IFRS vs. US GAAP

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IFRS vs. US GAAP

• Anthony P. Pencek, CPA
• IMA NERC-Mystic, CT
• September 20, 2010

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Accountants Cartoon
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International Financial Reporting Standards
(IFRS) vs. US Generally Accepted Accounting
Standards (GAAP)

• What does it mean for you?

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Convergence!!!!

• Dictionary Definition
• Convergence means to tend or move toward a
  common point or result.
• Goal Comparability and Consistency

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Common Traits of Both IFRS and GAAP

• Rules or guidelines issued to assist in preparing
  and issuing financial statements for use by the
  Regulatory Bodies, Investors and Other interested
  parties. Analogy of.
• Both are issued by a consensus of educated and
  expert individuals in accounting who are
  appointed to a Board. Hold hearings, comments
  from auditors, users are welcomed.
• International Accounting Standards Board (IASB)
  vs. Financial Accounting Standard Board (FASB)

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Why So Much Press on IFRS?

• Hottest Topic in Accounting. Why?
• Global Economy Demands It- Urgency!!!
• Economy Growth Stimulus
• Survey by International Federation of Accountants
  (IFAC)
• Financial Capital Markets are changing
• NYC is not the Financial Capital of the World,
  its going to elsewhere like London, Hong Kong and
  Dubai, etc.
• Foreign Purchase and/or Ownership of US Companies
• Recent---Anheuser-Busch Companies By InBev

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Why So Much Press on IFRS? (Continued)

• Need for comparability of information on public
  companies around the world
• US companies use US GAAP while foreign companies
  use IFRS. Analysts using which one?
• Sarbanes-Oxley Act of 2002 is presenting a
  competitive disadvantage to US Companies in the
  global financial Markets.
• Wiley Publishing now puts out a yearly IFRS book
  similar to the GAAP and GAAS books.

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IFAC Survey Results on Economic Growth with IFRS
Adaptation

• Very Important to Economic Growth- 55
• Important to Economic Growth 35
• Somewhat Important to Economic Growth - 9
• Not Important 1
• Website to get the survey, http//www.ifac.org/glo
  balsurvey

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Who is using IFRS today?

• 12,000 companies in almost 110 countries have
  adapted IFRS.
• 2005, European Union (EU) began to require the
  IFRS on its members states whose securities are
  listed on the EU regulated stock exchange,
  (London, Paris, etc.) to prepare its financial
  statements.

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History of IASB and IFRS
TODAY TOMORROW
Over 100 countries around the world require or permit the use of some form of IFRS By 2011, it is expected that all major countries will have adopted IFRS to some extent
Mandatory for all listed companies in the EU China and Japan will be substantially converged to IFRS
Permitted for non-listed companies in some member states Substantial majority of Global Fortune 500 will report under IFRS
Commonly used in Central and Eastern Europe, in Russia and many Caribbean Nations Others recently announced implementation programs, such as Canada, Korea and Israel
Many countries have moved to IFRS, including Australia, South Africa, Singapore and New Zealand Approximately 1/3 of US Foreign Private Issuers are in Canada
All major NON-US Capital Markets are impacted
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Who is using IFRS today? (Continued)

• Australia, New Zealand and Israel have almost
  completely accepted IFRS as their national
  standards.
• Canada, who had previously planned convergence
  with US GAAP, now has plans to require IFRS for
  publicly accountable entities in 2011.
• Japans Accounting Standards Board has planned
  convergence with IFRS by 2011.
• India will be using the IFRS for 2009.
• More countries are looking into adapting.

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What is the United State status on adoption?

• See Next Slides

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When will IFRS standards be required or not?

• The question is not if the IFRS standard will be
  required to be used, but When.
• Time line given for full adaptation is year 2015,
  but more than likely sooner. (See earlier slide
  of timeline) What is going to happen with the
  new administration? Madoff situation had an
  effect on compliance.
• FASB is now stating that any new standard being
  proposed will be close to IFRS standards.

