2. Introduction to IFRS

3. Academic Resource Center Introduction to IFRS Page 2 Accounting in the international spotlight The movement toward International Financial Reporting Standards (IFRS) represents an exciting development unprecedented in the world of financial accounting. It’s time to see what is going on in the international spotlight!

4. Academic Resource Center Introduction to IFRS Page 3 Let’s take a tour through the world of international accounting! What is the outlook for IFRS adoption? What is the outlook for IFRS adoption? What is the history of international standard setting? What is the history of international standard setting? Why is it important to learn about IFRS today? Why is it important to learn about IFRS today? How are the international standards set? How are the international standards set? What is the structure of the international standard setters? What is the structure of the international standard setters? Who are the international standard setters? Who are the international standard setters? Start What is IFRS? Is IFRS different or better than US GAAP? Is IFRS different or better than US GAAP? On your tour, click the globe icon on the bottom right hand corner of relevant slides to return to this home screen. How are the US and international standard setters working together? How are the US and international standard setters working together?

5. Academic Resource Center Introduction to IFRS Page 4 What is IFRS? ► IFRS stands for International Financial Reporting Standards. ► As indicated within the title, these standards are aimed at a global practice. ► Ultimately, the goal is to achieve a single set of high-quality, common accounting standards used around the world. ► These standards are the result of a convergence of international viewpoints. ► 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 has recently been accepted for non-SEC registrants by the AICPA as an acceptable alternative reporting standard to US GAAP; however, it is not yet common practice.

6. Academic Resource Center Introduction to IFRS Page 5 Is IFRS different than US GAAP? ► There are differences between IFRS and US GAAP but they are more alike than different for most commonly encountered transactions. ► IFRS is largely grounded in the same principles as US GAAP. ► The US and international standard setters are currently working on convergence projects to better align the standards and reduce these differences.   

7. Academic Resource Center Introduction to IFRS Page 6 Is IFRS better than US GAAP? ► It cannot be stated that IFRS is better (or of higher quality) than US GAAP nor that US GAAP is better (or of higher quality) than IFRS. Neither set of standards is perfect. ► This is evidenced by the convergence efforts where changes are being made to both sets of standards and are not one-sided. ► Some could say that the international standard setters have had the following advantages in their standard setting: ► Being able to obtain a greater amount of global perspective. ► Being able to draw upon the latest standards. ► Being able to remedy perceived problems identified in practice. ► Having an annual improvement process to enhance the clarity and consistency of IFRS, which continues to consider more current thinking and practice. ► Being able to focus more intently on a principles orientation.

8. Academic Resource Center Introduction to IFRS Page 7 Is IFRS better than US GAAP? ► As mentioned previously, both US GAAP and IFRS are largely grounded in the same principles. ► As a general rule, however, IFRS standards are broader with less rules and limited interpretive guidance. ► The international standard setters prefer to leave implementation of the principles embodied in the standards to preparers and auditors and its interpretive body. ► US GAAP contains underlying principles as well but is more specific and rules oriented with far more “bright lines,” comprehensive implementation guidance and industry interpretations.

9. Academic Resource Center Introduction to IFRS Page 8 Is IFRS better than US GAAP? 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.

10. Academic Resource Center Introduction to IFRS Page 9 Who are the international standard setters? International Accounting Standards Board (IASB): ► The IASB develops IFRS. ► The IASB is an independent group of 15 full-time members. ► The board intends to expand to 16 members by 2012. ► These members are appointed by the trustees.

11. Academic Resource Center Introduction to IFRS Page 10 Who are the international standard setters? ► Members of the IASB are selected and considered for reappointment through an open and rigorous process, which includes advertising vacancies and consulting relevant organizations. ► Board members must comprise a group of people representing, within that group, the best available combination of technical skills and background experience of relevant international business and market conditions.

