Introduction to International Financial Reporting Standards (IFRS)

IFRS stands for International Financial Reporting Standards. As indicated within the title, these standards are aimed at a

global practice. Ultimately, the goal is to achieve a single set of high-quality,

common accounting standards used around the world. These standards are the result of a convergence of

international viewpoints. These standards are for publicly accountable entities.

◦ Small and medium-sized entities (SMEs) that do not have public accountability may use a simplified version of IFRS known as IFRS for SMEs.

◦ IFRS for SMEs has recently been accepted for non-SEC registrants by the AICPA as an acceptable alternative reporting standard to US GAAP; however, it is not yet common practice.

Convergence is everyone agreeing to use the same set of standards.

Comparability Reduce financial reporting costs Reduce cost of capital Raise the quality level of accounting

practices Increase credibility of financial

information Allow developing nations to have highly

qualified standard setters Easier to transfer accounting staff

internationally

Nationalism Culture will still influence interpretation

and selection of choices Different environments may call for

different accounting systems Politics may rule whose accounting

systems are chosen Developing nations may not need as

complex an accounting system.

Investors and Regulators◦ IOSCO

Accountants and Auditors ◦ IFAC◦ IFAD◦ IASB

Regional Organizations◦ European Union

International Organization of Securities Commissions (IOSCO) – ◦Securities regulators around the world◦Around 135 members from about 100

countries◦SEC is a member◦Aims to ensure a better regulation of the

markets worldwide◦Global coordination of stock exchange rules to

encourage multiple listings◦Supports more disclosure and one set of high

quality standards

International Federation of Accountants (IFAC) ◦ Formed in 1977◦ Concerned with international auditing guidelines

and standards, ethics, education and training International Forum on Accountancy

Development (IFAD)◦ Formed in June 1999 to enhance the accounting

profession in emerging countries◦ Formed Forum of Firms to increase quality of

financial reporting and auditing standards for all nations

European Union - common framework of law, taxation, and financial resources

27 European countries currently◦ Austria, Belgium, Bulgaria, Cyprus, Czech Republic,

Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom

Goal is to have comparable, reliable financial information provided by all E.U. companies

As of 2007, ALL E.U. listed (publicly-held) companies must follow International Accounting Standards

For more details regarding the history of IFRS, see the appendix of the Ernst & Young publication, US GAAP vs. IFRS: the basics.

1960s 1970s 1980s 1990s 2000s

Proposal to create an

accountants’ international study group

► The IASC is formed in 1973.

► The IASC begins promulgating International Accounting Standards (IAS).

The IASC

expands.

► In 1994, the IASC Advisory Council is formed to provide oversight of IASC.

► In 1997, the Standards Interpretations Committee (SIC) is formed

► In 1999, the IASC is restructured to form a new board: the IASB.

► FASB agrees to work on a joint earnings-per-share project.

► In 2000, the initial 14 members are appointed to the IASB.

► In 2002, the IASB begins promulgating standards as IFRS from IAS. The SIC becomes the IFRIC. The European Union endorses IFRS for 2005 adoption.

► In 2002, the Norwalk Agreement is executed between the IASB and FASB.

► In 2005, the SEC published a roadmap (Roadmap) for elimination of a US GAAP reconciliation for FPIs.

► In 2006, the FASB and IASB published a Memorandum of Understanding, to set forth priorities in their joint work program.

► In 2007, the SEC eliminated the US GAAP reconciliation for FPIs.

► In 2008, the SEC published a proposed Roadmap anticipating the mandatory adoption of IFRS in the US.

► In 2009, the FASB and IASB reaffirmed their commitment to the MOU.

► In 2010, the SEC established a Work Plan for its 2011 IFRS adoption decision.

