IFRS Update. A Custom Designed BLI Seminar for South Carolina Association of CPAs. Presented by Peter Margaritas Business Learning Institute Partner

Transcription

1 IFRS Update A Custom Designed BLI Seminar for South Carolina Association of CPAs Presented by Peter Margaritas Business Learning Institute Partner Presented to South Carolina Association of CPAs Columbia, SC November 4,

2 Peter A. Margaritis, CPA, MAcc Peter Margaritis is the CEO of. IFRS Education and Training, LLC delivers high quality IFRS programs to CPA s, accountants, and business leaders. Peter s background includes a bachelor s degree in Business Administration from the University of Kentucky, and a master s degree in Accountancy from Case Western Reserve University. He is a licensed CPA who has a certificate in IFRS from the Institute of Chartered Accountants in England and Wales. He has also developed a four credit hour college course on IFRS, and is a member of the AICPA team that is writing IFRS questions for the CPA exam. In addition to running his own business, Peter is on faculty at Ohio Dominican University and the University of Maryland at University College. He has worked for companies such as Price Waterhouse, Victoria s Secret Catalogue, Gap Inc. Direct, Barnett Bank, C & S National Bank, and Franklin University. Peter is a member of the American Institute of CPAs and the Ohio Society of CPAs. He is currently the past chair of the Ohio Society of CPAs' executive board of directors and is a member of the AICPA governing council. Copyright 2006 Business Learning Institute, Inc.

3 Wish you could bring today s program back to your staff? Now you can with our customized onsite programs! Other Courses By This Instructor Pam Devine Customized Learning Manager , ext. 321 pam@bizlearning.net

4 IFRS Update South Carolina Association of CPA s November 4, 2011 IFRS IFRS are an existing set of high-quality, country-neutral accounting standards that continue to evolve. IFRS many economic benefits Greater transparency and comparability Facilitate cross-boarder filings Access to capital Lower cost of capital Improve investor confidence Reduce costs

5 IFRS of 195 Countries Permit/Require Source:: PwC IFRS Readiness Series 2005

6 Principles vs. Rules Based 2,000 pronouncements 17,000 + pages of standards and guidance in total Contains 37 standards, 27 interpretations Approximately 2,500 pages of standards and guidance 6 Putting Principles into Action US GAAP Transaction Analysis Accounting Research Decision Making IFRS Transaction Analysis Accounting Research Decision Making

7 United States Update SEC Work Plan Issued on February 24, 2010 The purpose of the Work Plan is to consider six specific areas and factors relevant to an SEC determination in Successful completion of FASB/IASB MoU critical steps in process First periodic staff reports: 10/29/2010 Mandatory adoption, if any, would likely be no earlier than 2015 or 2016

8 Characteristics of IFRS and its Standard Setting Process 1. Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System 2. The Independence of Standard Setting for the Benefit of Investors Sufficient Development and Application of IFRS Evaluating comprehensiveness by inventorying areas where U.S. GAAP contains more or less guidance than IFRS and how constituents manage these situations. Analyzing how other jurisdictions incorporate IFRS Reviewing the role of the national standard setter in other jurisdictions to help identify future role of FASB

9 Independence of the IASB Evaluation of the IFRS Foundation, the IASB and the Monitoring Board Funding mechanisms of the IFRS Foundation are being reviewed including use of financial sector regulators, stock exchanges or national standard setters Currently reviewing the IASB s policies and procedures and its compliance with those policies IASB Structure Source: Guide to IASC Founda3on and IASB

10 Who Funds The IASB $776,000 $900,000 $7 million $3 million $2.8 million $400,000 $150,000 $8 million $1 million Source: IASB.org (2010) Transition Considerations 3. Investor Understanding and Education Regarding IFRS 4. Examination of the U.S. Regulatory Environment that Would Be Affected by a Change in Accounting Standards 5. The Impact on Issuers, Both Large and Small, Including Changes to Accounting Systems, Changes to Contractual Arrangements, Corporate Governance Considerations, and Litigation Contingencies 6. Human Capital Readiness

