Introduction to International Financial Reporting Standards (IFRS)

 IFRS stands for International Financial Reporting Standards.  Ultimately, the goal is to achieve a single set of high-quality, common accounting standards used around the world.  These standards are for publicly accountable entities. ◦ Small and medium-sized entities (SMEs) that do not have public accountability may use a simplified version of IFRS known as IFRS for SMEs. ◦ IFRS for SMEs is accepted for non-SEC registrants by the AICPA as an acceptable alternative reporting standard to US GAAP; however, it is not common practice.  Currently, there are: ◦ 41 International Accounting Standards (IAS) – (28 still in use) ◦ 15 IFRS

 Formed June 29, 1973 by representative bodies from 9 countries including: ◦ Australia, Canada, France, Germany, Japan, Mexico, Netherlands, U.K./Ireland, and U.S  Headquartered in London, England  Representatives from 112 countries and more than 153 organizations  Formulated 41 International Accounting Standards (IAS)

 Restructured April 1, 2001  Called International Accounting Standards Board (IASB)  IASB is an independent organization with two main bodies ◦ Trustees ◦ Board ◦ Also has an IFRS Accounting Standards Advisory Forum (12 members from various country’s standard setting boards), an IFRS Advisory Council (51 members), miscellaneous advisory Committees and an IFRS Interpretations Committee (14 members appointed by the Foundation)

International Accounting Standards Board (IASB) IFRS and IFRS for SMEs IFRS Advisory Council & IFRS Advisory Forum IFRS Foundation IFRS Interpretations Committee Information provided by Monitoring Board

 Trustees ◦ 22 highly respected experienced members ◦ Chairman – Michel Prada (France), Former Regulator ◦ Vice Chairman – Ronald Arculli, Former Chairman of Hong Kong Exchanges ◦ Main duties  Appoint Board, Committee, and Council Members  Exercise oversight of Board  Raise funds

 Sole responsibility for setting accounting standards  Can have14 voting members, 2 nonvoting members – currently 14 members  Have best available combination of technical skills and international business experience  Seven must have a formal liaison with one or more national standard setters  Minimum: 5 practicing auditors, 3 preparers, 3 users, 1 academic  Chairman of the IASC Board  Hans Hoogervorst – Former chairman of the executive board, the Netherlands Authority for the Financial Markets and a former chairman of the IOSCO technical committee.

Ian Mackintosh – Vice Chair – U.K. and Australia Amaro Luiz de Oliveira GomesAmaro Luiz de Oliveira Gomes – Brazil Chung Woo Suh – South Korea Darrel Scott Darrel Scott – South Africa Gary Kabureck - US Martin Edelmann – Germany Mary Tokar – US Patrick Finnegan Patrick Finnegan – US Phillipe DanjouPhillipe Danjou – France Stephen Cooper Stephen Cooper – UK Suzanne Lloyd - Australia Takatsugu Ochi - Japan Zhang Wei-Guo Zhang Wei-Guo – China

How are international standards set? Agenda Discussion paper (DP) Post-implementation meetings Exposure draft (ED) IFRS Feedback statement Input is received from: ► IFRS Advisory Council and IFRS Advisory Forum ► Working Groups ► International groups such as analysts, preparers, audit technical partners ► Special interest groups ► Local standard setters ► Regulators ► Political groups Public consultation Research Information provided by

 1. The Board establishes an Advisory Committee to give advice on the issues arising in the project. Consultation with the Advisory Committee and various advisory organizations occurs throughout the project.  2. IASB may develop and publish Discussion Documents for public comment.  3. Following the receipt and review of comments, IASB would develop and publish an Exposure Draft for public comment.

 4. Following the receipt and review of comments, IASB would issue a final International Financial Reporting Standard.  5. Publication of a Standard, Exposure Draft, or final IFRIC Interpretation requires approval by a simple majority of the IASB.  Other decisions, including the issuance of a Draft Statement of Principles or a Discussion Paper and agenda decisions, requires a simple majority of the Board Members present at a meeting attended by 50% or more of the board members.

