IFRS vs. US GAAP
Anthony P. Pencek, CPA
IMA NERC-Mystic, CT
September 20, 2010
Accountant’s
Cartoon
International Financial Reporting
Standards (IFRS) vs. US
Generally Accepted Accounting
Standards (GAAP)
What does it mean for you?
Convergence!!!!
Dictionary Definition:
Convergence means “to tend or move
toward a common point or result.”
Goal– Comparability and Consistency
Common Traits of Both IFRS and
GAAP
• Rules or guidelines issued to assist in preparing
and issuing financial statements for use by the
Regulatory Bodies, Investors and Other
interested parties. Analogy of.
• Both are issued by a consensus of educated and
expert individuals in accounting who are
appointed to a Board. Hold hearings, comments
from auditors, users are welcomed.
• International Accounting Standards Board
(IASB) vs. Financial Accounting Standard Board
(FASB)
Why So Much Press on IFRS?
• Hottest Topic in Accounting. Why?
• Global Economy Demands It- Urgency!!!
– Economy Growth Stimulus
• Survey by International Federation of Accountants (IFAC)
– Financial Capital Markets are changing
• NYC is not the Financial Capital of the World, its going to
elsewhere like London, Hong Kong and Dubai, etc.
– Foreign Purchase and/or Ownership of US
Companies
• Recent---Anheuser-Busch Companies By InBev
Why So Much Press on IFRS?
(Continued)
• Need for comparability of information on
public companies around the world
– US companies use US GAAP while foreign
companies use IFRS. Analysts using which
one?
– Sarbanes-Oxley Act of 2002 is presenting a
competitive disadvantage to US Companies in
the global financial Markets.
– Wiley Publishing now puts out a yearly IFRS
book similar to the GAAP and GAAS books.
IFAC Survey Results on Economic
Growth with IFRS Adaptation
• Very Important to Economic Growth- 55%
• Important to Economic Growth – 35%
• Somewhat Important to Economic Growth
- 9%
• Not Important – 1%
• Website to get the survey,
http://www.ifac.org/globalsurvey
Who is using IFRS today?
• 12,000 companies in almost 110 countries
have adapted IFRS.
• 2005, European Union (EU) began to
require the IFRS on its members states
whose securities are listed on the EU –
regulated stock exchange, (London, Paris,
etc.) to prepare its financial statements.
History of IASB and IFRS
TODAY
 Over
100 countries around the world
require or permit the use of some
form of IFRS
 Mandatory
the EU
for all listed companies in
 Permitted
for non-listed companies in
some member states
 Commonly
used in Central and
Eastern Europe, in Russia and many
Caribbean Nations
 Many
countries have moved to IFRS,
including Australia, South Africa,
Singapore and New Zealand
TOMORROW
 By
2011, it is expected that all major
countries will have adopted IFRS to
some extent
 China and Japan will be substantially
converged
to IFRS
 Substantial majority of Global Fortune
500 will
report under IFRS
 Others recently announced
implementation programs, such as
Canada, Korea and Israel
 Approximately
Private Issuers
are in Canada
 All
1/3 of US Foreign
major NON-US Capital Markets
are impacted
Who is using IFRS today?
(Continued)
• Australia, New Zealand and Israel have almost
completely accepted IFRS as their national
standards.
• Canada, who had previously planned
convergence with US GAAP, now has plans to
require IFRS for publicly accountable entities in
2011.
• Japan’s Accounting Standards Board has
planned convergence with IFRS by 2011.
• India will be using the IFRS for 2009.
• More countries are looking into adapting.
What is the United State status
on adoption?
See Next Slides
When will IFRS standards be
required or not?
• The question is not “if the IFRS standard will be
required to be used, but When.”
• Time line given for full adaptation is year 2015,
but more than likely sooner. (See earlier slide of
timeline) What is going to happen with the new
administration? Madoff situation had an effect
on compliance.
• FASB is now stating that any new standard
being proposed will be close to IFRS standards.