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Potential Implementation Timeline
Based on 2015 implementation date

• 2010
• Put team together
• Train
• Keep track of convergence

• 2011
• Impact analysis
• Create formal plan

• 2011-2014
• Fill SME gaps
• Impact on processes/IC
• Develop communication plan

• 2011-2014
• Choose IFRS 1 options
• Make policy choices
• Restate /reaudit

• 2015
• Issue financial statements

Based on SEC proposal to begin IFRS for large
accelerated filers in 2014
Proprietary Confidential Trade Secret Protected
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Momentum to Adopt IFRS in the US
SEC Chief Accountant article regarding progress
on convergence
SEC holds roundtables discussions
SEC eliminates the requirement for reconciliation
to US GAAP to FPIs using IFRS as adopted by IASB
SEC issues initial roadmap
New SEC reinforces roadmap
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History of IFRS, FASB and the SEC

• SEC began preliminary talk about an international
  standard core way back in 1988 to be integrated
  with GAAP.
• FASB signed Norwalk Agreement with IASB in 2002
  and updated in 2008 to move IFRS adaptation
  faster.
• In 2008, SEC Chairman Cox issued a statement that
  use of IFRS for reporting purpose requirements in
  the US would be accepted and no need to reconcile
  the financials to US GAAP.

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Some Major Differences between US GAAP and IFRS

• IFRS standards published is only one book about
  two inches thick. There are 41 IAS and eight
  IFRS standards published.
• US GAAP is in three books about nine inches
  thick, and does not include all the authoritative
  literature. FASB standards has over 170 issued.
• Principles are used for IFRS
• Rules and/or Interpretations are used in GAAP

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Some Major Differences between US GAAP and IFRS
(Continued)

• Specific differences
• LIFO does not exist in IFRS standards. FIFO must
  be used for inventory costing method.
• Article in Strategic Finance July 2009
• Research Development costs get capitalized,
  costs of drugs in Canada.
• Impairment of Write downs to Net Realizable Value
  is a single step process for IFRS while US GAAP
  uses a two step process. Making the write down
  more easily. Write Up of Intangibles Possible.
• Reasonable estimate, impairment has occurred.

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Some Major Differences between US GAAP and IFRS
(Continued)

• Contingencies have a different probability
  threshold and measurement objective.
• After year curing of debt covenant violations is
  not allowed.
• Revenue recognition is less extensive in IFRS vs.
  GAAP
• No specific industry instruction or guidance,
  i.e. Percent of Completion and Completed contract
  on Long term construction projects.

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Some Major Differences between US GAAP and IFRS
(Continued)

• Indirect Method of Statement of Cash Flows vs.
  Direct Method
• Major difference is the Operating
  Activities -Direct Method has Cash Receipts from
  customers and Cash paid to suppliers and
  employees
• Indirect method has differences between non cash
  current assets and current liabilities and starts
  with net income or loss
• Direct Method must be used in IFRS

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Some Major Differences between US GAAP and IFRS
(Continued)

• Also on the Cash Flow statement
• Direct Method use Dividends received on
  investments may be put under Operating Activities
• Indirect Method uses the non cash expenses like
  depreciation and amortization within the
  Operating Activities.
• Direct Method has Income Taxes paid could be
  shown on either the Operating, Financing or
  Investing Activities depends on relationship or
  all three activities.

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Some Major Differences between US GAAP and IFRS
(Continued)

• Balance Sheet Presentation Difference
• Long Term Assets and Liabilities are listed first
  on IFRS statements- See slide
• On GAAP Statements, starts with current assets
  and liabilities.- See slide
• Write up of assets due to appreciation is allowed
  for IFRS. Intangibles impairment test is
  different.

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British Airways Balance Sheet
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Google Inc. Balance Sheet
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Some Major Differences between US GAAP and IFRS
(Continued)

• Earnings per Share (EPS)
• IFRS has only Basic and Diluted EPS on continuing
  operations and net profit or loss per share
• US GAAP has Basic and Diluted from continuing
  operations, discontinued operations,
  extraordinary items, cumulative effect of changes
  in accounting policy, and net income or net loss.

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EXAMPLE OF EARNINGS DIFFERENCE IFRS VS GAAP

• DAIMLER BENZ
• IFRS STANDARDS IN PLACE FOR YEAR 2006, ITS
  OPERATING PROFIT OF 2.4 BIL
• IF USED US GAAP STANDARDS, THEY WOULD HAD SHOWN A
  LOSS DUE TO NOT CAPITALIZING RESEARCH
  EXPENDITURES, ETC.

