IFRS

Overview of International Financial Reporting Standards

Purpose

The following document is to provide an update to the Audit and Finance Committee of the current status of International Financial Reporting Standards (“IFRS”) in the United States.  There has been much discussion over the past several years concerning IFRS and its required adoption by U.S. based companies.  With recent decisions made by the U.S. Securities and Exchange Commission (“SEC”), management believes this is the appropriate time to begin preparation for an IFRS transition. 

Given the significance of the impact an IFRS transition will have on The Company’s financial statements, an essential first step is for management and the Board of Directors to consider the Company’s approach and perspective on IFRS and begin discussions on the potential risks and benefits of IFRS.  In an effort to support these discussions, this overview provides a status of IFRS in the United States, management’s proposed response to begin preparation to IFRS and a summary of some of the key changes that an IFRS adoption would have on The Company and other U.S. companies.

The good news is that required IFRS adoption is not eminent.  Based on the most recent guidance from the SEC, required adoption of IFRS would not be expected until 2015 or 2016 at the earliest.  Management also believes that our IFRS adoption will not be as complex as it will be for some companies, such as those in the financial services or technology industries.  However, management believes delaying the beginning of its IFRS implementation could lead to risks and an ineffective and/or inefficient adoption.  Therefore, by starting its IFRS implementation planning now, similar to the proactive course it used several years ago to successfully implement its Sarbanes-Oxley compliance, will allow the Company and its operating companies the time to develop its IFRS direction and strategy, and to coordinate all the activities necessary for a successful adoption.

Background

In 2002, the European Union (“EU”) determined to require EU companies listed on EU exchanges to report under IFRS beginning in 2005.  IFRS is a set of standards determined by the International Accounting Standards Board (“IASB”).  This allowed EU companies only a couple of years to implement IFRS standards.  Today, IFRS is used for public reporting in over 100 countries throughout the world. Other countries, such as Argentina, Brazil, Canada, Chile, India, Korea and Mexico, will be moving to IFRS over the next couple of years. Japan may also convert to IFRS in 2015.

The benefits of global adoption of IFRS could be significant for investors. Global adoption will create a common denominator from which regulators and supervisors can assess the operations of the entities and markets they oversee. It will permit investors to compare the financial position of companies across borders, potentially allowing investors to more efficiently allocate capital on a global basis.  And for many global companies, global adoption will likely eliminate the need to keep multiple sets of books in order to comply with divergent accounting regimes.  This would improve the quality of financial statements by reducing the risk of translation errors between different accounting standards.

Based on the movements to IFRS by the rest of world, the SEC began to explore the ultimate adoption of IFRS in the United States.   In 2003, the SEC staff issued a study on the adoption in the United States of a principles-based accounting system. That study stated that global accounting standardization through convergence would lead to the following benefits:

·                     greater comparability for investors across firms and industries on a global basis;

·                     reduced listing costs for companies with multiple listings;

·                     increased competition among exchanges;

·                     better global resource allocation and capital formation;

·                     lower cost of capital; and

·                     higher global economic growth rate.

In November 2008, the SEC issued for comment its “Proposed Roadmap,” for an eventual adoption of IFRS for U.S. public companies beginning in 2014.  This Proposed Roadmap contemplated that the SEC could be in a position in 2011 to decide whether to require the use of IFRS by U.S. issuers beginning in 2014, and possibly allowing certain U.S. issuers to utilize IFRS in filings for fiscal years ending after December 15, 2009.

On February 24, 2010, the SEC issued a statement (“2010 Statement”) still supporting a single global set of accounting standards, but put its Proposed Roadmap on hold.  The SEC now believes more information is needed about the effects of IFRS on U.S. markets before a final decision can be made.  However, the SEC reaffirmed the goal of a single set of high-quality global accounting standards, and encourages the convergence of U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and IFRS in order to narrow the differences between the two sets of standards.

The SEC directed its staff to execute a Work Plan, the results of which will assist the SEC in its evaluation of the impact of IFRS on the U.S. securities market.  In 2011, assuming completion of these convergence projects and the staff's Work Plan, the Commission will decide whether to incorporate IFRS into the U.S. financial reporting system, and if so, when and how.

SEC Work Plan for Consideration of IFRS

When the SEC issued its Proposed Roadmap in 2008, it received numerous comment letters.  Based on the input from these letters, the SEC believed that a more comprehensive work plan was necessary to support its decision on whether to incorporate IFRS into the U.S. financial reporting system.  In its 2010 Statement, this Work Plan will include the scope, timeframe, and methodology for any such transition from U.S. GAAP to IFRS. The SEC directed the staff of the Office of the Chief Accountant, with appropriate consultation with other Divisions and Offices of the Commission, to develop and carry out the Work Plan.

The Work Plan sets forth specific areas and factors for the SEC staff to consider before potentially transitioning U.S. issuers from U.S. GAAP to a system incorporating IFRS. Specifically, the Work Plan addresses the following key issues, including:

·                     Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system;

·                     Ensuring that accounting standards are set by an independent standard-setter and for the benefit of investors;

·                     Investor understanding and education regarding IFRS, and how it differs from U.S. GAAP;

·                     Understanding whether U.S. laws or regulations, outside of the securities laws, for example tax laws and regulatory reporting, would be affected by a change in accounting standards;

·                     Understanding the impact on companies, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies; and

·                     Determining whether the people who prepare and audit financial statements are sufficiently prepared, through education and experience, to make the conversion to IFRS.

