IFRS Survival Guide

7/31/2019 IFRS Survival Guide

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IFRS SURVIVAL GUIDEADDRESSING THE CHALLENGES OF NE W STANDARDS


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CONTENTS

What is IFRS? 1

How does IFRS differ from GAAP? 2

Where do we stand now? 3

Making the transition 3

Retrospective approach 4

Exceptions and exemptions 5

Preparing for change 7

Get professional help 8

A B O U T T H I S G U I D E

This guide provides an introduction to IFRS, highlights important di erences between IFRS and U.S. GAAP, and reviews thestatus o the FASB-IASB convergence project and the SECs quest or global accounting standards. It also weighs the pros andcons o voluntary IFRS adoption by private companies (whether or not the SEC mandates its use by public companies). Finally,it outlines the next steps you should take, including assessing IFRSs e ects on your company and developing a transition plan.

The statements contained herein are provided or in ormational purposes only, are not intended to constitute tax advice which may be reliedupon to avoid penalties under any ederal, state, local or other tax statutes or regulations, and do not resolve any tax issues in your avor.Furthermore, such statements are not presented or intended as, and should not be taken or assumed to constitute, legal advice o any nature,

or which advice it is recommended that you consult your own legal counselors and pro essionals.

UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name oUHY Advisors. UHY Advisors, Inc. and its subsidiary entities o er services rom o fces across the United States. UHY Advisors, Inc. and itssubsidiary entities are not licensed CPA frms.

UHY LLPis a licensed independent CPA frm that per orms attest services.

UHY Advisors, Inc. and UHY LLPare independent U.S. members o UHY International, a global association o independent accounting andconsultancy frms.

2010 UHY LLP


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In recent years, the movement toward a single set ohigh-quality global accounting standards has gainedmomentum. The Financial Accounting Standards Board(FASB) and the International Accounting StandardsBoard (IASB) recently rea rmed their commitment

to converge U.S. Generally Accepted AccountingPrinciples (GAAP) and International Financial ReportingStandards (IFRS). The Securities and Exchange Commission(SEC) continues to explore the possibility o requiring U.S.public companies to use IFRS beginning as early as 2015.

While the uture o global accounting standards isntentirely certain, one thing is: Whether IFRS becomes theinternational language o accounting or FASB and IASBsimply continue to eliminate di erences between theirstandards, companies o all sizes must understand thepossible e ects o such changes and begin to prepare

or them now. The potential implementation date may

seem years ahead, but adopting IFRS isnt just a mattero fipping a switch. Its an intensive process that requiresseveral years o planning and preparation.

IFRS will almost certainly a ect most i not all companies. Privately held companies currently arentrequired to prepare their nancial statements in accor-dance with GAAP (although many do so to satis y lendersand other nancial statement users). Like their publiccounterparts, however, private companies that adopt IFRSmay potentially gain several bene ts including lowercompliance costs and greater access to global markets.

Most private companies are now eligible or IFRS orsmall and medium-sized entities (SMEs). IFRS or SMEseliminates topics that generally arent relevant or privatecompanies, simpli es the decision-making process,streamlines procedures and reduces the number orequired disclosures. For some private companies,however, ull IFRS o ers greater fexibility to selectaccounting policies and make other choices thatcan have a positive impact on their nancial results.

W H AT I S I F R S ?

The IASB is an independent, not- or-pro t standards-setterbased in London with 15 members rom 10 countries,including the U.S. The IASB issued its rst version o IFRS in2001 to initiate the process toward developing uni orm globalaccounting standards. Since 2001, IFRS has been acceptedor adopted or public reporting purposes by more than 100countries, including the members o the European Union.

Adoption o IFRS as a global standard o ers several potentialbene ts, including:

Enhanced comparability. Uni orm standards will aidinvestors in comparing global opportunities, making it easier

or companies to raise capital across multiple jurisdictions.

Reduced complexity. IFRS is 2,700 pages, compared to

approximately 17,000 pages or GAAP. IFRS or SMEs isonly 230 pages.

Greater transparency. IFRS is principles-based, whichbreaks rom GAAPs rules-based approach. Companiesand their auditors ocus on the economic substance oa transaction rather than strict compliance with detailedrules and bright-line tests. IFRS potentially produces aclearer picture o a companys nancial position orinvestors, lenders, regulators and other nancialstatement users.

Reduced costs. For companies that do business

in several countries, global adoption o IFRS willeliminate the costs associated with compliancewith multiple accounting standards and mainte-nance o multiple sets o books.

Protection o U.S. markets. By aligning U.S.accounting standards with those o other devel-oped countries, IFRS adoption will eliminate asigni cant cost barrier to operating in the U.S.

