Adv.11 Financial Flashcards
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What Are IFRS
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• International Financial Reporting Standards • Issued by International Accounting Standards Board (IASB), based in London • Format is somewhat similar to the US Codification (topical sections are revised as standards evolve) • IFRS are required or permitted for financial reporting by listed( On the stock exchange) domestic companies in more than 100 countries (and certain foreign issuers in US) • Gained legitimacy when adopted by the EU in 2005
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International Accounting Standards Board
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• IASB was formed in 2001 • Successor to International Accounting Standards Committee (IASC), which operated 1973 to 2001 • Oversight by IFRS Foundation (formerly IASCF) • 16* members with geographic ( Population is consideration) of appointments (9 votes needed) • Due process similar to FASB (agenda consideration, discussion and consultation leading to ED, public comment, deliberation, approval of final standard)
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What Is Included in \"IFRS\"
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• International Financial Reporting Standards (IFRS) - issued by the IASB (13 to date) • International Accounting Standards (IAS) - issued by the IASC (41 issued; 28 still in effect) • Interpretations issued by the IFRIC (IASB) and the SIC (IASC) (IFRICs and SICs) - (25 in effect 1/1/13) * IASB Framework (not technically part of IFRS)
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IASB Framework*
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Originally adopted by IASB in 1989 • Based on SFAC Nos. 1 through 6; minor differences exist - Assets and liabilities are defined somewhat differently - All aspects of the Framework are undergoing major revision/convergence as part of a joint IASB-FASB project which is now on hold (indefinitely) • \"The objective of the conceptual framework project is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged.\"
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Why Is the US Considering IFRS?
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• Lack of comparability of financial statements across countries (affects investors - key concern of the SEC) • Costs of compliance for MNCs • Use of IFRS by foreign subsidiaries and counterparties • Access of US companies to foreign capital markets • Loss of foreign filers on US stock exchanges (costs) • Human resource issues for auditors of MNCs • Increasing demand from US investors and issuers (voluntary contributions from the US are the largest country-specific source of funds to the IFRS Foundation) * Companies from oversea are not coming over like they use to. * The United States by companies are posting for a change to (IFRS)
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FASB -GAAP and Convergence US Consideration of IFRS
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FASB Convergence with IFRS
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• IASB/FASB Convergence Process • 2002 \"Norwalk Agreement\" - Make existing standards fully compatible as soon as is practicable - Work together to make sure compatibility, once achieved, is maintained • Goal of two separate sets of standards with no substantive differences * The two sets of standards are so close to together that it would seem like one.
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FASB Convergence Initiatives
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1. Short-term convergence projects (Focus on) 2. Joint projects (Focus on) 3. Liaison IASB member 4. Monitoring of IASB projects 5. Convergence research project 6. Consideration of convergence potential in Board agenda decisions
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Short-Term Convergence Projects
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• Identify the superior solution and converge on it • In some cases, IFRS converged toward GAAP - IAS 23 (Revised) - Capitalization of interest (SFAS 34) • In other cases, GAAP converged toward IFRS - SFAS 153 - Exchanges of nonmonetary assets
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Joint Projects
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• FASB and IASB work jointly to develop new or revised standards • Do not always result in identical treatment • Selected major projects - Leases (redeliberations on converged ED during 1Q 2014) - Revenue recognition (converged standards expected 1Q 2014) - Presentation of financial statements (Phase B \"in progress\") - Conceptual framework (8-phase project; after completing first phase the project was suspended then restarted as IASB-only) - Business combinations (converged standards issued in 2008)
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Example - Business Combinations
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• Treatment of noncontrolling interests (NCI) - SFAS 160 (2007) - IFRS 3 (2008) • Classification as equity (consistent) • Measurement - Fair value only (SFAS 160) - Fair value OR proportionate share of the fair value of acquired firm's identifiable net assets (IFRS 3)
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SEC - Reporting by Issuers US Consideration of IFRS
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Timeline of Major SEC Actions on IFRS ( Just Review you dont have to know the dates)
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• July 2007 - issues Concept Release proposing choice between GAAP and IFRS for US issuers • December 2007 - eliminates 20-F reconciliation requirement for FPIs using IFRS (other national standards still reconcile to GAAP) • November 2008 - issues \"Roadmap\" for potential use of IFRS by US issuers • February 2010 - issues updated statement in support of convergence and IFRS, including a \"Work Plan\" • October 2010 - issues first progress report under the Work Plan • May 2011 - issues a staff paper exploring \"condorsement\" • November 2011 - issues two staff papers examining IFRS and how they are used in practice • July 2012 - issues \"Final Report\" delaying any decision on IFRS
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What Are the SEC's Primary Concerns?