11 SEC Staff Paper: IFRS Incorporation Issued on May 26, 2011 Outline a possible approach for incorporation of IFRS into the U.S. financial reporting system Incorporation of IFRS would have the objectives of achieving the goal of having a single set of high-quality, globally accepted accounting standards The framework would retain a FASB and would facilitate the transition process by incorporating IFRSs into U.S. GAAP over some defined period of time (e.g., five to seven years), Providing for a U.S. issuer complying with U.S. GAAP also to be in a position to assert that it is compliant with IFRS as issued by the IASB. Role of FASB Remain the standard-setting body in the US. Participate in the process for developing IFRS Play an instrumental role in global standard setting by providing input and support to the IASB in developing and promoting high-quality, globally accepted standards; by advancing the consideration of U.S. perspectives in those standards; and by incorporating those standards, by way of an endorsement process, into U.S. GAAP.

12 One Approach: Condorsement IFRSs could be organized into one of the following categories: 1. IFRSs subject to MoU projects 2. IFRSs included on the IASB s current standard-setting agenda 3. All other existing IFRSs and areas not addressed by IFRSs IFRS Incorporation in the US Period IASB Convergence Quiet Period Post Convergence FASB Convergence Incorpora3on Endorsement En33es Assessment Voluntary Use US GAAP=IFRS Source: AICPA 2 nd Qtr IFRS Update

13 SEC s Casey Pushes to Incorporate IFRS The SEC can no longer kick the can down the road, with regard to IFRS adoption. In the absence of a credible step by the US to increase its use of IFRS, our ability to influence IFRS and thus ensure their continued quality and comparability will quickly dissipate. Smaller issuers that have no international operations should be allowed to opt out of IFRS and continue with U.S. GAAP, at least initially. AICPA Recommends Optional Adoption of IFRS by U.S. Companies Whether or not the SEC decides to incorporate IFRS into the U.S. financial reporting system through an endorsement / convergence approach, we believe U.S. issuers should be given the option to adopt IFRS as issued by the IASB An adoption option would provide a level of consistency in the treatment of U.S. companies and foreign private issuers that report under IFRS that does not exist today, and would facilitate the comparison of U.S. companies that elect IFRS with their non-u.s. competitors that use IFRS"

14 IASB/FASB Convergence Projects IASB/FASB Completed MoU Projects Share-based payments Segment reporting Research Costs Business Combinations Derecognition Consolidation Borrowing costs Disclosures of Interest in Other Entities Fair Value Employee Benefits (post employment benefits improvement) Joint Ventures Presentation of Financial Statements (presentation of OCI improvement)

15 Convergence - 9/30/ th QTR 2012 Leases Re-expose (1st QTR) IFRS (H2) Revenue Recognition Re-expose IFRS (H2) Financial Instruments: Impairment Financial Instruments: General Hedging Financial Instruments: Macro Hedging Financial Instruments: Offsetting Insurance Contracts Re-expose or Review Draft IFRS! IFRS Re-expose or Review Draft Exposure Draft Exposure Draft Re-expose or Review Draft Re-expose or Review Draft IFRS 13 - Fair Value IFRS 13 establishes a single framework for measuring fair value. The Standard applies to both financial and non-financial items measured at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with early adoption permitted Source: DeloiNe IFRS Focus: May 2011

16 Determination of Fair Value An entity must determine the following to arrive at an appropriate measure of fair value: The asset or liability being measured The principal (or most advantageous) market in which an orderly transaction would take place for the asset or liability For a non-financial asset, the highest and best use of the asset and whether the asset is used in combination with other assets or on a stand-alone basis. Those assumptions that market participants would use when pricing the asset or liability. Source: DeloiNe IFRS Focus: May 2011 Fair Value Disclosures Level 1 inputs - are fully observable (e.g., unadjusted quoted prices in an active market for identical assets and liabilities that the entity can access at the measurement date); Level 2 inputs - are those other than quoted prices within Level 1 that are directly or indirectly observable; and Level 3 inputs - are unobservable. Source: DeloiNe IFRS Focus: May 2011

17 IASB/FASB Joint Project - Lessee Right of Use Model A lessee in an arrangement that is, or contains, a lease would recognize an asset representing its right to use an underlying asset during the lease term and A liability representing its obligation to make lease payments during the lease term. Single Accounting Approach Recognize a liability to make lease payments and a ROU asset, both measured at the present value of the lease payments. Measure the liability to make lease payments using the effective interest method. Amortize the ROU asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits.