ARE YOU READY FOR IFRS?


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Adoption o IFRS in the U.S. also presents severalchallenges. For one thing, GAAP is well establishedand embedded in our business culture. Switching to

a new set o accounting standards will require exten-

sive education and training or accountants, auditors,bankers, brokers, lawyers, regulators and others.

Indeed, businesses that switch to IFRS will have tomake signi cant investments to modi y account-

ing processes and procedures; retool IT systems;and assess the impact o IFRS on everything

rom taxes and nancing to compensationarrangements and contractual relationships.

HOW DOES IFRS DIFFER FROM GAAP?

IFRS is principles-based, but it doesnt shun rules altogether.And GAAP, despite its many rules, is based on a set oprinciples. Rather than highlighting their di erences,observers should consider both sets o standards as pointson a continuum, with pure principles on one end and purerules on the other.

Some even compare IFRS today to GAAP 50 years ago.GAAP started out as a set o principles, which have beenre ned and clari ed over time. Whether IFRS moves closerto the rules end o the continuum as it ages remains tobe seen. But its proponents believe that an emphasis onprinciples can lead to greater transparency and help avoidmanipulation o nancial statements.

This may seem counterintuitive. A ter all, a principles-based approach relies on pro essional judgment ratherthan adherence to a comprehensive set o rules. Doesntthis make it easier to nancially engineer the desiredoutcome? Arguably, a principles-based approach makes

nancial statement manipulation more di fcult.

Critics o U.S. GAAPs rules-based approach say that itinvites abuse by allowing companies to ocus on meretechnical compliance at the expense o underlyingprinciples or values. Complex rules coupled withscant explanation can make it di cult or nancial

statement users to understand the economic realitiesbehind the numbers. IFRS, on the other hand, combinesa principles-based approach with extensive disclosuresthat require companies to document the process thatled to a particular accounting treatment and explainwhy its decision is consistent with underlying principles.

Take, or example, lease accounting. Both GAAP and IFRSdistinguish between operating leases which provideo -balance-sheet nancing and capital leases ( nance

leases in IFRS terminology). Under GAAP, a lease is classi edas capital i it meets certain criteria, including 1) a leaseterm equal to 75% or more o the leased propertys esti-mated economic li e, and 2) minimum lease payments whosepresent value is at least 90% o the leased propertys airvalue (less certain investment credits retained by the lessor).

GAAP VS. IFRS: HOW THEY COMPARE

GAAP IFRS

Rules-based Principles-based

Allows companies to Requires companies toocus on technical document the process

compliance, rather that led to a particularthan underlying values accounting treatment

Mandates numerical No specifcbright-line tests numerical thresholds

Relies on Relies oncomplex rules pro essional judgment

Noncontrolling Noncontrollinginterests always interests measuredmeasured at air value at air value or the

proportionate share othe acquirees net assets

All assets and liabilities Contingent assetsrom contractual recognized; contingent

contingencies recognized liabilities recognizedi air value can bereliably measured

Defnes the segment Defnes the segmentduring goodwill during goodwillimpairment testing impairment testing asas the reporting unit the cash generating unit

Two-step impairment One-step impairmentmeasurement model measurement model


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Although it calls or consideration o similar criteria, IFRSdoesnt mandate speci c numerical thresholds or bright-line tests. Instead, it ocuses on the substance o thetransaction and classi es a lease as nance (or in GAAPterminology, capital) i it trans ers substantially all o therisks and rewards incident to ownership to the lessee.GAAPs rules make it possible or companies to designlease contracts so that they quali y as operating leases something IFRSs principles make it much harder to do.

IFRSs standards arent without drawbacks, though. Someobservers ear that, while disclosures are more substantial,they rely on pro essional judgment that may lead to incon-sistent practices and, there ore, reduced comparability.Others claim that dependence on judgment rather thanbright-line rules will result in more requent litigation. Thetable on Page 2 outlines several other major di erences

between IFRS and GAAP.

W H E R E D O W E S TA N D N O W ?

Two separate movements are leading in the direction oglobal accounting standards:

1. The FASB and IASB continue to work on theconvergence project they began in 2002. Theprojects goal is to eliminate major di erencesbetween GAAP and IFRS in critical areas. Thetwo boards plan to nalize the convergenceo several standards including revenue

recognition, air value measurement, nancialinstruments, consolidation, leases and nancial statementpresentation by 2011.

