Agenda

International Financial Reporting Standards

Ian P.N. Hague Principal, Accounting Standards

Presentation 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 Canada’s 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 PAE’s); 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?

Jan 1/Apr 12010

Dec 312011/

Mar 31 2012

IFRSReporting

date

Openingbalancesheet

Preparatory period

Jan 1/Apr 12011

Jan. 1,2008

< 12 months

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 (14)(sets accounting

standards)

Int’l Finc’l Reporting

Interpretations Committee (IFRIC) (14)

Standards Advisory

Council (SAC)(advises Board)

Trustees (22)(appoint Board, IFRIC and SAC)

National standard setters

IASB structure

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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

Standards

EICs

Financial Reporting Standards

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)

Jan. 1,2010

Dec. 31,2011

IFRSReporting

date

Date of Transition

Jan. 1,2011

First IFRS Financial Statement

Openingbalancesheet

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 impairmentindicators (B/S date)

If impairment indicators exist, determine

recoverable amount (discounted cash flows)

Write-down to recoverable amount

Monitor for impairment indicators

Write-down to fair value

Identify cash generating unit

If impairment indicators exist, determine

recoverable amount (undiscounted cash flows)

Identify asset group

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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 & equipmentProperty 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 & equipmentRevaluation after initial recognition

Asset RevaluedPrevious

Downward Previous

UpwardIncrease toEquity as

‘revaluation surplus”

Decrease to Income

Increase to income = previousdownward. Excess

to equity in re-valuation surplus.

Decrease to revaluation surplus.

Excess to incomeStatement.

Upwards Downwards

YesYesNo No

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Property, plant & equipmentDepreciation•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 P&E [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 20112010 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 recognitionLikely 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 •What’s 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?

[email protected]