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IFRS vs. US GAAP

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Title: International Financial Reporting Standards (IFRS) vs. US Generally Accepted Accounting Standards (GAAP) Author: Anthony Pencek Last modified by – PowerPoint PPT presentation

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Title: IFRS vs. US GAAP


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

2
Accountants 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/glo
    balsurvey

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
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
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.
  • 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.

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
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
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
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.
  • -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??________

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 nations 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
    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?

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 clients 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 Auditors Report
37
Auditors 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 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

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-(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

47
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

48
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

49
Latest Proposals on Financial Statement
Presentation-(Contd)
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

51
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

52
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

53
Questions????
  • Thank you!!
  • Best Wishes for a wonderful conference!!!
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