Formed June 29, 1973 by representative bodies from 9 countries including:◦ Australia, Canada, France, Germany, Japan,

Mexico, Netherlands, U.K./Ireland, and U.S Headquartered in London, England Representatives from 112 countries and

more than 153 organizations Formulated 41 International Accounting

Standards (IAS)

Restructured April 1, 2001 New structure

◦ Called International Accounting Standards Board (IASB)

◦ IASB is an independent organization with two main bodies Trustees Board Also has a IFRS Advisory Council (about 50 members),

miscellaneous advisory Committees and an International Financial Reporting Interpretations Committee (12 members appointed by the Foundation)

InternationalAccountingStandards

Board (IASB)

IFRS and

IFRS for SMEs

IFRSAdvisory Council

IFRSFoundation

IFRSInterpretations

Committee

Information provided by www.IFRS.org

Monitoring Board

Trustees◦ 22 highly respected experienced members◦ Chairman – Michel Prada (France), Former

Regulator◦ Vice Chairman – Tsuguoki Fujinuma, Former

President of IFAC, JICPA, and Senior Partner of Ernst & Young

◦ Main duties Appoint Board, Committee, and Council Members Exercise oversight of Board Raise funds

Board◦ Sole responsibility for setting accounting standards◦ 14 voting members, 1 nonvoting member◦ CHANGING TO 16 MEMBERS IN 2012!!!!◦ Have best available combination of technical skills and

international business experience◦ Seven must have a formal liaison with one or more

national standard setters◦ Minimum: 5 practicing auditors, 3 preparers, 3 users, 1

academic◦ Chairman of the IASC Board

Hans Hoogervorst – Former chairman of the executive board, the Netherlands Authority for the Financial Markets and a former chairman of the IOSCO technical committee.

Ian Mackintosh – Vice Chair – U.K. and AustraliaAmaro Luiz de Oliveira Gomes – BrazilChung Woo Suh – South KoreaDarrel Scott – South AfricaJan Engström – Sweden and Latin America Martin Edelmann - GermanyPatricia McConnell – US Patrick Finnegan – US Paul Pacter – US and Hong KongPhillipe Danjou – France Prabhakar Kalavacheria – US and India Stephen Cooper – UKTakatsugu Ochi - JapanZhang Wei-Guo – China

The International Accounting Standards Board is an independent, privately-funded accounting standard setter based in London, United Kingdom. Board Members come from thirteen countries and have a variety of functional backgrounds.

The Board is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements.

In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world.

Agenda

Discussion paper

(DP)

Post-implementation meetings

Exposure draft

(ED)

IFRS Feedback statement

Input is received from:

► IFRS Advisory Council

► Working Group

► International groups such as analysts, preparers, audit technical partners

► Special interest groups

► Local standard setters

► Regulators

► Political groups

Public consultation

Public consultation

Research

Information provided by www.IFRS.org

1. The Board establishes an Advisory Committee to give advice on the issues arising in the project. Consultation with the Advisory Committee and the IFRS Advisory Council occurs throughout the project.

2. IASB may develop and publish Discussion Documents for public comment.

3. Following the receipt and review of comments, IASB would develop and publish an Exposure Draft for public comment.

4. Following the receipt and review of comments, IASB would issue a final International Financial Reporting Standard.

5. Publication of a Standard, Exposure Draft, or final IFRIC Interpretation requires approval by 8 of the 15 members (simple majority). Other decisions, including the issuance of a Draft Statement of Principles or a Discussion Paper and agenda decisions, requires a simple majority of the Board Members present at a meeting attended by 50% or more of the board members.

IFRS required or permitted

No action taken/date set for adoption

Local GAAP based on legacy IAS

In process of adopting or converting to IFRS

Currently, there are 123 countries that either adopted or signed to adopt IFRS.

Over the last year, several countries required or permitted IFRS such Canada, Japan and Brazil while several countries are impending in the near future as listed:

► Mexico – 2012

► Argentina – 2012

► Nigeria – 2012

► India – Indian Accounting Standards are issued as converged with some carveouts but the effective date is yet to be announced.

What is the outlook for IFRS adoption?Global snapshot

Standards are vague guidelines instead of step by step rules (as in the U.S.)

Guidance is limited (ON PURPOSE!) Judgment is encouraged to apply the

standards; over-reliance on detailed rules is discouraged

“True and fair” view overrides◦ If following a standard would be misleading, you

do not have to follow the standard

The following example is a simple illustration of a principles-oriented approach compared to a rules-oriented approach.

Rules oriented:

► Your parents tell you to get a 3.2 GPA or above.

► They provide you with 15 contingencies that might justify acceptance of anything lower than a 3.2 GPA.

Principles oriented:

► Your parents tell you to do your best to get good grades.

► If you do not get good grades, they will consider the substance of your reasons.

Revaluation of tangible assets – allows fair market valuation of property, plant and equipment

Development costs can be capitalized LIFO inventory not permitted No extraordinary items allowed

IFRS have no enforceability internationally; only enforceable by the local country adopting them.

