IFRS,
Convergence, and Change
Richard Dinkel
Controller, Koch Industries, Inc.
Member of FASAC
1
Disclaimer
The views expressed in this presentation are
my own and do not represent positions of
the Financial Accounting Standards
Advisory Council or the Financial
Accounting Standards Board.
Positions of the FASB are arrived at only
after extensive due process and
deliberation.
2
IFRS Timeline

2007- SEC eliminates US GAAP
reconciliation for IFRS filers

2007- SEC concept release on use of IFRS for
US registrants

2008- SEC issues proposed “Roadmap” for
adoption of IFRS in the US

2010- SEC issues statement of continued
support for convergence between US GAAP
and IFRS
Convergence
and Improvement

FASB and IASB working since 2002 to
improve and converge U.S. GAAP and IFRS.

Memorandum of Understanding (MoU)

Identified 9 major accounting areas needing
improvement in both U.S. GAAP and IFRS

Completed Business Combinations project in
2007 by issuing FAS 141(R) and 160, and IFRS 3

Remainder of projects still ongoing (slide 8)

In addition, just beginning joint deliberations on
De-recognition Project.
4
Overall Goal of Convergence
Improved, high-quality, converged
standards developed through
rigorous due process
Priorities:
1.
2.
3.
Independence
Improvement
Convergence
5
Drivers for Timing of Convergence
and Improvement Efforts

Financial Crisis underscored importance of
global convergence of standards

G-20 has called for FASB/ IASB to “redouble
their efforts” to complete their MoU projects
by June 2011

SEC awaiting outcome of MoU projects
before making decision about IFRS for U.S.
public companies
6
Drivers for Timing of Convergence
and Improvement Efforts

The June 2011 date also is being driven by
the IASB because of:

Countries, including Brazil, Canada, India, and
Korea, that have announced plans or intentions to
adopt IFRS for their listed companies on or
around 2011 or 2012

Terms ending for IASB chair Sir David Tweedie
and two other IASB board members in mid-2011.
7
Current Status of
Deliberations & Implications

Five major projects generally on track toward
convergence:

Fair Value Measurement

Consolidations

Revenue Recognition

Financial Statement Presentation

Financial Instruments with Characteristics of
Equity
8
Current Status of
Deliberations & Implications

Three major projects not on track toward
convergence:

Financial Instruments

Insurance

Leases

Further deliberations required

Target timelines for final standards could be
in jeopardy
9
FASB/IASB Project
Target Dates
Project
Exposure Draft
Final Statement
Financial Instruments
May 2010
March 2011
Fair Value Measurement
May 2010
October 2010
Consolidations
May 2010
January 2011
Revenue Recognition
May 2010
June 2011
Financial Statement
Presentation
May 2010
June 2011
Financial Instruments
with Characteristics of
Equity
June 2010
June 2011
Insurance
June 2010
June 2011
Leases
June 2010
June 2011
10
Current Status of
Deliberations & Implications

This intense level of standard setting is
unprecedented

FASB has issued, at most, 4 major standards in
one year

In addition, FASB has issued at one time no more
than 3 exposure documents proposing significant
changes

IASB has issued 9 major standards in its 9-year
history.
11
Current Status of
Deliberations & Implications

Volume and timing of MOU projects

Challenges ability of constituents to provide
quality input to due process


Reactions from CFA Institute, FEI, ITAC and others:
improvement is primary, speed is secondary.
Challenges preparers’ ability to implement final
standards and users’ ability to analyze new
financial reports

Joint Invitation to Comment to be issued by both Boards
to seek input from constituents regarding effective dates
and transition approaches
12
Convergence:
One Final Key Point

If FASB/IASB achieve convergence on all of
these major projects

U.S. GAAP and IFRS will not be completely
converged.