2. The SEC continues to consider adoption o IFRS byU.S. public companies. It already allows oreign issuersto le IFRS nancial statements without reconciliationto GAAP. Recently, however, it pushed back the earliestmandatory date to 2015 and withdrew its proposal orearly adoption. The Commission is assessing whether thechange is in the best interest o U.S. investors and marketsand may announce as early as 2011 whether IFRS will bemandatory. Its decision will be based on:

Whether the standards are su ciently developed andconsistent in application,

Whether the standards are set by an independentstandard-setter and or the bene t o investors,

The level o investor understanding and education,

The impact on tax laws and other regulatory reporting,

The impact on companies accounting systems,contractual arrangements, corporate governance andlitigation contingencies, and

The readiness o nancial statement preparers andauditors.

Finance personnel should monitor theactivities o the FASB, IASB and SEC to

determine appropriate next steps.

M A K I N G T H E T R A N S I T I O NAdopting IFRS is a delicate balancing act that requiresseveral years o planning and preparation. One o theadvantages o uni orm international accounting standardsis that companies operating globally avoid the cost ocompliance with multiple accounting standards. Butmaking the transition rom GAAP to IFRS generally involvesa period o dual reporting, during which companiesmust track their nancial results under both standards.

IFRS 1 is the standard that governs the accounting andpreparation o nancial statements in the year a company

adopts IFRS. Among other things, it requires rst-timeadopters to present at least one year o IFRS-compliantcomparative nancial in ormation. (The SEC, however,may require two years o comparative in ormation.)Companies also need to know some important dates.(See 3 Key IFRS Dates above.)

3 KEY IFRS DATES

1. Reporting. The year end date o the companysfrst IFRS fnancial statements.

2. Adoption. The opening balance date o the frstIFRS reporting year.

3. Transition. The opening balance date o theearliest year or which comparative IFRS in or-mation is required.

3


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Suppose, or example, that the SEC requires yourcompany to switch to IFRS beginning in 2015 and topresent two years o comparative in ormation. I yourcompany is on a calendar year, then the reporting dateis Dec. 31, 2015, the adoption date is Jan. 1, 2015, andthe transition date is Jan. 1, 2013.

R E T R O S P E C T I V E A P P R O A C H

IFRS 1 assumes that a company preparing its rst IFRSnancial statements will apply all standards in e ect

on the reporting date retrospectively. In other words,your company should prepare its nancial statementsas i it had always used IFRS as its accounting rame-work (subject to certain exceptions and exemptionsdiscussed below).

Although a complete discussion o the detailed guidanceon making the transition to IFRS is beyond the scope othis publication, here are the basic steps:

Prepare and present an opening IFRS statement onancial position (SFP) as o the transition date.

Select IFRS accounting policies, which must be used inthe opening SFP and throughout all periods presentedin the companys rst IFRS nancial statements.

In the opening SFP, recognize or derecognize assetsand liabilities; remeasure recognized assets andliabilities; and reclassi y assets, liabilities or equity

components in accordance with IFRS standards ine ect at the reporting date.

Recognize adjustments resulting rom rst-timeapplication o IFRS directly in retained earnings oranother appropriate equity category (with exceptions).

Ensure that IFRS estimates on the transition date areconsistent with GAAP estimates made or the samedate (with exceptions).

In addition to IFRSs general presentation and disclosurerequirements, your company needs to prepare disclosures

required or rst-time adopters. These include recon-ciliations between GAAP and IFRS measures and otherdisclosures that explain how adopting IFRS a ects yourcompanys nancial position, nancial per ormance andcash fows.

Starting at the transition date, companies will need to trackresults using both GAAP and IFRS continuing their currentledger and reporting process and establishing a second seto adjusting entries or ledgers based on the requirementso IFRS. Your company must maintain this dual reporting

ocus or system or two years so that on the adoption dateyou can present three statements o nancial position andtwo statements o comprehensive income, cash fows, andchanges in equity, along with related, comparative notes inaccordance with IFRS.


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E X C E P T I O N S A N D E X E M P T I O N S

Retrospective application may be inappropriate undercertain circumstances or may unduly burden a company.Accordingly, the IFRS has established our mandatory

exceptions and 16 optional exemptions.

The mandatory exceptions apply when retrospectiveapplication would involve management judgment aboutpast conditions a ter a transactions outcome is knownand, there ore, would be unreliable or would invite abuse.So, or example, a company cant adjust accountingestimates on transition to IFRS unless: 1) the adjustmentis necessary to refect changes in accounting policy, or 2)theres objective evidence that previous GAAP estimateswere in error. The other mandatory exceptions relate toderecognition o nancial assets and liabilities, hedgeaccounting, and noncontrolling interests.

