1. The World of GAAP IFRS for Credit Unions October 8, 2009 Hollis A. Skaife University of Wisconsin - Madison 1

2. Demand for Financial Information Internal Decision Makers – demand financial information useful in assessing performance and product mix. External Decision Makers – demand financial information that is relevant, reliable, and comparable in order to make resource allocation decisions 2

3. Who are the external users of financial information? Shareholders Creditors Suppliers Analysts Institutional investors Tax authorities Regulators 3

4. Demand for Financial Information by External Users Conditional on: Country-specific institutional features Legal system Taxation system Financial markets Firm-specific characteristics Ownership structure Capital needs 4

5. Financial Markets Private Debt Markets Private information flows generally more important Equity Markets and Public Debt Markets Public information flows generally more important 5

6. Primary Source of Public Information? Financial Statements “High quality” financial reporting produces financial information that is: Relevant – timely, pertinent Reliable – represents underlying economic events, verifiable Comparable – across time (consistency within a firm) and across firms 6

7. What does it take to produce “high quality” financial statements? SEC Concept Release (2000)* identified the elements of the infrastructure necessary to achieve high quality cross- border financial reporting. High Quality Financial Reporting Standards High Quality Audit Standards High Quality Audit Profession Regulatory Oversight *Securities and Exchange Commission (SEC). 2000. International Accounting Standards. February 16, 2000. Release nos. 33-7801, 34-42430; International Series Release No. 1215; File No. S7-04-00. 7

8. Financial Reporting Standards address: * Elements of Financial Statements * Measurement standards * Disclosure standards 8

9. Financial Reporting Standards continued In the “old days”, U.S. GAAP dominated the capital markets as a premier set of financial reporting standards. Since 2002 International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) have become an accepted basis for financial statement preparation worldwide. Some background ….. 9

10. Background The International Accounting Standards Committee (IASC) was formed in 1973 through an agreement made by professional accountancy bodies from Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States of America. Accounting standards were set by a part-time, volunteer IASC Board with13 country members and up to 3 additional members from professional organizations. The IASC Board also had a number of observer members (including representatives of IOSCO, FASB, and the European Commission) who participated in the debate but did not vote. International Accounting Standards (IASs) issued by the IASC Board continue to serve as the basis of IFRSs today. However, the set of IASs were not as broad in scope or rigorous in application as the international standards in play today. 10

11. Background continued In late 1997, the IASC formed a Strategy Working Party to re-examine its structure and strategy. A new constitution took effect 1 July 2000. The standards-setting body was renamed the International Accounting Standards Board (IASB). It would operate under a new International Accounting Standards Committee Foundation (IASCF). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. 11

12. Background continued The IASB is organized under an independent Foundation named the International Accounting Standards Committee Foundation (IASCF). That Foundation is a not-for-profit corporation created under the laws of the State of Delaware, United States of America, on 8 March 2001. Components of the new structure: The IASB has sole responsibility for establishing International Financial Reporting Standards (IFRSs) but other bodies support and are involved in the process. 12

13. Organizational Structure Source: www.iasplus.com 13

14. More Details on the Monitoring Board Effective 1 February 2009, the IASC Foundation Constitution was amended to create a Monitoring Board of public authorities. The Monitoring Board was formed to enhance public accountability of the IASC Foundation while not impairing the independence of the standard- setting process. The Monitoring Board will initially comprise the relevant leaders of the European Commission, the Japanese Financial Services Agency, the US Securities and Exchange Commission, the Emerging Markets Committee of IOSCO, and the Technical Committee of IOSCO. The chairman of the Basel Committee on Banking Supervision will be a non-voting observer. The Monitoring Board will participate in the Trustee nomination process and approve appointments to the Trustees. The Monitoring Board will have oversight responsibilities in relation to the Trustees and their oversight of the IASB's activities, in particular the agenda-setting process and the 'IASB's efforts to improve the accuracy and effectiveness of financial reporting and to protect investors'. 14

15. Acceptance of IFRS More than 100 countries have or will adopt IFRS. Daske, H. L. Hail, C. Leuz and R. Verdi. 2008. Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences. Journal of Accounting Research 46, 1085-1142. Many countries will have “as adopted” versions due to application differences. Certain country regulatory bodies, such as the AMF in France (the SEC’s equivalent), sometimes grant IFRS exceptions for local regulatory filings. 15

16. International Financial Reporting Standards Today Compliance with IFRS includes the following: All active standards (IASs and IFRSs) All active interpretations (SICs and IFRICs) IFRS requires presentation of comparative period 16

17. US Acceptance of IFRS? Since 2007, SEC accepts IFRS financial statements by foreign issuers. In 2008, the SEC unanimously approved releasing a proposed Roadmap that lays establishes a timeline and milestones for continuing US progress toward acceptance of IFRS for US public companies. The Roadmap set forth several milestones and, if achieved, they could result in mandatory use of IFRS in financial statements filed with the SEC by US issuers beginning in 2014, with early adoption permitted. Roadmap put on hold. Over 200 comment letters were received on the feasibility of the Roadmap. 17

18. IFRS versus US GAAP: Key differences 18

19. IFRS versus US GAAP: Key differences continued TopicUS GAAPIFRS Noncash Investing and Financing Activities These transactions are reported in the cash flow statement. Noncash investing and financing activities are reported in the notes and excluded from the cash flow statement. Interest PaymentsClassified as operating cash flows. Classified as either operating or financing cash flows. Extraordinary ItemsExtraordinary items are reported separately (net of tax) below income from operations Extraordinary items are not recognized, but instead are included with other revenues and expenses in IFRS reporting. The Completed Contract Method for Long-Term Contracts Permitted under GAAP in rare circumstances when the percentage-of- completion method is not justified. Prohibited under IFRS. IFRS requires the cost-recovery method be used instead of the completed-contract method. 19

20. IFRS versus US GAAP: Key differences continued TopicUS GAAPIFRS Revaluing Long-Term Assets Does not permit long-term assets to be revalued upward. Permits long-term assets to be revalued upward when conditions justify. Impairment of Long-Term Assets Impairment is determined without discounting the cash flows. The impaired amount is the difference between the carrying value and the fair value. Reversals are not permitted. Impairment is deemed to exist when the discounted values of the related cash flows are below book value. The asset is then reduced to the higher of its fair value or value in use. Reversals of previous write-downs are allowed, but not above the original cost. Interest on Directly Related Borrowings During Construction Interest during construction is capitalized. This includes interest on construction loans as well as some interest on debt not related to construction. Interest on directly related borrowing during construction is capitalized under IFRS after 1/1/2009. Other interest is expensed. 20

21. IFRS versus US GAAP: Key differences continued TopicUS GAAPIFRS Research CostsResearch costs are expensed. Capitalization of development costs under GAAP is allowed only in the case of software and web site situations and then only when special development goals have been met. Research costs are expensed. Development costs can be capitalized when specific criteria are met. Reporting of LeasesFinancing leases are capitalized while operating leases are not. Additional rules apply that relate to lease classification (operating versus financing) Financing leases are capitalized while operating leases are not. Leasing standards are similar to those under US GAAP. Classification of Deferred Taxes Classifies the deferred tax based on the classification of the asset that gives rise to the deferred tax. Classifies all deferred taxes as noncurrent liabilities. 21

22. IFRS versus US GAAP: Key differences continued TopicUS GAAPIFRS Convertible DebtTreated as debt onlyConvertible debt is split between debt and equity Negative GoodwillThe excess of the liabilities over the fair value of the assets acquired is used to reduce proportionally the fair value of the non- current assets with the remainder, if any, treated as an immediate gain. Any negative good will is recognized immediately in the income statement under IFRS. 22

23. Principles versus Rules Based Accounting Standards “The adoption of IAS/IFRS requires accountants to possess a solid knowledge of business and economics.” Carmona, S. and M. Trombetta. 2008. On the global acceptance of IAS/IFRS accounting standards: The logic and implications of the principles-based system. Journal of Accounting and Public Policy. 23

24. What about convergence? IASB and FASB agreed to eliminate the major differences between IFRSs and US Standards. 2002 Memorandum of Understanding (MoU). 2006 Road Map identifying minor and major convergence projects. Boards started with minor differences but soon decided to focus on major differences. 24

25. Will accounting standard convergence be sufficient to general high quality financial information? 25

26. Differences in other elements of the infrastructure for financial reporting Audit Quality Regulatory Oversight Firm Governance (which affects the demand for high quality external accounting information) 26

27. July 2009 IASB issued IFRS for SMEs The IFRS for SMEs is a self-contained standard tailored for small and medium sized businesses. The SME Standard does the following: Simplifies many of the principles in full IFRSs for recognizing and measuring assets, liabilities, income and expenses. Topics not relevant to SMEs have been omitted. The number of required disclosures has been significantly reduced. To further reduce the reporting burden for SMEs revisions to the IFRS will be limited to once every three years. 27

28. IFRS for SMEs is just another indication of how the IASB works towards promulgating financial reporting standards that are intended to improve financial reporting in the global economy. 28