Potential Implementation
Based on 2015 implementation date
Timeline
Continued IFRS/US GAAP convergence – milestones must be met by 2011
2011-2014
2010
2011
•Put team
together
•Train
•Keep track
of
convergence
•Impact
analysis
•Create
formal plan
2011-2014
2015
•Fill SME
gaps
•Impact on
processes/IC
•Develop
communicati
on plan
•Choose IFRS
1 options
•Make policy
choices
•Restate
/reaudit
•Issue
financial
statements
Train/monitor progress: Numbers, people, systems, processes
Based on SEC proposal to begin IFRS for large accelerated filers in 2014
Proprietary & Confidential Trade Secret Protected
Momentum to Adopt IFRS in
the US
April 2005
Summer 2007
November 2007
August 2008
February 2010
SEC Chief Accountant article regarding progress on
P reconciliation for foreign filers
convergence
Roundtable discussions held on the impact of IFRS on US Capital Market –
SEC holds
roundtables
discussions
overwhelming
support for
elimination of the reconciliation
SEC eliminates
the requirement for reconciliation to US GAAP
Concept Release issued for comment, allowing US issuers the option to use IFRS
to FPI’s using IFRS as adopted by IASB
Approved proposal to eliminate the reconciliation to US GAAP for foreign filers,
SEC issues initial “roadmap” effective immediately
Propose
in US “roadmap”
“New”
SECadoption
reinforces
History of IFRS, FASB and the SEC
• SEC began preliminary talk about an
international standard core way back in 1988 to
be integrated with GAAP.
• FASB signed Norwalk Agreement with IASB in
2002 and updated in 2008 to move IFRS
adaptation faster.
• In 2008, SEC Chairman Cox issued a statement
that use of IFRS for reporting purpose
requirements in the US would be accepted and
no need to reconcile the financials to US GAAP.
Some Major Differences between
US GAAP and IFRS
• IFRS standards published is only one book
about two inches thick. There are 41 IAS and
eight IFRS standards published.
• US GAAP is in three books about nine inches
thick, and does not include all the authoritative
literature. FASB standards has over 170 issued.
• Principles are used for IFRS
• Rules and/or Interpretations are used in GAAP
Some Major Differences between
US GAAP and IFRS (Continued)
• Specific differences
– LIFO does not exist in IFRS standards. FIFO must be
used for inventory costing method.
• Article in Strategic Finance –July 2009
– Research & Development costs get capitalized, costs
of drugs in Canada.
– Impairment of Write downs to Net Realizable Value is
a single step process for IFRS while US GAAP uses a
two step process. Making the write down more easily.
Write Up of Intangibles Possible.
• Reasonable estimate, impairment has occurred.
Some Major Differences between
US GAAP and IFRS (Continued)
• Contingencies have a different probability
threshold and measurement objective.
• After year curing of debt covenant violations is
not allowed.
• Revenue recognition is less extensive in IFRS
vs. GAAP
• No specific industry instruction or guidance, i.e.
Percent of Completion and Completed contract
on Long term construction projects.
Some Major Differences between
US GAAP and IFRS (Continued)
• Indirect Method of Statement of Cash
Flows vs. Direct Method
– Major difference is the Operating Activities
-Direct Method has Cash Receipts from
customers and Cash paid to suppliers and
employees
• Indirect method has differences between non cash
current assets and current liabilities and starts with
net income or loss
• Direct Method must be used in IFRS
Some Major Differences between
US GAAP and IFRS (Continued)
– Also on the Cash Flow statement
• Direct Method use Dividends received on
investments may be put under Operating Activities
• Indirect Method uses the non cash expenses like
depreciation and amortization within the Operating
Activities.
• Direct Method has Income Taxes paid could be
shown on either the Operating, Financing or
Investing Activities depends on relationship or all
three activities.
Some Major Differences between
US GAAP and IFRS (Continued)
• Balance Sheet Presentation Difference
– Long Term Assets and Liabilities are listed first
on IFRS statements- See slide
– On GAAP Statements, starts with current
assets and liabilities.- See slide
– Write up of assets due to appreciation is
allowed for IFRS. Intangibles impairment test
is different.
British Airways Balance Sheet
Google Inc. Balance Sheet
Some Major Differences between
US GAAP and IFRS (Continued)
• Earnings per Share (EPS)
– IFRS has only Basic and Diluted EPS on
continuing operations and net profit or loss
per share
– US GAAP has Basic and Diluted from
continuing operations, discontinued
operations, extraordinary items, cumulative
effect of changes in accounting policy, and net
income or net loss.
