International Financial Reporting Standards IFRS Kimberly Dwyer Mellen

International Financial Reporting Standards (IFRS) Kimberly Dwyer Mellen School District kdwyer@mellen. k 12. wi. us

Why International Standards? v Increased demand for global comparability v Harmonize preferred accounting practices v One set of financial statements

What’s the Status? v Currently over 115 countries v Convergence process continues v Proposed US corporation adoption range By 2014 – large companies By 2015 – midsize companies By 2016 – small companies

FASB & IASB Conceptual Framework Objectives Qualitative Characteristics & Elements Recognition of Measurement

IFRS – Four Basic Financial Statements Income Statement Balance Sheet Changes in Equity Cash Flows

IFRS – Revenue & Expenses IFRS Principles Based US GAAP Rules Based

IFRS – Merchandise Purchase & Sales US GAAP Purchases IFRS Sales

Income Statement Presentation The Bottom Line US GAAP Net Income Profit IFRS Earnings Profit

Income Statement Differences Expenses US GAAP IFRS Little guidance on order of Expenses Requires separate disclosures Financing Costs (Interest Expenses) Income Tax Expenses Other Special Items

Expenses Presented by… SEC Requires By Function IFRS By Function or Nature US GAAP Provides No Direction

Alternative Measures of Income US GAAP IFRS PROHIBITS PERMITS

IFRS vs US GAAP - Inventory Broad & Similar Guidance Allow Specific Identification in Assigning Costs FIFO Allow Cost Flow Assumptions Weighted Average LIFO

IFRS - Estimating Inventory Costs Original Acquisition Cost If Value Drops… Lower of Cost or Market Reversal allowed up to… If Value Increases Later…

US GAAP - Estimating Inventory Costs Original Acquisition Cost If Value Drops… Lower of Cost or Market Value may NOT be adjusted upwards If Value Increases Later…

The Meaning of Value US GAAP IFRS Replacement Cost Net Realizable Value

Increases in Inventory Value v Neither allow inventory adjustments upward beyond original acquisition cost. v EXCEPTION: Agricultural Assets Forests Animals Plants Fair Value Point-of-Sale Costs

Major Risks Associated Misstatement of financial information Fraud Converting US GAAP IFRS Ineffective communication of impact of change for investors, creditors and others. Management’s inability to certify effectiveness of controls over financial reporting.

Recognition of Receivables US GAAP Realization Principle Arm’s-Length Transaction occurs Reliable measurement & likelihood of economic benefit Earnings Process Risk Transfer & Ownership Reward Industry-Specific Guidance Limited Guidance IFRS

Disposition of Receivables US GAAP IFRS Bad Debt Expense Provision for Bad Debts or Provision for Uncollectible Accounts The term provision = Liability whose amount or timing (or both) is uncertain. Provision = Expense An important difference in interpretation of meaning exists.

IFRS – Assets & Liabilities Reporting Historical Cost Fair Value Exchange Value

Accounting for Plant Assets Cost Determination Broadly Similar Guidance Additional Expenditures Depreciation Disposals

Plant Asset Valuation US GAAP IFRS Impairment Losses Test for Impairment uses different base Revalues Impaired Assets to Fair Value Revalues to a Recoverable Amount* Disallows Recording of Increases in Asset Values Permits Upward Asset Revaluations, Above Original Cost *Defined as fair value – costs to sell

Asset Valuations Unlike US GAAP, IFRS Annual Review o f Useful Life & Salv age Estimates Permits Revalua tion of Plant Assets To Market Value (if reliably determ ined)

Accounting for Intangible Assets Cost Determination Amortization Broadly Similar Guidance Additional Expenditures Disposals

IFRS – Contingent Liabilities Probable outflow of resources Obligation exists from a past event Amount can be estimated reliably Contingent Liability is Recorded

US GAAP vs. IFRS – Partnership Accounting is similar world-wide, but not identical. Partnership organization • Different legal & tax systems • Different implications & motivations Partnership admission, withdrawal & liquidation • Procedures depend on partnership agreements • Different legal & tax systems impact agreements & implications to the parties.

Preferred Stocks Classification Equity Debt • IFRS uses different criteria for such classification Based on Analysis of Stock’s Contractual Terms

Accounting for Common Stock & Dividends Issuing at Par Accounting & Reporting of Common Stocks & Dividends are Similar Issuing at a Premium Issuing at a Discount Issuing for Noncash Assets US GAAP, “Common Shares” = IFRS, “Share Capital” (NOTE: Legal and cultural differences can impact rights and responsibilities of shareholders. Terminology can also vary, as seen in this example. )

Accounting for Treasury Stock Purchases US GAAP & IFRS: Companies are not to record gains or losses on transactions involving Treasury Stock. Reissuances Retirements IFRS Less Detailed Guidance

Accounting for Noninfluential Securities Trading Securities Broadly Similar Guidance Available-for. Sale Securities Held-to. Maturity Securities Differences in Terminology

Accounting for Influential Securities Equity Method Broadly Similar Guidance Consolidation Method Differences in Terminology

Reporting Cash Flows from Operating Broadly Similar Guidance Cash Flows from Investing & Financing Direct or Indirect Methods Difference: Cash In/Out Interest Rev/Exp Difference: Income Tax Outflows Classification US GAAP Operating IFRS permits classification as Operating or Financing Allows splitting Tax among Operating, Investing & Financing

IFRS & Accounting Students Recruit. Level Prof. Firm Level Corp. Level • No specific recruitment policy relating to IFRS yet • US GAAP convergence, IFRS knowledge level from awareness to conversant • More opportunities for those demonstrating proficiency • Introductory training provided for entry-level hires • More extensive training provided to IFRS reporting staff • Ranges from no need to know to begin very proficient • IFRS is integrated already in AUD, FAR, REG and BEC areas of the CPA Exam

Academic Resources $3. 3 m E&Y Foundation Leading. Edge Resources Technical Content EYARC Classroom Speakers Collaboration Faculty Education University Curriculum