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• Are IFRS ready to be the sole set of standards? - Sufficiently developed - are they comprehensive, auditable, and enforceable? - Consistently applied - are they truly comparable? • Is IFRS standard-setting independent and in the best interests of investors?
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What Are the Transitional Issues?
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• Investor understanding and education • Effects on US regulation other than securities laws (e.g., taxes, regulatory reporting) • Impacts on issuers - systems, contracts (debt covenants, compensation), governance, litigation contingencies • Human capital readiness, including audit capacity
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What Are the Incorporation Options?
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• Direct adoption of IFRS • National incorporation process - Convergence - minimize differences over time - Endorsement - incorporate into local standards • Condorsement- continued convergence followed by endorsement after convergence is achieved - Minimizes costs and consequences of a \"big bang\" - Avoids widening differences between public- and private-company standards*The only two methods the U.S are considering are- National incorporation process- Condorsement.
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Endorsement Example - The EU
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• IFRS must be endorsed by European Commission (EC) before they are approved for use by member nations • The EC is empowered to reject any standard, or part of a standard, that does not meet its criteria • EC endorsement is based on three criteria: - Standard is not contrary to EU's \"true and fair\" principle - Standard meets the criteria of understandability, relevance, reliability, and comparability - Adopting standard is in the European public interest
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What Possible Future Role for FASB?
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• The SEC expects a strong continuing (but as yet undetermined) role for FASB • Continued involvement in IASB standard setting? • Incorporate new IFRS standards into GAAP according to an endorsement process? • Authority to modify or add to standards to serve the public interest and/or needs of US investors? • Notwithstanding the continuance of GAAP and an authoritative role for FASB, the goal of incorporation would be \"full alignment of U.S. GAAP and IFRS\"
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When Would Incorporation Occur?
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• Previously proposed dates: - 2008 Roadmap - proposed 2014-2016 phase-in period with voluntary adoptions as early as 2010 - 2010 Statement - delayed adoption until 2015 at the earliest and eliminated early-adoption option • The 2012 \"final\" report delayed incorporation indefinitely (no timeline)
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Why the Delay(s)?
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• IFRS Foundation funding • Comprehensiveness and enforceability of IFRS • IFRS in practice: - Inconsistency in transparency and clarity (inadequate policy disclosure, inconsistent use of terminology, occasional reference to local guidance) - Diversity in the application of IFRS impairs comparability of financial statements across countries and industries (in some cases driven by the standards themselves due to explicit options or lack of guidance)
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IFRS vs. US GAAP Types of Differences
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Principles-Based Standards
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• Less detailed guidance than GAAP (fewer bright lines, less discussion of specific applications) • Leases - SFAS 13 - capitalize if lease term = 75% of useful life - IAS 17 - \"normally\" capitalize if lease term is for the \"major part\" of the asset's useful life • Revenue recognition - GAAP - over 200 separate instances of guidance - IAS 18 (Revenue), IAS 11 (Construction Contracts), and certain Interpretations (SICs 27, 31; IFRICs 12, 13, 15, 18) * GAAP - is more rules based standard * IFRS - is more simple and allows you to make a judgement call * IRFS - Doesn't put exact numbers in there terms ( no clear Guide)
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Differences Between IFRS and GAAP
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1. Recognition - whether an item is recognized in the financials or not 2. Measurement - the amount at which an item is recognized in the financials 3. Classification/Presentation - how/where the item is presented in the financial statements 4. Disclosure - whether and how much additional information is provided in the notes
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Recognition Differences
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Research and development costs • GAAP - expensed as incurred* • IFRS - Research costs expensed as incurred - Development costs are capitalized if specific criteria are met (as \"deferred development costs\") - Amortization begins when the asset under development is available for sale or use
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Measurement Differences
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Impairment of long-term assets • GAAP - two-step approach to measurement - Impairment is indicated based on undiscounted cash flows - Impairment is calculated as CV minus fair value • IFRS - single-step approach to measurement - If impairment indicators are present, impairment equals CV minus \"recoverable amount\" - Recoverable amount is the higher of: fair value OR valuein- use (discounted future cash flows) - Impairment losses reverse in future periods for recoveries
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Measurement Differences
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Inventory • Cost flow assumption - LIFO is not permitted under IFRS • Valuation at lower-of-cost-or-market - GAAP - market defined as replacement cost, constrained by a ceiling and floor - IFRS • market defined as NRV (equivalent to US ceiling) • write-downs must be reversed for recoveries* GAAP- Allows LIFO * IRRS - Doesnt allow LIFO * LIFO helps big companies with less taxes * GAAP you never go over the ceiling or under the floor * IFRS- you always are over the ceiling.