Additional details about the analysis that the SEC staff will perform in each of these six areas are as follows:

1)         Sufficient Development and Application of IFRS for the U.S. Reporting System

The 2010 Statement notes that a necessary element for a set of global accounting standards to meet the SEC’s mission is that the standards must be high-quality.  The SEC previously has described high-quality standards as consisting of a “comprehensive set of neutral principles that require consistent, comparable, relevant and reliable information that is useful for investors, lenders and creditors, and others who make capital allocation decisions.”  The SEC also has expressed its belief that high-quality accounting standards “must be supported by an infrastructure that ensures that the standards are rigorously interpreted and applied.”

The SEC’s Proposed Roadmap and resulting comment letters noted that IFRS has limited guidance in two respects.  IFRS lacks guidance for topical areas such as common control transactions, recapitalization transactions, and specific industry applications such as the utilities and extractive industries. Second, the IASB has elected to provide less detailed and prescriptive guidance than is customarily provided under U.S. GAAP. Proponents of the IASB’s approach assert that it is less complex than U.S. GAAP and allows companies to better capture the substance of transactions. Conversely, opponents assert that IFRS relies too much on management discretion, which creates a lack of comparability and hinders enforceability of the standards.

Accordingly, the SEC Staff believes that an evaluation of whether IFRS is sufficiently developed and applied to be the single set of globally accepted accounting standards for U.S. issuers requires consideration of the following areas:

·         The comprehensiveness of IFRS;

·         The auditability and enforceability of IFRS; and

·         The comparability of IFRS financial statements within and across jurisdictions.

2)         The Independence of Standard Setting for the Benefit of Investors

The 2010 Statement notes that another important element for a set of high-quality global accounting standards is whether the accounting standard setter’s funding and governance structure support the independent development of accounting standards for the ultimate benefit of investors.  To provide the SEC with the information necessary to determine whether the IASB is sufficiently independent for IFRS to be the single set of high-quality globally accepted accounting standards for U.S. issuers, the Staff will analyze four areas in particular:

·         Oversight of the IFRS Foundation (formerly called the “International Accounting Standards Committee (‘IASC’) Foundation”);

·         Composition of the IFRS Foundation and the IASB;

·         Funding of the IFRS Foundation; and

·         IASB standard-setting process.

3)         Investor Understanding and Education Regarding IFRS

Incorporation of IFRS for U.S. issuers requires consideration of the impact on investors, with a focus on the extent to which the accounting standards and the standard-setting process promote the reporting of transparent and useful financial information to support investors.  This requires an assessment of investor understanding and education regarding IFRS, as the main benefits to investors of a single set of high-quality globally accepted accounting standards would be realized only if investors understand and have confidence in the basis for the reported results.

The SEC Staff will analyze how to promote investor understanding of IFRS, as well as the existing mechanisms to educate investors about changes in the accounting standards, should the SEC determine in the future to incorporate IFRS into the financial reporting system for U.S. issuers. Specifically, the SEC Staff will:

·         Conduct research aimed at understanding U.S. investors’ current knowledge of IFRS and preparedness for incorporation of IFRS into the financial reporting system for U.S. issuers;

·         Gather input from various investor groups to understand how investors educate themselves on changes in accounting standards and the timeliness of such education; and

·         Consider the extent of, logistics for, and estimated time necessary to undertake changes to improve investor understanding of IFRS and the related education process to ensure investors have a sufficient understanding of IFRS prior to potential incorporation.

4)         Examination of the U.S. Regulatory Environment that Would Be Affected by a Change in Accounting Standards

In addition to filing financial statements with the SEC, U.S. issuers also provide financial information to a wide variety of other parties for different purposes. While the federal securities laws provide the SEC with the authority to prescribe accounting principles and standards to be followed by public companies and other entities that provide financial information to the SEC and investors, the SEC does not directly prescribe the provision and content of information that U.S. issuers provide to parties other than it and investors.  However, changes to the SEC’s accounting standards could affect issuers and the information they provide to regulatory authorities and others that rely on U.S. GAAP as a basis for their financial reporting.  In accordance with its Work Plan, the SEC staff will study and consider other regulatory effects of mandating IFRS for U.S. issuers.  Specifically, the SEC Staff will consider the following:

·         Manner in which the SEC fulfills its mission;

·         Industry regulators;

·         Federal and state tax impacts;

·         Statutory dividend and stock repurchase restrictions;

·         Audit regulation and standard setting;

·         Broker-dealer and investment company reporting; and

·         Public versus private companies.

           

5)         The Impact on Issuers, Both Large and Small, Including Changes to Accounting Systems, Changes to Contractual Arrangements, Corporate Governance Considerations, and Litigation Contingencies

Incorporation of IFRS for U.S. issuers would significantly affect preparers of financial statements for the several thousand issuers that file reports with the SEC.  Many U.S. issuers have expressed the view that the costs, effort, and time involved with a move to IFRS would be considerable, with many asserting that the benefits of such a move may not outweigh those costs.  In addition, U.S. issuers have further asserted that the transition time in the Proposed Roadmap was not sufficient and may cause confusion, which could damage investor confidence.

