International Financial Reporting Standards: Convergence and Standard Setting Activities

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International FinancialReporting
StandardsConvergence and Standard Setting
Activities

• Session 9

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Overview ofConvergence Efforts
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The Norwalk Agreement

• Significant step forward
• IASB and FASB agree to
• Work together to eliminate differences between
  IFRS and US GAAP
• Coordinate future work programs
• Involves several convergence projects
• Encourage coordination of interpretive bodies

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Memorandum of Understanding

• Original MOU published February 2006
• Reaffirms the Boards shared objective of
  developing high quality, common accounting
  standards for use around the world
• Further elaborates on the objectives and
  principles described in the Norwalk Agreement
• Convergence will proceed on the following two
  tracks
• Decide whether major differences should be
  eliminated through short term projects, and, if
  so, complete work in those areas by 2008
• Make continued progress in other areas that need
  improvement

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Memorandum of Understanding (contd)

• At the April 20-21, 2008 joint meeting, the
  Boards updated the MOU
• Significant concern about lack of progress to
  date
• Small group developed recommendations based on
  assumption that
• target date for mandatory adoption of IFRS is no
  later than 2013
• a quiet period of at least one year is provided
• Discussed progress that could be made between
  April 2008 and June 2011

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Short-termConvergence Projects
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FASB Short-Term Convergence Projects
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IASB Short-term Convergence Projects

• Statements Recently Issued
• IAS 23 (revised), Borrowing Costs
• IFRS 8, Segment Reporting

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Joint Short-term Convergence Projects
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JointConvergence Projects
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Joint Conceptual Framework Projects
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Joint Convergence Projects
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Joint Convergence Projects
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Consolidations

• IASB developing a single, comprehensive
  consolidation standard
• Incorporate guidance in IAS 27 and SIC 12 based
  the principle of effective control
• Improved disclosures relating to exposures of
  certain high-risk instruments
• Exposure draft expected in 2008
• FASB is reconsidering QSPEs and FIN 46(R) and is
  expected to issue an exposure draft by June 30,
  2008

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Leases

• Added to agendas in July 2006 to address
  off-balance sheet accounting
• Focus has been on a right to use model but lack
  of agreement on fundamental issues
• April 2008 joint meeting discussion
• Scope may be limited to lessee accounting
• May issue a discussion paper based on IAS 17
• Operating leases reflected as an acquisition of
  an intangible asset the right to use inherent
  in the lease matched by an obligation to pay for
  that right
• Finance leases will remain unchanged
• Current accounting for contingent rentals will
  likely remain

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Liabilities and Equity

• FASB and IASB issued documents for comment
• Three approaches basic ownership,
  ownership-settlement, and reassessed expected
  outcome
• The basic ownership approach is preferred
• Allows equity classification for instruments
  that
• are the most subordinated interest in an entity
  and
• entitle the holder to a share of an entitys net
  assets after satisfaction of all higher-priority
  claims.
• Preferred stock and other perpetual instruments
  classified as liabilities because they have a
  higher priority in liquidation than basic
  ownership instruments.
• Indirect ownership interests, such as options or
  forwards on an entitys own equity, classified as
  liabilities or assets.

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Financial Statement Presentation

• Three Phases
• Phase A Phase B
  Phase C
• FASB will issue discussion document combining
  Phases A and B while IASB will issue Phase B only
• IASB published the amended IAS 1 reflecting Phase
  A
• April 2008 joint meeting discussion
• Scope may be limited to presentation on the face
  of the primary financial statements and footnote
  disclosures.
• May not address what should be included in net
  income vs. OCI and when to recycle out of OCI

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Financial Statement Presentation
4.10
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Revenue Recognition

• Two primary models have been discussed
• April 2008 joint meeting discussion
• May proceed with customer consideration model
• Need to address performance obligations, rights
  of return, and disclosures

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Other Projects

• Fair value measurement project
• IASB may redeliberate FAS 157 only in difficult
  areas
• May limit objectives to
• Amend IFRSs to replace measurement terms
• Define exit price identically to FAS 157
• Define entry price and provide disclosures
• Derecognition project
• Progress made in the form of staff research but
  more work is needed to address securitization
  issues
• No staff recommendation until October 2008
• Post-employment benefits project
• Preliminary views document issued by IASB in
  March 2008
• May change scope to not include cash balance plans

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RegulatoryDevelopments
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Regulatory Development Highlights

• SEC rule change to eliminate the reconciliation
  to U.S. GAAP for foreign companies using IFRS
• SEC Concept Release on allowing U.S. issuers a
  choice between IFRS and U.S. GAAP
• Equivalence initiative for U.S. GAAP in the EU
• Greater cooperation between the SEC and
  international regulators on IFRS application
  issues
• Movement in the U.S. to simplify financial
  reporting
• Continuing convergence efforts between IASB and
  FASB

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SECs New Rule for Foreign Private Issuers

• Eliminates requirement to prepare a U.S. GAAP
  reconciliation for foreign private issuers using
  IFRS
• Effective March 4, 2008 for fiscal years ending
  after November 15, 2007
• Fully comply with IFRS as published by the IASB
• One exception for version of IFRS that includes
  European Commissions carve-out for IAS 39
• Reconciliation to IASBs version of IFRS still
  required for two years then must comply or
  provide reconciliation to US GAAP

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SECs Concept Release for U.S. Issuers

• Solicited feedback on whether U.S. issuers should
  be permitted to prepare financial statements
  using IFRS
• Primary areas of focus were
• Education training
• Application regulation
• Auditing
• Transition timing
• SEC held roundtables to discuss comments and
  solicit additional input

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SECs Concept Release for U.S. Issuers

• Feedback from constituents
• Global regulatory infrastructure must exist to
  facilitate faithful and consistent IFRS
  application
• IASB must continue to produce high-quality,
  objectives-based accounting standards
• Sufficient time must be provided to develop
  academic curricula and training
• Convergence efforts must continue
• SEC expected to issue proposing release and final
  rule in 2008
• U.S. issuers will likely have an option by 2011

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SEC Comment Themes

• Averaged 19 comments per filing reviewed
• Focus on IFRS financial statements
• Presentation and disclosure are significant areas
  of focus across industries
• Recognition and measurement comments vary by
  industry
• Particular interest in converged standards
• Focus on understanding judgments used and
  assumptions made in applying IFRS

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Overall Comment Summary

• 87 - financial statements
• 58 IFRS only
• 28 US GAAP only
• 14 IFRS and US GAAP
• 1 Previous GAAP
• 5 - operating and financial review
• 2 - disclosure controls and procedures
• 1 - selected financial data
• 1 - company information
• 4 - other

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Financial Statement Comments - Overall
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Top 10 IFRS Topic Comment Areas
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Final Thoughts

• By 2011, it is expected that
• All major countries will have adopted IFRS to
  some extent
• U.S. issuers will likely have the option of using
  either IFRS of U.S. GAAP
• There will be increased scrutiny of IFRS
  application by regulators
• Convergence efforts will continue between the
  IASB and FASB
• A significant number of U.S. companies will be
  planning for the adoption of IFRS