12. Academic Resource Center Introduction to IFRS Page 11 Who are the international standard setters? Hans Hoogervorst Hans Hoogervorst is currently the IASB Chairman. ► He is the former chairman of the executive board, the Netherlands Authority for the Financial Markets and a former chairman of the IOSCO technical committee On July 1, 2011, a vice-chairman position was created to assume some of the chairmanship responsibilities. This position was assumed by Ian Mackintosh.Ian Mackintosh ► He was formerly chairman of the United Kingdom Accounting Standards Board. The term of both of these individuals will end on June 30, 2016. Click on the names above to learn more about each of these individuals. Photos from www.ifrs.org

13. Academic Resource Center Introduction to IFRS Page 12 Who are the international standard setters? Amaro Luiz de Oliveira GomesAmaro Luiz de Oliveira Gomes – Brazil Darrel Scott Darrel Scott – South Africa Dr. Elke König Dr. Elke König – Germany Jan Engström Jan Engström – Sweden and Latin America John Smith John Smith – US Patricia McConnell Patricia McConnell – US Patrick Finnegan Patrick Finnegan – US Paul Pacter Paul Pacter – US and Hong Kong Phillipe Danjou Phillipe Danjou – France Prabhakar Kalavacheria Prabhakar Kalavacheria – US and India Stephen Cooper Stephen Cooper – UK Takatsugu Ochi Takatsugu Ochi – Japan Zhang Wei-Guo Zhang Wei-Guo – China ► Listed here are the other members of the IASB and the countries that they each draw their experiences from. ► Click on their names to learn more about them directly from the IASB website. ► Do you have any observations about the US representation?

14. Academic Resource Center Introduction to IFRS Page 13 What is the structure of the international standard setters? International Accounting Standards Board (IASB) IFRS and IFRS for SMEs IFRS Advisory Council IFRS Foundation IFRS Interpretations Committee Information provided by www.IFRS.org Monitoring Board

15. Academic Resource Center Introduction to IFRS Page 14 What is the structure of the international standard setters? IFRS Foundation International Accounting Standards Board (IASB) IFRS and IFRS for SMEs The IFRS Foundation is a not-for- profit organization that oversees the development of the IASB’s international reporting standards for general financial statements. Monitoring Board IFRS Interpretations Committee IFRS Advisory Council Information provided by www.IFRS.org

16. Academic Resource Center Introduction to IFRS Page 15 What is the structure of the international standard setters? International Accounting Standards Board (IASB) IFRS and IFRS for SMEs Monitoring Board This group assists in nominating and appointing individuals to IFRS Foundation trustee positions. IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council Information provided by www.IFRS.org

17. Academic Resource Center Introduction to IFRS Page 16 What is the structure of the international standard setters? International Accounting Standards Board (IASB) IFRS and IFRS for SMEs The IFRS Advisory Council is the IASB’s forum for consultation with representatives from user groups, preparers, financial analysts, academics, auditors, regulators and professional accounting bodies. Monitoring Board IFRS Foundation IFRS Interpretations Committee IFRS Advisory Council Information provided by www.IFRS.org

18. Academic Resource Center Introduction to IFRS Page 17 What is the structure of the international standard setters? International Accounting Standards Board (IASB) IFRS and IFRS for SMEs IFRS Interpretations Committee The IFRS Interpretations Committee releases interpretations (IFRICs) on newly identified financial reporting issues not dealt with in an IFRS and unsatisfactory or conflicting interpretations in areas without appropriate authoritative guidance. Monitoring Board IFRS Foundation IFRS Advisory Council Information provided by www.IFRS.org

19. Academic Resource Center Introduction to IFRS Page 18 What is the history of IFRS? 1960s1970s1980s1990s Proposal to create an accountants’ international study group ►The IASC is formed in 1973. ►The IASC begins promulgating International Accounting Standards (IAS). The IASC expands. ►In 1994, the IASC Advisory Council is formed to provide oversight of IASC. ►In 1997, the Standards Interpretations Committee (SIC) is formed ►In 1999, the IASC is restructured to form a new board: the IASB. ►FASB agrees to work on a joint earnings-per-share project.

