IFRS vs.

US GAAP
Anthony P. Pencek, CPA
IMA NERC-Mystic, CT
September 20, 2010

Accountants
Cartoon

International Financial Reporting

Standards (IFRS) vs. US
Generally Accepted Accounting
Standards (GAAP)
What does it mean for you?

Convergence!!!!
Dictionary Definition:
Convergence means to tend or move
toward a common point or result.
Goal Comparability and Consistency

Common Traits of Both IFRS and

GAAP
Rules or guidelines issued to assist in preparing
and issuing financial statements for use by the
Regulatory Bodies, Investors and Other
interested parties. Analogy of.
Both are issued by a consensus of educated and
expert individuals in accounting who are
appointed to a Board. Hold hearings, comments
from auditors, users are welcomed.
International Accounting Standards Board
(IASB) vs. Financial Accounting Standard Board
(FASB)

Why So Much Press on IFRS?

Hottest Topic in Accounting. Why?
Global Economy Demands It- Urgency!!!
Economy Growth Stimulus
Survey by International Federation of Accountants (IFAC)

Financial Capital Markets are changing

NYC is not the Financial Capital of the World, its going to
elsewhere like London, Hong Kong and Dubai, etc.

Foreign Purchase and/or Ownership of US

Companies
Recent---Anheuser-Busch Companies By InBev

Why So Much Press on IFRS?

(Continued)
Need for comparability of information on
public companies around the world
US companies use US GAAP while foreign
companies use IFRS. Analysts using which
one?
Sarbanes-Oxley Act of 2002 is presenting a
competitive disadvantage to US Companies in
the global financial Markets.
Wiley Publishing now puts out a yearly IFRS
book similar to the GAAP and GAAS books.

IFAC Survey Results on Economic

Growth with IFRS Adaptation
Very Important to Economic Growth- 55%
Important to Economic Growth 35%
Somewhat Important to Economic Growth
- 9%
Not Important 1%
Website to get the survey,
http://www.ifac.org/globalsurvey

Who is using IFRS today?

12,000 companies in almost 110 countries
have adapted IFRS.
2005, European Union (EU) began to
require the IFRS on its members states
whose securities are listed on the EU
regulated stock exchange, (London, Paris,
etc.) to prepare its financial statements.

History of IASB and IFRS

TODAY
Over

100 countries around the world

require or permit the use of some
form of IFRS

Mandatory

the EU

for all listed companies in

Permitted

for non-listed companies in

some member states

Commonly

used in Central and

Eastern Europe, in Russia and many
Caribbean Nations

Many

countries have moved to IFRS,

including Australia, South Africa,
Singapore and New Zealand

TOMORROW
By

2011, it is expected that all major

countries will have adopted IFRS to
some extent
China and Japan will be substantially
converged
to IFRS
Substantial majority of Global
Fortune 500 will
report under IFRS
Others recently announced
implementation programs, such as
Canada, Korea and Israel
Approximately

Private Issuers
are in Canada

All

1/3 of US Foreign

major NON-US Capital Markets

are impacted

Who is using IFRS today?

(Continued)
Australia, New Zealand and Israel have almost
completely accepted IFRS as their national
standards.
Canada, who had previously planned
convergence with US GAAP, now has plans to
require IFRS for publicly accountable entities in
2011.
Japans Accounting Standards Board has
planned convergence with IFRS by 2011.
India will be using the IFRS for 2009.
More countries are looking into adapting.

What is the United State status

on adoption?
See Next Slides

When will IFRS standards be

required or not?
The question is not if the IFRS standard will be
required to be used, but When.
Time line given for full adaptation is year 2015,
but more than likely sooner. (See earlier slide of
timeline) What is going to happen with the new
administration? Madoff situation had an effect
on compliance.
FASB is now stating that any new standard
being proposed will be close to IFRS standards.

