IFRS – An Overview
Beta Alpha Psi
Loyola University Maryland
Baltimore, MD
September 24, 2009
McGladrey & Pullen LLP is a member firm of RSM International – an affiliation of separate and independent legal entities.
Richard A. Rate, Jr., CPA
• Partner, National Professional Standards Group
• Member, Eastern Regional Professional Practice Office
• Member, AICPA and MACPA
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Agenda
• Structure and Conceptual Framework of IFRS vs. 10 minutes
US GAAP
• Status of IFRS and US GAAP Convergence 5 minutes
Efforts
• Differences between IFRS and US GAAP by 20 minutes
Topical Area
• Impact to private companies 5 minutes
• Conclusion 5 minutes
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Differences Between US GAAP and IAS/IFRS
• This presentation does not cover all the topics
• With regard to the topics covered:
– IFRS accounting is covered at a very high level
– Not all the differences between the two frameworks have been identified
• It is intended just to give a ―flavour‖ on major differences
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US GAAP Hierarchy*
• Category (a), officially established • Category (c) consists of:
accounting principles, consists of: – AICPA Accounting Standards Executive
Committee (AcSEC) Practice Bulletins
– FASB Statements and Interpretations – Consensus positions of the FASB Emerging
– APB Opinions Issues Task Force
– AICPA Accounting Research Bulletins • Category (d) includes:
– AICPA accounting interpretations and
• Category (b) consists of: implementation guides ("Qs and As") published
– FASB Technical Bulletins by the FASB staff
– Practices that are widely recognized and
– AICPA Industry Audit and Accounting prevalent either generally or in the industry
Guides – FASB Staff Positions (FSPs)
– AICPA Statements of Position
*: Source: AU 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
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The US GAAP Literature
• Over 2,000 pronouncements
• Over 6,500 pages – FASB material alone
• Some 25,000 pages of standards and guidance in total
• 501 EITF issued until December 2007
Example: GAAP on Leasing
• 9 FAS (FAS 13 + 8 other FAS)
• 6 FIN
• 36 EITF
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IFRS Hierarchy
• Standards and interpretations approved by the IASC/IASB
• SIC/IFRIC interpretations
IFRS is a “teenager”
compared to US GAAP
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The IFRS Literature
• 55 pronouncements
• Some 2,500 pages (all pronouncements)
Example: GAAP on Leasing
• IAS 17
• 1 IFRIC
• 2 SIC
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Set of Principles
What is IFRS?
Set of principles to measure assets and liabilities
Set of principles Asset and liability view
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Set of Principles
Asset and liability view
Does it meet the definition of an
asset/liability?
How much is it?
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Set of Principles vs Set of Rules
• Principles not rules: a question of judgement
• Principles-based standards requires a clear hierarchy of overarching
concepts
• Principles-based standards provide flexibility in order to deal with
new and different situations as they arise
• Disclosures play a key role
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Set of Principles vs Set of Rules
• Principles-based does not mean principles-only
• Principles-based accounting standards will be accompanied by
guidance
• Additional guidance is restricted to brief explanation as well as a
small number of interpretations on major issues
“Guidance anticipates the use of judgement
whereas rules discourages judgement”
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Set of Principles vs Set of Rules
• Focusing on principles places a significant obligation on preparers
and auditors to exercise professional judgement and users to weight
the benefits of fair presentation, or a true and fair view, against the
risks
• Use of judgement vs ―check-list‖ culture
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Set of Principles vs Set of Rules
The diamond of trust
Standard setters
Preparers Auditors
Regulators and other Users
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Set of Rules
How did the rules-based approach emerged?
