Introduction to IFRS Academic Resource Center Introduction to IFRS Page 2 Accounting in the...

Introduction to IFRS

Academic Resource Center


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!



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?

StartWhat is IFRS?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?



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.



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.



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.




► 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.




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.



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.




► 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.




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.

► 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




Amaro Luiz de Oliveira Gomes – Brazil

Darrel Scott – South Africa

Dr. Elke König – Germany

Jan Engström – Sweden and Latin America

John Smith – US

Patricia McConnell – US

Patrick Finnegan – US

Paul Pacter – US and Hong Kong

Phillipe Danjou – France

Prabhakar Kalavacheria – US and India

Stephen Cooper – UK

Takatsugu Ochi – Japan

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?



What is the structure of the international standard setters?

InternationalAccountingStandards

Board (IASB)

IFRS and

IFRS for SMEs

IFRSAdvisory Council

IFRSFoundation

IFRSInterpretations

Committee

Information provided by www.IFRS.org

Monitoring Board




IFRSFoundation


Board (IASB)

IFRSand

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

IFRSInterpretations

Committee







Board (IASB)

IFRSand

IFRS for SMEs

MonitoringBoard

This group assists in nominating and appointing individuals to IFRS Foundation trustee positions.

IFRSFoundation

IFRSInterpretations

Committee







Board (IASB)

IFRSand

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

IFRSFoundation

IFRSInterpretations

Committee







Board (IASB)

IFRSand

IFRS for SMEs

IFRSInterpretations

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

IFRSFoundation





What is the history of IFRS?

1960s 1970s 1980s 1990s

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.



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.



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

Public consultation

Research




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?”




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





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.





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.





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.





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.

Information provided by www.fasb.org



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 prioritizedto 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.



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.



How are the US and international standard setters working together?

Joint projects as of Decem

ber 2011



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



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.



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.



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.



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.




► 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.




► 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.”



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 statusquo 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.



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.




► 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




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.



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