Is it time for accountants to start Learning their I-F-R-S?

ACCOUNTING DAY MAY 12, 2008ACCOUNTING DAY MAY 12, 2008

Is it time for accountants Is it time for accountants to start Learning their to start Learning their I-F-R-S?I-F-R-S?

Don Schwartz, J.D., CPADon Schwartz, J.D., CPA

National University, San Diego CANational University, San Diego CA


[Release No. 36-7807; File No. S7-22-13][Release No. 36-7807; File No. S7-22-13]

Requirement that all U.S. public companies prepare financial Requirement that all U.S. public companies prepare financial reports in accordance with International Financial Reporting reports in accordance with International Financial Reporting Standards for years beginning on or after January 1, 2013. Standards for years beginning on or after January 1, 2013. Earlier adoption is permitted.Earlier adoption is permitted.

AgencyAgency:: Securities and Exchange CommissionSecurities and Exchange Commission

Action:Action: Final rule.Final rule.

U.S. Securities and U.S. Securities and Exchange CommissionExchange Commission

Might we see such a ruling by the end of 2008?


Same transactionsSame transactionsTwo entirely different outcomesTwo entirely different outcomes

Daimler-BenzDaimler-Benz

Excerpt from Form 20-F: Reconciliation to U.S. GAAP 1995Excerpt from Form 20-F: Reconciliation to U.S. GAAP 1995

19931993 19941994 19951995

(DM Million)(DM Million)

Net income as reported in the Net income as reported in the consolidated income statement consolidated income statement under German GAAPunder German GAAP

615615 895895 (5,734)(5,734)

Adjustment to reverse transfer of Adjustment to reverse transfer of hidden reserveshidden reserves (2,450)(2,450) 157157 55

Net income (loss) per U.S. Net income (loss) per U.S. GAAPGAAP (1,835)(1,835) 1,0521,052 (5,729)(5,729)


First 32 years…First 32 years…

19731973 Formation of IASC Formation of IASC 20002000 SEC Concept Release on allowing SEC Concept Release on allowing

IAS-based financials for non-U.S.IAS-based financials for non-U.S. 20022002 SOX questions rule-based GAAP, SOX questions rule-based GAAP,

FASB and IASB start work on FASB and IASB start work on ConvergenceConvergence

20052005 Deadline for EU countries to adopt Deadline for EU countries to adopt IFRSIFRS


Countries in dark blue either require or Countries in dark blue either require or allow IFRSallow IFRS

Canada and India are adopting IFRS in 2011

Canada and India are adopting IFRS in 2011

U.S. accepts IFRS but only from non-U.S. companies

U.S. accepts IFRS but only from non-U.S. companies


Canada joins the IFRS ranks…Canada joins the IFRS ranks…

Canadian Accounting Standards Board Canadian Accounting Standards Board (AcSB) Announces 2011 As Official IFRS (AcSB) Announces 2011 As Official IFRS Transition DateTransition Date

On February 13, 2008 the Canadian Accounting On February 13, 2008 the Canadian Accounting Standards Board confirmed that Canadian Standards Board confirmed that Canadian companies must start using International companies must start using International Financial Reporting Standards (IFRS) for years Financial Reporting Standards (IFRS) for years beginning on or after January 1, 2011. beginning on or after January 1, 2011.

Private companies (non-publicly accountable Private companies (non-publicly accountable enterprises), and not-for-profit organizations are enterprises), and not-for-profit organizations are not required, but are permitted, to adopt IFRSs not required, but are permitted, to adopt IFRSs in 2011. The financial reporting models for in 2011. The financial reporting models for these two sectors are still under consideration these two sectors are still under consideration by the AcSB.by the AcSB.


U.S. is behind, but U.S. is behind, but gathers steam in gathers steam in 20072007

JulyJuly SEC SEC proposalproposal to allow IFRS-based to allow IFRS-based 20072007 financials for non-U.S. registrants financials for non-U.S. registrants

without reconciliation to U.S. GAAPwithout reconciliation to U.S. GAAP

DecDec SEC SEC ruling ruling to allow IFRS-based to allow IFRS-based 20072007 financials for non-U.S. registrantsfinancials for non-U.S. registrants

AugAug SEC Concept Release: should SEC Concept Release: should U.S.U.S. 20072007 companies be allowed to use IFRS? companies be allowed to use IFRS?


ACCOUNTING IN 5 SELECTED COUNTRIES - 2008ACCOUNTING IN 5 SELECTED COUNTRIES - 2008

China Japan Germany MexicoUnited

Kingdom

IFRS are: "Required" "Permitted" or "Not Permitted"

Not permitted for unlisted companies, permitted for some listed companies

Not permitted for listed or unlisted companies

Required for listed, permitted for unlisted companies

Not permitted for listed or unlisted companies

Required for listed, permitted for unlisted companies

Primary source of capital: bank credit or equity market

Equity market Bank credit Bank creditTrend from bank credit to equity market

Equity market

Who sets accounting standards? Is this a government agency or non-government organization?