Potential Implementation
Based on 2015 implementation date
Timeline
Continued IFRS/US GAAP convergence milestones must be met by 2011

2011-2014

2010

2011

Put team
together
Train
Keep track
of
convergence

Impact
analysis
Create
formal plan

2011-2014
2015

Fill SME
gaps
Impact on
processes/IC
Develop
communicati
on plan

Choose IFRS
1 options
Make policy
choices
Restate
/reaudit

Issue
financial
statements

Train/monitor progress: Numbers, people, systems, processes

Based on SEC proposal to begin IFRS for large accelerated filers in 2014

Proprietary & Confidential Trade Secret Protected

Momentum to Adopt IFRS in

the US
April 2005

Summer 2007

November 2007

August 2008

February 2010

SEC Chief Accountant article regarding progress on

P reconciliation for foreign filers
convergence
Roundtable discussions held on the impact of IFRS on US Capital Market
SEC holds
roundtables
discussions
overwhelming
support for
elimination of the reconciliation

SEC eliminates
the requirement for reconciliation to US GAAP
Concept Release issued for comment, allowing US issuers the option to use IFRS
to FPIs using IFRS as adopted by IASB
Approved proposal to eliminate the reconciliation to US GAAP for foreign filers,
SEC issues initial roadmap effective immediately

Propose
in US roadmap
New
SECadoption
reinforces

History of IFRS, FASB and the

SEC
SEC began preliminary talk about an
international standard core way back in 1988 to
be integrated with GAAP.
FASB signed Norwalk Agreement with IASB in
2002 and updated in 2008 to move IFRS
adaptation faster.
In 2008, SEC Chairman Cox issued a statement
that use of IFRS for reporting purpose
requirements in the US would be accepted and
no need to reconcile the financials to US GAAP.

Some Major Differences between

US GAAP and IFRS
IFRS standards published is only one book
about two inches thick. There are 41 IAS and
eight IFRS standards published.
US GAAP is in three books about nine inches
thick, and does not include all the authoritative
literature. FASB standards has over 170 issued.
Principles are used for IFRS
Rules and/or Interpretations are used in GAAP

Some Major Differences between

US GAAP and IFRS (Continued)
Specific differences
LIFO does not exist in IFRS standards. FIFO must be
used for inventory costing method.
Article in Strategic Finance July 2009

Research & Development costs get capitalized, costs

of drugs in Canada.
Impairment of Write downs to Net Realizable Value is
a single step process for IFRS while US GAAP uses a
two step process. Making the write down more
easily. Write Up of Intangibles Possible.
Reasonable estimate, impairment has occurred.

Some Major Differences between

US GAAP and IFRS (Continued)
Contingencies have a different probability
threshold and measurement objective.
After year curing of debt covenant violations is
not allowed.
Revenue recognition is less extensive in IFRS
vs. GAAP
No specific industry instruction or guidance, i.e.
Percent of Completion and Completed contract
on Long term construction projects.

Some Major Differences between

US GAAP and IFRS (Continued)
Indirect Method of Statement of Cash
Flows vs. Direct Method
Major difference is the Operating Activities
-Direct Method has Cash Receipts from
customers and Cash paid to suppliers and
employees
Indirect method has differences between non cash
current assets and current liabilities and starts with
net income or loss
Direct Method must be used in IFRS

Some Major Differences between

US GAAP and IFRS (Continued)
Also on the Cash Flow statement
Direct Method use Dividends received on
investments may be put under Operating Activities
Indirect Method uses the non cash expenses like
depreciation and amortization within the Operating
Activities.
Direct Method has Income Taxes paid could be
shown on either the Operating, Financing or
Investing Activities depends on relationship or all
three activities.

Some Major Differences between

US GAAP and IFRS (Continued)
Balance Sheet Presentation Difference
Long Term Assets and Liabilities are listed
first on IFRS statements- See slide
On GAAP Statements, starts with current
assets and liabilities.- See slide
Write up of assets due to appreciation is
allowed for IFRS. Intangibles impairment test
is different.

British Airways Balance Sheet

Google Inc. Balance Sheet

Some Major Differences between

US GAAP and IFRS (Continued)
Earnings per Share (EPS)
IFRS has only Basic and Diluted EPS on
continuing operations and net profit or loss
per share
US GAAP has Basic and Diluted from
continuing operations, discontinued
operations, extraordinary items, cumulative
effect of changes in accounting policy, and
net income or net loss.

