Use of IFRSs Worldwide, First-time time Adoption of IFRSs, and IFRS Resources Paul Pacter Deloitte IFRS Global Office Deloitte Taiwan IFRS Seminar Taipei 9 December 2008 1 1. Use of International Financial Reporting Standards (IFRSs) Around the World 2 1
Enhancing Shareholder Value High quality global financial reporting standards carefully applied benefit investors, lenders, other capital providers: Information is understandable Enhance comparability of financial information Capital providers have confidence 3 Enhancing Shareholder Value Benefits not only capital providers but also companies that seek capital: Reduce their compliance costs Remove uncertainties that affect their cost of capital Improve consistency in audit quality Facilitate education and training 4 2
IASB s Objectives One set of global standards: International Financial Reporting Standards ds (IFRSs) Convergence of both current IFRSs and US GAAP to global gold standard Increase number of countries using IFRSs Separate Standard for SMEs based on user needs and cost/benefit 5 Use of Full IFRSs Around the World For domestic listed companies: Number of Jurisdictions IFRSs required for all 85 IFRSs required for some 4 IFRSs permitted 24 Today, IFRSs are used by listed companies in over 110 jurisdictions jurisdictions. 6 3
Use of Full IFRSs Around the World For domestic unlisted (private) companies: Number of Jurisdictions IFRSs required for all 28 IFRSs required for some 20 IFRSs permitted 36 Today, IFRSs are used by unlisted companies in over 80 jurisdictions. 7 Adoption of IFRSs Means All Ideal: Simply use IFRSs As issued by IASB. In full. No need for local endorsement Audit report refers to IFRS But, sovereignty and political issues in some jurisdictions Adopt all IFRSs word for word as national GAAP: Sometimes adopted by law Sometimes by professional body 8 4
Issues in Adoption of IFRSs Problems in local endorsement : Tinkering Time delays Cost What does audit report say? Sometimes adapt rather than adopt : Then this is no longer IFRS Audit report cannot refer to IFRS Financial statements less credible 9 Issues in Adoption of IFRSs Applies to which entities? Consolidated statements? Separate company statements? Listed companies only? Other publicly accountable? Private? Translation Enforcement and rigorous implementation 10 5
Fortune Global 500 July 2008 Fortune G500 Which GAAP? IFRS and word- for-word IFRS equivalents 2008 2012 based on announced plans 39% 49% US GAAP 31% 31% National GAAP 31% 21% Totals 100% 100% 11 Requirements in European Union 30 EU & EEA Members EU listed companies February 2008 Consol. F/S Separate Company IFRSs not permitted 0 7 Required for all 30 8 Required for some, permitted for others 0 5 Permitted for all 0 10 Permitted for some 0 0 12 6
Requirements in European Union 30 EU & EEA Members EU non-public co s. February 2008 Consol. F/S Separate Company IFRSs not permitted 0 9 Required for all 3 2 Required for some, permitted for others 8 6 Permitted for all 14 8 Permitted for some 5 5 13 IFRS Elsewhere in Asia for Listed IFRS: Australia Word-for-word identical: NZ, Hong Kong IFRS word-for-word in 2011: Korea (2009 optional), Sri Lanka IFRS word-for-word in 2012: Malaysia Nearly identical: Singapore IFRS under consideration: Taiwan (2012?), Pakistan (2009?), Japan Adopted most principles: China 14 7
2. First-Time Adoption of IFRSs as Your National Standards 15 Definition of First-time time Adoption (FTA) First set of financial statements in which the entity makes an explicit and unreserved statement of compliance with IFRSs : in conformity with International Financial Reporting Standards 16 8
Two Key Steps 1. Select accounting policies based on IFRSs in force at end of reporting period of FTA: Assume 31 December 2012 for this presentation 2. Prepare at least 2012 and 2011 financial statements, and opening balance sheet at 1 January 2011, using those policies 17 Selecting Initial Accounting Policies under IFRSs Criteria for selecting accounting policies: i Relevance Reliability Many accounting policy decisions depend on circumstances not free choice But some are pure free choice 18 9
Selecting Initial Accounting Policies under IFRSs A few examples of decisions that depend on circumstances: % of completion versus completed contract Method of depreciation Specific identification or FIFO for inventories Whether to adjust the financial statements for events occurring after end of period Functional currency for translation 19 Selecting Initial Accounting Policies under IFRSs On the other hand, IFRSs allow quite a few accounting policy choices that do not depend on circumstances: First-time time adopters must choose Examples on next eight slides 20 10
Accounting Policy Options in IFRSs IFRS 1 Options for whether to restate prior periods for some types of transactions at time of FTA: I will cover these in detail later this morning IFRS 3 In an acquisition of less than 100%, measure 100% of goodwill or only parent s share of goodwill 21 Accounting Policy Options in IFRSs IFRS 4 Option to re-measure insurance liabilities to fair value each period IAS 1 Present expenses in income statement by nature or by function IAS 1 One statement of comprehensive income or separate income statement and comprehensive income statement 22 11
Accounting Policy Options in IFRSs IAS 2 Option to measure inventories such as agricultural produce, minerals, and commodities at net realisable value rather than cost IAS 2 Inventories at FIFO or weighted average 23 Accounting Policy Options in IFRSs IAS 7 Direct or indirect method for presenting operating cash flows IAS 7 Option to classify interest and dividends as operating, investing, or financing i 24 12
Accounting Policy Options in IFRSs IAS 16 Measure PP&E using cost-depreciation model or revaluation through equity model IAS 19 Range of options for recognising actuarial gains and losses (immediately in P&L, immediately in equity, various ways of spreading) IAS 20 Many options for government grants 25 Accounting Policy Options in IFRSs IAS 27-28-31 In separate financial statements, choose cost or fair value for investments in subsidiaries, ies associates, joint ventures IAS 31 Equity method or proportionate consolidation for joint ventures IAS 38 Cost-depreciation model or revaluation through equity model for intangible assets with quoted market prices 26 13
Accounting Policy Options in IFRSs IAS 39 Hedge accounting is optional IAS 39 Designate individual id financial assets and financial liabilities to be measured at fair value through profit or loss IAS 39 Option to designate non-trading instruments as available for sale 27 Accounting Policy Options in IFRSs IAS 39 Option not to separate an embedded derivative and, instead, account for the entire contract at fair value through P&L IAS 39 Choice of trade date or settlement date accounting 28 14
Accounting Policy Options in IFRSs IAS 39 Choose whether to adjust the carrying amount of a hedged item for gains or losses on the hedging instrument IAS 39 Option to reclassify out of fair-value-through-p&l and out of available-for for-sale 29 Accounting Policy Options in IFRSs IAS 40 For investment property, choose the cost- depreciation model or fair value through profit or loss model IAS 40 Whether to treat land use rights as investment property 30 15
Adjustments Required to Move to IFRSs Four kinds of adjustments from national GAAP to IFRSs: 1. Derecognise some old assets and liabilities 2. Recognise some new assets and liabilities 3. Reclassifications 4. Measurement changes 31 Adjustments Required to Move to IFRSs 1. Derecognise some old assets and liabilities. Examples: No capitalised research, training, pre-operating, or advertising costs No accrued liabilities for general reserves, future losses, and most restructurings 32 16
Adjustments Required to Move to IFRSs 2. Recognise some new assets and liabilities. Examples: Derivatives and embedded derivatives Obligations for defined benefit pension, retiree medical and life insurance, termination benefits, accrued vacation If plan is over-funded employer would have a pension asset continued 33 Adjustments Required to Move to IFRSs 2. Recognise some new assets and liabilities. More examples: Deferred tax assets and liabilities Provisions (liabilities) for onerous contracts, litigation, decommissioning, i i environmental, warranties 34 17
Adjustments Required to Move to IFRSs 3. Reclassifications. Examples: Dividends declared after balance sheet date are not liabilities Treasury stock is not an asset Separation of land and buildings acquired jointly Liability versus equity: Mandatorily redeemable preferred shares are a liability Minority interest is in equity continued 35 Adjustments Required to Move to IFRSs 3. Reclassifications. More examples: Equity component of convertible debt, if still outstanding at FTA date Defining reportable segments under IFRS 8 Scope of consolidation Some offsetting Assets held for sale Discontinued operations 36 18
Adjustments Required to Move to IFRSs 4. Measurement changes: Measurement principles in IFRSs at 31/12/2012 must be applied to measure all recognised assets and liabilities at date of FTA More fair value measurements More present value 37 Adjustments Required to Move to IFRSs Adjustments to move from previous GAAP to IFRSs at FTA should be recognised directly in retained earnings or, if appropriate, another category of equity, at the date of the opening IFRS balance sheet. 38 19
Exceptions to Restatement There are some exceptions to the requirement to restate comparative data using IFRSs at 31/12/2012: Some exceptions are optional Some exceptions are mandatory 39 Optional Exceptions Business Combinations: May keep old GAAP. Need not restate: Initial measurement of goodwill. Goodwill written off against equity Carrying amounts of acquired assets and liabilities However, entity may elect to restate old business combinations back to any starting date Must test goodwill for impairment at opening balance sheet date 40 20
Optional Exceptions Property, plant and equipment: May measure at FV at 1/1/2011 This becomes deemed cost going forward Also, revaluations under old GAAP can be deemed cost at 1/1/2011 Employee benefits: Can eliminate any deferred actuarial gains and losses under old GAAP even if entity will continue to use corridor approach in future 41 Optional Exceptions Cumulative foreign currency translation adjustments: Any amount deferred d in equity under old GAAP can be eliminated (adjust retained earnings) at 1/1/2011 If eliminated, gain or loss on future disposal of the foreign operation reflects only translation adjustments arising after 1/1/2011 42 21
Optional Exceptions Split accounting for convertible debt redeemed before 1/1/2011 Entity may designate financial i instrument as available-for for-sale or fair-value-option at 1/1/2011 IAS 39 allows designation only on date instrument is acquired Need not apply IFRS 2 to share- based payments issued before 1/1/2011 43 Optional Exceptions In general IAS 1 requires comparative information for all amounts in financial statements and in the notes Exemptions for some comparative information for financial instruments (including IFRS 7), insurance contracts, extractive industries, and historical summaries 44 22
Mandatory Exceptions Derecognition of financial assets and liabilities: Do not undo past derecognitions based on new information. Hedge accounting No new designation of hedge accounting for hedges prior to 1/1/2011 if not treated as hedges under old GAAP Estimates Do not change previous estimates unless there was an error 45 Disclosure Reconciliation of equity and profit or loss under old GAAP to IFRSs Newly recognised impairment losses Material adjustments from old cash flow statement to IAS 7 cash flow statement 46 23
Current IASB Exposure Draft Further relief for future adopters ED comments due 23 Jan 2009 Proposals: No prior restatement for full-cost oil and gas companies and rate- regulated companies (ie carrying amounts become deemed cost ) No reassessment of whether an arrangement contains a lease in certain circumstances 47 Transition Issues Questions Each Company Should Consider Which historical data to convert to IFRSs for comparisons? How far back? Are key performance indicators adversely affected by IFRS? EPS? P/E ratio? Debt/equity ratio? Current ratio? Will you provide the market with historical KPIs restated for IFRS? 48 24
Transition Issues Questions Each Company Should Consider Have sources of volatility been identified and quantified? More fair value = More volatility Explain sources of volatility: Share-based payment Derivatives at fair value Remeasurement of AFS assets Pension assets and liabilities Provisioning 49 Transition Issues Questions Each Company Should Consider What is your timetable for releasing 2011 IFRS information? Same time as national GAAP financial statements? Later? Interim comparatives? Will initial IFRS data be audited? If yes, audit timetable? t What transition information will your competitors be releasing? 50 25
Transition Issues Questions Each Company Should Consider Do management decision makers understand implications of IFRSs on business strategy? Treasury functions, such as types of investments, hedging strategies, hedging instruments Future contracts, such as lease versus buy, R&D, outsourcing, mergers, employee benefits 51 Transition Issues Questions Each Company Should Consider IFRS impact on existing contracts: Performance-related related contracts? Employee remuneration plans (such as bonuses, profit sharing, stock options)? Changes to scope of consolidation under IAS 27? Equity method? IFRS data for subs and associates? Is hedge accounting documentation in place? 52 26
Transition Issues Questions Each Company Should Consider Audit committee: Involved in selection of initial IFRS accounting policies? Internal controls risks of misstatements may be greater at time of transition to IFRSs What revisions to accounting systems are needed to capture information for IFRS reporting? Reviewed by Internal Audit? 53 Transition Issues Questions Each Company Should Consider Systems for measuring fair values? Internal? Use outside valuers? Staff training in IFRSs? Deloitte IFRS e-learning What is affect of IFRSs on dividend distribution policy? What is affect of IFRSs on taxable income? 54 27
Transition Issues Biggest Problems in Europe and Australia Financial instruments: Classification as debt or equity Available for Sale Embedded derivatives Hedge documentation Intangible assets (esp. goodwill) Share-based payment Employee benefits and pensions Deferred taxes Provisions Fixed assets 55 Transition Issues Biggest Problems in Hong Kong (Listed) Average increase in net income was 53.6% (median 2.6%). 5 topics with greatest effect or on profit: 1. IAS 32 and IAS 39 Financial Instruments 2. IFRS 2 Share-based Payment 3. IAS 40 Investment Property 4. IAS 17 Leases 5. IFRS 3 Business Combinations and IAS 36 Impairment 56 28
Transition Issues Biggest Problems in Hong Kong (Listed) Average decrease in opening equity 2.0% (median 0.9%). 5 topics with greatest effect or on equity: 1. IAS 32 and IAS 39 Financial Instruments 2. IAS 40 Investment Property 3. IAS 17 Leases 4. IAS 16 PP&E 5. IFRS 3 Business Combinations and IAS 36 Impairment 57 3. IFRS Resources 58 29
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igaap 2007 A Guide to IFRS Reporting 2,070 pages August 2007 Explanation of each IFRS Interpretation Commentary Many examples 2009 Edition Expected 12/08 65 igaap 2008 Financial Instruments 851 pages June 2008 Guide to IAS 32, IAS 39, and IFRS 7 Explanations Interpretation Commentary Many examples US GAAP comparison 66 33
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Concluding Comment Don t fear IFRSs as burdensome regulation. There is a payback! Access to capital Lower cost of capital More favourable terms 77 Thank you. Questions? Comments? 78 39