• It emerged primarily in US as a result of a rigorous and aggressive
regulation of financial reporting driven by:
– Desire of comparability
– Litigations
“Show me a rule that says I can‟t do this”
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i.e. Specific literature on revenue recognition
IAS/IFRS/IFRIC/SIC U.S. GAAP literature on revenue recognition
IAS 18 Revenue 27 Statements of Financial Accounting Standards
IAS 11 Construction contract 72 EITF issues
SIC-13 Jointly Controlled Entities—Non-Monetary Contributions by Venturers 11 Statements of Position
SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a 3 FASB Interpretations
Lease
SIC-31 Revenue - Barter Transactions Involving Advertising Services 4 Staff Accounting Bulletins
IFRIC 12 Service Concession Arrangements 6 FASB Staff Positions
IFRIC 13 Customer Loyalty Programmes 2 Accounting Research Bulletins
IFRIC 15 Agreements for the Construction of the Real Estate 2 Accounting Principles Board Opinions
3 FASB Technical Bulletins
1 REG S-X
1 FASB Staff implementation guidance
Various audit and accounting guidance
Various AICPA Technical Practice Aids
8 pronouncements in total More than 130 pronouncements
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“Six years ago when we started, if
someone said, „describe where you‟ll be in
2007‟, I wouldn‟t have described this. This
is much , much better than we thought,
and it‟s happened much, much faster“
“Getting rid of the reconciliation has been
our absolute priority”
“Major companies have got IFRS
research units set up in the US saying,
„What‟s going to happen? What do we Sir David Tweedie
Chairman of IASB
have to do ?‟ It‟s a huge change, a big (source: Accountancy Magazine,
“Tweedie’s best of breed“,
difference” January 2008)
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“A „Pax Americana‟ in financial reporting where
everybody around the world does US GAAP is not
on the table. Ten years ago, people talked about
that. But the world‟s moved on. So it‟s likely to be
IFRS. But, in our view, it needs to be what we call
„improved IFRS‟ because there are so many
critical issues relating to the IASB and IFRS”
“The SEC could say, „we think broad choice is
just fine. No end game. Just let the market decide
between GAAP and IFRS‟”
Realistic time frame for convergence?: “I‟d say, Bob Herz
Chairman of FASB
if everything went absolutely right, it‟s a (source: Journal of
minimum of five years” Accountancy, “Change Agent”,
February 2008)
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SEC Proposes Roadmap Toward Global Accounting
Standards
(27 August 2008)
Proposed phased approach
Targeted U.S. issuers Type First IFRS reporting date
Limited early eligible entities Optional Fiscal years ending on or after 15 December 2009
Large accelerate filers Mandatory Fiscal years ending on or after 15 December 2014
Accelerated filers Mandatory Fiscal years ending on or after 15 December 2015
Non-accelerated filers Mandatory Fiscal years ending on or after 15 December 2016
Financial statements will include two years of comparatives
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SEC Proposes Roadmap Toward Global Accounting
Standards
(27 August 2008)
Non-accelerated filers
Accelerated filers
Limited eligible entities Large accelerated filers
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
31 December
2006
Evaluation period
Transition date
SEC Final decision Reporting date
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IASB Work Plan - New Standards and Major Projects
• IFRS for SMEs
• Consolidation 2009 In RED IASB-FASB
• Liabilities Joint projects
• Derecognition
• Emission Trading
• Fair Value 2010
• Income taxes
• Financial statement presentation
• Insurance contracts
• Leases
• Financial Instruments with the characteristics of equity 2011
• Post-employment benefits (including pensions)
• Revenue recognition
• Financial instruments: replacement
• Government grants TBD
• Common control transactions
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Examples of Key Differences between US GAAP and IFRS
• Presentation of Financial Statements
• Fair value
• Goodwill
• Revenue recognition
• Intangible and tangible assets
• Leases
• Inventories
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Financial Statements: Balance Sheet
Topic IFRS US GAAP
Balance Sheet • IAS 1 does not prescribe a particular • Similar to IFRS, but items are
format format, but minimum lines to be normally presented in decreasing order
presented of liquidity
Current/Non- • Required except for when a liquidity • An entity is elected to choose whether
current distinction presentation is used. In general, 12 to present Current/Non-current
months represents the border distinction
Offsetting • Permitted only if allowed by specific • Permitted where there is:
Standards/ Interpretations. Offset intention of offset
involving different parties is allowed offset is enforceable by law
• Offsetting derivatives based on offset permitted when only two
―master netting arrangement‖ is not parties involved
allowed
• Offsetting derivatives based on
―master netting arrangement‖ is allowed
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Financial Statements: Income Statement
Topic IFRS US GAAP
Income statement format • IAS 1 does not prescribe a • Entities are elected to choose:
particular format, but minimum lines Full ―by function‖ format
to be presented. Both classification Gross profit computed as Sales
―by function‖ and ―by nature‖ are less COGS. Then other costs
allowed
Extraordinary items • Expressly prohibited • Virtually not allowed
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Financial Statements: Cash Flow Statement
Topic IFRS US GAAP
Cash flow format • Both direct and indirect methods • Similar to IFRS
are allowed. Indirect method is more
common
Definition of cash and • Includes overdraft that fluctuates • Similar to IFRS except for
cash equivalents from being positive to overdrawn. overdrafts, which are always
Investment qualifies as a cash excluded from cash and cash
equivalent only when maturity of equivalents
three months or less from the date of
acquisition
Presentation of specific • Interest paid/received and • Interest paid/received and
items dividends paid/received can be both dividends received are operating.
