International Financial Reporting Standards Ian P.N. Hague Principal, Accounting Standards Presentation to FMI (Halifax Chapter) January 15, 2009 Own views

1
International Financial Reporting Standards Ian
P.N. Hague Principal, Accounting
StandardsPresentation to FMI (Halifax Chapter)
January 15, 2009 Own views not those of AcSB
or other staff
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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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The Plan

• February 13, 2008 The Canadian Accounting
  Standards Board (AcSB) has confirmed that use of
  International Financial Reporting Standards
  (IFRS) will be required in 2011 for publicly
  accountable profit-oriented enterprises.
• IFRS will replace Canadas current Generally
  Accepted Accounting Principles (GAAP) for those
  enterprises.
• The official changeover date is for interim and
  annual financial statements relating to fiscal
  years beginning on or after January 1, 2011.

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Who does this apply to?

• Publicly Accountable Enterprise
• Issued, or is in the process of issuing, debt or
  equity instruments that are or will be
  outstanding in a public market (i.e. all public
  companies are PAEs) or
• Holds assets in a fiduciary capacity for a broad
  group of outsiders as its primary business, (i.e.
  others with large or diverse groups of users,
  such as a bank, insurance entity, securities
  broker/dealer, credit union, mutual fund or
  investment banking entity).
• Also, Public Sector GBE/GBTO
• NOT required for NFPOs
• Others may choose to adopt IFRSs

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Public Sector

• November 2007, PSAB approved amendments to
  Introduction to PSAB standards
• GBEs and GBTOs follow for-profit GAAP i.e.,
  IFRSs
• December 2008, decided to reconsider whether ALL
  such entities should follow IFRSs ITC, early
  2009

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When is adoption required?
IFRS Reporting date
Opening balance sheet
? lt 12 months ?
Jan. 1, 2008
Jan 1/ Apr 1 2010
Dec 31 2011/ Mar 31 2012
Jan 1/ Apr 1 2011
Preparatory period
Cdn. GAAP IFRS
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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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What are IFRSs?

• A single set of globally converged, high quality
  accounting standards
• Regulatory backing IOSCO, EU, etc.
• Globally accepted (100 countries)
• SEC 2011 to decide if IFRS mandatory for 2014
  

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What are IFRSs?

• Principles-based standards
• Developed by International Accounting Standards
  Board (based in London, England)
• Broad international representation
• Independent
• Extensive due process

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IASB structure
Trustees (22) (appoint Board, IFRIC and SAC)
Standards Advisory Council (SAC) (advises Board)
IASB (14) (sets accounting standards)
National standard setters
Intl Fincl Reporting Interpretations Committee
(IFRIC) (14)
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The standards

• IFRSs
• IFRS
• IAS
• IFRIC
• SIC
• Developed in accordance with Conceptual Framework

Set out recognition, measurement, presentation
disclosure requirements for general purpose F/S
Financial Reporting Standards
Standards EICs
Financial Reporting Interpretations
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What does it mean to adopt IFRSs?

• PAEs adopt IFRSs without modification as Canadian
  GAAP all Canadian GAAP falls away (for PAEs)
• Interpretations by IFRIC only
• Focus of attention becomes on IASB in London

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Benefits to Canada

• Access to foreign markets
• Lower cost of capital familiar standards
• Continued principles-based standards less
  complexity
• Efficiencies for international companies
• BUT It will take work to get there

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Challenges

• Financial information will differ
• Recognition
• Measurement
• Disclosure
• Significant education required
• IFRSs are, themselves, changing

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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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First-time adoption of IFRSs

• Basic Principle Retrospective treatment of IFRSs
  in effect at the reporting date
• Cost benefit to retrospective treatment
• Optional exemptions e.g., fair value on
  transition
• Exceptions to the principle e.g., estimates and
  hedging

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IFRS 1 Timeline(calendar year entity)
Date of Transition
IFRS Reporting date
Opening balance sheet
First IFRS Financial Statement
Jan. 1, 2010
Dec. 31, 2011
Jan. 1, 2011
Same accounting policies
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First IFRS financial statements

• Reconciliations of the effect of the change from
  local GAAP to IFRS
• Equity as at
• Date of transition, and
• End of latest period presented by the entity in
  most recent annual financial statements prepared
  in accordance with its local GAAP
• Net income for period last presented in most
  recent annual financial statements
• Accounting policy disclosures
• Other disclosures if significant

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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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What will IFRS F/S look like? Similarities

• Cash
• Accounts Receivable except transfers
• Inventories - except for Agriculture and
  Construction Contracts
• Property, Plant and Equipment revaluation
  optional
• Leases finance lease capital lease
• Goodwill and Intangibles some revaluation
• Accounts payable
• Long term debt presentation must refinance by
  balance sheet date

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IFRS Adoption at changeover

• Many similarities between IFRSs Cdn GAAP
• BUT Also some major differences
• Impairment
• Fair value / Revaluations
• Securitization
• Devil is in the details!