Accordingly, this aspect of the Work Plan will explore the magnitude and logistics of changes that issuers would need to undertake to effectively incorporate IFRS for U.S. issuers in the following areas:

·         Accounting systems, controls, and procedures;

·         Contractual arrangements;

·         Corporate governance;

·         Accounting for litigation contingencies; and

·         Smaller issuers versus larger issuers.

6)         Human Capital Readiness

The SEC staff will consider the readiness of all parties involved in the financial reporting process, including investors, preparers, auditors, regulators, and educators. As a result, any change involving the incorporation of IFRS into the financial reporting system for U.S. issuers would require greater familiarity of IFRS for investors, preparers, auditors, regulators, academics, and many others. Under the Work Plan, the SEC staff will review the effect of the incorporation of IFRS on the education and training of professionals involved in the financial reporting process as well as any impact on auditor capacity. Accordingly, SEC Staff will explore considerations related to:

·         Education and training; and

·         Auditor capacity.

The SEC staff will provide public progress reports on the Work Plan, as well as the status of the FASB and IASB convergence projects, beginning no later than October 2010 and frequently thereafter until the work is complete.

Commenter’s to the SEC on the Proposed Roadmap expressed a view that U.S. companies would need approximately a four- to five-year timeframe to successfully implement a change in their financial reporting systems to incorporate IFRS. Therefore, if the SEC determines in 2011 to incorporate IFRS into the U.S. financial reporting system, the first time that U.S. companies would report under such a system would be no earlier than 2015. The Work Plan would further evaluate this timeline.

Lessons from European Adoption of IFRS

U.S. companies have the advantage of learning from companies in countries, such as those in the EU, that have already transitioned to IFRS.  The transition to IFRS went very smoothly for some EU companies, but was difficult for other companies.  There are many accounting and consulting firms that have accumulated “lessons learned” from these IFRS adoptions by EU companies.  Some of these “lessons learned” from the IFRS transitions are: 

·                     The effort was often underestimated – Many EU companies had the misconception that IFRS conversion was solely an accounting issue, and realized later that the initiative was larger and more complex.

·                     Projects often lacked a holistic approach – EU companies frequently did not take into consideration the effects on other areas, such as information technology, human resources, and tax.

·                     A late start often resulted in escalation of costs – The EU companies that anticipated conversion and took steps to prepare for it were often in much better shape than those that did not.  EU companies that delayed their response often paid a price, in terms of higher costs and greater diversion of resources.

·                     Many companies did not achieve “business as usual” state for IFRS reporting – The highest quality financial data is obtained when companies fully integrate IFRS into their systems and processes.  The compressed timeframes often precluded this possibility; instead, many EU companies had first-year financials produced using extraordinary, labor intensive and unsustainable measures.

·                     Many EU companies are only now starting to explore benefits from IFRS implementation – The first-year effort for many EU companies was focused more on “getting it done.”  The potential benefits of IFRS in reducing complexity, increasing efficiency, decreasing costs, and improving transparency were deferred.

Based on these lessons from EU companies, the Company hopes to avoid the difficulties experienced by many in an IFRS transition and achieve benefits from the transition as early as possible.

The Company Response

The increasing use of IFRS around the world and the likelihood that IFRS will eventually be required in the U.S. is driving a growing number of U.S. companies to develop an IFRS transition strategy.  The Company is no exception, and must develop its plan for IFRS adoption. 

There are some advantages that the Company has in its ultimate transition to IFRS.  First, we have been reporting to a major investor since 2005 a reconciliation of U.S. GAAP to IFRS for use in its financial results.  These schedules reconciling U.S. GAAP to IFRS have allowed the CompanyI to develop a certain understanding of IFRS and its related reporting requirements.  Also, the Company has plans to develop fully integrated and converged systems at all its significant operating companies that will ultimately facilitate its transition to IFRS.  The Company has well established accounting policies, procedures, processes and internal control structures that will allow it to not only identify areas that may change under IFRS, but will provide a good foundation for any necessary modifications, when a transition from U.S. GAAP to IFRS is required.

Based on the present status of the SEC Work Plan and possible delay of IFRS until 2015 or 2016, many U.S. companies may choose to delay development of an IFRS transition strategy.  However, given the business and system initiatives that are underway at the Company and its operating companies, a delay in beginning an IFRS transition strategy for the Company would be detrimental to meeting our overall business objectives.  Therefore, it is proposed by the Company management that the development of its IFRS transition plan should begin in the summer of 2010 to allow sufficient time to identify, evaluate and implement all necessary changes to processes and systems to allow for a seamless transition from U.S. GAAP to IFRS.

To begin the transition to IFRS, the Company will:

·                     Establish a Project Management Office for IFRS - A centralized project management office (“PMO”) provides a single point of coordination that will ensure that the Company and its operating companies adhere to a unified plan by:

-          establishing milestones and monitoring performance against them;

-          facilitating a globally consistent application of IFRS;

-          fostering the creation of and deploying standard templates; and

-          coordinating training activities.

