IFRS in the US – Why it Matters Today
UT Arlington EMBA Program
November 11, 2011
PwC
Agenda
IFRS background
IFRS in the United States
Near-term considerations
Impact on your business
Next steps
Questions and answers
Slide 2
IFRS background
International Financial Reporting Standards (“IFRS”) – The
global revolution
More than 100 countries require, permit, or are converging to IFRS
All major capital markets are changing…except the US
Top 10 global capital markets
Countries converging to IFRSs with the goal of adoption
Countries that require or permit IFRSs
US
US GAAP
Japan
Going to IFRS as
adopted by the FSA
UK
IFRS by the EU
France
IFRS by the EU
Canada
IFRS by the IASB
Germany
IFRS by the EU
Hong Kong
IFRS by the IASB
Spain
IFRS by the EU
Switzerland
IFRS by the IASB
Australia
IFRS as adopted
locally
Countries with no current plan to adopt
Slide 4
Standard Setting Structure
IFRS Foundation Trustees
The Trustees promote the work of the IASB and the rigorous application of IFRSs but are not involved in any technical matters
relating to the standards. Six of the Trustees must be selected from the Asia/Oceania region, six from Europe, six from North
America, one from Africa, one from South America and two from the rest of the world
appoint
inform
IFRS Advisory
Council
provides
strategic
advice
oversee, review effectiveness,
appoint and finance
informs
Standard-setting
International Accounting Standards
Board (“IASB”) – issues IFRSs
IFRS Interpretations Committee –
issues IFRICs
Slide 5
IFRS in the United States
IFRS in the United States
IFRS – Who is part of the debate
SEC
FASB
IASB
Europe
Preparers
US GAAP / IFRS
Convergence or Change
Asia
Academics
Investors
Market
Auditors
Slide 7
IFRS in the United States
The seeds of revolution…
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October 2002 Norwalk Agreement
Convergence
- Objective is to create one global set of high-quality standards
- Beginning: equivalent standards
- Now: robust, transparent frameworks with similar principles
April 2005 SEC “roadmap” (updated in November 2008)
February 2010 – SEC released Work Plan (first progress report was issued October 2010)
Competitiveness of the US capital markets
Simplicity in US financial reporting
Elimination of the US GAAP reconciliation for non-US registrants
SEC Concepts Release
Slide 8
IFRS in the United States
Convergence – Sweeping changes on the horizon
• The FASB and IASB established a pathway to converged standards in a Memorandum of
Understanding
• The planned convergence will result in a significant number of new US GAAP standards
which will be significantly influenced by IFRS
• It is expected that convergence will not lead to identical standards in the future
• The challenge for Company’s is to address convergence as well as anticipate those areas
that will not fully converge
GAAP GAP
US GAAP
IFRS
2011
2012
2013
2014
2015
2016
Estimated publication of selected converging IASB/FASB standards:
2017
2011
2012
TBD
Key
Remaining
Differences
Comprehensive Income
Leases
Income taxes
PPE
Revenue Recognition
EPS
Inventory
Discontinued Operations
Financial Statement
Presentation
Share-Based
Payments
Pensions
Extractive
Industries
Fair Value
Financial Instruments
Consolidation and
Derecognition
Slide 9
IFRS in the United States
Convergence – Staying ahead of the game
• Convergence efforts have gone relatively unnoticed by many companies
• Companies should start planning for two possible alternatives for US reporting:
- Convergence alone
- Convergence followed by adoption of IFRS
• Multiple financial reporting outcomes could result from either alternative and lead to extensive
business consequences
• Devising strategies around a range of potential scenarios can help companies prepare for
those eventualities
Companies can no longer afford to ignore the potential impacts of
both Convergence and IFRS in strategic planning, structuring of
contractual arrangements, system projects and other business
initiatives
Slide 10
IFRS in the United States
SEC work plan to assess potential use of IFRS by US issuers
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In February 2010 the SEC released Commission Statement in Support of Convergence and
Global Accounting Standards which includes details of a Work Plan to be executed by the
SEC staff to enhance the Commission’s analysis of the implications of a change to IFRS
Proposed phased-in mandatory adoption of IFRS in 2015
The Work Plan identifies six areas of consideration in determining both whether and how to
incorporate IFRS into the financial reporting system for U.S. issuers.
