IFRS vs. US GAAP

1. IFRS vs. US GAAP Anthony P. Pencek, CPA IMA NERC-Mystic, CT September 20, 2010

2. Accountant’s Cartoon

3. International Financial Reporting Standards (IFRS) vs. US Generally Accepted Accounting Standards (GAAP) What does it mean for you?

4. Convergence!!!! Dictionary Definition: Convergence means “to tend or move toward a common point or result.” Goal– Comparability and Consistency

5. 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)

6. 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

7. 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.

8. 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/globalsurvey

9. 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.

10. History of IASB and IFRS

11. 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. • Japan’s Accounting Standards Board has planned convergence with IFRS by 2011. • India will be using the IFRS for 2009. • More countries are looking into adapting.

12. What is the United State status on adoption? See Next Slides

13. 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.

14. Potential Implementation Timeline Continued IFRS/US GAAP convergence – milestones must be met by 2011 Train/monitor progress: Numbers, people, systems, processes 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

15. Momentum to Adopt IFRS in the US SEC Chief Accountant article regarding progress on convergence April 2005 P reconciliation for foreign filers SEC holds roundtables discussions Roundtable discussions held on the impact of IFRS on US Capital Market – overwhelming support for elimination of the reconciliation Summer 2007 SEC eliminates the requirement for reconciliation to US GAAP to FPI’s using IFRS as adopted by IASB Concept Release issued for comment, allowing US issuers the option to use IFRS November 2007 SEC issues initial “roadmap” Approved proposal to eliminate the reconciliation to US GAAP for foreign filers, effective immediately August 2008 “New” SEC reinforces “roadmap” Propose adoption in US February 2010

16. 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.

17. 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

18. 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.

19. 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.

20. 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

21. 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.

22. 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.

23. British Airways Balance Sheet

24. Google Inc. Balance Sheet

25. 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.

26. 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.

27. 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. -Japan’s 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??________

28. 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 nation’s financial reporting if you can chose what standards will be used?

29. 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.

30. 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 CPA’s 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?

31. 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%

32. 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 client’s personnel with new requirements to be in compliance with IFRS.

33. Suggestions for Compliance

34. 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.

35. Google, Inc. IC Report

36. British Airlines Auditor’s Report

37. Auditor’s Report-Google, Inc.

38. 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.

39. 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.

40. 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!!!

41. 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.

42. 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.

43. 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??

44. Recent Developments -IFRS • Issuance in 2009, IASB issued International Financial Reporting Standard for Small and Medium Sized Entities (IFRS for SME’s). • 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

45. 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

46. Latest Proposals on Financial Statement Presentation-(Cont’d) • 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

47. Latest Proposals on Financial Statement Presentation-(Cont’d) • 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

48. Latest Proposals on Financial Statement Presentation-(Cont’d) • 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

49. Latest Proposals on Financial Statement Presentation-(Cont’d)

50. 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