The optional exemptions involve situations in which thecost o applying IFRS retrospectively would likely outweigh

any potentialbene ts to nan-cial statement users.This is o ten the case when

compliance with IFRS dependson in ormation a company wasntrequired to track under GAAP.

Consider, or example, property, plantand equipment (PP&E). Under GAAP, PP&Egenerally is reported at historical cost. IFRS, onthe other hand, o ers two alternative policiesthat a company must elect and apply consistentlywithin each class o balance sheet items: 1) the costmodel, which is similar (but not identical) to GAAP, and2) the revaluation model, under which PP&E is reportedat air value, less accumulated depreciation and impair-

ment losses. Companies that elect this second modelmust measure air value periodically or when certaintriggering events occur.

LESSONS FROM EUROPE

From European companies that have already made the transition to IFRS, some key practices have emerged:

Be an early adopter.

Begin planning immediately.

Establish a steering committee to oversee the process.

Conduct an impact assessment to help contain costs and e fciently allocate resources.

Dra t a detailed plan that includes specifc tasks and a realistic timeline.

Determine how the transition will a ect business processes.

Engage the right in-house and external advisors.

Enlist the support o everyone in the company.

Upgrade your IT system to handle larger amounts o fnancial data.

Develop a communication strategy to help ensure all stakeholders receive consistent messages.

Make big picture goals or such areas as fnance, IT, compensation and management structure.

Keep current with IFRS developments as the IASB makes them public.


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Heres where retrospective application gets tricky: IFRS alsorequires companies to componentize PP&E. In other words,i the cost o a xed assets component part is signi cant inrelation to the assets total cost, then the component shouldbe depreciated separately over its individual use ul li e. So, orexample, you might depreciate a building over 39 years, butdepreciate its roo or HVAC system over a shorter period.

Companies currently ollowingGAAP may not track componentcosts, and reconstructing thosecosts can be expensive andtime-consuming. To relieve thisburden, IFRS 1 permits a rst-time adopter to set an assetstransition-date air value as itsdeemed cost rather than applyIFRS retrospectively. The companyuses this deemed cost going orward as the assets costbasis or purposes o depreciation or impairment testing.Recognizing an asset at deemed cost doesnt a ect the

companys ability to choose the cost or revaluation modelas a matter o accounting policy.

Other optional exemptions include business combinations,share-based payments, insurance contracts, leases andemployee bene ts. First-time adopters should project theimpact o each exemption election on their uture nancialresults and consider their choices care ully.

Going back to the PP&E example, electing the exemp-tion can be bene cial. Setting an assets air value as itsdeemed cost avoids the burden o retrospective applica-tion. Also, higher asset values may boost a companys

borrowing capacity and help ensure compliance withloan covenants. But there are also drawbacks to electingthe exemption. It requires you to measure the air valueo assets on the transition date and may result in higherdepreciation expense.

HOW COMPANIES CAN BENEFIT FROM IFRS PREPARATION

Even i the SEC doesnt mandate the use o IFRS, conducting a readiness assessment and preparing or IFRSallow your company to:

Review and fne-tune its accounting policies and procedures,

Evaluate and enhance its internal controls,

Ensure that its making the most o its IT systems,

Prepare or use o IFRS by a oreign subsidiary, and

Get ready or uture accounting changes brought about by the FASB-IASB convergence project.


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P R E PA R I N G F O R C H A N G E

Converting to IFRS is a signi cant challenge. Fortunately,U.S. companies have an advantage: Their peers in Europeand elsewhere have already gone through the process.From those companies experience, several success actorsand best practices have emerged:

Start immediately. Beginning the process too late probablyis the most common mistake rst-time adopters make. Ittakes time to select accounting policies, put the right tech-nology in place, train personnel and arrange or unding and these things need to be done be ore the transition date.

Even though its uncertain whether the SEC will mandateadoption o IFRS or simply continue the convergence process,companies that take a wait and see approach may ndthemselves playing catch-up once a nal determination ismade. Plus, many o the steps in the process provide businessbene ts that go beyond nancial reporting.

Conduct an impact assessment. This is critical to ane ective, cost-e cient transition. Every company isdi erent and will be a ected by IFRS in di erent ways.An impact assessment helps ensure you allocate yourresources e ectively and that your transition plan ocuseson the right things. As part o the assessment, ensure thatyour current policies and procedures are well documented.This can help you understand how IFRS will a ect yourcompany and lay the oundation or a smooth transition.

Think strategically. The transition to IFRSisnt just a compliance matter. Its also aunique opportunity or your companyto re-evaluate its nancial reporting

ramework. Each decision you makeregarding accounting policies andexemption elections will have ar-reaching consequences or yourcompanys uture nancial results.

