International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or the IASC Foundation Developing an IFRS for NPAEs Skopje, 11 March 2009 © 2008 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. March 2009 Michael Wells, Senior Manager – Education Projects, IASC Foundation

Outline Why an IFRS for NPAEs? IASB’s exposure draft IASB’s redeliberations Next steps IASCF training material Prospects 2

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation Why an IFRS for NPAEs?

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 4 History voluntary adoption of IAS by some listed, few unlisted. Since 2001: Old IASC restructured – full time IASB IFRSs’ growing complexity Full IFRSs required in over 100 countries National GAAPs converging to IFRSs Emerging economies – NPAEs need capital NPAEs: User needs? Burden? Enforcement problems  IFRS ‘Lite’?

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 5 GAAP reporting required by law for all or most private companies? USA: Generally NO. –5,000,000 private corporations: No –15,000,000 other business: No –25,000 SEC/others  FASB GAAP by law Rest of world: generally YES. –Europe: 5,000,000 companies must prepare GAAP f/s and have audit by law

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 6 Benefits of IFRSs for listed entities Improved quality of reporting Investors invest globally Companies seek capital globally Analysts follow industries globally Cross-border mergers Accounting differences obscure comparisons and reduce understandability

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 7 Global standards needed for NPAEs Bank lending decisions Banks monitor outstanding loans Vendors evaluate finances of buyers Credit rating Overseas customers Foreign venture capital Non-management investors Development institutions (WB etc)

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK. 8 Why NPAEs Standards Are Needed? Efficiency (homogeneous accounting  cost of processing the information is lower  Allocation of funds is more efficient) Financial integration (accounting could be a barrier) Improved quality of reporting as compared to existing GAAP Ease burden where full IFRSs or full national GAAP are now required Education and training Auditing efficiencies

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation IASB’s Exposure Draft

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Focus more on short-term cash flows, liquidity, and solvency Cash flow statement essential Restrict “off balance sheet” debt – unfunded pensions, leases, derivatives, contracts, and (at least some) deferred taxes Short-term items at current measurements Less interest in long-term earnings forecasts or long-term cash flows

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK IASB Definition of NPAE Which entities are eligible to use? IFRS for NPAEs is appropriate for an entity with no public accountability: – not publicly traded; and – not a financial institution

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Finding an Answer Self-contained standard: The entity must try to find answer in IFRS for NPAE –by analogy, and –by using pervasive principles in Sec. 2 of IFRS for NPAEs May look to full IFRSs if answer cannot be found in IFRS for NPAEs –But, not required

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Disclosure Simplifications Full IFRSs: More than 3,000 disclosures IFRS for NPAEs: Fewer than 400 Simplifications based on users’ needs and cost-benefit: Kept: Short-term cash flow, liquidity, solvency, measurement uncertainties, accounting policy choices Dropped: Disaggregations, public capital market disclosures

© 2009 IASC Foundation. 30 Cannon Street | London EC4M 6XH | UK Suitability for Micro-sized Entities? Is the IFRS for NPAEs suitable for companies with less than 10 employees? Yes Key issue: Is it required to prepare general purpose f/s that present fairly position, performance, and cash flows? –aimed at external capital providers –this is not IASB’s decision – rests with government

15 IASB Exposure Draft Organised by topic ED is 254 pages, plus: –financial statements –disclosure checklist –basis for conclusions Board vote: 13 to 1 ED issued: 15 February 2007 Translated: 5 languages Comment deadline was: 30 Nov 2007 Re-deliberations are mostly completed

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 16 About the ED Simplified principles tailored for smaller, private entities that: –do not have public accountability –issue general purpose financial statements Based on full IFRSs, which are developed for public capital markets Simplifications based on: –user needs –cost-benefits

NumberPercent Total Entities4,679, Owner run (no employees) 3,460, – 9 employees1,019, – 49 employees167, – 99 employees17, – 199 employees8, – 499 employees5, or more employees3, Who are we aiming at? In most countries, only 1% of businesses have over 50 employees. United Kingdom (2007):

NumberPercent Total Entities4,679, Owner run (no employees) 3,460, – 9 employees1,019, – 49 employees167, – 99 employees17, – 199 employees8, – 499 employees5, or more employees3, Who are we aiming at? In most countries, only 1% of businesses have over 50 employees. United Kingdom (2007): Over 50 employees are only 8/10 th of 1%. And many of those are ‘publicly accountable’ (full IFRSs).

