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MHM Executive Education Series:IFRS 1 - First Time Adoption of IFRS
Presenters: Keith Peterka and James ComitoShareholders, Mayer Hoffman McCann P.C.
June 21, 2012
Today’s Agenda
• Updates on FASB/IASB Projects:• Lease Accounting• Revenue Recognition
• Overview of IFRS 1
Convergence ProjectsProject Status
Business combinations Joint requirements for business combination accounting and non-controlling interests issued in 2008.
Fair value measurement FASB Statement No 157 Fair ValueFair value measurement FASB Statement No. 157 Fair ValueMeasurements issued in 2006. IFRS 13 FairValue Measurement issued in 2011.
Other Comprehensive Income
Amendments to IFRSs and US GAAP forpresentation of other comprehensive incomeissued in 2011.
Post-employmentbenefits
Amendments to IAS 19 Employee Benefitsto be issued in 2011.
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Convergence ProjectsProject Status
Revenue Recognition Exposure Draft (Re-Issued) Final Standard expected in 2012.
Lease Accounting Exposure Draft Issued in 2010, Re-Exposure g p pexpected in 4Q of 2012.
Insurance Accounting Exposure Draft expected in 2012.
Financial Instruments Exposure Draft expected in 2012.
Lease Accounting Project
• First Exposure Draft was August 2010
• Updated Exposure Draft expected in Q4 of 2012*
*Tentative Decisions reached at the June FASB IASB M i ddi i i h d l d f J l fMeeting, addition meetings scheduled for July of 2012.
Lease Accounting - Tentative Decisions
• Classify leases based primarily on the nature of the underlying asset being leased. The rationale for the classification assessment focuses on:1. The determination that the lessee is paying to finance the acquisition
of the portion of the underlying asset that it consumes. F t L d d / A l t d E R iti• Front Loaded / Accelerated Expense Recognition
2. Payment for usage the asset. • Straight line model
• All leases (other than short-term leases) would be recognized on the balance sheet.
• Presentation of the lease-related expenses on the income statement would depend on the type of lease.
• Lessors perspective would use the same classification criteria as lessees.
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Status of the Revenue Recognition Project
Key items being addressed by the Boards:• Onerous performance obligations
• Satisfaction of performance obligations
V i bl C id ti• Variable Consideration
• Presentation of Customer Credit Risk
• Time value of money
• Transition
• Disclosure
IFRS 1 – First Time Adoption of IFRS
IFRS 1 – The Rule Book
• Recognized as the most “rules based” standard in IFRS.
• IFRS’s are considered a living document
• Modifications to IFRS 1, since it’s release in 2003.
Convergence Projects have eliminated many of the• Convergence Projects have eliminated many of the differences between U.S. GAAP and IFRS.
• Caution – Convergence Standard do not equate to no differences. DIFFERENCES STILL EXIST.
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IFRS 1 – Background
In developing recognition and measurement requirements for an entity’s opening IFRS balance sheet, the IASB referred to the objective of financial statements, as set out in the Framework for the Preparation and Presentation of Financial Statements.
The Framework states that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.
IFRS 1 – Background
The Framework identifies four qualitative characteristics that make information in financial statements useful to users. In summary, the information should be:1. Readily understandable by users.1. Readily understandable by users.
2. Relevant to the decision-making needs of users.
3. Reliable, in other words financial statements should:(i) represent faithfully the transactions and other events they either purport
to represent or could reasonably be expected to represent;
(ii) represent transactions and other events in accordance with their substance and economic reality and not merely their legal form;
(iii) be neutral, that is to say, free from bias;
IFRS 1 – Background
(iv) contend with the uncertainties that inevitably surround many events and circumstances by the exercise of prudence; and
(v) be complete within the bounds of materiality and cost.
4 Comparable with information provided by the entity in its financial4. Comparable with information provided by the entity in its financial statements through time and with information provided in the financial statements of other entities.
The IASB also acknowledged that there is a danger of abuse if retrospective application would require judgments by management about past conditions after the outcome of a particular transaction is already known. The IFRS prohibits retrospective application in some areas where this could occur.
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IFRS 1 – Objective
The objective of this IFRS is to ensure that an entity’s first IFRS financial statements, and its interim financial reports for part of the period covered by those financial statements, contain high quality information that:
A. Is transparent for users and comparable over all periods presented;
B. Provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs); and
C. Can be generated at a cost that does not exceed the benefits.
IFRS 1 - Scope
An entity shall apply IFRS 1 in:• Its first IFRS financial statements; and
• Each interim financial report, if any, that it presents in accordance with IAS 34 Interim Financial Reporting foraccordance with IAS 34 Interim Financial Reporting for part of the period covered by its first IFRS financial statements.
IFRS 1 - Scope
An entity’s first IFRS financial statements are the first annual financial statements in which the entity adopts IFRSs, by an explicit and unreserved statement in those financial statements of compliance with IFRSs. p
Financial statements in accordance with IFRSs are an entity’s first IFRS financial statements.
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IFRS 1 - Requirements
• Identify the first IFRS financial statements.
• Prepare an opening statement of financial position at the date of transition to IFRS.
• Select accounting policies that comply with IFRS andSelect accounting policies that comply with IFRS, and those policies retrospectively to all periods presented
• Consider whether to apply any of the 18 optional exemptions from retrospective application.