- Sufficient development and application of IFRS for the US domestic reporting system
- The independence of standard setting for the benefit of investors
- Investor understanding and education regarding IFRS
- Examination of the US regulatory environment that would be affected by a change in
accounting standards
- The impact on issuers, both large and small, including changes to accounting systems,
contractual arrangements and corporate governance
- Human Capital Readiness
SEC will also consider consistency of IFRS around the globe
SEC to vote in 2011 on final mandatory adoption
Slide 11
IFRS in the United States
Status of SEC vote
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SEC floated an “condorsement” approach in May 2011
Rest of world is pushing for US to at the very least just allow IFRS
G20 is weighing in heavily for global accounting standards
Slide 12
IFRS in the United States
IFRS conversion – When might IFRS conversion occur in the
US?
SEC’s Roadmap for the potential use of financial statements prepared in accordance with IFRS by US issuers
November 14, 2008
SEC issued the
proposed roadmap
and rule
2008
2009
February 24, 2010
SEC released Commission Statement
in Support of Convergence and
January 1, 2013
Global Accounting Standards
Transition Date
including detailed Work Plan
Opening balance
sheet
2012
2010
2011
2013
During 2011
SEC to assess progress and confirm
path forward – assume proposed
mandatory use of IFRS, possibly in a
phased approach over 3 years starting
in 2015
January 1, 2015
Adoption Date
Go Live
March 31, 2015
1st quarter IFRS FS +
comparative reconciled
to US GAAP
2014
2016
2015
Dual Reporting Period
IFRS 2 years Comparatives reconciled
to US GAAP (annual and interim)
December 31, 2015
1st annual IFRS FS +
comparative reconciled
to US GAAP
Convergence
Slide 13
Near-term considerations
Near-term considerations
How IFRS is affecting US companies now
Customers
and vendors:
Know how IFRS
influences nonUS
counterparties’
negotiation
biases
Adoption:
Manage non-US
subsidiaries’
ongoing adoption
of IFRS
M & A:
Understand the
implications of
IFRS reporting
by non-US
targets and
acquirers
Contracts:
Consider how
IFRS affects the
structure of longterm contracts
and financial
agreements
Cost savings:
Streamline nonUS subsidiaries’
financial
reporting via
shared services
Convergence
Tax strategies:
Prepare for IFRS
effects on tax
rate and cash
flow.
US reporting:
Plan for business
implications
driven by
accounting
changes
System
upgrades:
Anticipate IFRS
impact on new
company-wide
and subsidiary IT
systems
Slide 15
Near-term considerations
Near-term change drivers
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The US path to IFRS will likely be one of convergence, ultimately followed by conversion
Companies face four near-term change drivers:
– Unprecedented level of accounting change driven by continued convergence of
standards
– Non-US subsidiaries moving to IFRS as other countries continue to adopt
– Customers/suppliers increasing interest in IFRS accounting outcomes
– Continued focus on differences between IFRS and US GAAP, as full convergence will
not be achieved
Over the next few years, US GAAP will be significantly influenced by IFRS
Slide 16
Near-term considerations
Global Adoption of IFRS - IFRS for SMEs next?
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IASB issued IFRS for Small and Medium Sized Enterprises (SME) in July 2009
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The standard applies to all entities that do not have public accountability - it is a matter for
authorities in each territory to decide which entities are permitted or even required to apply
the guidance
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The IFRS for SMEs contains several simplifications when compared to full IFRS, including
fewer disclosures, various omitted topics, disallowance of certain accounting policy options
and simplification of many recognition and measurement principles
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Bridging IFRS for SMEs with full IFRS could result in significant effort and consolidation
complexities for US entities with foreign subsidiaries applying the guidance
IFRS SME (possible) adopters
Austria
Portugal
Belgium
Russia
Denmark
South Africa
Finland
Spain
Ireland
Sweden
Italy
Turkey
Netherlands
United Kingdom
Norway
Slide 17
Impact on your business
Impact on your business
How is the marketplace reacting
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Companies are performing initial assessments of the impact of an IFRS, specifically
identifying:
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Potential US GAAP to IFRS differences
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Impact of IFRS conversion across the business (IT, HR, Treasury, etc.)