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Limitation of IFRS

• Pick and Choose which standards to be enforced or
  used by companies within its borders by
  government
• -French Government recently voted to allow
  certain industries, the wine industry to be
  exact, to sidestep certain IFRS standards to help
  that industry.
• -Japans Firms definition of Finished Goods
  Inventory or Merchandise Inventory has it as a
  liability not an asset due to
• - Storage Charges, Insurance on it,
  Safeguarding it, concept of Just In Time
• ________Are these really IFRS Standards??________

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Limitation of IFRS (Continued)

• Enforcement of the Standards
• No SEC like in the United States who oversees the
  GAAP standards
• What is the punishment for non compliance?
• Is there comparability among nations financial
  reporting if you can chose what standards will be
  used?

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AICPA Proactive to IFRS Adaptation

• Allowing private firms and not for profit firms
  to report under the IFRS
• Voted recently, May 2008, to modify rule 203 of
  Professional Code of Conduct to recognize IASB as
  an international accounting standard setter.
• Educating AICPA member firms and local CPA state
  societies about what IFRS requirements. Offering
  seminars for partners and also staff on IFRS.

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AICPA Proactive to IFRS Adaptation (Continued)

• Working with Academia, textbook authors, and
  educational institutions to get current soon to
  be professionals ready for using IFRS on the job.
• Keeping information flowing to members and the US
  CPAs voice be heard on these IFRS committees.
• Incorporating questions about IFRS into the
  Uniform CPA exam starting 1/1/2011. CMA exam will
  also have it incorporated on it?

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Academia response to IFRS

• Schools must educate Administrators of pressing
  need to learn IFRS
• Fit IFRS into already full slate of curriculum
  within the classroom- UNIFORM SYLLABUS. Separate
  Class on IFRS???
• Get schools to educate the professors on IFRS,
  Budget concerns and enrollment.
• KPMG-AAA survey
• Academic Year (AY) incorporate IFRS into
  curriculum.
• AY 2009-10 it will increase to 24
• AY 2010-11 it will be about 30
• AY 2011-12 it will be over 50

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Accounting Firms Response

• Sending employees to get training in London, etc.
  and work with that office to learn IFRS
  requirements
• Changing audit work programs and procedures to
  make the transition smoother. Have several audit
  teams, one IFRS, GAAP, etc. Pass on the cost to
  clients?
• Working with Academia the need to have graduates
  ready to hit the road running, changed curriculum
• Educating clients personnel with new
  requirements to be in compliance with IFRS.

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Suggestions for Compliance
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WHAT DOES IT MEAN TO BUSINESSES?

• How does it affect the tax structure and FIN 48
  and Schedule M3 that must be completed
• What does it do for management reporting systems
  and Financial Accounting Systems?
• What are the new industry measurements or
  indicators?
• What happens to PCAOB requirements from Sarbanes
  Oxley Act of 2002. Was it a waste of time and
  energy?
• Will IFRS assist in getting firm a strategic
  competitive advantage over other firms.

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Google, Inc. IC Report
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British Airlines Auditors Report
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Auditors Report-Google, Inc.
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WHAT DOES IT MEAN TO BUSINESSES? (Continued)

• What does it do for tax planning and tax deferred
  liabilities and assets on the balance sheet?
• What about Investor relationships, explaining the
  inconsistencies between years when implemented?
  What will be required to be restated? Educating
  them.

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WHAT DOES IT MEAN TO BUSINESSES? (Continued)

• Costs of training of the company personnel on the
  new standards, pass it on to customers
• Discussing with banks over the debt covenants,
  and the effect of them on the loans.

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What does it mean to me?

• If the IFRS are being made mandatory, as an
  professional the accounting degree earned
  recently may not be relevant. Retraining must be
  done. Community College in NJ gave a money back
  guarantee on learning? Free retraining??
• How do I read the financial statements and
  analytical information for comparability? Cost?
• Per my clients, how do I explain the differences
  between the two? NO EASY WAY!!
• Is this coming to the privately held companies
  that I work on? Probably!!!