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Impairment
Identify asset group
Identify cash generating unit
Monitor for impairment indicators
Identify impairment indicators (B/S date)
If impairment indicators exist, determine
recoverable amount (undiscounted cash flows)
If impairment indicators exist, determine
recoverable amount (discounted cash flows)
Write-down to recoverable amount
Write-down to fair value
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Looking for impairment

• Impairment Indicators
• Proactive review at each reporting date to assess
  whether there is any indication that an asset
  might be impaired
• External information
• Internal information

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Reversal of impairment loss

• All impaired assets other than goodwill
• Look for indicators of reversal (B/S date)
• Mirror of external and internal indicators of
  impairment
• Calculate new recoverable amount and perform
  impairment test
• Recognize reversal if appropriate
• Only if change in estimates since last impairment
  loss

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Fair value in existing IFRSscompared to Canadian

• IAS 16 Property, Plant and Equipment optional
  FV
• IAS 17 Leases - similar
• IAS 18 Revenue - similar
• IAS 19 Employee Benefits - similar
• IAS 20 Government Grants - similar
• IAS 21 Foreign Exchange - similar
• IAS 32 Financial Instruments Presentation -
  similar
• IAS 33 Earnings per Share - similar
• IAS 38 Intangible Assets optional FV
• IAS 39 Financial Instruments Recgn. Meas. -
  similar
• IAS 40 Investment Property optional FV
• IAS 41 Agriculture - additional
• IFRS 2 Share-based Payments - similar
• IFRS 3 Business Combinations - same
• IFRS 4 Insurance Contracts additional
• IFRS 7 Financial Instruments Disclosure - same

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Fair value guidance in IFRSs

• Limited guidance today in IAS 32, 39 41
• Recent guidance issued on fair value in inactive
  markets
• Active project to develop consistent fair value
  guidance

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Property, plant equipment

• Property plant and equipment (IAS 16)
• Options for measurement
• Cost
• Revaluation Model
• Both less accumulated depreciation and
  accumulated impairment losses

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Property, plant equipment

• When to revalue?
• As frequently as necessary to ensure that the
  carrying value of the revalued assets and the
  current values are not materially different
• Therefore, frequency depends on volatility of
  asset value
• Revalue all assets of same class at same time

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Property, plant equipment

• Changes in value
• Increase credit to revaluation surplus (in
  equity)
• Decrease charge to income statement

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Property, plant equipment

• Revaluation after initial recognition

Asset Revalued
Upwards
Downwards
Previous Upward
Previous Downward
Increase to Equity as revaluation surplus
Decrease to Income
No
No
Yes
Yes
Increase to income previous downward.
Excess to equity in re- valuation surplus.
Decrease to revaluation surplus. Excess to
income Statement.
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Property, plant equipment

• Depreciation
• Charge for depreciation against income even in
  revaluation model
• Portion of revaluation reserve also transferred
  to retained earnings
• When asset disposed of, any remaining balance in
  revaluation reserve moved to retained earnings

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Investment property

• Options for measurement
• Cost (but must disclose FV)
• Fair value method (not revaluation method)
• Gains and losses directly to income statement
• No depreciation

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Property, plant equipment / Investment property

• 28 of EU companies with investment property used
  FV method ICAEW, 2007
• 4 of EU companies used revaluation for buildings
  none for PE ICAEW, 2007

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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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Majority of IFRSs remain unchanged through 2011

• Inventories
• Accounting Policies Accounting Changes
• Events after the Balance Sheet Date
• Property Plant Equipment
• Government Grants
• Foreign Currency
• Borrowing Costs

• Associates
• Hyperinflation
• Interim Reporting
• Impairment ??
• Intangible Assets
• Investment Property
• Agriculture
• Business Combinations
• Extractive Activities
• Segments

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How do we get there?

• Convergence before changeover
• Business combinations IFRS 3/IAS 27 2011
• Earnings per share IAS 33 2010?
• Joint ventures IAS 31 2011
• Credit Environment? 2010/11?

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IASB changes expected

• IASB changes before 2011
• Financial instruments disclosures 2009
• Fair value measurement (how not when) 2010
• Liabilities 2010
• Income taxes 2010
• Emissions trading 2010
• 2009 probably effective 2011
• 2010 probably effective 2012

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IASB isolated changes

• Isolated changes
• Related Party Disclosures
• Discontinued Operations
• Group Cash-settled Shared-based Payment
• First-time Adoption

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Changes expected in 2011

• Financial statement presentation
• Insurance contracts
• Liabilities equity
• Leases
• Employee benefits
• Revenue recognition
• Likely to be effective in 2013. Might not be
  available for early adoption?

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IASB Projects in longer term

• Reducing complexity in financial instruments
• Extractive activities
• Common control transactions
• Government grants
• Intangible assets
• Conceptual framework

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Planning

• Evaluate the effects for your organization
• More than a technical exercise creates
  opportunities and challenges
• Need to thoroughly assess accounting policies
• Start thinking in terms of IFRSs
• More than just accounting
• User relations
• Performance measures
• Covenants, etc.

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Agenda

• What is changing and when?
• The IASB
• First-time Adoption
• Some similarities and differences
• Planning for the change
• Resources

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Find out more IFRS resources

• IASB web site www.iasb.org
• IFRSs on AcSB website www.acsbcanada.org
• Whats changing when?
• Canada/IFRS GAAP Comparisons 2 levels of detail
• Bulletins, Implementation Plan, etc.
• Major firms Newsletters, webcasts,
  publications, illustrative financial statements

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Find out more Training

• CICA/PICAs
• Three-day in-depth course
• One-day overview of differences
• Web-based learning
• Major Accounting Firms self-study (e.g.,
  www.iasplus.com)

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Conclusions

• Biggest changes to financial reporting in recent
  years
• Creates challenges and opportunities
• Be prepared for both

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Questions/comments?

• ian.hague_at_cica.ca