us gaap versus international financial reporting standards

Moving to IFRSOctober 13, 2008

*connectedthinking

2 PricewaterhouseCoopers October 2008

Today’s Agenda:

1. IFRS Overview

2. Similarities and Differences

3. Impact on Regulated Entities

1. IFRS Overview


The Global Revolution

Countries converging to IFRSs with the goal of adoption

Countries that require or permit IFRSs

Countries with no current plan to adopt

Top 10 Global Capital Markets

US US GAAP

Japan IFRS 2011

UK IFRS

France IFRS

Canada IFRS 2011

Germany IFRS

Hong Kong IFRS

Spain IFRS

Switzerland IFRS or US GAAP

Australia IFRS

• More than 100 countries require, permit, or are converging to IFRS

• All major capital markets changing…except the US


Catalysts of the US transformation

• Creation of IASB in 2001• October 2002 Norwalk Agreement• Convergence was the pathway to create one global set of high-quality

standards which are robust and transparent• April 2005 SEC “roadmap” – goal to eliminate reconciliation• Reports on competitiveness of the US capital markets• SEC roundtable discussions in March and December 2007 • Focus on simplicity in US financial reporting• August 2008 SEC Open Meeting for IFRS roadmap in the US• September 2008 SEC announced roadmap to conversion


When might the transition to IFRS occur in the US?

2008 2010

2009

2012 2014

2007 2011 2013 2015

March 2007 SEC roundtable on US GAAP reconciliation for IFRS filers

July 2007 SEC proposal eliminating US GAAP reconciliation for IFRS filers

August 2007 SEC concept release on use of IFRS for US registrants

November 15, 2007Reconciliation eliminated for IFRS filers

January 2010-2011Voluntary application of IFRS permitted for certain US registrants

Proposed roadmap targets potential mandatory adoption in 2014

Reasonable timeline for the US transition to IFRS

December 2007SEC roundtable on IFRS in the US

Summer 2008Roadmap to be issued

During 2011 the SEC will reconvene to decide whether a mandatory conversion date should be set


SEC Proposed Roadmap for Potential Use of IFRS by US Issuers

• Mandatory adoption beginning in 2014 using a “phase-in” approach • SEC will reconvene in 2011 to assess whether:

- Key milestones have been achieved- Mandatory adoption date should be set for all issuers- The option to early adopt should be expanded to a larger population


SEC Proposed Roadmap for Potential Use of IFRS by US Issuers

• Early adoption permitted as early as fiscal years ending on or after December 15, 2009. Eligibility based on:- Size of the company: must be among the largest 20, measured by market

capitalization, in the industry group- IFRS must be used by the majority of the largest 20 companies in that

industry group • Potential early adopters would need to obtain a letter of no objection from SEC• SEC estimated that at least 110 companies in 34 different industries would be

eligible for early adoption• Two potential disclosure alternatives for companies electing to early adopt

IFRS


History of international standard setting

IASCFoundation19 trustees

SAC50 members

IFRSHigh quality, enforceable and global

IASB14 members

IFRIC12 members

AppointGovernFund

Appoint Appoint

InterpretAdvise

Create

1 Trustee

1 Member


Objectives of International Accounting Standards Board

Goal of IASB:• Formulate and publish IFRS/IAS• Promote IFRS world-wide acceptance and observance• Support improvement and harmonization of accounting standards

and regulations• Being truly independent

IASB has no power to enforce • The power to enforce lies in the hands of national authorities

2. Similarities and Differences


Regulatory Assets and Liabilities:No Equivalent to FAS 71 in IFRS

• Costs associated with price increases are recognized as incurred• Refunds to customers are recognized as refunded• Financial reporting does not reflect the regulatory environment• Equity component of AFUDC cannot be capitalized• Cost of removal cannot be recognized until incurred• Impact is additional volatility that does not exist under US GAAP:

- Commodity costs- Storm costs- Derivative MTM


Utility Plant and Equipment:ComponentizationIAS 16 Property, Plant and Equipment

• IFRS requires componentization:- Significant components of a large asset are separately capitalized and

depreciated

• Reporting under IFRS requires more detailed analysis of depreciable lives by component

• Components may be more detailed than currently required by FERC


Utility Plant and Equipment – ImpairmentIAS 16 Property, Plant and Equipment

• IFRS tests for impairment in one step:- Impairment loss is recognized when carrying value is greater than

recoverable value (DCF or fair value)

• US GAAP tests for impairment in two steps:- First compare the carrying value to undiscounted cash flows - If step one fails, then measure impairment

• Impairments are more likely under IFRS• IFRS allows reversal of impairment loss, which is prohibited under US

GAAP


Lease Accounting:Determining Capital (Finance) LeasesIAS 17 Leases • IFRS provides guidelines of different indicators of financing leases based

on the substance of a transfer of risks and rewards

• US GAAP provides specific rules for determining capital leases

• Although the guidelines in each standard are similar, the specific rules under US GAAP (e.g., 90% and 75%) can lead to different answers than the principles based approach under IFRS


Provisions:Loss Contingencies and ProvisionsIAS 37 Provisions, Contingent Liabilities and Contingent Assets

• IFRS recognizes losses when the following three criteria are met:- There is a present obligation as a result of a past event- There is a probable outflow of economic benefit- A reliable estimate can be made

• Probable is defined as more likely than not• When an estimate is a range with no point being more probable, must

record the midpoint of the range• Long term liabilities must be discounted to present value, if material


Income Taxes:Uncertain Tax PositionsIAS 12 Income Taxes

• IFRS uses “best estimate” approach to recording uncertain tax positions• IFRS allows measurement of uncertain tax positions:

- At the individual uncertainty or group of related uncertainties- At the total tax liability to each taxing authority

• US GAAP moved farther away from IFRS with the adoption of FIN 48


Derivative Accounting:Overview IAS 39 Financial Instruments: Recognition and Measurement

• Measurement criteria and terminology broadly consistent between US GAAP and IFRS

• Shared concepts of embedded derivatives, hedge accounting (and effectiveness ranges) and NPNS (Own Use)


Consolidation and Special Purpose Entities:IAS 27, Consolidation and Separate Financial StatementsSIC 12, Consolidation – Special Purpose Entities

• IAS 27 focuses on voting power as the indicator of control

• SIC 12 provides several substance based indicators of control– Activities being conducted on behalf of entity– Entity has decision-making powers– Entity has rights to obtain majority of benefits– Entity retains majority of ownership risks


Emission TradingCurrent Joint Project between IASB and FASB

• IFRIC 3, Emission Rights, was withdrawn- Defined Emission allowances as intangible assets measured at fair

value- Required recognition of income for grants on a systematic basis

• Broadly defined project expected to cover- Cap and trade schemes- Baseline and credit schemes- Renewable energy certificates

3. Impact on Regulated Companies


Impact on Earnings and Rate Base

• Certain costs will change under IFRS- Pension and OPEB costs- Capital leases vs. operating leases- Loss contingencies- Stock based compensation

• Timing of certain costs- No deferral of over/under recovery- Depreciation

• Capitalized assets may differ- No equity AFUDC- Impact of componentization- Differing capitalized asset rules- Revaluation option


Financial Reporting Process and Control Considerations

• Need to ensure that IFRS policies have adequate processes and controls• Transition to IFRS will be subject to Sarbanes Oxley 404 evaluation • Need to evaluate the most efficient method of incorporating multiple

GAAPs into financial reporting processes• Significant system enhancements may be required


Other considerations

• Conversion to IFRS will involve significant costs - Project costs- System costs

• Regulated companies likely to maintain multiple ledgers- IFRS- FERC Uniform System of Accounts

4. Questions?


Contact Information

Michael (Casey) Herman

[email protected]

Danah Al-Husaini

617-530-4824

[email protected]


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