·                     Develop an IFRS Project Charter – A Project Charter will set out the impact analysis and implementation of IFRS for the Company and its operating companies.  The steps to complete the implementation, as well as key milestones and dates, will be identified.  Key Stakeholders, Core Working Groups and an Oversight Group will be identified, as well as the roles and responsibilities of each group.  Key success factors as well as risks and mitigations will be defined.  A budget for the project will be included to reflect incremental consulting fees, training and potential system changes, as well as an estimate of internal time requirements.

·                     Begin Training on IFRS - A key part of the implementation project will be the education and training of the PMO and both accounting and non-accounting staff.  Coordination of this training on IFRS will have to be developed to ensure that appropriate personnel receive the training effectively and efficiently. Accounting staff will need to be trained to ensure they fully understand IFRS and what it means to the Company and its operating companies.  Specific training needed for accounting staff will be identified as key differences are determined and implementation/application decisions are made.  Accounting functions that will definitely require training include:

-          Financial Planning (budgets and forecasts)

-          Consolidations

-          Financial Services (transactional)

-          Financial Reporting

-          Pensions

-          Tax

-          Internal Controls

Non-accounting staff that work with or explain financial information will need education.  The following non-accounting staff work with financial information and will therefore need to understand the impacts of IFRS as it relates to their function.

-          Investor Relations

-          Treasury

-          Enterprise Risk

-          Human Resources

-          Information Management

-          Business Development

·                      Perform Accounting Policy Review - IFRS provides an opportunity to refresh accounting policy implementation, with a focus on achieving greater transparency and timely financial reporting.  The adoption of accounting policies under IFRS carries significant importance, since IFRS must be applied consistently throughout the Company and its operating companies. 

·                      Monitor Evolving Standards - The Financial Accounting Standards Board (“FASB”) and the IASB are working toward convergence of their standards.  There are currently several active projects, some of which may result in significant impacts. While a goal of the projects is to achieve full convergence, some differences may remain upon their completion. When the Company adopts a new U.S. GAAP standard, management will also consider the related IFRS standard, and address the impact of the differences that remain between the two standards.  Management should also consider anticipated changes related to the convergence agenda—and incorporate those into its long-term plan.  The convergence projects presently being considered by FASB and/or IASB include:

-          Financial Instruments

-          Consolidations

-          Revenue Recognition

-          Financial Statement Presentation

-          Leases

-          Financial Instruments

-          Fair Value Measurement

·                     Risk Identification – Management must identify and evaluate potential risks up front.  IFRS contains less detailed guidance than U.S. GAAP and therefore requires the use of more professional judgment.  As more professional judgment is utilized in IFRS compared to “rules based” U.S. GAAP, this can create additional accounting and financial reporting risks.

-     Judgment - In contrast with U.S. GAAP, IFRS has fewer bright-line rules, resulting in the need for the increased application of judgment. Because of various factors, such as complexity and multiple business units, the Company will need to develop a framework for how judgments will be made, focusing on transaction analysis, accounting research and decision making.  With this increased use of judgment, we also expect that the level of disclosure will increase. As IFRS policies are considered for adoption, it will be important to understand whether the policy selections are overly aggressive or conservative, and how such selections stack up against peers or other companies.  Proper evaluation and communication with executive management and the Audit and Finance Committee will be necessary to determine the appropriateness of these professional judgments on accounting policies, as well as an assessment of the “conservative vs. aggressive” nature of the IFRS accounting policies.

·                     Implications Related to Sarbanes-Oxley Compliance - To guard against Sarbanes-Oxley compliance issues or deficiencies during the IFRS conversion, as process changes are designed, management must consider the effects of such changes on existing internal controls.  Evaluation of these accounting changes to processes and key internal controls must be performed to ensure proper internal controls over financial reporting is in place before, during and after the transition to IFRS.

·                     Involvement of the Independent Auditor – Management believes that the early and continued involvement of our independent auditor will prevent future surprises.  To obtain the appropriate level of involvement, as allowed by the SEC and protecting the independence of our independent auditor, The Company  and its operating companies would utilize its outside auditors as a well-informed source of information and assistance given their knowledge of our company and expertise and experiences with companies world-wide that utilize IFRS.

Based on our preliminary assessment of an IFRS transition in the United States, the following outlines certain areas for the Company and its operating companies that could have an impact on its financial statements:

·                     Inventory – IFRS does not allow the use of LIFO as an inventory valuation method.  Presently the Internal Revenue Service requires the use of LIFO for financial statement purposes if used for tax purposes.  While the removal of LIFO would not have significant impact on the Company’s operating financial results, the negative cash impact resulting from the tax impact, would be significant. 

·                     Pensions – Under IFRS, amortization of actuarial gains/losses is not required to be recognized in the income statement.  In 2009, this impact would have increased operating income significantly.

·                     Research and Development – Under U.S. GAAP, all R&D activities are expensed as incurred.  Under IFRS, certain R&D activities are capitalized and amortized over a period of time.  R&D costs expensed in 2009 were significant under U.S. GAAP. Some portion of those costs would likely be need to be considered for capitalization under IFRS.

Additionally, IFRS could have an impact to the Company and its operating companies in processes and disclosures related to stock-based compensation, intangible assets and impairment calculations, income taxes and contingencies.  Non-financial impacts must also be addressed, such as adherence to consistently applied accounting policies for all operating companies.  These areas, plus other financial and non-financial matters will require further evaluation to determine the appropriate application of IFRS and impact of the transition.

