Are You IFRS Ready? Frank Brod Corporate Vice President, Finance & Administration Chief Accounting Officer Microsoft Corporation

Transcription

1 Are You IFRS Ready? Frank Brod Corporate Vice President, Finance & Administration Chief Accounting Officer Microsoft Corporation

2 Agenda IFRS Overview FASB and IASB Convergence Activity Memorandum of Understanding (MOU) Regulatory Update IFRS Conversion Strategy Next Steps in Preparing for IFRS

3 IFRS Overview What is IFRS and who is responsible IFRS is a single set of high quality, understandable and international financial reporting standards (IFRS) for general purpose financial statements IFRS is set by the International Accounting Standards Board (IASB), the independent standard-setting body of the International Accounting Standards Committee Foundation (IASC Foundation) IFRS is developed following an international consultation process, involving interested individuals and organizations from around the world and with the support of an external advisory council, the Standards Advisory Committee (SAC) The International Financial Reporting Interpretations Committee (IFRIC) develops guidance to promote consistent practice

4 IFRS Overview What is the FASB doing to address IFRS In October 2002 the Financial Accounting Standards Board (FASB) and IASB announced the issuance of a memorandum of understanding ("Norwalk Agreement or MOU), marking a significant step toward formalizing their commitment to the convergence of U.S. and international accounting standards In February 2006 the FASB and IASB reaffirmed the commitment to enhance consistency, comparability and efficiency in global capital markets

5 IFRS Overview What is the FASB doing to address IFRS (continued) The FASB has undertaken six key initiatives to further the goal of convergence of U.S. GAAP with IFRS Joint projects being conducted with the IASB Short-term convergence projects Liaison IASB member on site at the FASB offices Monitoring of IASB projects Convergence research project Explicit consideration of convergence potential in all Board agenda decisions

6 IFRS Key Points Inventory Research and Development Expenses Accounting for Share-based Compensation Provisions and Estimates Revenue Recognition Property Plant & Equipment Financial Statements (Disclosures)

7 IFRS Inventory IFRS inventory should be stated at the lower of cost or NRV A reversal of a previously recorded inventory impairment is required where the circumstances that previously caused inventories to be written down below cost either no longer exist or where there is clear evidence of an increase in NRV or forecasted demand due to changed economic circumstances The new carrying amount of the inventory would be the lower of cost or revised NRV The amount of the reserve of reserve that may be reversed is limited to the amount of the original write-down and is reflected against cost of revenue where the original impairment was recorded Does not specify the P&L classification of the write-down Requires use of FIFO or weighted average method for inventory costing Same costing method is required for all inventories having a similar nature and use to the entity

8 IFRS Research and Development IFRS makes a distinction between the research and development phases. IFRS makes no distinction between treatment of development costs for internal purposes or to be sold. Expenditures in the development phase must be capitalized if the following six criteria are met regardless of the nature of the development activity (i.e. software, hardware, etc.): Technical feasibility Intention to complete and use or sell Ability to use or sell Probable future economic benefits Available resources Ability to measure

9 IFRS Research and Development Costs to be capitalized in the development phase include: Costs of materials and services used Employment costs of direct employees Legal fees Registration fees Absorption of overheads Borrowing costs that meet the capitalization criteria

10 IFRS Share-based Compensation Based on a fair value approach For non-employees the fair value of the award is based on the value of the goods and services received; fair value of the equity instruments used only if the fair value of the goods and services cannot be reliably determined For non-employees the measurement date of the award is the date the entity obtains the goods and services; no performance commitment concept Compensation cost must be recognized on an accelerated basis

11 IFRS Provisions and Estimates Defines a provision as a liability of uncertain timing or amount Requires that an outflow of resources be probable and defines probable as a situation in which the outcome is more likely than not to occur, i.e., greater than 50% likelihood In order to recognize a provision, an entity must have a present obligation (either legal or constructive) resulting from a past event Unless fair value of obligation is observable in a market, provision is measured at the best estimate Provision discounted only if time value of money is material Restructuring costs are accrued when management has demonstrated commitment to a detailed exit plan

12 IFRS Revenue Recognition Defines revenues as follows: Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in an increase in equity, other than increases relating to contributions from equity participants When to recognize revenue Sale of goods Transfer of risks and rewards of ownership of the goods No continuing managerial involvement Revenue can be measured reliably Probable that economic benefits will flow to the entity Costs can be measured reliably Sale of services Revenue can be measured reliably Probable that economic benefits will flow to the entity Stage of completion can be measured reliably Costs incurred and costs to complete can be measured reliably

13 IFRS Revenue Recognition Limited guidance on the allocation of consideration (multiple elements) although it does emphasize the use of the most appropriate method that best reflects the economics of the underlying transaction; acceptable methods include: Relative fair value Costs plus a reasonable margin Residual method Reverse residual method (extremely rare) Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction Companies using IFRS cannot default to VSOE fair value

14 IFRS Revenue Recognition Approach to determining consideration to individual elements Identify deliverables Determine substance of arrangement Examine the overall arrangement economics Evaluate whether deliverables are inconsequential or perfunctory Service revenue is required to be recognized by reference to the stage of completion (percentage of completion, surveys of work performed, etc) IFRS has no rules specifically dedicated to software revenue recognition

15 IFRS Property, Plant and Equipment An entity may elect by class of asset either the Cost Model or the Revaluation Model for subsequent measurement of PP&E or intangible assets Use of the Revaluation Model for intangible assets requires an active market Requires significant components of an item of PP&E be recorded and depreciated separately If a component is replaced, the cost of the replacement is recorded at cost and any remaining value of the old component is de-recognized Any gain or loss arising from de-recognition of an item of property, plant and equipment included in profit or loss when the item is derecognized; gains are not be classified as revenue

16 IFRS Property, Plant and Equipment Substance rather than legal form is applied in determining lease classification and there are no bright-line percentage indicators IFRS uses the term finance lease as opposed to capital lease under US GAAP Requires a review at each financial year end, at a minimum, of useful lives for PP&E and intangibles

17 IFRS Financial Statements (Disclosures) Critical accounting estimates and assumptions Significant areas of estimation and uncertainty underlying the quantification of key assets and liabilities Variables and assumptions underlying management s most difficult, subjective or complex judgments Nature of the assumption, a sensitivity analysis and expected resolution, where possible Significant judgments Significant judgments that management has made in its application and interpretation of accounting policies and literature

18 IFRS Financial Statements (Disclosures) Financial statement risk Discussion of risk through the eyes of management Extensive qualitative and quantitative disclosures on the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages them Quantitative data for each type of risk (i.e., credit, liquidity and market risk) based on information collated and monitored by the Company for risk management purposes Quantitative disclosures on market risk should include sensitivity analysis for each type of market risk (currency, interest and other price risk)

19 IFRS Financial Statements (Disclosures) Executive compensation Key management compensation in total for each of the following categories: Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Roll-forwards Detailed roll-forwards for classes of components of certain financial statement line items such as property, plant and equipment developed technology for intangible assets, land for investment property and legal contingencies for provisions

20 IFRS Financial Statements (Disclosures) Impairment of non-financial assets Impairment of non-financial assets, including significant assumptions made and sensitivity analysis Investment property Assets that meet investment property definition should be separately presented in the balance sheet; management will have to determine, formally document and disclose the fair value of investment property at each reporting period (including interim reporting periods)

21 Implications of Proposed SEC Roadmap Qualified companies can adopt IFRS SEC will evaluate the progress and success of early adopters against pre-defined milestones Potential mandatory adoption of IFRS for large accelerated filers Calendar Year Ending OPTION 1 : Pilot adoption point for Microsoft OPTION 2: Early adoption point for Microsoft OPTION 3: Mandatory adoption point for Microsoft Implications of Proposed SEC Roadmap Microsoft is not likely included in the SEC s initial list of 110 eligible pilot adoption companies, but could petition to be included Potentially, Microsoft will have the option of adopting IFRS in 2011 (MS FY 2012) Denotes two-year dual reporting and reconciliation

22 General Themes of Comments Letter on Roadmap 84% of respondents supported moving to a single set of global accounting standards IFRS is only viable option, but needs improvement Views varied on the path to IFRS, but many asked for more time Independence and accountability of the IASB is important The change to IFRS proposed by the Roadmap will have a much wider impact than expected

23 Microsoft 's Comment Letter on Roadmap The milestones are appropriate SEC should undertake a study on the implications for investors and other market participants of the implementation of IFRS Proposed date is challenging leading to condensed implementation time and increased costs and decreased quality and efficiency; alternative is two years of financials Concerned with volume of activity in the MOU; quiet period is necessary Cost estimate of.125% of revenue appears reasonable but there could be great variability

24 Canadian Roadmap Canadian GAAP Reporting IFRS Reporting Calendar Year Ending MD&A disclosure about IFRS transition and possible impact 2010 IFRS data needed for 2011 IFRS reporting IFRS will be mandatory beginning 2011 for publicly accountable enterprises (PAE) Debt or equity securities in a public market Assets in a fiduciary capacity for a broad group of outsiders IFRS will be optional for organizations that are not a PAE Canadian Securities Administrators (CSA) adopting IFRS as promulgated by the IASB as part of Canadian GAAP but has the authority to modify

25 IFRS Conversion It s More Than Accounting Determine where you want to be from an operational readiness perspective* Establish detailed IFRS accounting policies and complete analysis of tax impacts Prioritize components by complexity, resources and required time of completion Assess subsidiaries to determine current IFRS activities, system requirements and process changes Drive conversion on a corporate level and drive change through to foreign subsidiaries Manage communication and training programs for impacted external and internal stakeholders * Operational readiness from the manual vs. automated process perspective

26 What Has Microsoft Done to Address IFRS? Conducted a feasibility study (Phase 1) focusing on the financial and operational impacts of 11 accounting components Targeted training to finance personnel on existing standards Prepared high-level IFRS proforma financial statements for fiscal year 2008 Partnered with other companies and trade organizations to share best practices and leverage findings Responded to SEC Roadmap

27 Microsoft IFRS Phase 1 Executive Summary Irrespective of adoption decision between FY 2012 and 2015, there are activities that need to be started immediately Certain strategic foreign subsidiaries will already be permitted or required to report under IFRS before the SEC proposed mandatory adoption in 2015 Revenue recognition provides the greatest accounting, systems and process challenges to Microsoft s conversion Microsoft will need to develop a centralized IFRS accounting policy decision and conversion protocol process The tax implications of conversion to IFRS may have cash flow impacts

28 Evaluating Microsoft's Conversion Options Microsoft would shape the application of IFRS in tech sector Pilot FY 2010 Early FY 2012 Mandatory FY 2015 Foreign subsidiary conversion in conjunction with corporate Confirmation of SEC positions on IFRS and stable platform of IFRS Major systems implementation completed Level of 404 compliance risk due to manual vs. automated controls High degree of complexity and burden on resources Degree of Benefit low high

29 Microsoft IFRS Pilot Study The pilot study assessed the accounting and operational impacts in the following components: High Research & Development Revenue Impairment PPE Financial Instruments Share Based Compensation Accountin g Impact Inventory Business Combinations Provisions & Contingency Tax Financial Statements Low Operational Impact High

30 Key Operational Impacts Level of Future Work Description of Future Activities Revenue Evaluate the structure of existing contractual arrangements to achieve desired subscription accounting Assess data and system requirements to support separation of bundled arrangements for Volume Licensing programs Research & Development Establish policy on technical feasibility to determine period of development cost capitalization Develop systems and processes to support tracking and capitalization of incremental costs and cost types for software and hardware development Share Based Comp Update Options Manager System to process graded vesting, social costs and deferred taxes Revise employee award and withholding tax settlement process Develop integrated processes between accounting, HR, tax and treasury Low High

31 Key Operational Impacts Level of Future Work Description of Key Activities Financial Statements Develop processes and controls to capture liquidity, credit and market risk Incorporate uncertainty analysis and key management judgments Assess data gaps and ability to meet requirements for non-financial assets and provisions Financial Instruments Create processes and controls for the creation and review of valuation models for non publicly traded equities and derivatives Develop new impairment processes Create IFRS specific hedge accounting policies and programs PP&E Develop processes and systems for implementing componentization (embedded base and ongoing) Affirm estimates of depreciable lives on an annual basis Obtain third-party valuation for investment properties Low High

32 Key Operational Impacts Level of Future Work Description of Key Activities Tax Assess compliance costs and risks as book/tax differences change Adjust methodologies for compiling cost sharing pool for R&D, IPR&D and share based compensation Adapt systems and process to ensure data integrity and accurate tax reporting Provisions & Contingency Assess impact of lower recognition threshold and discounting Develop process to calculate interest expense amortization Restructure systems to monitor changes in provisions and contingencies Low High

33 Key Operational Impacts Level of Future Work Description of Key Activities Impairments Increase resources and technical expertise to perform impairment testing Update processes to facilitate value in use model Develop process to evaluate impairment of capitalized R&D and IPR&D Inventory Assess platform approach for inventory measurement Evaluate if impairment analysis should be automated or manually calculated Develop communications structure between Finance and BU controllers Business Combination Incorporate IFRS 3R knowledge transfer and training as a component of implementation of FAS 141R Assess ability of systems to handle increased volume of IPR&D projects Identify specialists and processes for assessment of contingent liabilities Low High

34 Key Next Steps Monitor the regulatory and standard setting environment Formalize IFRS at corporate level for overall conversion strategy and accounting policies for critical components Assess foreign subsidiaries knowledge, activities and readiness with respect to IFRS Use selected IFRS accounting component policies to map data gaps, system requirements and process changes Conduct detailed analysis on the required process and system changes for both corporate and foreign subsidiaries Develop a detailed estimated cost of conversion budget and implementation plan

35

36 2009 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries. The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

37