financing or operating Dividends paid are financing
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Financial Statements: Comparatives
Topic IFRS US GAAP
Comparatives • One year of comparative for all • No ―pure‖ US GAAP requirement
presentation numerical information reported in the
financial statement
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Fair Value
Topic IFRS US GAAP
Fair value • Dispersed widely in IFRS • SFAS 157
guidance • Inconsistencies:
Business combinations (tax
assets/liabilities, pension plans)
PPE: revaluation model – use fair
value if can be measured reliably
Leases: require fair value
measurement but there is no guidance
Fair value not defined in the
Framework
NB: IASB is working on the fair value
measurement project. The current project plan
envisages that an IFRS on fair value
measurement guidance will be published in 2010
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Goodwill (IFRS 3R vs SFAS 141R)
Topic IFRS US GAAP
Negative goodwill • After reassessment any residual • Same
excess is recognised immediately in
profit or loss (not as extraordinary
gain)
Provisional accounting • Adjustments of provisional fair • Same
values can be booked against
goodwill within 12 months from
acquisition date. After, adjusted to
income statement
Goodwill • Not amortised and tested for • Not amortised but tested for
impairment at least annually at CGU impairment at least annually at
level Reporting unit level
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CGU vs Reporting Unit
Topic IFRS US GAAP
Definition • CGU: the smallest identifiable group of • RU: an operating segment or one
assets that generates cash inflows that are level below an operating segment
largely independent of the cash inflows from (referred as to a component)
other assets or groups of assets • A component is a business for which
• If an active market exists for the output discrete financial information is
produced by a CGU, it shall be identified as available and segment management
a CGU, even if some or all of the output is regularly reviews the operating results
used internally • Components of an operating segment
• Considers various factors. i.e. how shall be aggregated and deemed a
management monitors the entity’s operations single reporting unit if have similar
or how management makes decisions about economic characteristics
continuing or disposing of the entity’s assets
and operations
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Impairment of Goodwill
Topic IFRS US GAAP
Impairment amount • IAS 36 applies: one-step approach: • SFAS 142 applies: two-step
calculation • Impairment results from the difference approach:
methodology between the carrying amount and the 1) If the carrying amount of the
higher between the asset’s VIU and its reporting unit including goodwill is
fair value less cost to sell lesser than its fair value, then step 2
• VIU: reasonable estimate performed 2) Determine the implied fair value of
by the individual enterprise (not market goodwill and compare with goodwill
specific). But IAS 36 includes carrying amount. Implied fair value of
requirements to prevent an enterprise goodwill shall be determined in the
from using assumptions different from same manner as the amount of
the market place that are unjustified goodwill recognised in a business
combination is determined
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Impairment of Goodwill
Topic IFRS US GAAP
Indication of impairment • IAS 36 applies: assess at each • SFAS 142 applies: tested for
reporting date whether there is any impairment on an annual basis and
indication that an asset may be between annual tests in certain
impaired and al least annually circumstances
• List of indicators • List of indicators
Reversal of impairment • Prohibited • Prohibited
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Revenue Recognition
Topic IFRS US GAAP
Preliminary • IASB and FASB Joint project
Views on • A contract-based revenue recognition model
Revenue • Revenue is recognized when performance obligations
Recognition
are satisfied
Revenue • IAS 18 is very much principle-based • No one dedicated standard to
recognition • Goods: ―Risk and rewards‖ approach and the revenue recognition
framework seller retains neither management involvement nor • Extensive and detailed guidance
control over goods included in various statements
• Services: percentage of completion (more than 200 sources of
• Interests: effective interest method standards and guidance in
existence, including broad
• Dividends: right to receiver payment established conceptual discussions and
• Royalties: accrual basis industry-specific guidance)
• Appendix include additional guidance and • SAB 104
examples
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Revenue Recognition
Topic IFRS US GAAP
Multiple-element • Some principle-based guidance • Revenue arrangements are
arrangements available in IAS 18 separated into units of accounting
• Little specific guidance and accounted for separately if
conditions of EITF 00-21 are met
Software • Almost non-existent specific • Detailed specific guidance,
guidance primarily SOP 97-2
• General principles apply
• US GAAP can be used to integrate
IFRS, but doesn’t have to.
