IFRS & SOX
Solution Consultants:
Lance LaCross, CPA
Bill Wermes, MBA
Today’s Agenda
• SOX (Sarbanes-Oxley Act)
– Background
– Was It Worth It?
– Latest Update
• IFRS (International Financial Reporting Standards)
– What Is It?
– Will It Effect Me?
– Latest Update
The Enron Scandal
The Scandals of …
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Enron
WorldCom
Tyco
Arthur Anderson
KPMG
HealthSouth Corporation
Drove investors to loss confidence in our regulators and the
reliability of publically reported financial information so our
government sent a strong message to the marketplace with this
act.
Sarbanes-Oxley Act - Summary
The Sarbanes-Oxley Act of 2002 (named for its sponsors Senator Paul Sarbanes
and Representative Michael G. Oxley) is a law that was passed in response to
the previously mentioned financial scandals. The law established new, stricter
standards for all US publicly traded companies. It does not apply to privately
companies.
The Act is administered by the Securities and Exchange Commission (SEC),
which deals with compliance, rules and requirements. The Act also created a
new agency, the Public Company Accounting Oversight Board, or PCAOB, which
is in charge of overseeing, regulating, inspecting, and disciplining accounting
firms in their roles as auditors of public companies.
Key Sections Summary
• Key Sections
– Section 201 Outlines Prohibited Auditor Activities.
– Section 302 Describes The CEO's And CFO's New
Responsibilities Regarding Corporate Reports.
– Section 404 Addresses The Management
Assessment Of Internal Controls.
– Section 409 Outlines Real Time Disclosure.
– Section 802 Describes Criminal Penalties For
Altering Documents.
– Section 806 Describes Whistleblower Protection.
– Section 807 Describes Criminal Penalties For Fraud.
Internal Controls = Safety Procedure
Section 404 of the Sarbanes-Oxley Act
SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.
(a) RULES REQUIRED- The Commission shall prescribe rules requiring each annual
report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15
U.S.C. 78m or 78o(d)) to contain an internal control report, which shall-–
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(1) state the responsibility of management for establishing and maintaining an adequate internal control
structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness
of the internal control structure and procedures of the issuer for financial reporting.
(b) INTERNAL CONTROL EVALUATION AND REPORTING- With respect to the internal
control assessment required by subsection (a), each registered public accounting firm
that prepares or issues the audit report for the issuer shall attest to, and report on,
the assessment made by the management of the issuer. An attestation made under
this subsection shall be made in accordance with standards for attestation
engagements issued or adopted by the Board. Any such attestation shall not be the
subject of a separate engagement.
Sarbanes-Oxley Section 404 IT Controls Top
Deficiencies
Common deficiencies found in first year of audits:
1. Unidentified or unresolved segregation of duties
issues
2. Programmer/developer access to production
business transactions
3. Large number of users with access to “Super” or
“Power” User transactions in production
Was It Worth It?
• Per the SEC, the internal-control provision of the Sarbanes-Oxley Act — was
initially estimated to cost companies $91,000.
• Actual implementation costs in 2004 were 35 times higher than SEC estimate
($3.185 M)
• In 2002, only 3 Congressmen opposed SOX
– Now a lot of businessmen & politicians oppose the financial burden it puts on smaller
companies
• SOX led to the creation of the Public Company Accounting Oversight Board
(PCAOB), which was established to oversee public companies' auditors and
protect the public's interest by ensuring informative, fair, and independent
audit reports.
• The PCAOB is actively investigating small business issues (70+% of public
companies are considered small).
• The SEC and PCAOB are constantly revising their guidance to address some of
the concerns Small company i.e. compliance dead lines have been extended.
