International Financial Reporting Standards (IFRS)

1 International Financial Reporting Standards (IFRS). An AICPA Backgrounder 1. Table of Contents Get Ready for 2. Worldwide 2. SEC Leadership in International 3. The SEC Work 4. FASB and IASB Convergence 5. AICPA 7. Two Sides of the 7. Differences Remain Between GAAP and 8. What CPAs Need To 8. 10. Organizations 12. 1. Get Ready for IFRS that could be used by developing and smaller nations unable to establish their own The growing acceptance of International accounting Standards . But as the business Financial Reporting Standards (IFRS) as a world became more global, regulators, basis for Financial Reporting represents a investors, large companies and auditing firms fundamental change for the accounting began to realize the importance of having profession. The number of countries that common Standards in all areas of the Financial require or allow the use of IFRS for the Reporting chain. preparation of Financial statements by publicly held companies has continued to increase.

2 In In a survey conducted in late 2007 by the the United States, the Securities and Exchange International Federation of Accountants Commission (SEC) is taking steps to determine (IFAC), a large majority of accounting leaders whether to incorporate IFRS into the Financial from around the world agreed that a single Reporting system for issuers and, if so, set of International Standards is important for when and how. economic growth. Of the 143 leaders from 91 countries who responded, 90% reported Worldwide Momentum that a single set of International Financial Reporting Standards was very important . The International standard-setting process or important for economic growth in began several decades ago as an effort by their countries. industrialized nations to create Standards 2. Currently, more than 120 nations and SEC Leadership in Reporting jurisdictions permit or require IFRS for domestic listed companies. The International Effort European Union (EU) requires companies The Securities and Exchange Commission incorporated in its member states whose has for many years been a strong leader in securities are listed on an EU-regulated stock International efforts to develop a core set exchange to prepare their consolidated of accounting Standards that could serve Financial statements in accordance with as a framework for Financial Reporting in Australia, New Zealand and Israel have cross-border offerings.

3 It has repeatedly essentially adopted IFRS as their national made the case that issuers wishing to raise Brazil started using IFRS in 2010. capital in more than one country are faced Canada adopted IFRS, in full, on Jan. 1, 2011. with the increased compliance costs and Mexico will require adoption of IFRS for inefficiencies of preparing multiple sets of all listed entities starting in 2012. Japan is Financial statements to comply with different working to achieve convergence of IFRS. jurisdictional accounting requirements. In and began permitting certain qualifying 2000, the International Organization of domestic companies to apply IFRS for fiscal Securities Commissions (IOSCO), in which the years beginning April 1, 2010. A decision SEC plays a leading role, recommended that regarding the mandatory use of IFRS in its members allow multinational issuers to Japan is to be made around 2012. Hong use 30 core Standards issued by the IASB's Kong has adopted national Standards predecessor body in cross-border offerings that are equivalent to IFRS and China is and listings.

4 Converging its accounting Standards with IFRS. Other countries have plans to adopt A few years later, the SEC announced its IFRS or converge their national Standards support of a Memorandum of Understanding with IFRS. the Norwalk Agreement between 1. he European Union (EU) has T. the FASB and the IASB. This agreement, adopted virtually all International In addition to the support received from Financial Reporting Standards concluded in Norwalk, CT, established a certain entities, Financial (IFRSs), though there is a time lag joint commitment to develop compatible and economic leaders from various in adopting several recent IFRSs. accounting Standards that could be used for In the EU, the audit report and organizations have announced their both domestic and cross-border Financial basis of presentation note refer support for global accounting Standards . to compliance with IFRSs as Reporting . In a subsequent Memorandum of Leaders of the Group of 20 (G20) called for adopted by the EU.

5 Understanding in September 2008, the FASB. global accounting Standards and urged the and the IASB agreed that a common set of 2. I srael requires IFRS for all Financial Accounting Standards Board high-quality, global Standards remained their companies, except banks and (FASB) and the International Accounting companies dually listed in the long-term strategic priority and established Standards Board (IASB) to complete their and Israel. Dually listed a plan to align the Financial Reporting of companies have the option to convergence projects in 2011. A summary issuers under generally accepted use IFRS or GAAP. Australia of the IASB and FASB's efforts regarding and New Zealand have adopted accounting principles (GAAP) with that of convergence is subsequently described. national Standards that they companies using IFRS. describe as IFRS-equivalents. 3. In 2007, the SEC unanimously voted to single set of high-quality globally accepted allow foreign private issuers to file Financial accounting Standards would benefit statements prepared in accordance with IFRS investors and expressed encouragement for as issued by the IASB without reconciliation the continued convergence of GAAP.