Look beyond fnancial reporting. Well-prepared com-panies know how the transition to IFRS will a ect business

processes throughout the organization and have a planor addressing these issues. IFRS will have an impact on

in ormation technology, internal controls, risk management,budgeting, incentive compensation plans, loan covenantsand a variety o contractual arrangements.

The transition to IFRS may also a ect tax planning. Forexample, IFRS prohibits the use o LIFO (last in, rstout inventory accounting). Unless Congress revises the

ederal tax code to permit companies to use di erentinventory accounting methods or nancial reporting and

tax purposes, many U.S. companies that switch to IFRSwill nd themselves with a signi cant tax liability.

Involve everyone. In addition to enlisting thesupport o your board and top management,ask people throughout the organization at alllevels and in all departments to participate in

the transition process.

Put the right technology in place. Converting toIFRS can place an enormous strain on your in ormation

technology systems. Under IFRS, your company will needto track new types and larger amounts o nancial data,incorporate new processes, and satis y new nancialreporting requirements. Your IT systems and sta mustbe prepared or these changes.


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Provide training. Converting to and operating under IFRSdemands trained personnel throughout your organization,so ongoing training is critical. You also need to communicatewith and educate investors and other external stakeholdersabout how IFRS will a ect the companys earnings and other

nancial results.

Be an early adopter. Keep a close watch on the FASB-IASBconvergence project. As the FASB issues new or amendedstandards that con orm more closely to IFRS, consider earlyadoption i permitted. This will make the transition to IFRSthat much easier when and i the time comes.

Have a plan. Like any major business initiative, a success-ul transition to IFRS requires a solid transition plan and a

disciplined approach to project management.

Monitor IASB activities. Remember, your rst set o IFRSnancial statements and comparative in ormation must

comply with the standards in e ect on the reporting date. Be sure to monitor IASB changes and proposals during thetransition period and, i necessary, modi y your systems orprocedures to capture the in ormation you need.

Weigh potential benefts. While private companiesmay not ace regulatory requirements to use IFRS,the pressure to convert may increase or those withinternational operations, customers or nancing needs.To determine whether they would bene t by adoptingIFRS, private companies should conduct an impact

assessment and weigh the potential bene ts againstthe tax and other costs o converting.

G E T P R O F E S S I O N A L H E L P

Making the transition to IFRS is a complex process andthis guide only scratches the sur ace. A success ultransition requires the support o pro essionals withIFRS experience inside and outside your company.You will need to develop an understanding oIFRS so you can have in ormed discussions withyour advisors and make the many strategic businessdecisions that adopting IFRS requires.

IFRS, UHY LLP AND YOU

Making the transition to IFRS isnt easy or anycompany. But UHY LLPcan help ease the transitionprocess and increase e fciency. Our our corner-stones o service are:

1. Expert team. Our fnancial pro essionals deliverbroad understanding and deep expertise in allindustry sectors. We are hands on and collaboratewell with clients.

2. Commitment to a smooth transition andconversion. We provide a ull suite o services,including technical accounting, accountingpolicy, internal controls, tax and systems-relatedcapabilities. UHY LLPworks with managementand trains employees to ensure a smooth process.

3. Collaborative and proactive process. To avoidsurprises and ensure quality results, we providecollaborative and continual communication.

4. Integrated approach. We deliver a ull suite oservices and expertise through a continuum oclient involvement. (See back cover.)


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The earliest required adoptionyear will be 2015 or 2016 forpublic companies.

4

The SEC has afrmed 2010as an evaluation period andplans to set an adoptiondate in 2011.

1

2010

2011

2012

2013

2014

2015AND BEYOND

IFRS statementsled with the SEC are

published with two yearsof comparative information

2013 and 2014statementsled under

U.S. standards

Run U.S. GAAPand IFRS parallel

IFRS PREPARATION

3 This is the potential rstyear of IFRS reporting forpublic companies. The SECwill likely use a one-timeadoption approach (i.e., nophase-in by size) and mayallow early adoption bysome companies.

2 FASB convergence will continuethrough 2011 and beyond, withincreased progress towardconvergence.

5 Quarterly reporting under IFRSbeginning the rst quarter ofthe year of adoption.

Prepare the nancialstatement process toaddress the latestIFRS-related guidance.

IFRS SEC ROAD MAPKey milestonesThe road to IFRS conversion may be a long one, and its never too soon or public and even private companies to beginplanning and preparing. Below is a general IFRS conversion timeline that may not apply to all companies. You should talkwith your fnancial advisors to determine when your company needs to begin the process.


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UHY LLPS INTEGRATED APPROACH FOR ADDRESSING IFRS

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