Ministry of Finance (Gov't)

Legislation: Commercial Code, Securities Exchange Law, Corporate Income Tax Law (Gov't)

German Accounting Standards Committee (non-gov't private)

Mexican Institute of Public Accountants

UK Accounting Standards Board influences Companies Act legislation

Are standards influenced by tax laws?

Yes, close link between taxation and accounting

Revenues and expenses required to be recognized in accordance with tax law

Strong influenceTax reports must comply with Mexican GAAP

Tax laws do not have a major influence


““Given the unfathomable complexity of Enron’s multi-layered SPE Given the unfathomable complexity of Enron’s multi-layered SPE structuring, it is unlikely that qualitative criteria such as that used structuring, it is unlikely that qualitative criteria such as that used by international standards would have had any more success in by international standards would have had any more success in deterring Enron’s off balance sheet maneuvering than did the 3% deterring Enron’s off balance sheet maneuvering than did the 3% bright-line.”bright-line.”

From the book “Power Failure: The Inside Story of the Collapse of Enron” by Mimi Swartz and Sherron Watkins


SEC Concept Release – August 2007SEC Concept Release – August 2007

Question No. 1Question No. 1

““Do investors, U.S. issuers, and market Do investors, U.S. issuers, and market participants believe the Commission should allow participants believe the Commission should allow U.S. issuers to prepare financial statements in U.S. issuers to prepare financial statements in accordance with IFRS as published by the IASB?”accordance with IFRS as published by the IASB?”


Responses to Question No. 1 Responses to Question No. 1 Should SEC allow U.S. issuers to use IFRS Should SEC allow U.S. issuers to use IFRS ??

FASB – No, a two-GAAP system would create FASB – No, a two-GAAP system would create unnecessary complexity unnecessary complexity

CalPERS – No, important issues need to be addressed CalPERS – No, important issues need to be addressed firstfirst

Chevron – No, coping with two sets of rules would be a Chevron – No, coping with two sets of rules would be a distraction from one global setdistraction from one global set

NASBA – No, focus on convergenceNASBA – No, focus on convergence Illinois State Society – No, two sets of standards is Illinois State Society – No, two sets of standards is

counterintuitive to mission of SECcounterintuitive to mission of SEC NYS Society of CPAs – No, requiring U.S. GAAP is a NYS Society of CPAs – No, requiring U.S. GAAP is a

significant incentive for convergencesignificant incentive for convergence Standard & Poors - No, two systems would significantly Standard & Poors - No, two systems would significantly

complicate our analysiscomplicate our analysis


Responses to Question No. 1 (continued) Responses to Question No. 1 (continued) Should SEC allow U.S. issuers to use IFRS Should SEC allow U.S. issuers to use IFRS ??

KPMG – Yes, as part of a transition planKPMG – Yes, as part of a transition plan Deloitte – Yes, early adopters would provide experienceDeloitte – Yes, early adopters would provide experience Ernst & Young – Yes, impetus for analysts and investors Ernst & Young – Yes, impetus for analysts and investors

to improve their understanding of IFRSto improve their understanding of IFRS Grant Thornton – Yes, issues that arise now will benefit Grant Thornton – Yes, issues that arise now will benefit

later participantslater participants Morgan Stanley – Yes, would encourage convergence Morgan Stanley – Yes, would encourage convergence

efforteffort UBS – Yes, as part of a transition planUBS – Yes, as part of a transition plan Microsoft – Yes, as an interim step before requiring IFRSMicrosoft – Yes, as an interim step before requiring IFRS AICPA – Yes, an important step toward global standardsAICPA – Yes, an important step toward global standards


SEC Concept Release (continued)SEC Concept Release (continued)

Question No. 33Question No. 33

““Should the opportunity, if any, to switch to Should the opportunity, if any, to switch to IFRS reporting be available to U.S. issuers for a IFRS reporting be available to U.S. issuers for a particular [limited] period of time? If so, why particular [limited] period of time? If so, why and for what period? and for what period?

At the end of that period of time, could At the end of that period of time, could commenters foresee a scenario under which it commenters foresee a scenario under which it would be appropriate for the Commission to call would be appropriate for the Commission to call for all remaining U.S. issuers to move their for all remaining U.S. issuers to move their financial reporting to IFRS?”financial reporting to IFRS?”