Summary

With IFRS clearly on the horizon for U.S. companies, the early and comprehensive development of an IFRS implementation program can help ensure our success. It is essential that Management and the Board of Directors and its committees begin to form our company’s perspective on IFRS and begin discussions on the potential risks and benefits of IFRS.

While there may be U.S. companies that chose to postpone or delay their evaluation of IFRS and wait on additional input from the SEC and its Work Plan, management believes that such a delay would bring increased risk to our company, and would not allow for the effective and efficient transition to IFRS once required.  The careful planning, evaluation and determination of appropriate IFRS accounting policies will allow the Company and its operating companies to implement IFRS when it is appropriate, with a seamless transition that has minimal impact to our business.  Key issues will be identified earlier, so that thorough, thoughtful and insightful discussion with Executive Management and the Board of Directors and its committees can be performed.  This will allow the company, Executive Management and members of the Board of Directors to become aligned – and determine the company’s IFRS direction and strategy.

To this point, a clear line of communication to our Executive Management, Board of Directors and the Audit and Finance Committee must be developed and implemented to allow each to ask the key questions and engage management on the IFRS transition.  Establishing a process for frequent updates and communications will help drive a sustainable plan and implementation of IFRS going forward. Underestimating the planning involved—and the time required—for a change from U.S. GAAP to IFRS, could increase our risk. Our Executive Management, the Board of Directors and the Audit and Finance Committee will be utilized as a guiding force in positioning the Company and its operating companies to achieve strategic, operational, and economic benefits from a transition to IFRS.

In the appendix, an outline of some of the key potential accounting differences between IFRS and U.S. GAAP are provided.

APPENDIX

Financial Statement Presentation

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standards – IAS 1, IAS 7, IAS 8, IAS 10, IAS      • Format and structure of the financial statements

  24, IAS 33, IAS 34, IFRS 5, IFRS 8                                     may present alternative performance measures;

• Guidance addresses the basic form and content                      no “extraordinary items” in the statement of

  of financial statements and includes general                            comprehensive income; classification of expenses may

  considerations such as fair presentation, going                       be based on function or nature

  concern, accrual accounting, consistency of                          • Cash-flow classification of interest, dividends, income

  presentation, materiality and offsetting                                    taxes and bank overdrafts; disclosure of discontinued

• Financial statement components include a statement               operations by category

  of financial position, statement of comprehensive • Level and nature of disclosure in the notes to the

  income, statement of changes in equity, statement of              financial statements; more focus on judgments

  cash flows, and notes to the financial statements                     made and assumptions used

• May have a “condensed” presentation for interim • Events occurring after the reporting period do not

  reporting                                                                                  affect classifications as of the end of the reporting

• Certain disclosures are required for public companies            period (i.e., refinancing of bank loans or debt covenant

  (e.g., EPS, segments)                                                              waivers)

• No specific industry guidance                                               • Narrower definition of a discontinued operation

Implementation Considerations

• The process around monitoring debt covenants or calculating EPS may need to be revisited

• Disposals may result in more or less discontinued operations

• Management reporting may change as a result of different financial statement formats and the use of alternative

  performance measures

• Communication with investors may be affected: questions may be asked about financial statement formats; accounting differences and how general principles were applied

• Changes pending: There is an IASB/FASB joint project to develop a comprehensive standard for the organization

  and presentation of information in the financial statements with an emphasis on presentation of a cohesive picture

  of an entity’s operations and enhanced cash flow information to assess liquidity and financial flexibility. An exposure

  draft is expected in early 2010 with a final standard in 2011. The boards also have a joint project to develop a

  comment definition of a discontinued operation, which is expected to be finalized by early 2010.

Consolidation Policy

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 27                                                   • Overall consolidation approach is based on whether an

• Key issue is determining whether “control” exists                  entity controls another; applies to all types of entities

• All controlled entities are required to be                                  regardless of legal structure

  consolidated, with limited exceptions for certain                   • There is no exception from consolidation for “investment

  nonpublic entities                                                                    companies”

• Control is the power to govern the financial and                   • The accounting policies of all subsidiaries must be

  operating policies of an entity so as to obtain                          conformed to those used in consolidation

  benefit from its activities                                                       • The reporting dates of all subsidiaries must be conformed

• Guidance provides a number of control “indicators”

  that focus on governance and decision-making

  activities, as well as economic factors such as

  benefits and risks

• Potential voting rights must be considered when

  assessing whether control exists

• Entities holding less than majority of voting rights

  may still consolidate under “de facto” control

• Guidance also included on the presentation of the

  parent’s separate financial statements

Implementation Considerations

• Determining whether entities should be consolidated will require increased judgment

• Processes and controls will need to be developed for monitoring potential voting rights and whether they are

  currently exercisable or convertible

• Processes for the capture of financial data related to all controlled entities will need to be developed, and accounting

  policies and reporting dates will need to be conformed

• Changes in the reporting entity as a result of more or fewer entities consolidated may affect income taxes

• Changes pending: The IASB is currently working on a new consolidation standard, as part of a joint project with

  the FASB, which will revise the definition of control, include more application guidance, and require enhanced

  disclosures. In addition, the FASB issued guidance (Statement 167) in June 2009 to improve the financial reporting

  for variable interest entities.