SOX & The Future
• Section 404 certification is an annual event. Compliance is an ongoing
requirement which will require resources (people / $$$)
• Auditors are now more objective because they cannot provide non audit
services
• Audit partners (not auditor) are rotated every five years
• External Reporting is expanded for investors
• The SEC and PCAOB are constantly revising their guidance to address some
of the ongoing concerns which drives continuous change
• CEO & CFO are likely to be more proactive in their financial disclosure due
to potential liability
• SEC has more power – i.e. blackball officers & directors
SOX & The Future cont…
The Sarbanes-Oxley Act has many critics:
• Opponents state the Act is an over-burdensome piece of regulation, one that has
imposed costly and unneeded obligations on issuers. It has driven U.S. companies to
exit the public markets and “go private,” and it has deterred non-U.S. companies from
raising capital and listing in the United States.
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Supporters of Sarbanes-Oxley counter that these arguments are extreme. Yes the
benefits of Sarbanes-Oxley are hard to quantify. Little discussion about the costs of
not implementing such compliance measures, such as the losses due to fraud, and the
loss of investor confidence. The costs of an entity's dysfunction, such as what
happened with Enron and a number of other companies, were enormous. Trillions of
dollars were lost in market capitalization, and this was a real crisis with respect to
investor confidence. The feelings are that is has increased public confidence in the
markets and arguably lessened accounting fraud and numbers “manipulation.”
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However, there is agreement among all parties that the act needs some adjustment
particularly with respect to the burdens it imposes on smaller companies.
Latest News
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Everyone Is Talking About It
Everyone Is Writing About It
IFRS vs. GAAP
IFRS – International Financial Reporting Standards
by IASB (International Accounting Standards Board)
GAAP – Generally Accepted Accounting Principals
by FASB (Financial Accounting Standards Board)
But Why Be Concerned about IFRS?
How can global investors, regulatory agencies, etc
compare financial information/statements on a
global basis if it is based on different rules, etc. It
is like comparing …
TO
IFRS Compared to GAAP = Apples vs. Oranges
Both are in the fruit family but a different
variety - having major differences: color,
skin, taste, purpose & texture
But if everyone is using IFRS (a Worldwide
Standard) for their Financial Reporting…
Than it is like comparing Apples (Macintosh) vs.
Apples (Granny Smith) Both in the fruit family and in
the same variety - having minor differences: color,
taste & texture – Easier comparison
IFRS vs. GAAP
IFRS – International Financial Reporting Standards
by IASB (International Accounting Standards Board)
IFRSs are considered a "principles based" set of standards in that they
establish broad rules as well as dictating specific treatments.
Vs
GAAP – Generally Accepted Accounting Principals
by FASB (Financial Accounting Standards Board)
GAAP is the standard framework of guidelines for financial accounting.
It includes the standards, conventions, and rules accountants follow in
recording and summarizing transactions, and in the preparation of
financial statements
Why Is Everyone Talking About IFRS?
• The SEC Is Mandating It?
• Your Competitors Are Doing It
• Your CPA Thinks It Is A Great Idea
The SEC Is Mandating It
The SEC Is Mandating It
• International Corporations preparers no longer
must reconcile to US GAAP
• Will it replace US GAAP?
– The SEC has announced a timeline (2014) for
potential adoption
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2005 – EU Accepts it
2009 - US listed companies have the option to use IFRS
2009 – New SEC Chairman – “Now my agenda”
2011 - SEC will access results
2014: This would be the earliest year that the SEC would require U.S. large
accelerated filers to convert their financials to IFRS.
• 2015: Earliest year the SEC would require U.S. accelerated filers to convert to IFRS.
• 2016: Earliest year the SEC would require U.S. non-accelerated filers, including smaller
U.S. public companies to convert to IFRS.
SEC Update
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Your Competitors are Doing It
• Today more than 113 countries permit or
require IFRS
• By 2012 every major capital market will have
adopted IFRS except the US (last to the dance)
• We are a globally driven environment who
will need to have a common standard in place
World Market Acceptance
Your Competitors are Doing It cont…
2011
2014?