Responses to Question No. 33Responses to Question No. 33““Should the Commission call for all remaining U.S. issuers to Should the Commission call for all remaining U.S. issuers to move their financial reporting to IFRS move their financial reporting to IFRS ?”?”

NASBA – No, continue convergence but at NASBA – No, continue convergence but at accelerated paceaccelerated pace

AICPA – AICPA – question was not addressedquestion was not addressed IMA – IMA – question was not addessedquestion was not addessed Illinois Society of CPAs – No, continue Illinois Society of CPAs – No, continue

convergenceconvergence NYSSociety of CPAs – NYSSociety of CPAs – question was not question was not

addressedaddressed


Responses to Question No. 33 (continued) Responses to Question No. 33 (continued) ““Should the Commission call for all remaining U.S. issuers to Should the Commission call for all remaining U.S. issuers to move their financial reporting to IFRS move their financial reporting to IFRS ?”?”

FASB – Yes, once a “blueprint” has been developed and FASB – Yes, once a “blueprint” has been developed and implemented implemented

KPMG – Yes, once key conditions are metKPMG – Yes, once key conditions are met PriceWaterhouseCoopers – Yes, assuming 5 to 7 year PriceWaterhouseCoopers – Yes, assuming 5 to 7 year

transition periodtransition period Ernst & Young – Yes, pending essential changes and Ernst & Young – Yes, pending essential changes and

actionsactions Grant Thornton – Yes, after reasonable timeframeGrant Thornton – Yes, after reasonable timeframe UBS – Yes, for comparability and reduced cost of capitalUBS – Yes, for comparability and reduced cost of capital CalPERS – Yes, once key conditions are addressedCalPERS – Yes, once key conditions are addressed Microsoft – Yes, begin 4-year transition in 2011 or 2012Microsoft – Yes, begin 4-year transition in 2011 or 2012 Chevron – Yes, global standards rather than slow Chevron – Yes, global standards rather than slow

convergenceconvergence Standard & Poor’s – Yes, SEC should develop a Standard & Poor’s – Yes, SEC should develop a

comprehensive plancomprehensive plan


Response to Concept Response to Concept ReleaseRelease

““The Concept Release asks, “…could commenters The Concept Release asks, “…could commenters foresee a scenario under which it would be appropriate foresee a scenario under which it would be appropriate for the Commission to call for all remaining U.S. [non-for the Commission to call for all remaining U.S. [non-governmental] issuers to move their financial reporting governmental] issuers to move their financial reporting to IFRS?”to IFRS?”

We believe the answer to that question is “yes”. In our We believe the answer to that question is “yes”. In our view, now is the time to develop a plan for moving view, now is the time to develop a plan for moving all all U.S. public companies [from U.S. GAAP] to an U.S. public companies [from U.S. GAAP] to an improved version of International Financial Reporting improved version of International Financial Reporting Standards (IFRS).”Standards (IFRS).”

(emphasis added)(emphasis added)


Some of the major differences…Some of the major differences…Excerpted from “A Comparison of IFRS and U.S. GAAP" Excerpted from “A Comparison of IFRS and U.S. GAAP" PriceWaterhouseCoopers October 2007PriceWaterhouseCoopers October 2007

IFRS US GAAP

Revenue recognition

Based on several criteria, which require the recognition of revenue when risks and rewards and control have been transferred and the revenue can be measured reliably.

Similar to IFRS in principle, although there is extensive detailed guidance for specific types of industries.

Property, plant and equipment

Historical cost or revalued amounts are used. Regular valuations of entire classes of assets are required when revaluation option is chosen.

Historical cost is used; revaluations are not permitted.

Research and Development

Research costs are expensed as incurred. Development costs can be capitalized and amortized if specific criteria are met.

Both research and development costs are expensed as incurred, with the exception of some software and website development costs that are capitalized.

Leases

A lease is a finance lease if substantially all risks and rewards of ownership are transferred. Substance rather than form is important.

Similar to IFRS, but with more extensive form-driven requirements (“bright lines”).

InventoriesCarried at lower of cost and net realizable value. FIFO or weighted average method is used to determine cost. LIFO prohibited.

Similar to IFRS; however, use of LIFO is permitted.


Some of the major differences…Some of the major differences…

IFRS US GAAP

Inventories

Carried at lower of cost and net realizable value. FIFO or weighted average method is used to determine cost. LIFO prohibited.

Similar to IFRS; however, use of LIFO is permitted.

ACCOUNTING DAY MAY 12, 2008ACCOUNTING DAY MAY 12, 2008Source: Iofe., Y. And M.C. Calderisi, eds, 2005, Source: Iofe., Y. And M.C. Calderisi, eds, 2005, Accounting Trends & Techniques, 59th Edition, Accounting Trends & Techniques, 59th Edition, (New (New York, NY: AICPA), pp. 169-170.York, NY: AICPA), pp. 169-170.

