1. Fair Value GAAP vs. IFRS

2. Convergence or Conversion of GAAP- IFRS World is going towards one set of accounting standards but is IFRS truly uniform? United States conceded that IFRS is more widely used, so U.S. will change – but when? Canada changed as of January 1, 2011 Securities and Exchange Commission:  Starting in 2010-11 voluntary adoption of IFRS by U.S. Companies  Starting in 2014-15 mandatory adoption of IFRS by all public companies – private companies will follow!

3. Problems with Convergence Principles vs. Rules Business complexity = complex rules  Will IFRS have to adopt ‘Rules’ over time? What happens if our SEC disagrees with IFRS? Transition  Training of preparers – option for early adoption by large companies  Training of auditors

4. Fair Value vs. Fair Market Value There are real differences among:  Fair Market Value (not used for financial reporting)  Fair Value – GAAP  Fair Value – IFRS Difference in concept of Fair Value between GAAP and IFRS has not been resolved

5. Exit Value – GAAP Concept Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This concept works for financial instruments and does not work for tangible and intangible assets

6. Fair Value – IFRS Concept Fair Value is the amount for which an asset could be exchanged, a liability settled, or an equity instrument granted could be exchanged between knowledgeable, willing parties in an arm’s length transaction.

7. Exit Value GAAP concept of valuing something at what it could be sold for today, to a ‘market participant’ works only if there is a market with market participants U.S. and EU experience recently with sub- prime securities indicates that often there is no market, and no market participants willing to make a market

8. Fair Value and Impairment: Key Differences ISRF vs. GAAP Real Estate Investment property Agricultural/biological IFRS permits/requires periodic revaluation up or down U.S. GAAP absolutely prohibits write up In U.S. this is a one-way street. Can take impairment loss but never an impairment gain – or even write back up to previous amount

9. IFRS Permits Revaluations A literal reading of IFRS suggests that if they want to, companies can revalue other assets – for example intangibles  Brand Names  Patents Will Canadian companies take advantage of this?

10. Fair Value Option Companies are permitted to revalue LIABILITIES if they wish Banks and financial institutions have had to write down investments because of credit problems in the economy So if a company’s credit rating drops, they can record a ‘GAIN’ which may offset the Fair Value loss on the investments – Bear Stearns example

11. Asset Impairment Impairment indicators are essentially the same between GAAP and IFRS IFRS writes down to Fair Value when FV is less than carrying value No intermediate cash flow test IFRS looks to the higher of:  Net selling price (exit value)  Value in Use (entity specific)

12. Research & Development ‘Research’ expensed in both systems ‘Development’ is capitalized in IFRS and expensed in GAAP Basic question:  Is the true Fair Value of R&D properly measured based on costs incurred?

13. Valuing Liabilities and Contingencies Rules calling for what you could pay someone to take on your liabilities makes no sense Should allow companies to determine the Present Value or Expected Value of what they anticipate paying to settle liabilities and contingencies GAAP values contingencies only in a Business Combination

14. Can We Value Contingencies? Contingent payment in a Business Combination Settle Environmental Liabilities ‘Fair Value’ of lawsuits

15. Revenue Recognition GAAP has over 200 items in the literature IFRS is very general Revenue Recognition is a big item at least in the U.S. FASB looks to ‘Fair Value’ as one way of measuring Revenue Recognition.

16. Is There Such a Thing as The Fair Value? The value of an asset depends on who is going to use it, and for what purpose How can anyone write a set of rules that provides ‘consistency’ among preparers and yet reflects economic reality? FASB and IASB would like a “one size fits all” solution in terms of defining Fair Value

17. Where Are We Going? Recent problems in valuing subprime assets will slow down move to increased Fair Value Convergence of IFRS and GAAP will be much harder (and slower) than anticipated LIFO problem Different versions of IFRS  Demand for Fair Value by Security Analysts will continue and even increase

18. Further Study Using the Internet, compare some of the Canadian GAAP with Canadian IFRS From your textbook, find at least six GAAP’s and revise them according to the new Canadian IFRS