2012
2011
2012
2010
2009
2012
Your CPA Thinks it is a Great Idea
• AICPA – Appendix A Rule 2003
– In 1973 FASB was set as the sole standard setter
– IASB (International Accounting Standards Board) is
designated as an acceptable principles creation
organization
– Continuous Convergence between IASB & FASB for
a common “standard”
• There are more than 15,000 SEC registered
companies in the USA
History – Timeline of IASB
• 1973: Foundation of the International Accounting Standards Committee
(IASC) in London as the result of an agreement between accountancy
bodies in nine countries
• 1998: Completion of 39 ‘core’ international accounting standards (IASs).
The number of IASC members passes one hundred
• 2001: The IASB assumes the standard-setting responsibilities from IASC
and is overseen by the IASC Foundation (established in 2001)
• 2002: The EU Parliament confirms the endorsement process by which
IFRSs will become the sole set of standards for EU listed companies
• 2005: Adoption of IFRSs for listed companies in the EU
• 2006: The US FASB and the IASB publish a Memorandum of Understanding
detailing a roadmap to convergence
• 2007: US SEC publishes a proposal to eliminate reconciliation requirement
for foreign private issuers using IFRSs
IFRS Timeline
Why Not Use GAAP as the Global Standard?
• US GAAP Is Too Detailed
• The Rest Of The World Would Not Accept
Detailed Rules
• IFRS Is Already Widely Accepted Through Out
The World
Is Success In The Detail?
Convergence Process Between IASB & FASB
IASB
FASB
Convergence
Final IFRS
Standard?
On Going Effort
Convergence Process Between IASB & FASB
• Agenda Alignment
– Full Joint Projects
– Modified Joint Projects
• Short term:
– Projects of Narrower areas of difference
• Long term:
– Projects of “Big Ticket”
• Not just convergence for the sakes of
convergence, but also improvement
Convergence Process Between IASB & FASB
• Short Term
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Fair Value Option (FASB) completed
Segment Reporting (IASB) completed
Joint Ventures (IASB) final standard in 2009
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• Long Term
– Financial Statement Presentation (Joint) DP
(Discussion Paper) issued in Q42008
– Leases (Joint) Discussion Paper issued in Q12009
– Liabilities & Equity ED (Exposure Draft) in 2009
–…
IASB Project Example
Convergence Process Between IASB & FASB
“ Great strides have been made by the FASB and the
IASB to converge the content of IFRS and U.S. GAAP.
The goal is that by the time the SEC allows or
mandates the use of IFRS for U.S. publicly traded
companies, most or all of the key differences will have
been resolved. Because of these ongoing convergence
projects, the extent of the specific differences
between IFRS and U.S. GAAP is shrinking.”
However ….
Convergence Process Between IASB & FASB
• There Are Still Major Differences:
– IFRS does not permit Last In First Out (LIFO) as an inventory costing method.
– IFRS uses a single-step method for impairment write-downs rather than the
two-step method used in U.S. GAAP, making write-downs more likely.
– IFRS has a different probability threshold and measurement objective for
contingencies.
– IFRS does not permit curing debt covenant violations after year-end.
– IFRS guidance regarding revenue recognition is less extensive than GAAP and
contains relatively little industry-specific instruction.
Perhaps the greatest difference between IFRS and U.S. GAAP
is that IFRS provides much less overall detail.
High Level Differences Areas:
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Financial Statement Presentation
Consolidations, Joint Ventures, and Equity Method Investees
Business Combinations
Inventory
Intangible Assets
Long-Lived Assets
Impairment of Assets
Leases
Financial Instruments
Foreign Currency Matters
Income Taxes
Provisions & Contingencies
Revenue Recognition
Share Based Payments
Employee Benefits other than Share-based Payments
Segment Reporting
Earnings Per Share
Interim Financial Reporting
High Level Differences cont…
• Financial Statement Presentation:
– The opening IFRS balance sheet is the starting point for all subsequent
accounting under IFRS and is prepared at the date of transition, which is
the beginning of the earliest period for which full comparative
information is presented in accordance with IFRS. For example, preparing
IFRS financial statements for the three years ending December 31, 2011,
would have a transition date of January 1, 2009. That would also be the
date of the opening IFRS balance sheet.