Full IFRS adoption may still not happen







Point raised in February 2010 SEC statement
More urgent priorities
Costs of full adoption are high
Mixed support from regulators
Unresolved reporting issues
Convergence conflicts
Private company standards
How to stay converged??
13
MoU Projects
14
Financial Instruments

Problems:

Complexities and inconsistencies within and
between U.S. GAAP and IFRS, on:





Classification and measurement,
Impairment
Hedge accounting
In U.S., different impairment approaches for debt
securities and loans especially problematic
Financial Crisis pointed to untimely recognition of
credit impairment of loans held for collection by
financial institutions
15
Financial Instruments

Proposed Solution:

Fewer/ simpler classification and measurement
approaches


Two “buckets”: FV (mandatory for derivatives and
trading instruments; default for other items) and FV/OCI
(optional, based on business model, for other assets and
liabilities, such as many loans and core deposits)
Fair value information on the balance sheet for
most financial instruments


Exceptions: short-term trade receivables and payables;
in certain circumstances, own debt
Amortized cost information also reported for FV/OCI
items
16
Financial Instruments

Proposed Solution (cont’d):

Income statement puts non-credit-related FV
changes of FV/OCI assets in OCI, rather than Net
Income



Consistent with approach taken in FSP FAS 115-2 and
124-2
Improvements to impairment accounting, to
develop single overall approach applicable to
debt securities as well as loans
Simplified criterion to qualify for hedge
accounting, leading to more consistent and
transparent application
17
Financial Instruments

Companies Affected:


All; greater effect on financial institutions
Challenges to Convergence:


IASB currently has reached different conclusions
in their proposed model, highlighted in table on
following slide. We may or may not be able to
reconcile these differences
While many users in the U.S. favor the more
prominent display of FV information on the
balance sheet, for loans, deposits, etc., banks and
bank regulators generally oppose such change
18
Financial Instruments
Area
Main Classification
Categories
Credit Impairment
FASB

Fair value through net income

Fair value through net income

Fair value through other
comprehensive income (FVOCI)

Amortized cost

Based on past events and

existing conditions and their
implications for the collectibility
of the financial asset(s)

Recognized in net income

Hedge Accounting
IASB

Bifurcation by risk allowed for
financial items

Qualitative assessments
required at inception
(quantitative may be necessary)

Reasonably effective threshold

Impairment recognized based on
expected credit losses over the
life of the financial asset
Recognized in net income
Currently deliberating issues with
a plan to issue and exposure draft
in the second half of 2010
Fair Value Measurement

Problem:

US GAAP and IFRS not yet converged; FASB took
the lead on improving this area a few years ago
with Statement 157




Statement 157: how to, not when to, measure fair value
The IASB exposed Statement 157 with some fairly minor
suggested modifications
Both FASB and IASB have since issued additional
guidance in this area in response to Financial Crisis
Proposed Solution:

One global definition of fair value and approach to
measurement and disclosure of fair value
20
Fair Value Measurement

Companies Affected:


All, with greater effect on financial institutions;
overall, will cause relatively insignificant changes
when compared to current U.S. GAAP
Challenges to Convergence:


No significant differences regarding how to
measure fair value
More significant differences relate to when to use
fair value (see Financial Instruments Project)
21
Consolidations

Problems:


Inconsistent guidance between U.S. GAAP and
IFRS, especially on consolidation of variable
interests (securitizations/ structured entities)
Consolidation requirements for voting interests
may lead to non-economically-representative
consolidation decisions, in certain situations:


Effective control rather than contractual control
Options, convertible instruments, agency relationships
22
Consolidations

Proposed Solution:


Overall consolidation standard for both variable
interest and voting interest entities identifying the
party, if any, with power over and benefits from
the key economic activities of the entity
Will result in fewer activities off-balance sheet


FASB already tightened de-recognition and
consolidation guidance for variable interests (VIEs),
through FAS 166 and 167, bringing it closer to IFRS and
setting stage for convergence
Companies Affected:

All
23
Consolidations

Challenges to Convergence:

Potential differences between Boards about how
to evaluate effective control of voting interest
entities (IASB: ability to control concept vs.
FASB: ability to control with historical evidence
view)

Banks fought recent changes to U.S. GAAP (SFAS
166 and 167), but bank regulators eased transition
by phasing-in recognition for regulatory capital
purposes
24
Revenue Recognition

Problems:



U.S. GAAP: in 200+ standards (now codified),
inconsistent, developed piecemeal
IFRS: very limited guidance, permitting “anything
goes application” or need look to U.S. GAAP to
apply IFRS
Proposed Solution:

Common principle, based on satisfaction of
performance obligations, that can be applied
consistently across various industries and
transactions and better reflect the underlying
economics of revenue transactions
25
Revenue Recognition

Companies Affected:


All, but greatest effect on software and
construction companies
Challenges to Convergence:

Nothing significant between the Boards
26
Financial Statement
Presentation
 Problem:

The ability of users to predict cash flows
associated with a company would be enhanced
greatly if the basic financial statements (balance
sheet, income statement, cash flow statement)
related to each other more cohesively and
presented more disaggregated information
 Proposed

Solution:
A consistent format across statements,
classifying items into business and financing
categories, with a further disaggregation of
business into operating and investing activities
27
Financial Statement
Presentation
 Proposed
Solution (cont’d):

Required use of the direct method for
presentation of operating cash flows

Disaggregation of reported items by function and
nature to facilitate prediction of cash flows

Together all of these changes should help improve
communication between preparers and users
28
Financial Statement
Presentation
Statement of
financial position
Statement of
comprehensive
income
Statement of
cash flows
Business
Business
Business

Operating assets
and liabilities
 Investing assets and
liabilities

Operating income and
expenses
 Investing income and
expenses

Financing
Financing
Financing
Financing assets
 Financing liabilities

Financing asset
income
 Financing liability
expenses


DIRECT
Operating cash flows
 Investing cash flows
Financing asset cash
flows
 Financing liability
cash flows
29
Financial Statement
Presentation
 Companies

All business entities (not-for-profit entities have
been scoped out)
 Challenges

to Convergence:
Differences in approaches by Boards for
disaggregating expenses by nature



Affected:
FASB: in segment note
IASB: at consolidated level in notes, pending postimplementation review of IFRS 8
Preparers have expressed concerns about
implementation costs, especially about direct
method for presenting operating cash flows
30
Financial Instruments with
Characteristics of Equity

Problem:


Inconsistent classification and measurement of
hybrid financial liabilities with similar
characteristics; vast rules-based literature
(especially in U.S.) leading to structuring
opportunities
Proposed Solution:

Replace complex inconsistent literature with one
set of coherent classification requirements that
define equity based on two principles


Ownership of the entity
Settlement with a specified number of ownership
instruments
31
Financial Instruments with
Characteristics of Equity

Companies Affected:


All companies
Challenges to Convergence:

Nothing significant between the Boards
32
Insurance


Problems:

Lack of a standard in IFRS for insurance contracts

U.S. guidance is unique and industry-specific

Industry practice of excessive deferrals of
contract acquisition costs
Proposed Solution:

Common, high-quality standard for recognition,
measurement, presentation, and disclosure of
insurance contracts, with contract acquisition
costs expensed when occurred (similar to what is
done for regulatory purposes)
33
Insurance

Companies Affected:


Insurance companies
Challenges to Convergence:

The Boards have tentatively reached different
conclusions on numerous fundamental issues


Definition of insurance, measurement of liability,
unbundling of contracts, accounting for acquisition
costs and participating contracts
U.S. insurance industry generally has different
views about the model than other major global
insurers
34
Leases


Problems:

Off-balance sheet presentation of leased assets
and related financing

A bright-line distinction, especially in U.S. GAAP,
between on- and off-balance sheet transactions,
leading to structuring opportunities
Proposed Solution:

For lessees, lease obligations recognized on
balance sheet as liabilities, along with a
corresponding asset (using a “right to use”
approach)
35
Leases

Proposed Solution (cont’d):


Also looking at lessor accounting, to achieve
consistency with model in Revenue Recognition
Project
Companies Affected:

All; key industries affected include retailers,
banks (branch offices), big equipment lessees
(such as airlines and hospitals)
36
Leases

Challenges to Convergence:


Differences between the Boards on approach to
lessor accounting:

FASB: performance obligation approach, which
recognizes revenue over lease term.

IASB: de-recognition approach that results in more upfront revenue
Leasing industry opposed to pattern of income
recognition in lessee model and to performance
obligation approach to lessor revenue recognition
37
Conclusions
38
Conclusions

Proposed changes are unprecedented

Politics may be impactful

Uncertainty still abound

FASB objectives are independence,
improvement, and convergence—in
that order

Thus, due process is crucial

Not too early to start planning
39
Questions?
40