

► Places greater emphasis on principle-based Places greater emphasis on principle-based standards and the need for professional judgment, standards and the need for professional judgment, with less reliance on detailed rules with less reliance on detailed rules

Model 3- Pros Cont.Model 3- Pros Cont.

► Reduces the risk of different interpretations Reduces the risk of different interpretations of IFRS that apply equally to public of IFRS that apply equally to public companies and private companies companies and private companies

►Needs of private company constituents Needs of private company constituents would be accommodated within a single set would be accommodated within a single set of accounting standardsof accounting standards

► Time and effort to prepare private company Time and effort to prepare private company financial statements reduced, compared to financial statements reduced, compared to pubic companies complying with full IFRSpubic companies complying with full IFRS

Model 3- ConsModel 3- Cons

►Considered a “dumb-downed” approach Considered a “dumb-downed” approach and second class to full IFRS and second class to full IFRS

►Confusion will result trying to Confusion will result trying to incorporate U.S. differential standards incorporate U.S. differential standards into IFRSinto IFRS

►Diminished comparability with Diminished comparability with companies abroad companies abroad

►Would be considered IFRS with a “local Would be considered IFRS with a “local flavor”flavor”

Model 4-Separate US Model 4-Separate US Private Company GAAP- Private Company GAAP-

RevisedRevisedCurrent U.S. GAAP is reviewed, modified, andCurrent U.S. GAAP is reviewed, modified, and

developed into a comprehensive and selfdeveloped into a comprehensive and self

contained set of accounting standards forcontained set of accounting standards for

private companies. This GAAP would be forprivate companies. This GAAP would be for

private companies with and without significantprivate companies with and without significant

external financial statement users, and wouldexternal financial statement users, and would

be sensitive to the needs of owner managedbe sensitive to the needs of owner managed

enterprises. enterprises.

Model 4 in OperationModel 4 in Operation

► An accounting board would need to exist to An accounting board would need to exist to review and modify current U.S. GAAP review and modify current U.S. GAAP

►Would need to be maintained and updated, Would need to be maintained and updated, similar to the current process for setting U.S. similar to the current process for setting U.S. GAAPGAAP

► Private company constituents would Private company constituents would influence the standard setting process by influence the standard setting process by commenting on proposed standardscommenting on proposed standards

► Identify a mechanism for funding the Identify a mechanism for funding the standard setting board and its workstandard setting board and its work

Model 4 ProsModel 4 Pros

► The needs of U.S. private company financial The needs of U.S. private company financial reporting constituents are prioritized reporting constituents are prioritized

► Simplified, self-contained set of accounting Simplified, self-contained set of accounting principles developed for private companies principles developed for private companies

► Avoid current problem of GAAP requirements Avoid current problem of GAAP requirements for public companies that lack for public companies that lack relevance/decision usefulness for private relevance/decision usefulness for private company financial reporting constituentscompany financial reporting constituents

Model 4- Pros Cont.Model 4- Pros Cont.

► Eliminate needless accounting complexities Eliminate needless accounting complexities and costs for private companies and costs for private companies

► Private company constituents already know Private company constituents already know U.S. GAAP and therefore, intensive education U.S. GAAP and therefore, intensive education or training efforts would not be necessary or training efforts would not be necessary

► No conversion costsNo conversion costs►Maintain industry-specific accounting Maintain industry-specific accounting

guidance guidance ► Time and effort to prepare private company Time and effort to prepare private company

financial statements reduced financial statements reduced

Model 4- ConsModel 4- Cons

►Not based on IFRS-makes comparability Not based on IFRS-makes comparability with U.S. public company and with U.S. public company and international company financial international company financial statements more difficult statements more difficult

►Hampers credit rating agencies and Hampers credit rating agencies and lenders trying develop cross border lenders trying develop cross border ratings ratings

►Comparability with suppliers and other Comparability with suppliers and other business relationships overseasbusiness relationships overseas

Model 4- Cons Cont.Model 4- Cons Cont.

►May not be helpful to equity investorsMay not be helpful to equity investors►Adds confusion to the marketplace Adds confusion to the marketplace ►Private companies wishing to “go public”, Private companies wishing to “go public”,

would need to convert to IFRS would need to convert to IFRS ►More rules-based and less principles-More rules-based and less principles-

based based ►““Second class” compared to IFRS Second class” compared to IFRS ►Students would have to learn two Students would have to learn two

standardsstandards

Model 5- Model 5- Separate U.S. GAAP - Maintained and Updated in Future

►Current U.S. GAAP would be Current U.S. GAAP would be maintained, as is, for use by private maintained, as is, for use by private companies companies

►Periodically literature updates for Periodically literature updates for needed changes and improvements needed changes and improvements specific to private companiesspecific to private companies

►No initial review and modification of No initial review and modification of current U.S. GAAP, as in Model 4 current U.S. GAAP, as in Model 4

Model 5 in OperationModel 5 in Operation

►An accounting board exists to monitor An accounting board exists to monitor current U.S. GAAP and update it in the current U.S. GAAP and update it in the future future

►Private company constituents would Private company constituents would influence the updating process by influence the updating process by commenting on proposed revisionscommenting on proposed revisions

►A mechanism for funding the board to A mechanism for funding the board to be identified be identified

Model 5 ProsModel 5 Pros

► Needs of U.S. private company financial reporting Needs of U.S. private company financial reporting constituents are prioritized constituents are prioritized

► Avoid requirements that lack relevance/decision Avoid requirements that lack relevance/decision usefulnessusefulness

► Avoid any further needless accounting complexities Avoid any further needless accounting complexities and costsand costs

► No intensive education or training efforts would be No intensive education or training efforts would be necessary necessary

► No conversion costs No conversion costs ► Maintain industry-specific accounting guidance Maintain industry-specific accounting guidance

Model 5 ConsModel 5 Cons

►Same as Model 4 except maintaining Same as Model 4 except maintaining current U.S. GAAP, as is, does not current U.S. GAAP, as is, does not allow for modifications that would allow for modifications that would eliminate current standards that lack eliminate current standards that lack relevancy and decision usefulness for relevancy and decision usefulness for private company constituents private company constituents

►Accounting students will be learning Accounting students will be learning IFRSIFRS

WHAT DO YOU WHAT DO YOU THINK??????THINK??????

How Can You Participate?How Can You Participate?

►Become a member of our Resource Become a member of our Resource Group- sign-up on Web site and receive Group- sign-up on Web site and receive notification of meetings and meeting notification of meetings and meeting summariessummaries

►Resource Group will be tapped for special Resource Group will be tapped for special task forces and input on projectstask forces and input on projects

►Attend meetings and speak during open-Attend meetings and speak during open-mic sessionmic session

►Email chair with ideas and opinionsEmail chair with ideas and opinions

Questions?Questions?

www.pcfr.org

judyodell@dmv.comjudyodell@dmv.com