Practical implications of a transition to ifrs joel o snoss
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Practical Implications of a Transition to IFRS Joel O snoss. Bogota Colombia. August 31, 2011. Background Benefits and challenges Best practices Some high-level advice Final thoughts. Agenda. Background. Background: Status of IFRS Usage. IFRS is widely spread across the globe.

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Practical Implications of a Transition to IFRS Joel O snoss

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Practical Implications of a Transition to IFRSJoel Osnoss

Bogota Colombia

August 31, 2011

  • Background

  • Benefits and challenges

  • Best practices

  • Some high-level advice

  • Final thoughts

  • Agenda


Background: Status of IFRS Usage

IFRS is widely spread across the globe

  • Required of public companies in 100+ countries

    • Used by more than 40% of the global Fortune 500

    • More coming on-line 2011 through 2012 including

      • Argentina, Mexico, India, Korea

  • IFRS for SMEs

    • Starting to see interest from private entities

    • Basis for statutory reporting in some countries

Transition in the US

Current Landscape

  • SEC issued a statement in February 2010

    • Supports one set of global accounting standards

    • IFRS is best positioned

    • Initiated a “Work Plan”

    • Staff Paper issued May 26, 2011

      • Possible IFRS “incorporation” over 5 to 7 years

      • Possible earlier option to adopt

    • On track to make decision later this year

  • Japan may decide based on SEC’s decision

  • Non-US companies that file with the SEC are already permitted to use IFRS

  • Background: IFRS Overview

    • Key characteristics of IFRS

    • Principles-based approach that places greater emphasis on interpretation and application of principles, with a particular focus on the spirit of the principle being applied

    • The standards necessitate the assessment of the substance of transactions and an evaluation of whether the accounting presentation reflects the economic reality

    • Focus on the need for professional judgment in arriving at accounting conclusions

    • Greater use of fair value as a measurement basis placing emphasis on obtaining reliable measurements

    • More extensive disclosure requirements

    Background: Putting principles into action

    • More comparability under IFRS will impact investor expectations…

    U.S. GAAP

    Other GAAPs



    Benefits and challenges

    Benefits / Challenges

    Benefits and challenges can be considered from the following different perspectives:

    • Technical accounting and financial reporting

    • Process and statutory reporting

    • Technology infrastructure

    • Organizational

    Benefits and challenges of IFRS implementation

    Technical accounting and financial reporting

    • Benefits:

    • Enhanced comparability— Global investors want the comparability of a single set of accounting standards

    • Easier access to capital – IFRS is a “global passport”

    • Easier M&A – No need to reconcile buyer and seller

    • Challenges:

    • Robust financial reporting requirements – IFRS requires additional disclosure; may be more restrictive in certain areas

    • Objective application — Cultural bias can be an issue

    • Moving target — Additional complexities due to changes in IFRS

  • But it goes beyond accounting and financial reporting…

  • Beyond accounting and financial reporting…

    Process and statutory reporting

    • Benefits:

    • Standardized reporting — Streamline management reporting, including bonus systems; transform statutory and tax reporting

    • Reduction in consolidation adjustments – Conformed IFRS policies reduce the number of adjustments needed

    • Internal controls – Opportunity to improve controls / processes


    • Challenges:

    • Policies of overseas group entities – The extent of accounting policy alignment if some subsidiaries have adopted IFRS

    • Management and internal reporting – Aligning internal and external reporting may require significant effort

    • Internal controls — Changes to processes and systems could impact control effectiveness

    Beyond accounting and financial reporting (continued)…

    Technology infrastructure

    • Benefits:

    • Integrated systems — Opportunity to reduce the number of ledgers and systems being used

    • Update legacy systems — Gain efficiencies by replacing disjointed legacy systems with enterprise-wide systems


    • Challenges:

    • Dual reporting — Maintaining multiple accounting frameworks during transition

    • IFRS compatibility — Current or planned systems may not be “IFRS ready”

    Beyond accounting and financial reporting (continued)…


    • Benefits:

    • Efficient use of resources — Consistent accounting policies can lead to cost savings through shared services, greater mobility of accounting personnel and standardized reporting

    • Access to capital markets — IFRS facilitates easier access

    • Tax and treasury — Consider strategic tax alternatives, cash tax impacts, and opportunities to enhance subsidiary distributable reserves


    • Challenges:

    • Cooperation — Potential difficulties in achieving convergence of non-controlled interests

    • Employee commitment — Significant training and communication is often required

    • Contracts — Impact on debt covenants, bonus and compensation arrangements, revenue contracts, etc.