20. Academic Resource Center Introduction to IFRS Page 19 What is the history of IFRS? 2000 through 2011 ►In 2000, the initial 14 members are appointed to the IASB. ►In 2002, the IASB begins promulgating standards as IFRS from IAS. The SIC becomes the IFRIC. The European Union endorses IFRS for 2005 adoption. ►In 2002, the Norwalk Agreement is executed between the IASB and FASB. ►In 2005, the SEC published a roadmap (Roadmap) for elimination of a US GAAP reconciliation for FPIs. ►In 2006, the FASB and IASB published a Memorandum of Understanding, to set forth priorities in their joint work program. ►In 2007, the SEC eliminated the US GAAP reconciliation for FPIs. ►In 2008, the SEC published a proposed Roadmap anticipating the mandatory adoption of IFRS in the US. ►In 2009, the FASB and IASB reaffirmed their commitment to the MOU. ►In 2010, the SEC established a Work Plan and reaffirmed a 2011 decision date on IFRS adoption. ►In 2011: ►May: the SEC issued a staff paper outlining a possible approach for incorporation known as condorsement ►June through August: the SEC conducted public outreach ►November: the SEC conducted public outreach ►November: the SEC issued a staff paper on a comparison of US GAAP and IFRS and a staff paper on an analysis of IFRS in practice around the world ►December: the SEC delayed its adoption decision several months to post-2011.

21. Academic Resource Center Introduction to IFRS Page 20 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 ►Working Group ►International groups such as analysts, preparers, audit technical partners ►Special interest groups ►Local standard setters ►Regulators ►Political groups Public consultation Research Information provided by www.IFRS.org

22. Academic Resource Center Introduction to IFRS Page 21 Setting the agenda ► The IASB evaluates the merits of adding a potential item to its agenda mainly by reference to the needs of investors. ► The IASB considers: ► Relevance to users of the information and the reliability of information that could be provided. ► Existing guidance available. ► Possibility of increasing convergence. ► Quality of the standard to be developed, taking into account the availability of alternative solutions, cost/benefit considerations and feasibility. ► Resource constraints in terms of availability of expertise and additional research required. Return to “How are international standards set?” Information provided by www.IFRS.org

23. Academic Resource Center Introduction to IFRS Page 22 Plan the project, and develop and publish the DP ► IASB decides whether to conduct the project alone, or jointly with another standard setter. ► A DP is not mandatory, but is quite typical. The purpose is to explain the issue, and solicit early comments from constituents. ► A DP includes: ► Comprehensive overview ► Possible approaches ► Preliminary views Return to “How are international standards set?” Information provided by www.IFRS.org

24. Academic Resource Center Introduction to IFRS Page 23 Develop and publish the ED ► Mandatory step, it is the main vehicle for consulting the public. ► Unlike a DP, an ED sets out a specific proposal in the form of a proposed standard. ► The development of an ED begins with the IASB considering: ► Issues on the basis of staff research and recommendations. ► Comments received on any DP. ► Suggestions made by the IFRS Advisory Council, working groups and accounting standard setters, and those arising from public education sessions. Return to “How are international standards set?” Information provided by www.IFRS.org

25. Academic Resource Center Introduction to IFRS Page 24 Develop and publish the standard ► After resolving issues arising from the ED, the IASB considers whether it should expose its revised proposals for public comment. The revised proposal would be in the form of a second ED. ► In considering the need for re-exposure, the IASB: ► Identifies substantial issues that emerged during the comment period on the ED that it had not previously considered. ► Assesses the evidence that it has considered. ► Evaluates whether it has sufficiently understood the issues and actively sought the views of constituents. ► Considers whether the various viewpoints were aired in the ED and adequately discussed and reviewed in the basis for conclusions. Return to “How are international standards set?” Information provided by www.IFRS.org