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 19 Who are we aiming at? Which entities must produce general purpose financial statements is not IASB’s decision: –public interest issue addressed by legislature and regulators Present fairly financial condition, performance, and cash flows For external capital providers and others

20 How did we simplify? 1.Some topics in IFRSs omitted if irrelevant to NPAEs 2.Where IFRSs have options, include only simpler option (there will be exceptions) 3.Recognition and measurement simplifications 4.Reduced disclosures 5.Simplified drafting

21 Extensive outreach and consultation Presentations at 104 conferences and roundtables in 40 countries (55 since ED was issued) + 14 SAC, IASCF, and WSS meetings 10 published articles Field tests with 116 very small companies – field test questionnaire in English, French, Spanish 162 comment letters

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation IASB’s redeliberations

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 23 Board redeliberations so far March 2008 – analysis of comment letters April 2008 – analysis of field test results May 2008 – February 2009 – Board review of ED section by section, several hundred decisions, many simplifications.

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 24 Title of the standard Tentative decisions ED—IFRS for SMEs (problem—implies size test) May 2008—IFRS for Private Entities January 2009—IFRS for NPAEs March 2009—? The National Standard Setters had recommended IFRS for Non-publicly Accountable Entities (IFRS for NPAEs)

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 25 Cross-references to full IFRSs Tentative decisions Should be fully stand alone Drop cross-references by bringing in some ‘complex options’ (and a few omitted topics): – lessor accounting for finance leases – share-based payment – fair value of agricultural assets – hyperinflation Exception Option to use full IFRSs for financial instruments (IASs 32 & 39 and IFRS 7 and all relevant Interpretations) included by cross-reference

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 26 Do not anticipate changes to full IFRSs Tentative decision Consider issue by issue

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 27 Scope Tentative decisions excludes small listed entities excludes an entity whose primary business is holding funds in a fiduciary capacity includes an entity that holds funds in a fiduciary capacity as a sideline to its principal business (eg travel agency or utility company that holds deposits) that otherwise qualifies as a NPAE.

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 28 Historical cost model should be default For non-financial assets, it essentially is For financial assets, ED is amortised cost for receivables, payables, loans, loan commitments, and non-publicly traded equity But ED is presented as FV model, and if there is embedded, entire instrument at FV Always a ‘reliability exception’ for FV

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 29 Financial instruments Tentative decisions Split out ‘plain vanilla’ instruments in separate cost-based section Many NPAEs won’t need to look at the other section Option (by cross reference) to follow IASs 32, 39 and IFRS 7 in lieu of Section 11

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 30 Consolidation Tentative decisions Consolidated financial statements required for all groups (as proposed in ED) Include principles from SIC-12 SPEs Exemption from consolidation if acquired for sale within 12 months

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 31 Associates Tentative decision Accounting policy choice: –cost method; –equity method; or –at fair value through profit or loss If using cost model then do not separate pre- and post-acquisition retained earnings (ie recognise all dividends received in profit or loss)

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 32 Jointly controlled entities Tentative decisions Accounting policy choice: –cost method; –equity method; or –at fair value through profit or loss Prohibit proportionate consolidation If using cost model then do not separate pre- and post-acquisition retained earnings (ie recognise all dividends received in profit or loss)

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 33 Presentation of financial statements Tentative d ecisions Conform to revised IAS 1 Include a statement of comprehensive income Use of new titles will not be required

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 34 Operating cash flows Tentative decision Choose either presentation format: –direct method, or –indirect method

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 35 Debt-equity classification Tentative d ecisions Incorporate recent ‘puttables’ changes Issuer must split compound financial instrument. Add examples.

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 36 Share-based payment Tentative d ecisions Recognise an expense for equity-settled SBPs The expense should be measured on the basis of observable market prices, if available, or, if not, using the directors’ best estimate of the fair value of the equity-settled SBPs. Disclosure alone, without expense recognition, would not be permitted. Include principles of IFRIC 8

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 37 Goodwill and indefinite life intangibles Tentative d ecisions Impairment test (indicator approach as in ED) Deemed to have finite lives Amortise over 10 years (maximum)

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 38 Revaluation model Tentative decisions No revaluations of property, plant & equipment No revaluations of intangible assets

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 39 Non-current assets held for sale Tentative decisions No ‘held for sale’ classification However, the decision to sell an impairment indicator

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 40 Impairment Tentative decision Add notions like in IAS 36: – recoverable amount –value in use –cash generating unit

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 41 Investment property Tentative decisions Circumstance driven – fair value model if can measure reliably without undue cost or effort –otherwise use cost model Full IFRS—accounting policy choice

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 42 Government grants Tentative decisions A grant that does not impose specified future performance conditions on receipts is recognised in income when the grant proceeds are receivable A grant that imposes specified future performance conditions on receipt is recognised only when the performance conditions are met

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 43 Government grants continued Tentative decisions continued Grants received before the recognition criteria are satisfied are classified as liabilities IAS 20 methods are prohibited

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 44 Leases Tentative decisions Include finance leases for lessors (not in ED) Include principle of IFRIC 4 (not in ED) Operating leases—modified application of straight- line method for inflation adjustments

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 45 Borrowing costs Tentative decisions Expense No option to capitalise Full IFRS requires capitalisation of borrowing costs for all qualifying assets.

