Member of Iranian Association of Certified Public Accountants(IACPA) What is IFRS Gholamhossein Davani Member of New York State Society of Certified Public Accountants(NYSSCPA) Member of Iranian Association of Certified Public Accountants(IACPA) November 2009

What is IFRS? IFRS is a set of established accounting standards that is rapidly gaining worldwide acceptance Standards are promulgated by the London-based International Accounting Standards Board (IASB)–IASB includes representatives from major countries, including the U.S. Generally more focused on objectives and principles and less reliant on detailed rules and interpretations than U.S. GAAP– IFRS currently consists of a single volume of approximately 40 standards and 25 interpretations Standards include IASs and IFRSs Interpretations include SICs and IFRICs

Consensus on the use of a “principle-based” approach The Big Picture A new perspective on financial reporting –Focus on “transparency” of financial information versus uniformity of practices General movement toward global standards–Growing consensus among regulators and standard setters on need for global standards Consensus on the use of a “principle-based” approach Shift in how standards are developed, written and applied–Will involve a new way of thinking about accounting and financial reporting Reducing complexity and simplifying standards

The Global Move Towards IFRS Canada 2009/11 Europe 2005 United States (2011?) China 2007 Japan (?) India 2011 Brazil 2010 Chile 2009 South Africa 2005 Australia 2005 Current or anticipated requirement or option to use IFRS (or equivalent) 4

IFRS Today and Tomorrow Today IFRS is used in over 100 countries: Required across all EU countries, starting in 2005 Argentina, Brazil, Canada and India have announced mandated use Ongoing convergence efforts between FASB and IASB By 2014, it is expected that: All major countries will have adopted IFRS to some extent China and Japan will be substantially converged to IFRS U.S. public companies will begin to be required to use IFRS Accounting Standards Used by Global Fortune 500 5

Global IFRS reporting trends IFRS quickly picking up share of Global F500 companies 300 268 250 203 204 200 183 US GAAP 150 Other 113 IFRS 100 50 29 2004 2007 IFRS Drivers Enhances transparency/comparability Eases flow of capital globally, thus possible reduction in cost of capital Facilitates accounting and reporting

Recent Regulatory Developments SEC Concept Release on allowing U.S. issuers a choice between IFRS and U.S. GAAP Elimination of U.S. GAAP reconciliation for Foreign Private Issuers using IFRS FASB panel discussion of U.S. moving to IFRS Encouragement from stakeholders for the SEC to set a definitive timeline for conversion to IFRS SEC IFRS Roundtable –August 2008 Discussion on performance of IFRS and U.S. GAAP during credit crisis Consensus that IFRS held up well, if not better than U.S. GAAP Fair value still remains a challenge under both standards Discussion on areas where continued convergence is needed

Recent Regulatory Developments 􀂃SEC Proposing Release sets the stage for possible mandatory adoption of IFRS by U.S. issuers beginning with fiscal years ending after December 15, 2014 for large accelerated filers 􀂃Roadmap contains certain milestones to be achieved–SEC Commission to review milestone progress in 2011 before issuing a final rule for mandatory adoption 􀂃Proposed rule to permit certain U.S. issuers the option to use IFRS for fiscal years ending after December 15, 2009– Three years of financial statements must be presented –Issuers must be in the top 20 companies in their industry based on market capitalization, andtheir industry peer groupmustpredominantly report under IFRS

US GAAP – IFRS Convergence Convergence is to be achieved through: Formal liaison relationships Monitoring of FASB and IASB major projects Short-term convergence projects Joint projects 9

Ongoing Convergence Efforts IASB and FASB reaffirm convergence efforts Updating of the “Norwalk Agreement” Focus is on the process and converging general principles Less focus on converging details Involves several projects “Short-term” convergence projects Joint conceptual framework projects Other Joint convergence projects Other IASB projects Future prospects In 2002 the FASB and IASB entered into an agreement (dubbed the “Norwalk Agreement”) that set forth each board’s commitment to converging U.S. GAAP and IFRS. This agreement was updated in 2006 and includes a specific work plan targeted at converging a number of major topical areas. Under this plan, the FASB will amend certain U.S. GAAP standards to conform with IFRS and the IASB will amend IFRS to conform with U.S. GAAP. There also are a number of “joint” projects where new standards will be developed. It’s important to keep in mind that convergence is really a process – the result of which are standards that are similar, but not necessarily identical. The major focus has been on converging the general principles versus detailed guidance. The Norwalk Agreement involves several detailed projects over a number of years. There are ten “short-term” projects that are targeted toward completion by 2009. There are several other projects, which are longer term in nature and involve major topics (such as revenues, liabilities, consolidation, leasing). Most of these are “joint” projects. Recent changes to U.S. GAAP related to converge efforts include, FAS 123R, FAS 132R, FAS 151, FAS 153, FAS 154, FAS 158, and FAS 159. FAS 141R is expected soon. 10

Recent FASB/IASB Standards “High Level” Convergence Description FASB Issuances IASB Issuances Share-based payments FAS 123R IFRS 2 Business combinations FAS 141R IFRS 3 (2008) Goodwill and other intangible assets FAS 142 IAS 36 and IAS 38 Long-lived assets held for sale and discontinued operations FAS 144 IFRS 5 Fair value option and measurement guidance FAS 155, FAS 157 and FAS 159 IAS 39 Even though these were joint projects, key differences still remain. 11

US GAAP – IFRS Convergence – Where are we now? Boards have achieved “high-level” convergence in some areas Examples include income taxes, business combinations, share-based payments, etc. Other areas, models are very different Examples include debt/equity classification, de-recognition, consolidation, etc. 12

US GAAP – IFRS Convergence – Where are we now? A study of 130 reconciliations from foreign filers using IFRS in 2006 showed the differences between the two accounting systems can be quite large: Approx. 2/3 of the companies showed higher earnings under IFRS Only two companies in the study showed the same earnings under both IFRS and US GAAP 13

US GAAP – IFRS Convergence – Where are we now? Impact to Equity Slightly more than half of the cos. Showed greater equity under IFRS 1 company had the same equity The following areas contributed significantly to the differences Deferred taxes, PP&E, pensions, minority interest, capitalization of interest, purchase price accounting and asset impairment 14

First Time Adoption of IFRS

Terminology Differences IFRS U.S. GAAP Shares Stock Stock Inventory Reserves Equity Associate Investee Provision Accrual True and fair Presents fairly

Overview of IFRS 1 Applicable when an entity makes its first explicit and unreserved reference to IFRS Generally apply retrospectively all IFRS effective at reporting date Certain exemptions can be elected Some exceptions that must be followed Requires one year of comparative financial information Transition adjustments recognized in retained earnings Must explain effect of transition to IFRS

Scope An entity is a “first-time adopter” if the most previous financial statements were prepared: In conformity with IFRS in all respects, except that an explicit and unreserved statement of compliance was not presented Stating compliance with some, but not all of IFRS With a reconciliation of some amounts to IFRS On an IFRS basis for internal use only

Terms to Remember 􀂃First IFRS financial statements–First annual financial statements in which an “explicit and unreserved” reference to compliance with IFRS 􀂃Date of transition to IFRS–Beginning of the earliest comparable period presented in an entity’s first IFRS financial statements 􀂃Reporting date–The end of the latest period covered by financial statements or by an interim financial report

Compliance with IFRS Compliance with IFRS includes: All active standards (IASs and IFRSs) All active interpretations (SICs and IFRICs) IFRS requires presentation of comparative period Must make explicit and unreserved statement of compliance 20

The Good, the Bad, and the Ugly The good–You know more about IFRS than you think Many areas are similar to U.S. GAAP The bad–There are significant areas of difference New way of thinking about standards Just plain ugly–There has been historically lax practices in applying IFRS (“IFRS lite”)

Overview of Key Concepts Concept Discussion Accounting policies Specific principles, bases, conventions, rules and practices Estimates Adjustments in the carrying amount of assets or liabilities Result from new information or developments Errors Material omissions or misstatements in financial statements Include clerical errors, mistakes in application, oversight or misinterpretation of facts, fraud Material Omissions or misstatements that individually or collectively influence the economic decisions of users Consider the size and nature of the item

IFRS Accounting Policies – IAS 8 IAS 8 established “hierarchy” when choosing IFRS accounting policies Apply any specific IFRS; consider any relevant implementation guidance Refer to other IFRSs dealing with similar or related issues IFRS Framework Consider pronouncement of other standard-setting bodies or industry practices if consistent with the above steps 23

Consistency of Accounting Policies – IAS 8 If one or more alternative methods are available: Choose and apply one method for the consolidated entity For all transaction/items; or If expressly permitted, for all transactions/items, etc. in a category of items If expressly permitted on a transaction by transaction basis 24

IFRS Timeline

What will happen

IFRS Solution

IFRS will integrate domestic businesses with the global investor Why world going IFRS IFRS will integrate domestic businesses with the global investor Financial community so that there is no language gap and barrier IFRS is acceptable globally and provides a common accounting/reporting language to the world

Because of longstanding convergence projects between the IASB and the FASB, the extent of the specific differences between IFRS and GAAP has been shrinking. Yet significant differences do remain, most any one of which can result in significantly different reported results, depending on a company's industry and individual facts and circumstances. For example: • IFRS does not permit Last In, First Out (LIFO). • IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely. • IFRS has a different probability threshold and measurement objective for contingencies. • IFRS does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date. What are some of the most important specific differences between IFRS and U.S. GAAP?

Structure of IFRS(1) IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments. International Financial Reporting Standards (IFRS) - standards issued after 2001 International Accounting Standards (IAS) - standards issued before 2001 International Financial Reporting Standards comprise: Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001 Standing Interpretations Committee (SIC) - issued before 2001

A Principles-based Approach Less detailed guidance to consider More of a focus on the “substance” of transactions Evaluate whether the accounting presentation reflects the “economic reality” More use of professional judgment Impact on risk Possibility of second-guessing by regulators More of a focus on the “process” around making judgments CIFR recommendations

Other Accounting Policy Considerations In considering the applicability of U.S. GAAP pronouncements, must consider consistency with the overall IFRS “principle” Generally no “bright lines”–Need to establish “benchmarks” for analysis Transitional provisions in U.S. standards and interpretations may not be applicable under IFRS On first-time adoption would need to apply retrospectively unless related to exemption

Sources : 1-NYSCPA. org 2-aicpa. org 3-IFRS. org 4-iasb Sources : 1-NYSCPA.org 2-aicpa.org 3-IFRS.org 4-iasb.org 5-Wikipedia.org 6-CFO.org