EXAMPLE OF EARNINGS
DIFFERENCE IFRS VS GAAP
• DAIMLER BENZ
– IFRS STANDARDS IN PLACE FOR YEAR
2006, ITS OPERATING PROFIT OF $2.4 BIL
– IF USED US GAAP STANDARDS, THEY
WOULD HAD SHOWN A LOSS DUE TO NOT
CAPITALIZING RESEARCH
EXPENDITURES, ETC.
Limitation of IFRS
• Pick and Choose which standards to be enforced or
used by companies within its borders by government
-French Government recently voted to allow certain
industries, the wine industry to be exact, to sidestep
certain IFRS standards to help that industry.
-Japan’s Firms definition of Finished Goods Inventory or
Merchandise Inventory has it as a liability not an asset
due to
- Storage Charges, Insurance on it, Safeguarding it,
concept of Just In Time
________Are these really IFRS Standards??________
Limitation of IFRS (Continued)
• Enforcement of the Standards
– No SEC like in the United States who
oversees the GAAP standards
– What is the punishment for non compliance?
– Is there comparability among nation’s financial
reporting if you can chose what standards will
be used?
AICPA Proactive to IFRS
Adaptation
• Allowing private firms and not for profit firms to
report under the IFRS
• Voted recently, May 2008, to modify rule # 203
of Professional Code of Conduct to recognize
IASB as an international accounting standard
setter.
• Educating AICPA member firms and local CPA
state societies about what IFRS requirements.
Offering seminars for partners and also staff on
IFRS.
AICPA Proactive to IFRS
Adaptation (Continued)
• Working with Academia, textbook authors, and
educational institutions to get current soon to be
professionals ready for using IFRS on the job.
• Keeping information flowing to members and the
US CPA’s voice be heard on these IFRS
committees.
• Incorporating questions about IFRS into the
Uniform CPA exam starting 1/1/2011. CMA exam
will also have it incorporated on it?
Academia response to IFRS
• Schools must educate Administrators of pressing need to
learn IFRS
• Fit IFRS into already full slate of curriculum within the
classroom- UNIFORM SYLLABUS. Separate Class on
IFRS???
• Get schools to educate the professors on IFRS, Budget
concerns and enrollment.
• KPMG-AAA survey
–
–
–
–
Academic Year (AY) incorporate IFRS into curriculum.
AY 2009-10 it will increase to 24%
AY 2010-11 it will be about 30%
AY 2011-12 it will be over 50%
Accounting Firms Response
– Sending employees to get training in London, etc. and
work with that office to learn IFRS requirements
– Changing audit work programs and procedures to
make the transition smoother. Have several audit
teams, one IFRS, GAAP, etc. Pass on the cost to
clients?
– Working with Academia the need to have graduates
ready to hit the road running, changed curriculum
– Educating client’s personnel with new requirements to
be in compliance with IFRS.
Suggestions for Compliance
WHAT DOES IT MEAN TO
BUSINESSES?
• How does it affect the tax structure and FIN 48
and Schedule M3 that must be completed
• What does it do for management reporting
systems and Financial Accounting Systems?
• What are the new industry measurements or
indicators?
• What happens to PCAOB requirements from
Sarbanes Oxley Act of 2002. Was it a waste of
time and energy?
• Will IFRS assist in getting firm a strategic
competitive advantage over other firms.
Google, Inc. IC Report
British Airlines Auditor’s Report
Auditor’s Report-Google, Inc.
WHAT DOES IT MEAN TO
BUSINESSES? (Continued)
• What does it do for tax planning and tax
deferred liabilities and assets on the
balance sheet?
• What about Investor relationships,
explaining the inconsistencies between
years when implemented? What will be
required to be restated? Educating them.
WHAT DOES IT MEAN TO
BUSINESSES? (Continued)
• Costs of training of the company
personnel on the new standards, pass it
on to customers
• Discussing with banks over the debt
covenants, and the effect of them on the
loans.
What does it mean to me?
• If the IFRS are being made mandatory, as an
professional the accounting degree earned
recently may not be relevant. Retraining must
be done. Community College in NJ gave a
money back guarantee on learning? Free
retraining??
• How do I read the financial statements and
analytical information for comparability? Cost?