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Classification/Presentation Differences
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• Extraordinary gains and losses - GAAP - unusual and infrequent - IFRS - not permitted to report separately - July 2010 Staff Draft proposes eliminating separate presentation • Interest paid (in SCF) - GAAP - classified as operating activity - IFRS - may be classified as operating or financing activity - July 2010 Staff Draft proposes requiring direct method of presenting cash flows from operating activitiesThe Interest paid must be shown in the operating and not the financial activity. The reason not in the financial activity is that company can make the it seem like there is a positive number in the total.
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Disclosure Differences
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Segment reporting • GAAP - disclosure of segment liabilities is not required • IFRS - disclosure of segment liabilities is mandatory
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Transitioning to IFRS First-Time Adoption of IFRS
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IFRS Opening Balance Sheet
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• The first standard adopted by the reconstituted IASB was IFRS 1, \"First-Time Adoption of IFRS\" • An entity must prepare an \"opening balance sheet\" at beginning of earliest period for which it presents full comparative information under IFRS • This date becomes the \"date of transition\" to IFRS - must be in full compliance with IFRS - prior period adjustments made to beginning retained earnings for conversion from previous standards
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Date of Transition
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• The beginning of the earliest period for which an entity presents full comparative information under IFRS
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Timing of US Adoption of IFRS
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• SEC currently requires two years of comparative information • Proposed first reporting date: 12/31/17? • Comparative SEC periods: 2015, 2016* • Opening IFRS Balance Sheet: 1/1/15 • Determine IFRS adjustments: late 2014
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Preparing Opening Balance Sheet
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• Select accounting policies based on IFRS standards in force on proposed reporting date • Firms are not required to continue with an accounting policy previously used under prior GAAP, even if the policy is in compliance with IFRS • Accordingly, firms adopting IFRS are able to make a \"fresh start,\" selecting accounting policies without regard to consistency with prior national standards
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Steps in Preparing Opening Balance Sheet
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1) Recognize assets/liabilities required by IFRS but not previously recognized under GAAP 2) Derecognize assets/liabilities previously recognized under GAAP but not recognizable under IFRS 3) Reclassify items previously classified under GAAP in a different manner than under IFRS 4) Retrospectively apply IFRS in force on the reporting date in measuring all recognized assets and liabilities (there have been calls to allow US firms to apply IFRS prospectively upon transition)
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Exceptions (Mandatory)*
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• IFRS 1 explicitly prohibits retrospective application of IFRS relating to: - Estimates (para. 14) - Derecognition of financial assets and liabilities (Appendix B) - Hedge accounting (Appendix B) - Non-controlling interests (Appendix B)
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Exemptions (Optional)
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• IFRS 1 permits a number of exemptions from full retrospective application of IFRS in the opening balance sheet (difficult to apply retrospectively, costs exceed benefits) • Optional exemptions cover the following topics: - Business combinations (IFRS 3) - Employee benefits (IAS 19) - Cumulative translation adjustment (IAS 21) - Share-based payment (IFRS 2) Anthony J. Amoruso, Ph.D.
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Reconciliations
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• Initial IFRS statements will include comparative periods that were previously reported under prior GAAP (e.g., 2015-16 for 2017 SEC filings) • Firms must reconcile the following amounts under prior standards to restated IFRS amounts: - Total equity - at the date of transition and at the end of each comparative period - Net income - for each comparative period
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Initial Presentation and Disclosure
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• Initial IFRS financial statements must be presented in accordance with IAS 1 (and all other applicable standards dealing with presentation and disclosure) • At least one year of comparative financial information must be presented • Initial IFRS statements should include disclosures explaining the firm's adoption of IFRS
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Selecting IFRS Policies - IAS 8
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• IAS 8 establishes a hierarchy when choosing IFRS accounting policies: Must know the Order of the Hierarchy. 1) Apply IFRS specifically dealing with accounting item 2) Refer to other IFRSs (IFRSs, IASs, Interpretations) dealing with similar or related issues 3) Refer to IASB Framework (definitions of elements, recognition criteria) 4) Consider pronouncements of other standard-setting bodies with similar conceptual frameworks or industry practices, if consistent with above (e.g., US)
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Standards - Stable Platform?
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• IASB provided a \"stable platform\" for EU adoption - Effective for fiscal years beginning on/after January 1, 2005 - Standards issued after March 1, 2004, did not take effect until 2006 at the earliest • Precedent for a stable platform for US adoption? - EU adoption was more complex - more than a dozen countries with separate and varied national standards - Few countries relied on IFRS at time of EU adoption - US has had the benefit of a decade of convergence - Size and role of US market makes transition momentous
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Conclusion
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• We are too far down this path to turn back • All major players have expressed some degree of support for a single set of global standards • The most likely outcome is some form of continued convergence and/or endorsement • Regardless of the SEC's ultimate decision, US GAAP is being profoundly affected by the process - the same is true for IFRS