    • Taxes – impact on tax structures, potential loss of benefits and volatility in tax provisions and the effective tax rate



    Lessons learned

    • Overall approach was to minimize differences from local GAAP

    • Variety of performance measures were used

    • Increased disclosure in financial statements

      • Judgments made and risk disclosures

    • Use of IFRS 1 exemptions

      • Business combinations, CTA and pension exemptions widely used

    • Significant impact on results

      • Asset impairments, “split accounting” and components were significant issues

    • Effort was underestimated

    • Lead time from announcement to reporting date was short

    • Late start often resulted in escalation of costs, especially after transition date

    • Some companies did not achieve “business as usual” state for IFRS reporting

      • Often a lack of a holistic approach, taking collateral effects into consideration

    • Hard to get it right the first time

      • Several companies are only now starting to explore benefits from IFRS implementation

    The EU experience

    Best practices

    Illustrative adoption timeline

    Reporting Date

    Transition Date

    Step 5

    • Transition to IFRS

    • Interim Reporting

    • Investor Communications

    Step 4

    • Transition to IFRS

    • Interim Reporting

    • Investor Communications

    Step 3

    • Local GAAP and IFRS opening balance

    • Investor Communications

    • Audit Procedures

    • Change Standards

    • Local GAAP and IFRS opening balance

    • Investor Communications

    • Audit Procedures

    • Change Standards

    • Statutory Implementation

    • Select Exemptions

    • Prepare IFRS Opening Balance sheet

    • “Dry Runs”

    Step 2

    • Statutory Implementation

    • Select Exemptions

    • Prepare IFRS Opening Balance sheet

    • “Dry Runs”

    IFRS Competence

    • Targeted Statutory Implementation

    • System and Process redesign

    Step 1

    • Targeted Statutory Implementation

    • System and Process redesign

    • Awareness

    • Assessment

    • Planning

    • Initial Training

    • Roadmap

    • Awareness

    • Assessment

    • Planning

    • Initial Training

    • Roadmap

    Alignment with other initiatives and training for appropriate personnel

    Rationalization and standardization of statutory reporting

    Potential near-term action steps

    • We have identified the following areas where companies can get started:

    Potential near-term action steps (continued)

    Some High-level advice andfinal words

    Some High-Level Advice

    Prepare for Macro-implications

    • IFRS is global

      • Regulators are communicating and cooperating

        • SEC; European Securities and Markets Authority (ESMA); International Organization of Securities Commissions (IOSCO)

      • Analysts and investors will expect consistency and transparency

      • Industry participants are communicating

      • Your financial statements may be read and understood anywhere

      • Decisions made in London can be felt in Peru

  • Standards based on principles:

    • Require discipline over judgments

    • Necessitate robust disclosure around judgments

    • Do not permit the ability to say “tell me where it says I can’t do this!”

  • Some High-Level Advice

    Implement a Judgment Framework

    • Discipline over principles-based accounting

      • A balanced approach to accounting and disclosure

      • Committee on Improvements to Financial Reporting (CIFiR) Recommendations:

      • Analyze business purpose and substance of transactions

      • Identify all relevant accounting research

      • Consider alternatives based upon investor needs

      • Seek input from multiple individuals with expertise

      • Consistent application of accounting judgments based upon reliable assumptions and estimates

    Some High-Level Advice

    Areas Most Subject to Judgment:

    • Revenue recognition

    • Provisions

    • Business combinations

    • Consolidation

    • Impairment of assets

    • Employee benefits

    • Financial instruments

    Some High-Level Advice

    Prepare for new IFRSs

    • Monitor IASB meetings

    • Share information within your industry

    • Stay abreast of current publications/ thought pieces

    • Participate in IASB outreach activities

      • Comment letters

      • Roundtables

      • Field testing

    • Communication is critical (internal and external)

    Some High-Level Advice

    Monitor Continuing Developments

    • Pace of standard-setting unprecedented

    • Stakeholders expressed concern over due process

    • The IASB and FASB pressured to re-expose

  • Revenue recognition and leasing will be re-exposed

  • Insurance and parts of financial instruments likely re-exposed

  • Target completion dates updated

  • Recently issued IASB proposals

    • Defer mandatory effective date of IFRS 9 to 2015 from 2013

    • Agenda consultation

  • Effective dates of major projects could be 2015 or 2016

  • Updated IASB Work Plan

    Final Thoughts to Leave You With

    IFRS is Going to Be the Universal Accounting Language

    • IFRS is the global passport to capital

    • There is a global focus on IFRS by regulators

    • Prepare now to adopt properly

      • Set the “tone at the top” of the organization

      • Implement a judgment framework

      • Follow IASB activities and get involved

    • A global perspective is essential to a successful implementation


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