18 Short Term Leases A lease that is 12 months or less. Need not recognise lease assets or lease liabilities. Amortise lease payments on a straight line basis over the lease term Definition of a Lease A contract in which the right to use a specified asset (the underlying asset) is conveyed, for a period of time, in exchange for consideration.

19 Applying the Definition Determine whether the contract contains a lease on the basis of the substance of the contract by assessing whether Fulfillment of the contract depends on the use of the specified asset The contract conveys the right to control the specified asset for a period of time Does the lessee have the ability to direct and receive benefit from the use of the asset? A specified asset refers to an asset that is explicitly or implicitly identifiable A physical distinct portion of the larger asset of which a customer has exclusive use is a specified asset. Lease Term Includes the fixed non-cancellable term plus any options to extend or terminate when a significant economic incentive exists (for example, bargain renewal options) Reassessment is required when there is a significant change in one of the indicators relating to significant economic incentive

20 Example A five year lease with rental payments of $20,000 with an 8% discount rate. PV of lease payments = $79,854 (lease asset & lease liability) Operating Lease: $20,000 rent expense in years 1 5 Proposed model Amortization expense (S/L) and Interest Expense (effective interest method) Amortization Interest Total Rent Expense Difference Year 1 $15,971 $6,388 $22,359 20,000 $2,359 Year 2 $15,971 $5,299 $21,270 20,000 $1,270 Year 3 $15,971 $4,123 $20,094 20,000 $94 Year 4 $15,971 $2,853 $18,824 20,000 ($1,176) Year 5 $15,971 $1,481 $17,452 20,000 ($2,548) P&L Effect

21 Examples (in millions) Capital Lease Operating Lease Delta (U.S.$) $626 $14,946 American Airlines (U.S.$) $689 $9,327 Qantas (A$) $633 $3,994 Nestle (CHF) $494 $2,452 Walmart (U.S.$) $600 $1,800 IASB/FASB Joint Project - Lessor Receivable and residual model: aka Derecognition Model Requires a lessor to remove the leased asset from its balance sheet and recognize: (1) a receivable related to the lessee s right-of-use asset and (2) the portion of the asset retained by the lessor (the residual). Companies would be required to separately disclose these amounts, either on the face of the balance sheet or in the notes. Immediate profit recognition may be permitted when the underlying asset s fair value exceeds its carrying value.

22 IASB/FASB Joint Project on Revenue Core principle Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services Five Steps in Revenue Recognition 1.Identify the contract(s) with the customer 2.Identify the separate performance obligations 3.Determine the transaction price 4.Allocate the transaction price to the performance obligations 5.Recognise revenue when a performance obligation is satisfied

23 Identify the Contract(s) with the Customer Objective: to identify the bundle of contractual rights and obligations to which an entity would apply the revenue model Specific criteria must be met to apply model: commercial substance approval identifiable rights to the promised assets identifiable payment terms Some contracts would need to be combined and accounted for as one contract Contract modifications Identify Separate Performance Obligations Objective: To identify the promised goods or services that are distinct and, hence, that should be accounted for separately. A good or service is distinct if: it is sold separately or the customer can benefit from the good or service either on its own or together with readily available resources. A good or service is not distinct if it is bundled with other goods or services and: the goods or services are highly interrelated the goods or services are significatly modified or customized.

24 Separate Performance Obligations The Exposure Draft identify s six situations that call for performance obligations to be separated: 1. Sale of a product with a right of return 2. Product warranties and product liabilities 3. Principal versus agent considerations 4. Customer options for additional goods or services 5. Non-refundable upfront fees and 6. Licensing and rights to use Determine Transaction Price Objective: To determine the amount of consideration to which an entity expects to be entitled in exchange for promised goods or services. Allocate in proportion to stand-alone selling price Best evidence is observable price when sold separately. Must consider the effects of: Time value of money Non-cash consideration Variable consideration Consideration payable to the customer

25 Determine Transaction Price Collectibility is not considered in determining the transaction price. Rather, it is accounted for under other standards and presented adjacent to the revenue line on the income statement. Allocate the Transaction Price Objective: To allocate to each separate performance obligation the amount to which the entity expects to be entitled. Allocate on a relative standalone selling price basis Contingent amounts are allocated entirely to one performance obligation if specific criteria are met

26 Allocate the Transaction Price Allocate selling price based on the performance obligation FV of components Cellphone Deal: Free Smartphone (retail value $500) 24 month $60/month (total contract $1,440) What amount should be recognized as revenue when customer signs cell phone contract? Allocate Transaction Price Example Total cost = $1,940 ($500 + $1,440) Revenue recognition on the sale of handset = $371 [($500/$1940) x $1,440] Deferred Revenue = $1069 Monthly service revenue = $44.54 ($1069/24)

27 Recognize Revenue Objective: To recognize revenue when the entity satisfies a performance obligation by transferring a promised good or service A good or service is transferred when the customer obtains control of that good or service Control is the ability to direct the use of and obtain substantially all of the remaining benefits from an asset. Control may be transferred (and a PO satisfied at a point in time or over time. If over time, an entity must select an appropriate measure of progress toward completion. Recognize Revenue A performance obligation is satisfied over time if the entity s performance either: Creates or enhances an asset (e.g. WIP) that the customer controls as the asset is created or enhanced, or Does not create an asset with alternative use and: The customer benefits as the entity performs, or Another entity would not need to re-perform work completed to date, or The entity has a right to payment for work completed to date

28 Recognize Revenue If not over time, must consider indicators to determine at what point the PO is satisfied Indicators of when a PO is satisfies at a point in time (right of payment, legal title, physical possession, risks and rewards of ownership, and customer acceptance) If it is not necessary to meet all the indicators and no single indicator is determinative Adopting The Standard No earlier than 1/1/15 BUT it will be retrospective When companies adopt the new standard they will need to adjust prior period financial statements to reflect as if the guidance had always been applied. There appears to be a few practical exceptions provided to reduce costs. However, data gathering on historical transactions could be challenging, particularly for companies with multi-year contracts. Which means 1/1/13 - dual systems?

29 Consolidation IFRS 10 A single control model that applies to all entities. The changes will require management to exercise significant judgment to determine which entities are controlled, and are required to be consolidated. Control An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The investor must possess all of the following elements:

30 Elements 1. Power over the investee: having existing rights that give the ability to direct the activities of the investee that significantly affect the investee s returns 2. Exposure, or rights, to variable returns from its involvement with the investee 3. Ability to use its power over the investee to affect the amount of the investor s returns Assessing Control Step 1 Relevant activities: Identify which activities of the investee are considered relevant activities. Determining operating policies Appointment of key management

31 Assessing Control Step 2 Power: Determine which party, if any, has power the ability to direct activities. Voting rights Decision making rights, within a management contract Assessing Control Step 3 Returns: Assess whether the investor is exposed, or has rights, to variable returns from its involvement with the investee. Returns can be positive or negative Dividends Remuneration

32 Other Matters Interim Reporting and IFRS 1 An entity will discover that the first published financial statements under IFRS is in the form of interim financial statements. The interaction of the reconciliation requirements under IFRS 1 and the requirement of IAS 34 to present all information material to an understanding of the current period will require the production of extensive interim financial statements.

33 Interim Reporting and IFRS 1 Bewitched Inc., first annual reporting date is December 31, 2015 and its date of transition is January 1, 2014 (one year comparative). Reconcile equity Reconcile equity and net income Reconcile equity and net income January 1, 2014 Transition Date March 31, 2014 Interim Comparative December 31, 2014 Year-end Comparative March 31, 2015 Interim Date December 31, 2015 Year-end IFRS 1 - Important Dates Transition date is identified as the beginning of the earliest period for which full comparative information is presented in accordance with IFRS. Reporting date is defined as the closing balance sheet for the first IFRS statements.

34 Comparative Statements IFRS 1 allows for only one year of comparative statements to the reporting year. The SEC may require two years of comparative information to the reporting year. Transition Date 1/1/14 1/1/15 12/31/16 Date of transition for: Companies presenting 2 yrs of comparative information Recognize and measure all items using IFRS Date of transition for: Companies presenting 1 yr of comparative information Recognize and measure all items using IFRS Reporting Date Prepare an opening IFRS statement of financial position Source: IFRS Digest - AICPA

35 IFRS Reporting Date 12/31/16 Financial Statement 1/1/15 12/31/15 12/31/16 Statement of Financial Position X X X Statement of Comprehensive Income X X Statement of Cash Flows X X IFRS Reporting Date 12/31/16 Financial Statement 1/1/14 12/31/14 12/31/15 12/31/16 Statement of Financial Position Statement of Comprehensive Income Statement of Cash Flows X X X X X X X X X X

36 Peter A. Margaritis, CPA Macc

37 About BLI ABOUT BLI The Business Learning Institute (BLI) exists to help business leaders and their companies succeed. It provides a center of learning that strives to develop competencies, facilitate networking and share strategic knowledge. Businesses, government, non-profit organizations and other entities in search of strategic, executive leadership are all served by the offerings of BLI. The Business Learning Institute offers over 250 programs in many formats; including on-site training, consulting, keynote speakers, webcasts and other resources. Our mission is to deliver competency-based courses, content and community that will enhance learning and foster organizational and executive leadership. To learn more about BLI or schedule a meeting to find out more about what we offer such as a customized solution for your training needs Pamela Devine, pam@bizlearning.net or call , or Laura Dorsey-Shaner, laura@bizlearning.net or call The BLI Curricula - Five Critical Skill Areas Today s business environment demands the need to gain competencies and share strategic knowledge. BLI delivers competency-based curriculum, courses, content, and community to enhance learning and grow intellectual capital for organizational and executive leadership. These soft skills are essentially people skills the non-technical, intangible, performance skills that determine your strengths as a leader, manager, and team member. They are a critical component of intellectual capital and include categories like strategic management, business management, performance management, leadership development, and communications skills. Strategic Management - Strategic conversation reflects the dynamics between the organization and its environment. The closer the language is to current and potential customer dynamics, the higher the company s profit potential. Business Management - As the business world moves at an incredible pace, keeping up is key to its success. Today s financial managers must be able to translate strategy into operational and corporate growth. Performance Measures / Management - Executives and managers must effectively transform their firms or companies into high performance organizations. First, they have to identify and develop the appropriate core competencies and skills, and then figure out how to link them to their business strategies. At every step, seemingly simply but often elusive performance measures are crucial to staying on course. Leadership Development Great leadership is one of the most valued of all human activities. Modern myth holds that leaders are born, not made, and then only for the exclusive few. On the contrary, leadership is a set of observable and learnable practices. It is the process ordinary people use when they bring out the best in others and themselves. Communications Skills - The ability to communicate well is a necessity in life. Until recently it was an extremely underrated skill in business, but that has changed. Not only writing and speaking, but body language, tone and presentation is used to communicate. With advanced technology, we now have numerous new avenues of expressing ourselves, and we need to improve our ability to communicate well in order to form and maintained good relationships. This catalog lists programs and course descriptions that fall under the curricula that have been identified as critical skills for managers, partners, CEOs and other strategy makers. It describes BLI programs in all the above areas, taught by topnotch instructors with outstanding track records. Many of our BLI instructors are available as keynote speakers as well. These courses can also be brought on-site through our Customized Learning Solutions business model. To access program descriptions via the website go to and click on the icon to SEARCH the customized Training Catalog. Technical Expertise In addition to the five critical skill areas highlighted above, specialized or higher level technical-type programs, as opposed to soft-skill programs, are also available through BLI. These programs are more practical in nature and are identified with a Curriculum of Technical Expertise. Vendors interested in having their products or services listed in the BLI catalog should contact Deborah Zizwarek, Debbie@bizlearning. net or call (443) Please note that many programs in this catalog are available in Webcast format. Contact a BLI Customized Learning consultant if you are interested in a Webcast. The BLI tornado symbol is a registered trademark of the Business Learning Institute 4 Business Learning Institute, Inc.