IFRS required or permitted No action taken/date set for adoption Local GAAP based on legacy IAS In process of adopting or converting to IFRS Currently, there are over 130 countries that have either adopted or signed to adopt IFRS. What is the outlook for IFRS adoption? Global snapshot

 Standards are vague guidelines instead of step by step rules (as in the U.S.)  Guidance is limited (ON PURPOSE!)  Judgment is encouraged to apply the standards; over-reliance on detailed rules is discouraged  “True and fair” view overrides ◦ If following a standard would be misleading, you do not have to follow the standard

The following example is a simple illustration of a principles-oriented approach compared to a rules-oriented approach. Rules oriented: ► Your parents tell you to get a 3.2 GPA or above. ► They provide you with 15 contingencies that might justify acceptance of anything lower than a 3.2 GPA. Principles oriented: ► Your parents tell you to do your best to get good grades. ► If you do not get good grades, they will consider the substance of your reasons.

 Revaluation of tangible assets – allows fair market valuation of property, plant and equipment and some intangible asets  Development costs can be capitalized  LIFO inventory not permitted  No extraordinary items allowed  Debt classifications are more stringent under IFRS

 IFRS have no enforceability internationally; only enforceable by the local country adopting them.  IFRSs deemed less rigorous  IFRSs do not cover as many issues as US GAAP  *See Scott Taub’s recent article about these “differences” being myths!

 FASB/IASB Memorandum of Understanding – MoU (Norwalk Agreement) ◦ In 2006, both pledged to use their best efforts to converge standards ◦ Coordinate future work programs ◦ Originally wanted to “converge” by June 30, ◦ Did not happen but still working on projects.

 Boards have achieved “high-level” convergence in some areas ◦ Business combinations ◦ Share-based payments ◦ Income taxes ◦ Fair value option ◦ Earnings per share ◦ Statement of cash flows ◦ Pensions ◦ Presentation of other comprehensive income ◦ Revenue recognition (most recently)

 In other areas, models are very different: ◦ Debt/equity classification ◦ Derecognition ◦ Consolidation ◦ Impairment of long-lived assets  Still working on: ◦ Leases ◦ Insurance contracts ◦ Financial Instruments ◦ Conceptual framework

 Securities and Exchange Commission (SEC) ◦ As of Nov., 2007, foreign listed companies using IFRS do not have to reconcile to U.S. GAAP. ◦ Proposal to switch to IFRS under consideration ◦ In 2010, SEC established a “Work Plan” to support a decision for IFRS. ◦ In a July, 2012 final report, the SEC reaffirmed its commitment to IFRS and continued convergence activities. It mentioned endorsement and convergence – “condorsement”, as a way to adopt selected IFRS.

 The final report concerns for IFRS implementation:  Sufficient development and consistent application of IFRS  Independence of the standard-setting process  Investor understanding and education  Examination of the US regulatory environment  The effect of IFRS on US issuers, both large and small  Human capital readiness

 On May 20, 2014, current SEC chair Mary Jo White, indicated that IFRS continues to be a top priority for the SEC in her remarks at a Financial Accounting Foundation Trustees Dinner.  She also highlighted the SEC’s commitment to IFRS with over 500 foreign private issuers reporting under IFRS at this time, but that the question still remains for domestic issuers.  Given this experience, she indicated a an updated statement on IFRS from the SEC in the relatively near future.  December 2014  SEC Chief Accountant stated that the SEC is considering allowing U.S. companies to allow IFRS- based supplemental information (along with U.S. GAAP information.)

 Resistance to change  Individual countries often do not adopt all of the IFRS (carving out standards they do not like).  IFRS are no more rigorous than the FASB  U.S. Congress may be confronted by non- accepting constituents  IASB too large? Too political? (Desired composition: 4 – North America, 4 Europe, 4 Asia/Oceania, 1 Africa, 1 South America, 2 other for geographical balance)

 IASB (  IAS Plus ( ◦ Website sponsored by Deloitte