Companies Reporting Some Use of Companies Reporting Some Use of LIFO - from review of 600 Fortune 1000LIFO - from review of 600 Fortune 1000

2004 2003

No. % No. %

Aerospace 5 29 5 29

Apparel 7 47 7 50

Beverages 4 40 4 40

Building materials, glass 5 63 6 75

Chemicals 23 85 24 83

Computers, office equipment 1 9 1 9

Electronics, electrical equipment 13 31 12 29

Engineering, construction 1 8 1 9

Food 12 52 12 50

Food and drug stores 13 81 11 73

Food services - - - -

Forest and paper products 14 70 16 80

Furniture 8 80 8 67

General merchandisers 9 90 9 82

Industrial and farm equipment 25 69 26 74

Medical products and equipment 3 23 4 31

Metal products 15 79 17 81

Total companies 239 40 251 42

Petroleum refining 11 79 12 92


2004

LIFO used for some inventory for majority of inventory

Trend in use of LIFO by 600 Fortune 1000 companies

80%

1966


TESTIMONY OF GEORGE A. PLESKOTESTIMONY OF GEORGE A. PLESKOUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEJUNE 13, 2006JUNE 13, 2006

In contrast to U.S. generally accepted accounting In contrast to U.S. generally accepted accounting procedures (GAAP), International Accounting procedures (GAAP), International Accounting Standards (IAS) generally prohibit the use of LIFO. Standards (IAS) generally prohibit the use of LIFO.

Congress could repeal the LIFO conformity Congress could repeal the LIFO conformity requirement and allow firms to use LIFO for tax requirement and allow firms to use LIFO for tax reporting only, but doing so would create reporting only, but doing so would create additional administrative complexity, as well as additional administrative complexity, as well as increased book-tax reportingincreased book-tax reporting differences.differences.

Since many companies that use LIFO for external Since many companies that use LIFO for external reporting purposes do not use it for internal reporting purposes do not use it for internal decision making (such as pricing or decision making (such as pricing or compensation), allowing LIFO for tax purposes in compensation), allowing LIFO for tax purposes in the absence of LIFO-conformity would appear to the absence of LIFO-conformity would appear to generate no benefit other than the deferral of generate no benefit other than the deferral of income taxes by LIFO firms.income taxes by LIFO firms.


Continued…Continued…

With respect to a LIFO repeal, the $60 billion With respect to a LIFO repeal, the $60 billion aggregate LIFO reserve reported represents the aggregate LIFO reserve reported represents the amount of additional net income publicly-traded amount of additional net income publicly-traded firms would report on their tax returns if a tax firms would report on their tax returns if a tax change required them to recognize this reserve as change required them to recognize this reserve as income. income.

TESTIMONY OF GEORGE A. PLESKOTESTIMONY OF GEORGE A. PLESKOUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEJUNE 13, 2006JUNE 13, 2006


““Some of the key infrastructureSome of the key infrastructure elements to consider for the elements to consider for the blueprint “blueprint “

How a move to IFRS will affect audit firms and auditing How a move to IFRS will affect audit firms and auditing standard settingstandard setting

How a move to IFRS by public companies might affect How a move to IFRS by public companies might affect financial reporting by private and not-for-profit entitiesfinancial reporting by private and not-for-profit entities

How to effectively train and educate issuers, their How to effectively train and educate issuers, their auditors, investors, and other users of financial auditors, investors, and other users of financial statements about the improved version of IFRS, statements about the improved version of IFRS, including implications for the U.S. education system including implications for the U.S. education system and the uniform Certified Public Accountant and the uniform Certified Public Accountant examinationexamination


First, the chicken has First, the chicken has to lay the eggto lay the egg

The SEC has to commit to IFRS by setting a due The SEC has to commit to IFRS by setting a due date for public corporations, say January 1, 2013date for public corporations, say January 1, 2013

That would stimulate:That would stimulate:– FASB and IASB to accelerate convergence effort FASB and IASB to accelerate convergence effort – AICPA and IMA to provide IFRS training to their AICPA and IMA to provide IFRS training to their

membersmembers– AICPA and IMA to include questions on IFRS in the CPA AICPA and IMA to include questions on IFRS in the CPA

and CMA exams…and CMA exams……which would in turn motivate universities to include …which would in turn motivate universities to include IFRS in accounting and auditing curriculumIFRS in accounting and auditing curriculum

– Congress to repeal LIFO-conformity ruleCongress to repeal LIFO-conformity rule– FASB to decide what to do about non-public entities FASB to decide what to do about non-public entities

SEC


Thank YouThank You

Is it time for accountants to start Learning their I-F-R-S?

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