• Apply the five mandatory exemptions from retrospective application.
• Make extensive disclosures to explain the transition.
IFRS 1 – Transition Date
An entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRSs. This is the starting point for its accounting in accordance with IFRSs.
The beginning of the earliest comparative period for which a first-time adopter presents full comparative financial statements under IFRS will be its date of transition to IFRS — the starting point for accounting for assets, liabilities and equity accounts recognized as of the transition date and subsequently.
IFRS 1 – Opening Balance Sheet
An entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements.
Those accounting policies shall comply with each IFRS effective at the end of its first IFRS reporting period.
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IFRS 1 – Reporting Date
Reporting Date is the balance sheet date for the first IFRS statements.
When a first-time adopter is preparing its first IFRSWhen a first time adopter is preparing its first IFRS financial statements, there may be standards at the reporting date that have been issued by the IASB but that are not yet effective. If those standards have transitional provisions that allow early application, the first-time adopter may but is not required to apply them in its first IFRS financial statements.
IFRS 1 – Comparative Statements
An entity's first IFRS financial statements shall include at least three statements of financial position, two statements of comprehensive income, two separate income statements (if presented), two statements of cash flows and two statements of changes in equity and related notes including comparative informationand related notes, including comparative information.
IFRS 1 does not provide exemptions from the presentation and disclosure requirements in other standards. IASB decided “that such disclosures are essential … because they help users understand the effect and implications of the transition to IFRS and how they need to change their analytical models to make the best use of information presented using IFRS.”
IFRS 1 – Comparative Statements
SEC Registrants would be required to present two years of comparative information.
– Does not apply to selective financial information presented elsewhere but should clearly state.p y
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Main Features of IFRS 1
1. Recognize all assets and liabilities whose recognition is required by IFRSs.
2. Not recognize items as assets or liabilities if IFRSs do not permit such recognition.p g
3. Reclassify items that it recognized in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with IFRSs.
4. Apply IFRSs in measuring all recognized assets and liabilities.
IFRS 1 Adoption
The accounting policies that an entity uses in its opening IFRS statement of financial position may differ from those that it used for the same date using its previous GAAP.
The resulting adjustments arise from events and transactions before the date of transition to IFRSs. Therefore, an entity shall recognize those adjustments directly in retained earnings.
Common U.S. GAAP Adjustments
• Assets and liabilities that meet IAS 17, Leases, finance lease criteria.
• Development costs that meet IAS 38, Intangible Assets, capitalization criteria.p
• Provisions meeting the IFRS recognition threshold of probable which is defined as “more likely than not.”
• Deferred costs that do not meet the definition of an asset.
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Common U.S. GAAP Adjustments
• Hedging relationships that do not meet the IAS 39 criteria for hedge accounting.
• Bifurcated debt and equity components of compound financial instruments.
• Debt issuance costs must be netted against the related financial liability.
• Inventory (No LIFO, LCM measurement)
• Impairment
THE EXEMPTIONS
The IASB has identified five mandatory exemptions:
1.Estimates
2.Noncontrolling interests
3 Derecognition of financial assets and financial3.Derecognition of financial assets and financial liabilities
4.Hedge accounting
5.Classification and measurement of financial assets
THE EXEMPTIONS
The IASB has identified 18 optional exemptions:
1.Business combinations
2.Fair value as a deemed cost
3 Employee benefits3.Employee benefits
4.Cumulative translation differences
5.Compound financial instruments
6.Assets and liabilities of subsidiaries, associates and joint ventures
7.Designation of previously recognized financial instruments
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THE EXEMPTIONS
The IASB has identified 18 optional exemptions:
8. Share based payments
9. Insurance Contracts
10 Leases10.Leases
11.Decommissioning
12.Fair value measurement of financial assets and financial liabilities at initial recognition
13.Service concession arrangements
14.Borrowing costs
THE EXEMPTIONS
The IASB has identified 18 optional exemptions:
15. Investments in subsidiaries, jointly controlled entities, and associates
16 Transfer of assets from customers – IFRIC 1816.Transfer of assets from customers IFRIC 18
17.Extinguishing financial liabilities with equity instruments – IFRIC 19
18.Disclosing about financial instruments – IFRS 7
Questions?Questions?
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Speaker BiographyKeith Peterka, CPA
Shareholder
Mayer Hoffman McCann P.C.
610.862.2744
With more than 19 years of experience in public accounting, Keith performs national firmresponsibilities for IFRS, fair value accounting and auditing, revenue recognition andbusiness combinations. He has also developed national training programs for accountingpronouncements and complex accounting topics. Keith is a subject matter expert forIFRS, SEC reporting and fair value accounting in MHM’s Professional Standards Group.He also is a member on the IFRS Foundation's Small & Medium-sized Entities (SMEs)Implementation Group.
Speaker BiographyJames Comito, CPA
Shareholder
Mayer Hoffman McCann P.C.
858.795.2029
A member of the MHM Professional Standards Group, James has an expertise in allaspects of revenue recognition, business combinations, impairment of goodwill andother intangible assets, accounting for stock-based compensation, accounting for equityand debt instruments and other accounting issues.
Additionally, he has significant experience with a variety of other regulatory andcorporate governance issues pertaining to publicly traded companies, including allaspects of internal control. In addition, James frequently speaks on accounting andauditing matters at various events for MHM.