EXAMPLE OF EARNINGS
DIFFERENCE IFRS VS GAAP
DAIMLER BENZ
IFRS STANDARDS IN PLACE FOR YEAR
2006, ITS OPERATING PROFIT OF $2.4 BIL
IF USED US GAAP STANDARDS, THEY
WOULD HAD SHOWN A LOSS DUE TO
NOT CAPITALIZING RESEARCH
EXPENDITURES, ETC.

Limitation of IFRS
Pick and Choose which standards to be enforced or
used by companies within its borders by government
-French Government recently voted to allow certain
industries, the wine industry to be exact, to sidestep
certain IFRS standards to help that industry.
-Japans Firms definition of Finished Goods Inventory or
Merchandise Inventory has it as a liability not an asset
due to
- Storage Charges, Insurance on it, Safeguarding it,
concept of Just In Time
________Are these really IFRS Standards??________

Limitation of IFRS (Continued)

Enforcement of the Standards
No SEC like in the United States who
oversees the GAAP standards
What is the punishment for non compliance?
Is there comparability among nations
financial reporting if you can chose what
standards will be used?

AICPA Proactive to IFRS

Adaptation
Allowing private firms and not for profit firms to
report under the IFRS
Voted recently, May 2008, to modify rule # 203
of Professional Code of Conduct to recognize
IASB as an international accounting standard
setter.
Educating AICPA member firms and local CPA
state societies about what IFRS requirements.
Offering seminars for partners and also staff on
IFRS.

AICPA Proactive to IFRS

Adaptation (Continued)
Working with Academia, textbook authors, and
educational institutions to get current soon to be
professionals ready for using IFRS on the job.
Keeping information flowing to members and the
US CPAs voice be heard on these IFRS
committees.
Incorporating questions about IFRS into the
Uniform CPA exam starting 1/1/2011. CMA
exam will also have it incorporated on it?

Academia response to IFRS

Schools must educate Administrators of pressing need
to learn IFRS
Fit IFRS into already full slate of curriculum within the
classroom- UNIFORM SYLLABUS. Separate Class on
IFRS???
Get schools to educate the professors on IFRS, Budget
concerns and enrollment.
KPMG-AAA survey

Academic Year (AY) incorporate IFRS into curriculum.

AY 2009-10 it will increase to 24%
AY 2010-11 it will be about 30%
AY 2011-12 it will be over 50%

Accounting Firms Response

Sending employees to get training in London, etc. and
work with that office to learn IFRS requirements
Changing audit work programs and procedures to
make the transition smoother. Have several audit
teams, one IFRS, GAAP, etc. Pass on the cost to
clients?
Working with Academia the need to have graduates
ready to hit the road running, changed curriculum
Educating clients personnel with new requirements to
be in compliance with IFRS.

Suggestions for Compliance

WHAT DOES IT MEAN TO

BUSINESSES?
How does it affect the tax structure and FIN 48
and Schedule M3 that must be completed
What does it do for management reporting
systems and Financial Accounting Systems?
What are the new industry measurements or
indicators?
What happens to PCAOB requirements from
Sarbanes Oxley Act of 2002. Was it a waste of
time and energy?
Will IFRS assist in getting firm a strategic
competitive advantage over other firms.

Google, Inc. IC Report

British Airlines Auditors Report

Auditors Report-Google, Inc.

WHAT DOES IT MEAN TO

BUSINESSES? (Continued)
What does it do for tax planning and tax
deferred liabilities and assets on the
balance sheet?
What about Investor relationships,
explaining the inconsistencies between
years when implemented? What will be
required to be restated? Educating them.

WHAT DOES IT MEAN TO

BUSINESSES? (Continued)
Costs of training of the company
personnel on the new standards, pass it
on to customers
Discussing with banks over the debt
covenants, and the effect of them on the
loans.

What does it mean to me?