Revenue Recognition

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standards – IAS 11, IAS 18                                    • Overall level of guidance is much less; limited detailed

• Guidance addresses general principles related to                    guidance resulting in more judgment in determining

  revenue from the sale of goods and services; little                  revenue recognition policies

  detailed guidance; also addresses revenue from                    • Variances in applying judgment may result in

  interest, royalties and dividends                                              differences in the revenue recognition related to

• A key issue is understanding the “unit of account”                 arrangements with multiple elements and those

  (i.e., combining and segmenting contracts, multiple                involving upfront fees; as well as in real estate sales and

  element arrangements)                                                             other industry issues

• Principles relating to the sale of goods focus on the             • Contract accounting – when the stage of completion

  transfer of “risks and rewards” and “control” over                 cannot be estimated reliably, revenue is recognized

  the goods                                                                                 to the extent that recoverable expenses have been incurred

• Revenue from the sale of services is recognized based         • Revenue recognition is based mainly on a single standard

  on the “percentage of completion”                                           that contains general principles

• Emphasis on fair-value measurement of the

  consideration received

Implementation Considerations

• The selection of revenue recognition policies will require increased judgment; an overall approach to revenue

  recognition will need to be developed that focuses on a judgment framework

• Data capture may be more or less detailed, which could lead to information systems changes

• Contract designs may be affected

• Changes in the timing of revenue recognition may affect income taxes

• Changes pending: There is an IASB/FASB joint project to develop a single contract-based model for revenue

  recognition upon completion of performance obligations that can be applied consistently across industries and

  geographies. An exposure draft is expected in 2010 with a final standard in 2011.

Inventory

General Requirements

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 2                                                     • Use of LIFO for valuation of inventory is 

• Guidance addresses the recognition                                        prohibited under IFRS

  and measurement of inventory                                              • Inventory is required to be measured at the lower of

• Alternatives for measuring the cost of inventory                    cost or NRV, which may not be the same as a “market                         

  include FIFO and weighted average cost                                value”

• NRV is the estimated selling price of the inventory              • Same cost formula must be used for similar inventory        

  in the ordinary course of business less the estimated            • Costs related to asset retirement obligations may be as

  costs of completion and of making the sale                              part of inventory cost basis, rather than included as            

                                                                                                   PP&E                    

                                                                                                • Impairment charges on inventory are required to be

                                                                                                  reversed, if certain criteria are met

 

Implementation Considerations

               

• Data capture may be more or less detailed leading to possible inventory system changes

• Cost formulas for inventories whose nature and use are similar may need to be aligned throughout the entity

• NRV will need to be calculated and tracked

• Processes and controls will need to be developed for monitoring whether inventory impairment should be

  subsequently reversed

• Changes in the measurement basis of inventory may affect income taxes, particularly if LIFO currently is used as a

  measurement basis

• Changes pending: None

Long-Lived Assets

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standards – IAS 16, IAS 23, IAS 40, IAS 41        • Components approach to depreciation is required,

• Long-lived assets are initially recognized at cost,    major overhaul costs are generally included as a

  includes all costs directly attributable to preparing the             separate component

  asset for use; borrowing costs are capitalized                        • Residual values are required to be adjusted to fair value

• Depreciation is based on the “components” approach             (upwards or downwards)

• Subsequent measurement of property, plant and                   • Subsequent measurement of asset retirement

  equipment or investment property may be at fair                     obligations may be different

  value                                                                                      • Property, plant and equipment may be measured at cost

• Investment property is land or a building (or part   or fair value using the “revaluation model”

  of a building) held to earn rentals or for capital                     • Investment property may be accounted for using the

  appreciation or both                                                                 cost or fair value model; property held as an operating

• Biological assets and agricultural products at the    lease may be considered an investment property

  point of harvest must be measured at fair value; fair             • Biological assets must be fair valued

  value changes of biological assets in profit or loss;

  agricultural products at the point of harvest under

  IAS 2

• Asset exchanges are recognized at fair value, if they

  have “commercial substance”

Implementation Considerations

• Asset valuation and depreciation will require increased judgment

• Process and controls may need to be developed for determining the fair value of certain assets if the fair value option

  is selected

• Data capture for asset componentization may be detailed; which could lead to information system challenges

• Residual value changes will need to be tracked

• Changes in the measurement basis of long-lived assets and depreciation may affect income taxes

• Changes pending: The IASB issued an Exposure Draft of an IFRS on fair value measurement which is generally         consistent to the fair value guidance under U.S. GAAP. A final standard is expected in the second half of 2010.