IFRSs deemed potentially less rigorous IFRSs do not cover as many issues as US

GAAP

FASB/IASB Memorandum of Understanding – MoU (Norwalk Agreement)◦ In 2006, both pledged to use their best efforts to

converge standards◦ Coordinate future work programs◦ Originally wanted to “converge” by June 30, 2011.◦ Did not happen.

Boards have achieved “high-level” convergence in some areas◦ Business combinations◦ Share-based payments◦ Income taxes◦ Fair value option◦ EPS◦ Statement of cash flows◦ Pensions

In other areas, models are very different:◦ Debt/equity classification◦ Derecognition◦ Consolidation◦ Impairment of long-lived assets

June 2010 – announced areas of “priority” Consolidation, Fair value measurement, Financial instruments, Financial statement presentation, Leases, and Revenue recognition

Securities and Exchange Commission (SEC) ◦ As of November 15, 2007, foreign listed

companies using IFRS no longer have to reconcile to U.S. GAAP.

◦ Currently there are over 1,200 foreign private issuers from more than 57 countries listing with the SEC. Around 150 companies filed their 2011 20-F with no

U.S. GAAP reconciliation

◦ Proposal to switch to IFRS under consideration

In 2008, the SEC released a proposed Roadmap that laid out a timeline and milestones for continuing US progress toward acceptance of IFRS for public companies.

In October 2010, the SEC reaffirmed its commitment to IFRS and continued convergence activities. It also set forth a transparent work plan (the Work Plan) to allow the SEC to make its decision on IFRS adoption in 2011.

2011 – No decision made.

In July, 2012, the SEC reaffirmed its commitment to IFRS and continued convergence activities. It mentioned endorsement and convergence as two ways to adopt selected IFRS.

The following are the specific areas of focus within the Work Plan:

Sufficient development and consistent application of IFRS:

The SEC staff will evaluate the comprehensiveness and enforceability of IFRS as well the auditability and comparability of financial statements prepared using IFRS, both in concept and in practice. These efforts will include consideration of the IASB’s efforts to improve IFRS through its conversion efforts with the FASB.

Independence of the standard-setting process:

The SEC staff will consider the extent to which the IASB’s governance (including its Monitoring Board), composition, funding and standard-setting process continue to promote the reporting of full, fair and reliable financial information to support investors in their capital allocation decision making.

Investor understanding and education:

The SEC staff will consider investor understanding and education regarding IFRS, including the current familiarity with IFRS, the actions needed to facilitate further understanding and the time frame to do so.

In December 2010, Paul Beswick, SEC Deputy Chief Accountant, shared his thoughts on the method in which the US might move to IFRS at the 2010 AICPA National Conference on Current SEC and PCAOB developments. He proposed a “condorsement” approach as follows: ◦ US GAAP would continue to exist.◦ The IASB and FASB would finish the major convergence projects in the

MOU.◦ The FASB would work on the following simultaneously:

No new major projects but rather set priorities of converging US GAAP (remaining topics not on the current agenda) to IFRS. This would be to make sure that these existing IFRS standards are suitable for US capital markets.

Consider new standards issued by the IASB for endorsement (but not required) or incorporation (required) into US GAAP. This would ideally be issuing the standards in the codification without modification. This would also assume the US involvement in IFRS standard setting.

This approach would allow the US to maintain control of US standards.

What is the outlook for IFRS adoption?Condorsement

Resistance to change European Union wanted changes in IAS 32

and 39 and forced the IASB to change its IFRS

No more rigorous than the FASB U.S. Congress Too political? Board still too large?

◦15 now, expanding to 16 people(4 – North America, 4 Europe, 4 Asia/Oceania, 1 Africa,

1 South America, 2 other for geographical balance)

Is it really independent? ◦ There is now a MONITORING BOARD for the Trustees

Composed of Emerging Markets and Technical Committees of IOSCO

Financial Services Agency of Japan U.S. SEC Basel Committee on Banking Supervision is an observer.

Are constituents biased toward their own national standards?

Constituents often appear Anti-U.S. Other differences?

IASB (www.iasb.org) IAS Plus (www.iasplus.com)

◦ Website sponsored by Deloitte◦ Lists differences between IFRSs and different

country’s GAAP