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Intangible Assets
Topic IFRS US GAAP
Development costs • Capitalised since certain criteria • Strict criteria results in very rare
are met. Cost previously expensed development costs capitalised.
cannot be capitalised in subsequent Different guidance for computer
period software to be sold which must be
•No specific guidance for software capitalised if certain criteria are met
Revaluation • Permitted only if an active market • Prohibited
exist
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Tangible Assets
Topic IFRS US GAAP
Change in • Regarded as a change in accounting • Treated as a change in
depreciation estimate and reflected in current and accounting estimate and
method prospective periods reflected entirely in the current
year’s income statement
Subsequent • Revaluation model is allowed • Revaluation model is
measurement • Revaluation model: Changes in fair value are prohibited
recognized in OCI, depreciation and
impairment is charged to the income statement
Investment • IAS 40 includes specific guidance for •There is not a specific definition
property investment property. Entities choose between of investment properties.
fair value model or depreciated cost model Depreciated cost model must be
• Fair value model: all changes in fair value are applied
recognised in income statement
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Leases
Conceptually similar: a finance lease is one where substantially all risks and rewards associated
with the asset are transferred to the lessee. US GAAP includes more form-driven and is more
quantitative tests oriented
US GAAP indicators IFRS IFRS indicators
Classify as finance lease if any one of Similar to US GAAP indicators
the following criteria is met: Qualitative + others
• Transfer of ownership at the end of However these are genuine
lease term indicators and not triggering
• Bargain purchase option events
• PV of minimum lease is payments
greater than 90% of the fair value
• Lease term higher than 75% of Quantitative
estimated economic life
US GAAP
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Leases
• Leases—Preliminary Views
• IASB and FASB Joint project
• If this principle is adopted in a new
standard on lease accounting, it
would result in the lessee
recognizing:
– an asset for its right to use the leased
item (the right-of-use asset)
– a liability for its obligation to pay
rentals
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Inventories
Topic IFRS US GAAP
Measurement • Inventories shall be measured at • Inventories shall be measured at the
the lower of cost and net realisable lower of cost and market
value • Market means current replacement cost
• Net realisable value is the (purchase or reproduction), but
estimated selling price in the • Upper limit: market should not exceed
ordinary course of business less the the net realisable value (i.e. estimated
estimated costs of completion and selling price - cost of completion and
the estimated costs necessary to disposal)
make the sale (this is not fair value) • Lower limit: market should not be less
than the net realisable value reduced by
an allowance for normal profit margin
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Inventories
Topic IFRS US GAAP
LIFO method • Prohibited * • Permitted
FIFO • Allowed • Allowed
Average cost method • Allowed • Allowed
Retail method • May be used for convenience if the • In some situations may be both
results approximate cost practical and appropriate
Biological assets • Measured at fair value less • Not specified. Normally historical
estimated point-of-sale costs cost is used
Reversal of inventory • Required if certain criteria are met • Prohibited
write-downs
*: The use of LIFO will be banned in IFRS for SMEs as well
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Tax implications of adopting IFRS
• U.S. companies for tax purposes must continue to follow the tax rules
of the Internal Revenue Code, Regulations and case law
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Tax implications of adopting IFRS
• Book treatment changes may result in changes in tax methods which
require the filing of Form 3115s.
• Questions to consider:
– Does the present tax method require book conformity?
– Will the new book method omit information required to continue the tax
method?
– Is the new book method permissible for tax purposes?
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Tax implications of adopting IFRS
• Tax accounting methods
– LIFO – Tax requires book conformity, but IFRS prohibits LIFO
– Intangible asset capitalization
– Change in depreciation method
– No revaluation allowed on assets for tax purposes
– Revenue recognition
– Lease recognition (capital leases)
– Any other change in method that does not conform to tax law or that
changes the method used for currently recognizing income or
deductions
• Expected to have a major impact on implementation of FIN 48
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Importance of IFRS to Preparers
• Public company?
• Private company with foreign parent?
• Private company with foreign subsidiaries?
• Private company with significant foreign suppliers or customers?
• Access to foreign capital markets?
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Importance of IFRS to Bankers
• Public borrowers?
• Loan underwriting?
• Financial debt covenants?
• Global capital markets?
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Importance of IFRS to Attorneys
• IPO’s?
• Registrations?
• Exempt offerings?
• Securities law?
• Re-writing or renegotiation of any legal contract or agreement
containing financial information?
• Fraud implications – use of judgment?
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First-time adoption of IFRS
• Scale of the project
• Use of experts
• IFRS Accounting manual, IFRS Group Reporting Package, Impact on
information systems, etc.
• Industry specific issues: what are key players doing?
• IFRS 1: exemptions and exceptions
• Communication to stakeholders
• Industry specific issues
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A few things to consider before …
• Training, training, training
• Auditor preparation and status
• Management information systems
• Compensation plans
• Government accountability audits
• Users of your financial information
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Conclusions
• Only in some cases is it possible to say that the IFRS requirements
are clearly different or equivalent to US GAAP
• In many cases the same concept is expressed using different words.
Therefore, the concept is similar but not identical
• Similar standards are not identical standards
• US GAAP literature is much more extensive compared to IFRS
• Convergence projects are underway
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