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What does it mean to me? (Continued)

• What is next change or challenge, are I ready?
  Is my firm ready?
• Challenge to keep up. Looking forward to it.
  Competitive Advantage?
• Example, If you got your Masters Degree in
  Taxation, MST in 1986 and the tax law
  dramatically changed later that year.

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SEC Hearing on IFRS

• Panel on US Financial Services and IFRS recap
• IFRS creates more work or interpretation to
  determine whether you put it on the Financial
  Statements
• US GAAP gives you more guidance
• Entity recognition is a problem, Asset
  capitalization was not easy task, Example used
  where 200 leased vehicles had to be capitalized
  due to control of vehicle.

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SEC Hearing on IFRS (Continued)

• On Panel, John Smith, An American IASB member.
• -Mentioned that on the board there are 14
  members and they are from United States, South
  Africa, Japan, China, Sweden, France and United
  Kingdom.
• -Panelists stated time consuming and costly to
  use IFRS.
• -Are they getting better information to the
  creditors, regulators, investors and management
  were questioned? Are the interested parties
  getting value for this exercise? MAYBE??

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Recent Developments -IFRS

• Issuance in 2009, IASB issued International
  Financial Reporting Standard for Small and Medium
  Sized Entities (IFRS for SMEs).
• For example, no Earnings per Share (EPS), no
  Interim reporting or Segment reporting are needed
  
• No Fair Value determination of Long term assets
  are needed to complete financial statements

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Latest Proposals on Financial Statement
Presentation

• Overall Project Goal
• Develop a common standard on organization and
  presentation of information in financial
  statements
• Improve
• The usefulness of information provided to users
  of financial statements (in making decisions as
  providers of capital)
• Communication between management and users of
  financial statements

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Latest Proposals on Financial Statement
Presentation-(Contd)

• Status of Project
• IASB/FASB joint project formerly known as the
  Performance Reporting Project
• Discussion paper issued October 16, 2008
• Comments received April 14, 2009
• Exposure draft expected in 2010

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Latest Proposals on Financial Statement
Presentation-(Contd)

• Objectives
• Three objectives for financial statement
  presentation
• Cohesiveness flow of information should follow
  through all of the different statements
• Relationships are clear statements are
  complimentary
• Disaggregation more information should be shown
  separately
• Common sections and categories more line items
• Ability to assess liquidity and cash flow
• Ability to meet financial commitments and invest
  in business opportunities

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Latest Proposals on Financial Statement
Presentation-(Contd)

• Statement of Financial Position
• Grouped by operating, investing, financing (no
  longer by assets liabilities and equity)
• Disaggregate assets and liabilities into short
  term and long term, totals and subtotals
• Statement of Comprehensive Income
• One statement
• More disaggregation (function, nature)
• Statement of Cash Flows
• Direct method
• New reconciliation schedule
• Reconcile cash flows to comprehensive income
• In notes

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Latest Proposals on Financial Statement
Presentation-(Contd)
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Bibliography

• AICPA, International Financial Reporting
  Standards (IFRS), an AICPA Backgrounder
• AICPA Website, www.aicpa.org
• AICPA IFRS website, www.ifrs.com
• University Professors Weigh in on Building IFRS
  in Curricula, KPMG-AAA Survey. In
  www.Marketwatch.com.
• Colleen Cunningham, CPA talk on IFRS, IMA
  National Conference, June 2010

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Bibliography(Continued)

• International Federation of Accountants website,
  www.iafc.org
• SEC website, www.sec.gov
• Price Waterhouse Coopers Website, www.pwc.tv
• Bruce Pounder, CMA, CFM articles in Strategic
  Finance, contact and website, BPounder_at_leveragedlo
  gic.com

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OTHER ACCOUNTING ISSUES

• FASB 157, FAIR VALUE ACCOUNTING
• LEHMAN BROTHERS DEMISE-MAYBE?
• MULLIGAN STANDARD- GET IT RIGHT OR GIVE ME
  ANOTHER SHOT
• XBRL ALREADY AVAILABLE AND BEING USED TO REPORT
  UNDER IFRS

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Questions????

• Thank you!!
• Best Wishes for a wonderful conference!!!