If the IFRS are being made mandatory, as an
professional the accounting degree earned
recently may not be relevant. Retraining must
be done. Community College in NJ gave a
money back guarantee on learning? Free
retraining??
How do I read the financial statements and
analytical information for comparability? Cost?
Per my clients, how do I explain the differences
between the two? NO EASY WAY!!
Is this coming to the privately held companies
that I work on? Probably!!!

What does it mean to me?

(Continued)
What is next change or challenge, are I
ready? Is my firm ready?
Challenge to keep up. Looking forward to
it. Competitive Advantage?
Example, If you got your Masters Degree
in Taxation, MST in 1986 and the tax law
dramatically changed later that year.

SEC Hearing on IFRS

Panel on US Financial Services and IFRS
recap:
IFRS creates more work or interpretation to
determine whether you put it on the Financial
Statements
US GAAP gives you more guidance
Entity recognition is a problem, Asset
capitalization was not easy task, Example
used where 200 leased vehicles had to be
capitalized due to control of vehicle.

SEC Hearing on IFRS (Continued)

On Panel, John Smith, An American IASB
member.
-Mentioned that on the board there are 14
members and they are from United States,
South Africa, Japan, China, Sweden, France
and United Kingdom.
-Panelists stated time consuming and costly
to use IFRS.
-Are they getting better information to the
creditors, regulators, investors and management
were questioned? Are the interested parties
getting value for this exercise? MAYBE??

Recent Developments -IFRS

Issuance in 2009, IASB issued
International Financial Reporting Standard
for Small and Medium Sized Entities (IFRS
for SMEs).
For example, no Earnings per Share (EPS),
no Interim reporting or Segment reporting are
needed
No Fair Value determination of Long term
assets are needed to complete financial
statements

Latest Proposals on Financial

Statement Presentation
Overall Project Goal
Develop a common standard on organization
and presentation of information in financial
statements
Improve:
The usefulness of information provided to users of
financial statements (in making decisions as
providers of capital)
Communication between management and users
of financial statements

Latest Proposals on Financial

Statement Presentation-(Contd)
Status of Project
IASB/FASB joint project formerly known as
the Performance Reporting Project
Discussion paper issued October 16, 2008
Comments received April 14, 2009
Exposure draft expected in 2010

Latest Proposals on Financial

Statement Presentation-(Contd)
Objectives
Three objectives for financial statement presentation:
Cohesiveness flow of information should follow
through all of the different statements
Relationships are clear: statements are complimentary

Disaggregation more information should be shown

separately
Common sections and categories: more line items

Ability to assess liquidity and cash flow

Ability to meet financial commitments and invest in business
opportunities

Latest Proposals on Financial

Statement Presentation-(Contd)
Statement of Financial Position
Grouped by operating, investing, financing (no longer by
assets liabilities and equity)
Disaggregate assets and liabilities into short term and long
term, totals and subtotals

Statement of Comprehensive Income

One statement
More disaggregation (function, nature)

Statement of Cash Flows

Direct method

New reconciliation schedule

Reconcile cash flows to comprehensive income
In notes

Latest Proposals on Financial

Statement Presentation-(Contd)

Bibliography
AICPA, International Financial Reporting
Standards (IFRS), an AICPA Backgrounder
AICPA Website, www.aicpa.org
AICPA IFRS website, www.ifrs.com
University Professors Weigh in on Building IFRS
in Curricula, KPMG-AAA Survey. In
www.Marketwatch.com.
Colleen Cunningham, CPA talk on IFRS, IMA
National Conference, June 2010

Bibliography
(Continued)
International Federation of Accountants
website, www.iafc.org
SEC website, www.sec.gov
Price Waterhouse Coopers Website,
www.pwc.tv
Bruce Pounder, CMA, CFM articles in
Strategic Finance, contact and website,
BPounder@leveragedlogic.com

OTHER ACCOUNTING ISSUES

FASB # 157, FAIR VALUE ACCOUNTING
LEHMAN BROTHERS DEMISE-MAYBE?
MULLIGAN STANDARD- GET IT RIGHT OR
GIVE ME ANOTHER SHOT
XBRL ALREADY AVAILABLE AND BEING
USED TO REPORT UNDER IFRS

Questions????

Thank you!!

Best Wishes for a wonderful conference!!!