Asset Impairments

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 36                                                   • Impairment losses may be recognized in an earlier

• A single approach to impairment                                            period given differences in the impairment “trigger”

• Focus on the asset’s “recoverable amount,” which               • The level of impairment testing may be different

  is the higher of fair value less costs to sell and value              depending on the CGU

  in use                                                                                     • Amount of impairment may be different based on the

• Value in use is the present value of estimated future               recoverable amount of the asset

  cash flows expected to arise from use of the asset and          • Any impairment charges on property, plant and

  its disposal                                                                              equipment, investment property (where the cost model

• Level of testing is based on the “cash-generating unit”           is used), and intangibles (except goodwill) are required

  (CGU) (i.e., smallest identifiable group of assets that             to be reversed, if certain criteria are met

  generates cash inflows independently of other assets)

• For goodwill, testing may aggregate CGUs; must at

  least allocate to an operating segment

• Impairment losses, except on goodwill, are required

  to be reversed, if certain criteria are met

Implementation Considerations

• Determining the level at which assets are tested for impairment will require increased judgment processes and

  controls for the reversal of impairment charges will need to be developed

• Data capture for an asset’s recoverable amount may be detailed, which could lead to information system changes

• Changes in the timing and amount of impairment charges may affect income taxes

• Changes pending: None

Intangible Assets

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 38                                                   • Capitalization of development costs is required; criteria

• Guidance addresses the accounting for intangible   to be met include:

  assets acquired separately or in a business                              –  Ability to demonstrate technical feasibility,

  combination and those generated internally                             –  Intention to complete the asset and use or sell

• Requires acquired intangible assets, including                        –  Ability to use or sell the asset

  development costs, to be recognized, if certain criteria            –  How the intangible asset will generate probable

  are met                                                                                         future economic benefits

• Must classify costs of internally generated intangible             –  Availability of adequate technical, financial and other

  assets into a research phase and a development phase                 resources to complete the development and to use or

• Requires all research expenditures to be expensed                       sell the intangible asset

• Development expenditures are required to be                         –  Ability to reliably measure the expenditure during

  capitalized, if certain criteria are met                                            development

• Intangible assets may be revalued, if certain criteria              • Intangible assets may be measured at cost or fair value

  are met                                                                                     using the “revaluation model”

                                                                                                • Advertising and promotional costs are generally

                                                                                                  expensed as incurred

Implementation Considerations

• Determining when intangible assets should be capitalized will require increased judgment

• Processes and controls for determining fair value of certain intangible assets may need to be developed if the

  revaluation model is used

• Processes and controls for the capitalization of development costs will need to be developed

• Data capture for the capitalized development costs may be more detailed, which could lead to information system

  changes

• Capitalization of development costs may affect income taxes

• Changes pending: None

Financial Instruments Recognition

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 39                                                   • Fair value not limited to an “exit-value” notion

• Financial instruments are recognized and measured              • Impairment testing not based on an “other-than

  based on their classification as either financial assets,             temporary”; reversal of impairments for some items, if

  financial liabilities, or equity                                    certain criteria are met

• Derecognition of financial assets is based primarily on        • Derecognition of financial assets

  whether “risks and rewards” have been transferred              • Definition of a derivative is broader - a notional,

• Financial liabilities are derecognized when                             payment provision and net settlement are not required

  extinguished                                                                          • Fewer restrictions on the types of risks that can be

• Focus on the use of “fair value” as a measurement                 hedged; the “shortcut method” is not permitted for

  basis – subsequent measurement depends on                          hedge accounting; all hedges must be assessed for

  classification of financial instrument; use of the fair value      effectiveness and documented

  option is allowed in certain instances                                    • May adjust the basis of certain assets or liabilities for

• “Hedge accounting” is allowed if certain criteria are               the effects of “cash-flow hedges”

   met and are sufficiently documented

Implementation Considerations

• Valuation techniques used to determine fair value may need adjustment

• Processes will need to be developed for the capture of data for impairments (including reversals), interest recognition,

  and derecognition requirements will need to be developed

• Hedge documentation may need adjustment, and hedge effectiveness testing may require additional documentation

• Different recognition and amounts of financial instruments may affect income taxes

• Changes pending: As part of a joint project, the IASB and FASB are amending the accounting for financial

  instruments with a goal of simplifying the classification and measurement requirements. The project will replace IAS

  39 and is being conducted in three phases and expected to be finalized in 2010 by the IASB (1) classification and

  measurement, (2) impairment, and (3) hedge accounting. The IASB issued IFRS 9 on November 12, 2009 addressing

  phase one. While this is a joint project, the boards currently are discussing proposals that could result in significant

  differences.

Financial Instruments Presentation and Disclosure

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standards – IAS 32, IFRS 7                                    • There is no mezzanine equity classification under IFRS;

• Financial instruments are classified as either financial            must classify as either liabilities or equity

  assets, financial liabilities, or equity depending on the          • “Split accounting” is required for instruments with

  substance of the underlying contractual arrangement             liability and equity components; allocate the individual

• Instruments with liability and equity elements                        components based on fair value using the “with-and

  are generally accounted for separately – “split                         without” method

  accounting”                                                                           • Offsetting of financial assets and liabilities is more intent

• Issued equity securities redeemable at the option of                based rather than just legal right of offset

  the holder or upon a contingent event are usually  • Additional disclosures are required

  classified as liabilities

• Financial assets and liabilities may be offset, if certain

  criteria are met

• Several disclosures required related to risks related to

  financial instruments held

Implementation Considerations

• Processes will need to be developed for the capture of data for additional disclosures, differing offsetting, and “split

  accounting.”