– IAS-1 requires that the opening IFRS balance sheet:
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Include all of the assets and liabilities that IFRS requires;
Exclude any assets and liabilities that IFRS does not permit
Classify all assets, liabilities and equity in accordance with IFRS; and
Measure all items in accordance with IFRS.
High Level Differences cont…
• Inventory:
– IAS-2 - the objective of this Standard is to prescribe the accounting
treatment for inventories. A primary issue in accounting for inventories
is the amount of cost to be recognized as an asset and carried forward
until the related revenues are recognized. This Standard provides
guidance on the determination of cost and its subsequent recognition as
an expense, including any write-down to net realizable value. I t also
provides guidance on the cost formulas that are used to assign costs to
inventories.
• For example inventory using LIFO is prohibited under IFRS. Techniques for the
measurement of the cost of inventories, such as the standard cost method, may be
used for convenience if the results approximate to cost. Companies on LIFO for US
GAAP would have to support multiple inventory costing methods resulting in changes,
not only to the General Ledger but also as well to the inventory management, project
tracking, and procurement systems to support multiple cost basis capabilities.
High Level Differences cont…
• Fixed Assets:
– The objective of IAS 16 is to prescribe the accounting treatment for
property, plant, and equipment. The principal issues are the
recognition of assets, the determination of their carrying amounts,
and the depreciation charges and impairment losses to be recognized
in relation to them.
• Fixed Assets requires componentization of fixed assets and permits revaluation to
fair value
• Requires new depreciable lives, asset categories, etc., as well as modification to
front- end systems (real estate, property management) to track costs at lower levels
of detail
Key Challenges …
Key Challenges - Time
Key Challenges
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Principles vs. Rules – Mindset Change
Hidden Differences – More Than Expected
Integration Into Education/Budget
Policy Issues i.e. LIFO Accounting
Education
– Investors, Employees (current & future), etc.
• And …?
Transition for US Corporations from GAAP to IFRS
• Financial Statements:
– Based on the current proposed roadmap
published by the SEC, companies would need to
be able to produce financials under both US GAAP
and IFRS for a minimum of three (3) years
• For some companies, the time period may be longer
due to stand alone US GAAP reporting requirements for
statutory reporting, debt covenant reporting to banks,
etc.
Transition for US Corporations from GAAP to
IFRS – Costs?
• Expenses to determine the effects of adopting IFRS
• Systems/ IT changes
– Multi GAAP Capability / IFRS Complaint
• Potentially higher cost of accounting staff –
– Restatement of 2 prior years
– Internal Experience
• Outside consultants & auditors who understand IFRS
• Possible cost of switching to an audit firm with
proper experience in IFRS reporting
Transition for US Corporations from GAAP to IFRS
• Information Technology Considerations:
– IFRS is accounting driven but it will drive major changes to IT systems as well as
business processes and personnel
– Current experience indicates that IT costs are generally over 50 percent of the cost
of IFRS conversion
– Organizations benefit when they identify and integrate the efforts of the IT team
early in the IFRS conversion process
– Depending on the system complexities associated with the conversion to IFRS,
experience from other global conversion efforts indicates that the IT system
conversion component of an overall IFRS conversion can take 18 -24 months or
longer.
– IT efforts will comprise a mix of short and long term projects within the
organization s overall IFRS project
– The IFRS conversion effort provides opportunities for achieving synergies with
other IT projects and strategic initiatives, such as an ERP implementation or major
upgrade
SEC - Cost Estimate
“ We estimated that the cost of IFRS transition under Proposal A would be 0.125% of
revenue for the U.S. issuers that would be eligible to use IFRS accounting, and would
be approximately 0.13% of revenue under Proposal B to reflect the additional U.S.
GAAP reconciliation disclosure.182 . We used a higher percentage of revenue to take
into account our different filing obligations in the U.S., which require, among other
things, issuers to include three years of audited financial statements, and our
requirement related to internal controls over financial reporting.” SEC Quote
So a $1B organization estimate = $1,300,000.