26. Academic Resource Center Introduction to IFRS Page 25 IASB members hold regular meetings ► The purpose is to help understand unanticipated issues related to the practical implementation and potential impact of proposals. ► After a suitable time, the IASB may consider initiating studies in light of: ► Its review of the IFRS’ application. ► Changes in the financial reporting environment and regulatory requirements. ► Comments by the IFRS Advisory Council, the IFRS Interpretations Committee, standard setters and constituents about the quality of the IFRS. Return to “How are international standards set?” Information provided by www.IFRS.org

27. Academic Resource Center Introduction to IFRS Page 26 A comparison of standard-setting processes ► The IASB standard-setting process is almost identical to that of the FASB. The following are steps the FASB takes to create a standard: ► The FASB receives requests/recommendations for possible projects and reconsideration of existing standards from various sources. ► The FASB Chairman decides whether to add a project to the technical agenda, subject to oversight by the Foundation and after consultation with FASB members. ► The FASB deliberates the various issues identified at one or more public meetings. ► The Board issues an ED. In some projects, a DP may be issued to obtain input at an early stage that is used to develop the ED. ► The FASB staff analyzes comment letters, public roundtable discussion and any other information. ► The FASB redeliberates the proposed provisions at public meetings. ► The FASB issues an Accounting Standards Update describing amendments to the Accounting Standards Codification. Click here to read the entire standard-setting process from the FASB’s website.here Information provided by www.fasb.org

28. Academic Resource Center Introduction to IFRS Page 27 How are the US and international standard setters working together? ► The FASB and IASB have been actively working together on convergence efforts since 2006. ► In early 2011, certain major convergence projects were prioritized to allow the Boards the ability to focus on these projects and strive for completion in 2011. ► Some of these projects have been completed; however, the timing on many of these projects has been extended based on comments from constituents. ► Some project remain inactive and will not be addressed by the Boards until the prioritized projects are completed.

29. Academic Resource Center Introduction to IFRS Page 28 How are the US and international standard setters working together? ► Major projects recently completed in 2011 include: ► Fair value ► Presentation of other comprehensive income ► Balance sheet offsetting ► Major projects currently underway include (see timing on the following slide): ► Financial instruments (classification and measurement, impairment and hedging) ► Revenue recognition ► Leases ► Consolidation ► Insurance contracts ► Projects that have been inactive include financial statement presentation, reporting discontinued operations, financial instruments with characteristics of equity and emissions trading schemes.

30. Academic Resource Center Introduction to IFRS Page 29 How are the US and international standard setters working together? Joint projects as of December 2011

31. Academic Resource Center Introduction to IFRS Page 30 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 123 countries that either adopted or signed to adopt IFRS. Over the last year, several countries required or permitted IFRS such Canada, Japan and Brazil while several countries are impending in the near future as listed: ►Mexico – 2012 ►Argentina – 2012 ►Nigeria – 2012 ►India – Indian Accounting Standards are issued as converged with some carveouts but the effective date is yet to be announced. What is the outlook for IFRS adoption? Global snapshot

32. Academic Resource Center Introduction to IFRS Page 31 What is the outlook for IFRS adoption? The Work Plan ► In 2010, the SEC set forth a transparent work plan (the Work Plan) to support a decision for incorporation of IFRS into the US financial reporting system. The following are the specific areas of focus within the Work Plan: ► Sufficient development and consistent application of IFRS: ► The SEC staff will evaluate the comprehensiveness and enforceability of IFRS as well the auditability and comparability of financial statements prepared using IFRS, both in concept and in practice. These efforts will include consideration of the IASB’s efforts to improve IFRS through its conversion efforts with the FASB. ► Independence of the standard-setting process: ► The SEC staff will consider the extent to which the IASB’s governance (including its Monitoring Board), composition, funding and standard-setting process continue to promote the reporting of full, fair and reliable financial information to support investors in their capital allocation decision making. ► Investor understanding and education: ► The SEC staff will consider investor understanding and education regarding IFRS, including the current familiarity with IFRS, the actions needed to facilitate further understanding and the time frame to do so.