• Per my clients, how do I explain the differences
between the two? NO EASY WAY!!
• Is this coming to the privately held companies
that I work on? Probably!!!
What does it mean to me?
(Continued)
• What is next change or challenge, are I
ready? Is my firm ready?
• Challenge to keep up. Looking forward to
it. Competitive Advantage?
• Example, If you got your Masters Degree
in Taxation, MST in 1986 and the tax law
dramatically changed later that year.
SEC Hearing on IFRS
• Panel on US Financial Services and IFRS
recap:
– IFRS creates more work or interpretation to
determine whether you put it on the Financial
Statements
– US GAAP gives you more guidance
– Entity recognition is a problem, Asset
capitalization was not easy task, Example
used where 200 leased vehicles had to be
capitalized due to control of vehicle.
SEC Hearing on IFRS (Continued)
• On Panel, John Smith, An American IASB
member.
-Mentioned that on the board there are 14
members and they are from United States,
South Africa, Japan, China, Sweden, France and
United Kingdom.
-Panelists stated time consuming and costly
to use IFRS.
-Are they getting better information to the
creditors, regulators, investors and management
were questioned? Are the interested parties
getting value for this exercise? MAYBE??
Recent Developments -IFRS
• Issuance in 2009, IASB issued
International Financial Reporting Standard
for Small and Medium Sized Entities (IFRS
for SME’s).
– For example, no Earnings per Share (EPS),
no Interim reporting or Segment reporting are
needed
– No Fair Value determination of Long term
assets are needed to complete financial
statements
Latest Proposals on Financial
Statement Presentation
– Overall Project Goal
– Develop a common standard on organization
and presentation of information in financial
statements
– Improve:
• The usefulness of information provided to users of
financial statements (in making decisions as
providers of capital)
• Communication between management and users
of financial statements
Latest Proposals on Financial
Statement Presentation-(Cont’d)
– Status of Project
– IASB/FASB joint project – formerly known as
the “Performance Reporting Project”
– Discussion paper issued October 16, 2008
– Comments received April 14, 2009
– Exposure draft expected in 2010
Latest Proposals on Financial
Statement Presentation-(Cont’d)
– Objectives
– Three objectives for financial statement presentation:
– Cohesiveness – flow of information should follow
through all of the different statements
• Relationships are clear: statements are complimentary
– Disaggregation – more information should be shown
separately
• Common sections and categories: more line items
– Ability to assess liquidity and cash flow
• Ability to meet financial commitments and invest in business
opportunities
Latest Proposals on Financial
Statement Presentation-(Cont’d)
– Statement of Financial Position
• Grouped by operating, investing, financing (no longer by
assets liabilities and equity)
• Disaggregate assets and liabilities into short term and long
term, totals and subtotals
– Statement of Comprehensive Income
• One statement
• More disaggregation (function, nature)
– Statement of Cash Flows
• Direct method
– New reconciliation schedule
• Reconcile cash flows to comprehensive income
• In notes
Latest Proposals on Financial
Statement Presentation-(Cont’d)
Bibliography
• AICPA, International Financial Reporting
Standards (IFRS), an AICPA Backgrounder
• AICPA Website, www.aicpa.org
• AICPA IFRS website, www.ifrs.com
• University Professors Weigh in on Building IFRS
in Curricula, KPMG-AAA Survey. In
www.Marketwatch.com.
• Colleen Cunningham, CPA talk on IFRS, IMA
National Conference, June 2010
Bibliography
(Continued)
• International Federation of Accountants
website, www.iafc.org
• SEC website, www.sec.gov
• Price Waterhouse Cooper’s Website,
www.pwc.tv
• Bruce Pounder, CMA, CFM articles in
Strategic Finance, contact and website,
BPounder@leveragedlogic.com
OTHER ACCOUNTING ISSUES
• FASB # 157, FAIR VALUE ACCOUNTING
– LEHMAN BROTHERS DEMISE-MAYBE?
– MULLIGAN STANDARD- GET IT RIGHT OR
GIVE ME ANOTHER SHOT
XBRL– ALREADY AVAILABLE AND BEING
USED TO REPORT UNDER IFRS
Questions????
• Thank you!!
• Best Wishes for a wonderful conference!!!