But you must remember that not too long ago the SEC made an estimate for a
mandated enterprise-wide project that ended up costing companies millions of dollars
in auditing fees. That project — the internal-control provision of the Sarbanes-Oxley
Act — was initially estimated to cost companies $91,000.
Addressing IFRS Challenges with QAD Solutions
• For Global Manufacturing Companies, the typical
areas concerned will center on choices to be made in
the areas of:
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First-time adoption (IFRS 1) Reporting
Segment Reporting (IAS 14, recently superseded by IFRS 8)
Inventory Valuation (IAS 2)
Fixed Assets Valuation (IAS 16)
Revenue Recognition (IAS 18)
Foreign Exchange rates (IAS 21)
Addressing IFRS Challenges with QAD Solutions
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Where some ERP vendors can only handle the multi-GAAP and reporting
requirements by using separate consolidation or BI solutions, w e have embedded
these capabilities in the core product suite. Some examples include:
– Combination of Local GAAP and IFRS, also supporting the first time adoption
• QAD Enterprise Applications allow combining reporting both on Local GAAP as well as on IFRS
standards through the application ‘adjustment layers’ (EE). This approach allows for separately
recording and tracking of the differences between the GAAPs.
– Segment reporting
• IFRS 8 applies when a company has parts of the business operating in different business segments.
QAD EE support multiple analytical segments (e.g. subaccount and SAF’s) that can be used to
support segment reporting. In some cases there might be a need to reallocate general costs and
revenues to the appropriate segments. QAD EE introduces an allocation module for this,
streamlining the automation of this process
– Inventory Valuation
• IAS 2 concerns inventory valuation and recommends costing inventory by either specific
identification, FIFO or weighted average. The standard cost inventory method may be used,
provided that results after incorporation of variance reconcile back to one of the above. QAD
Enterprise Applications supports both standard and average costing.
Addressing IFRS Challenges with QAD Solutions
– Fixed Assets
• QAD Enterprise Applications provide for the different ways to treat the
lifecycle of a Fixed Asset from acquisition, revaluation through dismissal.
QAD Enterprise Applications supports putting in place multiple
depreciation books for an asset, allowing complying with both Local GAAP
and IFRS valuation requirements.
– Foreign Exchange Rates
• QAD Enterprise Applications provide powerful tools for multi-currency
activities, translating foreign currencies to functional currency at the
moment of transaction and supporting the recognition of realized and
unrealized exchange gains and losses at the moment of reporting.
– Others
• The above list is far from complete. QAD Enterprise Applications have
many built-in provisions for internal controls that make reconciliation and
reporting easier. QAD Enterprise Edition introduces an even more
extensive set of these internal controls and extra functions.
QAD Solution – 2009 EE
• QAD Enterprise Edition introduces new
capabilities to further streamline IFRS compliance
– Accounting Layers
QAD Solution – 2009 EE
• QAD Enterprise Edition introduces new capabilities to
further streamline IFRS compliance
– Supplementary Analysis Fields (SAF)
QAD Solution – 2009 EE
• QAD Enterprise Edition introduces new capabilities to
further streamline IFRS compliance
– Periodic Costing
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Periodic revaluation of item costs based on all inventory/shop floor
transactions occurred during that period supporting following calculation
methods:
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Generation of GL Transactions for all related transactions based on new
calculated item cost
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Weighted Average (WAVG)
FIFO
LIFO
Complete versus standard costing plus adjustments
Inventory Valuation based on WAVG, FIFO LIFO calculated item unit costs
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Absorption of Indirect costs
Absorption of expenses (Freight, Insurance, …)
QAD Solution – 2009 EE
• QAD Enterprise Edition introduces new capabilities to
further streamline IFRS compliance
– Allocations
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What Next?
SEC Final
Decision, If
Yes – When?
Today’s US Date - Moving Target
What Next?
The Clock is ticking…
Reminder
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