33. Academic Resource Center Introduction to IFRS Page 32 What is the outlook for IFRS adoption? ► Examination of the US regulatory environment: ► The SEC staff will examine how the US regulatory environment would be affected by the further incorporation of IFRS into the US financial reporting system. While the SEC does not directly prescribe the provision and content of information provided to other regulators, such as industry and tax regulators, the SEC’s decision to incorporate IFRS likely would affect regulatory regimes and parties subject to those regimes. ► The effect of IFRS on US issuers, both large and small: ► The SEC staff will assess the scope and timing of potential approaches for US issuers to make the necessary changes to their accounting systems, controls and procedures, and contractual arrangements. The SEC staff also will consider the effect of IFRS in the US on an issuer’s ability to comply with corporate governance requirements, including the requirements for audit committee financial experts, and requirements related to the accounting for litigation contingencies. In addition, the SEC staff will consider whether the cost of a potential transition to IFRS would be more burdensome for smaller issuers. ► Human capital readiness: ► The SEC staff will assess the readiness of all parties involved in the financial reporting process, including regulators, for the further incorporation of IFRS in the US financial reporting system. The SEC staff also will consider the constraints on the availability of individuals experienced in the application of IFRS and the required education, training and time frame necessary to address these constraints.

34. Academic Resource Center Introduction to IFRS Page 33 What is the outlook for IFRS adoption? The Work Plan ► Since its release, the SEC has been executing the Work Plan by: ► Performing its own research. ► Seeking comment from, holding discussions with, and analyzing information from constituents. ► Considering the experiences of jurisdictions that have successfully incorporated or plan to incorporate IFRS into their financial reporting systems. ► In May 2011, the SEC released a staff paper on the potential approach to incorporation of IFRS into US financial reporting system. This approach became known as “condorsement” and will be discussed shortly. ► In November 2011, the SEC issued two staff papers that compare US GAAP and IFRS and analyze the use of IFRS in practice around the globe.

35. Academic Resource Center Introduction to IFRS Page 34 What is the outlook for IFRS adoption? Decision and approach ► In 2010, SEC Chairman, Mary Schapiro, said that she expected the SEC to make a decision on IFRS incorporation in 2011. By then, the SEC was expected to have completed its Work Plan and the Boards were expected to have completed their priority convergence projects. However, as previously discussed, the Boards extended their timelines on priority convergence projects in response to comments from constituents. ► In December 2011, at the AICPA National Conference on Current SEC and PCAOB Developments, SEC Chief Accountant, James Kroeker, announced a delayed decision about IFRS adoption and stressed the importance of the completion of the prioritized convergence projects in consideration of making a decision. ► He also stated that while the SEC staff had completed the majority of its “fieldwork” related to the Work Plan, a few more months were needed to produce a final report. Additionally, he stated that his staff were in the process of developing an approach for consideration by the Commission.

36. Academic Resource Center Introduction to IFRS Page 35 What is the outlook for IFRS adoption? Decision and approach ► The SEC decision to mandate the use of IFRS is generally described as a decision to adopt IFRS. However, there are several manners in which the US could move forward to IFRS that are not considered to be adoption in the pure sense. ► In October 2010, the SEC provided a progress report identifying that most jurisdictions adopt IFRS with a mechanism in place for making changes to the standards. In other words, most jurisdictions follow either a convergence or endorsement approach. ► Adoption: A jurisdiction practices under IFRS as issued with no modifications. ► Convergence: A jurisdiction practices under national standards with efforts to converge differences with IFRS standards over time. ► Endorsement: A jurisdiction reviews each IFRS standard as issued and determines whether the standard should be endorsed for practice with or without modification. ► As previously mentioned, in May 2011, an SEC Staff Paper outlined a possible approach for incorporating IFRS described as “condorsement.” This approach would establish an endorsement protocol for the FASB to incorporate new or amended IFRSs into US GAAP. During a defined transition period (e.g., five to seven years), the FASB would work to eliminate differences between IFRS and US GAAP through standard setting.