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An IFRS training plan for their employees
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Plan for next steps of conversion
Companies are waiting to see if the SEC is really going to mandate a move to IFRS.
Slide 19
Impact on your business
What does a change in GAAP impact?
Changing numbers
Changing people:
Addition of another GAAP and/or change in primary GAAP –
accounting policies determination; chart of accounts review,
opening balance sheet, comparative financial statements,
quarterly financial statements
Changing processes
Changing systems
a new business language
Communication
 Internal
 External
Training
 At different levels
 Not only finance people
Changing business
Existing processes to be enhanced
New processes created
Budgeting & forecasting
Internal controls revisited
Data availability and system
requirements
New systems components: data
warehouse, calculation engine
Re-alignment of management
information systems
Multi-GAAP solutions
Primary GAAP changeover
Performance management to be embedded across:
 Performance measure/KPIs
 Management accounts
 Remunerations/bonuses
 Budgeting/forecasting
 Financial and Business impact analysis: debt covenants
 Different valuations
Slide 20
Impact on your business
Key differences between IFRS and US GAAP
Business combinations
Tax accounting
Recognition and
measurement
of provisions
Derivatives and hedge
accounting
Consolidation
of entities
Impairment
testing methods
Capitalization of R&D
Asset retirement obligations
Securitizations/
Derecognition
Revenue recognition
Measurement
of inventories
Classification and
measurement of financial
instruments
Accruals
Debt and equity classification
Employee stock
compensation
LIFO
Slide 21
Impact on your business
Challenges in a conversion to IFRS
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Application of judgment within a principles-based framework
Policy setting and control challenges due to fewer “rules” in IFRS
Adopters finding many more differences than expected
Data gaps resulting from increased disclosures
Systems capabilities
US GAAP deficiencies (i.e., conversion to IFRS uncovering challenges with historical US
GAAP accounting)
Sufficient, trained resources
Change management
Slide 22
Next steps
Next steps
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Focus on the challenge address upcoming major US financial reporting changes
Perform an assessment to identify business, accounting, tax, investor, systems, controls
and workforce-related issues
Stay current on convergence projects
Be ready to adapt to ongoing change using scenario planning to incorporate likely
convergence and IFRS adoption expectations into your strategic thinking and business
planning
Monitor actual changes and consider how they will influence your non-US counterparties
(customers and vendors) and affect your reporting, long-term contractual commitments, tax
structures, financings, systems and controls
Maintain corporate oversight to influence transition timing, strategies, and policy
decisions of non-US subsidiaries that are, or may soon apply IFRS
Identify what you can do now, being mindful of the specific aspects of convergence and
conversion that will take the longest and consider smaller controlled one-off projects and
“easy wins” where desirable
Slide 24
Contact Information
Margaret Montemayor
Pioneer Natural Resources
Director of Financial Reporting and Technical Accounting
Phone: (972) 969 3628
Email: margaret.montemayor@pxd.com
Margaret joined Pioneer Natural Resources, a large independent exploration and production company in June 2010 as the
Director of Technical and Equity Accounting. Margaret was previously employed with PwC as a manager in the Accounting
Advisory and Financial Reporting group of Transaction Services in Dallas, Texas where she provided US GAAP, SEC and IFRS
expertise to clients in various industries.
In August 2008, Margaret returned from a four year tour in Zurich, Switzerland with the PwC Capital Markets Group where she
provided European companies with advice on complex accounting issues, SEC regulatory issues and IFRS, local GAAP and US
GAAP accounting conversions. Prior to Margaret's role in Transaction Services she spent two years in Audit at PwC in Dallas,
Texas and 2 years at Arthur Andersen in San Antonio, Texas.
Margaret has a Master of Business Administration and a Bachelor of Business Administration in Accounting from St. Mary’s
University in San Antonio, Texas. She is a Certified Public Accountant and a member of American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants.