IFRS:

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IFRS Much More Than a Technical Accounting
Exercise
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IFRS Much More Than a Technical Accounting
Exercise
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• Moderator
• Rodney Delli-Gatti Business Development
  Manager, Accretive Solutions
• Speakers
• Todd Markus VP Accounting Finance and
  Enterprise Governance, Accretive Solutions
• Mike Beaty Managing Director, Advisory
  Services, KPMG LLP

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(No Transcript)
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Current Status of IFRS in the U.S.
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• The SEC Moves Closer to IFRS
• Under a final rule issued in 2007, the SEC now
  permits foreign registrants to file in the U.S.
  under IFRS without any reconciliation to U.S.
  GAAP
• The SEC Roadmap for U.S. public companies to
  adopt IFRS
• Released by the SEC on November 14, 2008
  (originally approved in August)
• SEC is seeking comment on their plans for issuing
  a rule to mandate IFRS
• Comment period to end 90 days after publication

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• SEC Roadmap Proposal
• SEC will issue final rule in 2011 that requires
  conversion to IFRS for all public companies, if
  additional progress on IFRS is made
• Continued improvements/convergence of IFRS
• Funding and accountability of IASB
• Education and training in the U.S.
• Improvements in use of XBRL for IFRS

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• SEC Roadmap Proposal, continued
• Mandatory adoption fiscal years ending after
  December 15
• 2014 Large accelerated filers
• 2015 Accelerated filers
• 2016 Non-accelerated filers
• 3 years of IFRS financials required upon initial
  adoption (i.e., current year 2 comparable
  periods)
• For 2014 adopter, IFRS financial statements will
  be required for 2013 and 2012 comparative periods

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• SEC Roadmap Proposal, continued
• A limited number of companies will be eligible
  for voluntary adoption of IFRS for fiscal years
  ending after December 15, 2009
• For calendar year company that meets criteria,
  could file 2009 10-K utilizing IFRS
• SEC estimates only about 110 companies will
  qualify
• All companies may have ability to early-adopt
  after (and if) SEC final rule is passed in 2011

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What Is IFRS and How is it Different From
U.S. GAAP?
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• IFRS The Basics
• Underlying principles of IFRS and U.S. GAAP are
  very similar
• However, IFRS is much less prescriptive (includes
  far fewer rules) than U.S. GAAP
• IFRS includes almost no industry-specific rules
  and very little implementation guidance
• By some estimates, the volume of U.S. GAAP covers
  25,000 pages IFRS covers less than 3,000 pages

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• IFRS The Basics, continued
• Application of IFRS will require far more
  judgment
• May result in companies reaching different
  accounting conclusions for transactions that are
  essentially similar
• Contrast this with U.S. GAAP where
  bright-lines, rules and interpretations attempt
  to achieve uniformity

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• Key Differences IFRS vs. U.S. GAAP
• Inventory valuation (IAS 2)
• LIFO not permitted under IFRS
• Subsequent recoveries of impairment are reversed
• Depreciation (IAS 16)
• Separate depreciation required under IFRS if
  asset components have significantly different
  lives
• Example depreciation of building separate from
  HVAC system if useful lives are different

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• Key Differences IFRS vs. U.S. GAAP, continued
• Capitalization of development costs (IAS 38)
• Under U.S. GAAP, RD costs are expensed
• IFRS distinguishes between research (expensed)
  and development (capitalized when certain
  conditions met)
• Technical feasibility of completing the
  intangible asset
• Intention to complete the intangible asset
• Ability to sell or use the intangible asset
• Ability of intangible asset to generate future
  economic benefits
• Adequate resources exist to complete development
• Ability to reliably measure development costs
  attributable to the intangible asset

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• Key Differences IFRS vs. U.S. GAAP, continued
• Impairments of long-lived assets (IAS 36)
• Under U.S. GAAP, first compare undiscounted cash
  flows to carrying value, then determine fair
  value (two-steps)
• IFRS impairment is a single-step determine
  recoverable amount of asset
• IFRS requires subsequent-period recovery of
  impairment to be recorded as a reversal (this
  does not apply to goodwill)

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• Key Differences IFRS vs. U.S. GAAP, continued
• Share-based payments (IFRS 2)
• For grants with graded vesting, U.S. GAAP permits
  companies to value the grant in total and
  recognize to expense on a straight-line method
  (most companies follow this approach)
• Under IFRS, each individual tranche must be
  separately measured and recognized to expense on
  an accelerated basis
• Plan provisions that permit withholding of
  exercised shares for taxes result in liability
  accounting for that portion of grant
• Under IFRS, deferred taxes are calculated based
  on the intrinsic value each reporting period
  (under U.S. GAAP, these are based on the to-date
  FAS 123R expense recognized)

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• Key Differences IFRS vs. U.S. GAAP, continued
• Contingent liabilities/provisions (IAS 37)
• Under U.S. GAAP, probable likely (generally
  gt70)
• Under IFRS, probable more likely than not
  (gt50)
• Uncertain amounts if a range of outcomes is
  equally possible
• U.S. GAAP permits the low-end of the range to be
  recorded
• IFRS requires the midpoint of the range to be
  recorded
• Uncertain tax positions evaluated in similar
  manner as other provisions no FIN 48 equivalent
  in IFRS

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• Significant Differences Today, But Convergence
  Coming Soon (Maybe)
• FASB/IASB projects
• Revenue recognition
• Fair value
• Financial instruments
• Financial statement presentation
• Income taxes
• Liability vs. equity classification
• Pension and postretirement plans

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Conversion to IFRS The Impact on Information
Systems Mike Beaty, Managing DirectorAdvisory
Services KPMG LLP
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• Agenda
• Organizational Impact
• Information Systems Impact
• Conversion Approach and Considerations
• Example of Potential Impacts to Information
  Systems
• IFRS Transition Milestones and Timeline
• Q A

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Organizational Impact IFRS Beyond Finance
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• Assessing the Effect of IFRS on Information
  Systems
• IFRS is an accounting-driven initiative, but it
  can drive major changes to information systems,
  data, internal controls, business processes, and
  personnel.

Source KPMG LLP (U.S.), 2008
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• IFRS and Information Systems Key Learnings
• Since IT costs and level of effort are usually a
  significant component of an IFRS conversion,
  advance planning and integration with other
  initiatives can yield substantial benefits

• Based on our experience with IFRS conversion
  projects in Europe
• IFRS conversions have more often led to
  enhancement, rather than system replacement.
• Multiple global legacy systems can create
  problems for conversion as reporting entities
  learn to convert to IFRS.
• Some companies have used the conversion process
  as an opportunity to implement a new
  consolidation system while others have been
  concerned about introducing too much change at
  any one time.
• Some companies are electing to embed IFRS in
  local ledgers where appropriate, but many have
  left the decision on how they address the issue
  to individual entities.

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• Information Systems Impact Types of Changes to
  Information Systems
• IFRS conversion affects information systems in
  many ways, depending on the nature of the
  accounting changes and the existing information
  systems.

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Information Systems Impact Types of Changes
toInformation Systems, continued
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Information Systems Impact Types of Changes
toInformation Systems, continued
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Information Systems Impact Types of Changes
toInformation Systems, continued
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Information Systems Impact Time and Complexity
of Changes to Information Systems
Source KPMG LLP (U.S.), 2008
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Conversion Approach
Approach
Description
Potential Benefits
Potential Issues
Shadow Reporting/Workarounds
Managements solutions based on end-user
developed spreadsheets and models to support IFRS
reporting. Some organizations might use this
approach as a short-term remedy combined with a
long-term plan.

• Low cost to implement
• Quicker implementation
• Low impact on the IT organization

• High cost of maintenance
• Increased financial reporting risks
• Data reliance
• Strong reliance on workarounds and manual
  procedures

Hybrid Approach

• Planned conversion
• Manageable up-front costs
• Manageable impact to operations and IT

Approach based on a weighted balance of
workarounds and full-conversion process solutions
according to the organizations needs and
readiness in each of those areas. Workarounds
are implemented as a short-term remedy while
long-term process solutions are developed.

• Increased financial reporting risks and data
  reliance issues during the initial phase
• Longer implementation plan (short-term solutions
  being replaced by long-term)

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Conversion Approach, continued
Approach
Description
Potential Benefits
Potential Issues
FullConversion
Process solution based on changes made to source
systems feeding sub-ledger and GL systems. This
approach enables IFRS accounting and reporting at
the source and better supports changes to the
organization beyond financial reporting, such as
changes to management information reports,
operational KPIs, and regulatory reporting.

• IFRS accounting at the source level
• Leverage of synergies identified with other
  transformational initiatives at the organization
• Reduced costs associated with duplication of
  efforts
• Alignment with business objectives

• Higher level of planning and operational and IT
  involvement
• Potentially higher costs associated with the
  implementation
• Requires certain level of organizational readiness

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Achieving Synergies with Transformational
Initiatives

• To the extent the organization is engaged in
  transformational projects, it should plan and
  execute the IFRS conversion initiative in
  alignment with those projects.

• Transformation projects include
• Process Transformation
• Shared Service Center
• Chart of Accounts
• Financial Close
• Process Standardization
• Systems Transformation
• Systems Implementation
• ERP
• Consolidation
• Supply Chain
• Business Intelligence
• Standardization of Systems
• Organizational Transformation
• Business Unit Reorganization
• Business Unit Integration
• Business Unit Disposal

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Elements of a Successful IFRS Conversion

• Start early
• Kick-off project early (average project time from
  kick off to conversion and parallel run estimate
  23 years)
• Execute a robust assessment phase to develop a
  master conversion plan that incorporates all
  departments and business units
• Embed and automate data collection as soon as
  possible. Create an opportunity to dry run the
  data collection process to check integrity of
  IFRS numbers

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Elements of a Successful IFRS Conversion,
continued

• Plan to utilize synergies with other projects
• Synchronize project with other major initiatives
  and process changes (e.g., ERP implementation,
  finance transformation, etc.)
• Identify performance improvement opportunities
  that can be realized
• Corporate-level sponsorship and strong
  governance
• Execute as HQ initiative defining the global
  approach and policies - roll out internationally
  in a latter phases
• Provide global coordination, engaging local teams
  to help ensure knowledge transfer and provide
  clear accountability
• Establish senior management ownership and project
  leads
• Form a steering committee to help ensure good
  governance, communications, reporting, and timely
  issue resolution

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Elements of a Successful IFRS Conversion,
continued

• Engage key stakeholders and resources
• Involve external audit and tax departments early
  in the process and throughout project
• Include experienced personnel with knowledge of
  issues and strong problem-solving capabilities.
  Engage third-party resources appropriately
• Involve corporate planning function in advance

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Elements of a Successful IFRS Conversion,
continued

• Invest in education at all levels, including
  shareholders
• Provide senior management with appropriate level
  of training to explain IFRS impacts to external
  stakeholders
• Develop a structured training program. Schedule
  training early to mitigate against knowledge
  attrition
• Help ensure education of the shareholders and
  industry analysts, and ongoing communications

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IFRS Transition Milestones and Timeline
1. Assess Impact and Develop Conversion Workplan
Business as usual
3. Build, Implement, and Roll out
4. Long-term Approach/Monitor
2. Design
Comparative years on IFRS basis (2 years)
Year of adoption large accelerated filers
Note Illustrative timeline for U.S. large
accelerated filers.
31 Dec 2009
31 Dec 2012
31 Dec 2013
31 Mar 2014
31 Dec 2014
31 Dec 2011
Q3 2008
31 Dec 2010
31 Dec 2008
2013 A/R
2014 A/R
Assess impact of conversion
Design and Implement conversion
Interims on IFRS basis
Recasted 2013 under IFRS
Start first IFRS year
Update qualitative discussion
First IFRS financial statements
Recasted 2012 under IFRS
Discuss initial assessment of impact
Date of Transition
Hold educational/informationaldiscussions
regardingIFRS with managementand the audit
committee
Many seek to separate results from impact of
change in GAAP
December 31, 2014 Reporting Date

• The SEC proposed to allow U.S. public companies
  that meet two criteria to begin filing IFRS
  financial statements on or after December 15,
  2009.
• A majority of peer-group companies report
  financial information using IFRS.
• The candidate U.S. company is one of the top 20
  peer-group companies.

Source KPMG LLP (U.S.), 2008
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• Q A

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• Presenters Contact Details
• Michael A. Beaty
• KPMG LLP
• 404-658-5063
• mbeaty_at_kpmg.com