37. Academic Resource Center Introduction to IFRS Page 36 What is the outlook for IFRS adoption? Decision and approach ► Major themes from the feedback received on the May Staff Paper including strong support for the objective of a single set of high-quality globally accepted accounting standards with a general premise that an endorsement mechanism would be used to achieve this goal. Constituents also believed that further progress needed to be made on the convergence projects. ► Some questioned whether a single set of accounting standards can be achieved if the FASB and SEC retain the ability to deviate from an IASB standard. Given that an incorporation mechanism is used in some other jurisdictions, consideration can be made for the US as well to try to seek as much convergence as possible while fully understanding differences rather than just abandoning the possibility of a single set of accounting standards. ► There is also discussion about what type of threshold would be used to consider whether to endorse an IASB standard. IASB Chairman, Hans Hoogervorst, has said he believes the key to making a possible endorsement model work “is setting an appropriately high threshold for endorsement. This ensures that any deviations are extremely rare. If we end up with non- endorsements and carve-outs left and right, the gains of adopting IFRS will remain elusive.”

38. Academic Resource Center Introduction to IFRS Page 37 What is the outlook for IFRS adoption? Future of joint convergence efforts ► At the 2011 AICPA National Conference, Leslie Seidman, FASB Chairman, noted that the FASB would like to work with the IASB to complete the priority projects on revenue recognition, leasing, financial instruments and insurance, but said “we do not believe indefinite convergence is a viable option, politically or practically.” ► Hans Hoogervorst added that, while it is tempting to maintain the status quo, “For the long term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or suboptimal outcomes.” ► Both Chairman nevertheless said that the convergence process has been extremely useful in improving both US GAAP and IFRS and moving them closer together. ► Many questions remain about when the SEC will make a decision on whether and, if so, how IFRS will be incorporated into the US financial reporting system. What is clear is that there is strong support for an endorsement-type approach and the retention of US GAAP. Optional use of IFRS has not been ruled out however.

39. Academic Resource Center Introduction to IFRS Page 38 Why is it important to learn about IFRS today? ► Knowledge of IFRS provides an ability to practice accounting in the global marketplace. ► Through convergence efforts, US GAAP continues to become more aligned with IFRS. ► US practice of IFRS currently exists in the following ways: ► Foreign multinationals that report using IFRS have US operations. While some of these entities file IFRS financials with regulators of foreign exchanges, some file with the SEC as foreign private investors (FPIs) under IFRS as well. ► US multinational companies have foreign operations that are required to report using IFRS. ► Many US companies are making assessments of the potential impact of adopting IFRS and IFRS convergence efforts on their current operations.

40. Academic Resource Center Introduction to IFRS Page 39 Why is it important to learn about IFRS today? ► Under IFRS 1, First-time Adoption of International Financial Reporting Standards, there is a variety of exemptions and options that the preparer may elect to utilize in the adoption process that need to be assessed to best position the company. ► The IFRS adoption and convergence efforts impact much more than just the accounting function. Additional functions that are impacted include the following: ► Information systems ► Tax ► Treasury ► Investor relations ► Sales ► Human resources ► Mergers and acquisitions

41. Academic Resource Center Introduction to IFRS Page 40 Why is it important to learn about IFRS today? Given the level of IFRS knowledge expected by US practitioners today, the AICPA now includes IFRS in the content specifications for the Certified Public Accountant exam.

42. Academic Resource Center Introduction to IFRS Page 41 Ernst & Young LLP Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. © 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4113C.