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 46 Research and development costs Tentative decisions Expense research cost Expense development costs No option to capitalise borrowing costs Full IFRS requires the capitalisation of qualifying development costs

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 47 Real estate—revenue recognition Tentative decision Include principles from IFRIC 15 Agreements for the Construction of Real Estate

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 48 Service concession arrangements Tentative decision Include principles from IFRIC 12 Service Concession Arrangements

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 49 Income taxes Tentative decisions Keep temporary difference approach (as in ED) with some simplifications Retain the requirements proposed in the ED and in IAS 12 regarding the measurement of deferred tax when a jurisdiction imposes different tax rates on distributed and undistributed income All deferred tax assets and liabilities classified as non-current Prohibit discounting (current and deferred tax)

Defined benefit plans Tentative decisions If can get information without undue cost or effort, use IAS 19 method, ie PUC etc If not, IAS 19 approach but ignore future salary increase, future service, or possible mortality during an employee’s period of service. However, take account of life expectancy of employees after retirement age. The resulting defined benefit pension obligation would reflect both vested and unvested benefits. Comprehensive valuations normally every three years. Interim periods, valuations rolled forward for aggregate adjustments for employee composition and salaries, but without changing the turnover or mortality assumptions. Further guidance would be added on insured benefits.

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation Next steps

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 52 Redrafting of the ED January to March 2009 Reflect all Board decisions Additional guidance examples Editorial corrections and improvements –many indentified in comment letters Send pre-ballot draft to Board Then one or more ballot drafts Then, finally, the ballot (vote)

53 Re-exposure? IASB handbook says: In considering re-exposure, the IASB Identifies substantial new issues arising in ED comments not previously considered Assesses evidence that it has considered Evaluates whether it has understood the issues and sought views of constituents Considers whether the various viewpoints were aired in the ED and adequately discussed and reviewed in the ED basis for conclusions － －

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation IASC Foundation training material

Overview IASCF does not certify accountants… However, is developing training material for use by others +35 standalone modules (1 for each section of the IFRS for NPAEs) Training material = +1,000 A4 pages. IFRS for NPAEs = +250 A5 (half size) pages Developed by IASCF education staff Extensive multi-level peer review Expect in H (after IASB issues IFRS for NPAEs)

Access Free to download (PDF files of modules) Self study You can incorporate the modules (PDF files) into your IFRS for NPAEs education and training programmes Ask development agencies to fund official translations into multiple languages High quality home-language material is essential for quality implementation in SMP/SME environment

Each module includes: –introductory material –explanation of the requirements (including the full text of the requirements, ‘how to’ examples and explanations) –discussion of important judgements –comparison with full IFRSs –test your knowledge—multiple choice –apply your knowledge—case studies Content

Proposal to the world’s development agencies and others Fund the official translation of the IASC Foundation’s IFRS for NPAEs training material? Organise regional ‘train the trainers’ workshops? –IASCF education staff willing to lead regional workshops Assist developing nations build sustainable IFRS for NPAEs application capacity?

International Financial Reporting Standards The views expressed in this presentation are those of the presenters, not necessarily those of the IASB or the IASC Foundation Prospects

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 60 Use in the United States Could private companies in the US use the IFRS for NPAEs? No reason why not No statutory audit requirement in US Basis of presentation note would refer to conformity with IFRS for NPAEs If audited, auditor would report on conformity with IFRS for NPAEs AICPA: Designated IASB under Rule 203 Considerable support in US

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 61 Use in Europe IAS regulation applies only to full IFRSs IFRS for NPAEs not required or prohibited Each jurisdiction must decide We believe it is consistent with Directives EC staff and some MEP stated concerns – not enough simplifications Hint at developing an EU SME standard Expressed interest in adopting: Denmark, Norway, UK, Sweden, others

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 62 Use elsewhere South Africa Already adopted the ED as their final standard World Bank, IDB, other development agencies Strong support Expect regional conferences Others under serious consideration

© 2009 IASC Foundation | 30 Cannon Street | London EC4M 6XH | UK | 63 Next steps Board re-deliberations: Finish in Q Pre-ballot draft and ballot drafts: Q Final Standard: Late H Effective: Whenever adopted locally IASCF training material: H2 2009

64 Questions or comments? Expressions of individual views by members of the IASB and their staff are encouraged. The views expressed in this presentation are those of the presenters. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.