6 To GAAP. Of even greater importance and IFRS. The releases also called for the was the SEC's Concept Release seeking input development and execution of a work plan . on allowing public companies to use to enhance both the understanding of the IFRS when preparing Financial statements. In SEC's purpose and public transparency in November 2008, the SEC issued a proposed regard to IFRS. The work plan addresses many roadmap that included seven milestones for of the areas of concern highlighted in the continuing progress toward acceptance comment letters to the 2008 roadmap. of IFRS. The roadmap generated significant interest and thoughtful comments from investors, issuers, accounting firms, regulators The SEC Work Plan and others regarding factors the SEC The work plan includes consideration of IFRS, should consider. both as they currently exist and after the completion of the various convergence projects On Feb. 24, 2010, the SEC issued Release under way by the FASB and the IASB.

7 Among Nos. 33-9109 and 34-61578, Commission other things, the work plan addresses some Statement in Support of Convergence and of the comments and concerns received in Global Accounting Standards , in which response to the SEC's proposed roadmap issued the SEC stated its continued belief that a in November 2008, including the following: SEC Timeline 2010. SEC issues a statement in support of convergence and global accounting Standards and calls for the 1988 1997 development and execution of a work plan. SEC. Securities and Exchange SEC encouraged the issues work plan progress report on Oct. 29. Commission (SEC) issues a efforts of the International policy statement supporting Accounting Standards the establishment of Committee to develop 2008. mutually acceptable a core set of accounting SEC issues proposed roadmap with timeline and key International accounting Standards . These Standards milestones for moving to IFRS and allowing early adoption Standards .

8 Are now known as IFRS. for public companies meeting certain criteria. 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010. 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009. 2002 2007. SEC announces support of Norwalk Agreement SEC votes unanimously to accept between the Financial Accounting Standards from foreign private issuers Board (FASB) and the International Accounting Financial statements prepared Standards Board (IASB). in accordance with IFRS without reconciliation to GAAP. 4. etermining whether IFRS is sufficiently D so, when and how. If the SEC determines developed and consistent in application to incorporate IFRS into the Financial for use as the single set of accounting Reporting system, the SEC believes the first Standards in the Reporting system time entities would be required to report under such a system would be no earlier than nsuring that accounting Standards are set E 2015. This timeline will be further evaluated by an independent standard setter and for as part of the work plan.

9 The work plan is the benefit of investors included as an appendix at the end of the SEC's release, which is located on the SEC's Investor understanding and education website at the following address: regarding IFRS and how it differs from rules/other/2010 GAAP. Additional information, including the Understanding whether laws or SEC's progress report, can be found at regulations, outside of the securities laws the following address: and regulatory Reporting , would be affected by a change in accounting Standards FASB and IASB. nderstanding the impact on companies U. both large and small, including changes to Convergence Efforts accounting systems, changes to contractual The FASB and the IASB have been working arrangements, corporate governance together toward convergence since 2002. The considerations and litigation contingencies two boards have described what convergence means and their tactics to achieve it in two uman capital readiness determining H documents the Norwalk Agreement issued in whether the people who prepare and audit 2002 and the Memorandum of Understanding Financial statements are sufficiently (MoU), originally issued in 2006 and updated in prepared, through education and 2008.

10 The MoU originally highlighted several experience, to convert to IFRS major convergence projects between IASB and FASB scheduled for completion in 2011. In On Oct. 29, 2010, the SEC released a progress response to the requests from the leaders of the report on its IFRS Work Plan. The report G20, the IASB and FASB published a progress provided details on progress and remaining report, describing an intensification of their research and analysis to be done as the SEC work program, including monthly joint board considers whether to incorporate IFRS into the meetings and quarterly progress updates on Financial Reporting system for issuers. these convergence projects. In 2011, assuming completion of the On Nov. 29, 2010, FASB and IASB issued a convergence projects and the SEC staff's convergence progress report. In the report, the work plan, the SEC will decide whether standard setters reaffirmed their priority projects to incorporate IFRS into the Financial for completion by June 30, 2011, or earlier.