• Different classification of financial instruments may affect income taxes

• Changes pending: The IASB and FASB have a joint project to better distinguish between debt and equity

  classification of financial instruments and converge the two sets of standards. An ED is expected in 2010 related

  to this project. The IASB also has a project on derecognition with a goal of clarifying the guidance, eliminating

  differences with U.S. GAAP and requiring further disclosure on exposure to risks. The IASB is expected to finalize

  the deconsolidation guidance in the second half of 2010 – the FASB is monitoring this project to determine what

  standard-setting might be required.

Employee Benefits

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 19                                                   • Multiemployer plans are accounted for based on their

• Guidance addresses all forms of employee benefits,               economic substance as either a defined benefit or

  including short-term benefits; post-employment                     defined contribution plan

  benefits, (i.e., pensions); other long-term benefits (i.e.,         • Policy choice regarding recognition of actuarial

  bonuses); and termination benefits                                          gains and losses; recognized in income either using

• Accounting for post-employment benefits depends                the “corridor” method or accelerated method, or

  on the type of plan (defined contribution, defined   permanently in equity

  benefit or a multi-employer plan)                                          • Prior service costs are recognized immediately, if vested

• Defined contribution plans involve payment of fixed           • Measurement of expected rate of return on plan assets

  amounts that are expensed as the employee provides              is based solely on fair value

  services                                                                                 • Recognition of a defined benefit asset is subject to a

• For defined benefit plans, a benefit obligation is                     “ceiling”

  recognized using an actuarial valuation method, net              • Liability must be recognized for minimum funding

  of plan assets held                                                                   requirements when obligation arises

• Termination benefits are recognized when                            • Termination benefits and curtailments are recognized

  “demonstrably committed”                                                      when “demonstrably committed”

Implementation Considerations

• Current plans will need to be evaluated to ensure they are accounted for under the appropriate type of plan

• Determining actuarial gains and losses requires judgment

• Processes and controls for the asset ceiling test will need to be developed

• Data capture may be more detailed, which could lead to information system changes

• Changes in the timing and amount of pension cost may affect on income taxes

• Changes pending: The IASB has a project to significantly improve IAS 19 over the next couple of years and has

  divided the project into three phases in addition to a later more fundamental review in conjunction with the FASB of

  accounting for employee benefits: (1) discount rate; (2) recognition and presentation of changes in defined benefit

  obligation and plan assets and disclosures; and (3) contribution-based commitments. An ED was issued regarding the

  discount rate for employee benefits and the IASB will determine the timing of the other phases in conjunction with

  the financial statement presentation project.  The proposed changes are expected to include:

-       Replacing interest cost and the expected return on plan assets with a measure of net interest income or expense, measured by applying the discount rate to the plan surplus or deficit

-       Requiring immediate recognition of gains and losses through OCI

-       Immediate recognition through P&L of the cost of plan changes for both vested and nonvested benefits (versus amortization of the cost of nonvested benefits under the current rule)

-       Prescribing how changes in the benefit obligation and fair value of plan assets are to be reported in the comprehensive income statement

-       Enhanced disclosures, especially related to risks and sensitivities

Share-Based Payments

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IFRS 2                                                   • Scope is broader; includes employee stock plans

• Applies to transactions where goods and services                • Compensation expense is recognized on an accelerated

  have been exchanged for share-based payments                     basis for grants with “graded vesting” provisions

• Transactions generally measured based on a “grant              • Compensation expense related to certain types of

  date” approach                                                                         award modifications is based on the higher of the

• Accounting for grant depends on how transaction will           modified award fair value or the original grant date

  be settled; cash settlement is a liability; equity settled              fair value

  is equity; may have elements of both                                     • Measurement of compensation expense for grants to

• Compensation expense recognized on the basis of                 non-employees is based on the fair value of the goods

  grant-date fair value over the period in which the    or services when provided

  shares vest. Awards with “graded vesting” features are        • Classification of grant is based on how the transaction

  measured as multiple awards                                   will be settled

• No specific valuation model is required to determine            • Income tax treatment

  share value; guidance requires inclusion of several               • Requirements are the same for public and nonpublic

  inputs                                                                                      entities

Implementation Considerations

• Processes and controls need to be developed for identifying all transactions that should be accounted for as share          based payments

• Awards need to be evaluated for appropriate classification as a liability or equity

• Judgment will be required in the measurement of share-based payments at fair value

• Data capture may be more detailed, particularly regarding graded vesting, which could lead to information system

  changes

• Income tax implications of share-based payments need to be understood

• Changes pending: None

Provisions and Contingencies

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 37                                                   • Recognition threshold for provisions based on

• Guidance addresses the accounting for “provisions”              “more likely than not;” result is that liabilities may be

  and “contingent” assets and liabilities                                      recognized earlier

• Provisions are liabilities of uncertain timing or amount;       • Provisions are measured based on the “expected-value”

  are “probable“ (i.e., more likely than not) of occurring           method or at the mid-point of a range of equally likely

  and resulting in an outflow of resources to settle the               possible outcomes

  obligation (may be either legal or constructive)                     • Provisions must be discounted, if material

• “Contingent” assets or liabilities are not recognized as         • Provisions relating to “onerous” operating lease

  their likelihood of occurring is not “probable”                       contracts are recorded when there is a commitment

• Provisions are measured using a settlement notion;                (i.e., communication to a landlord)

  use of the “best estimate” or mid-point of range if all            • Areas where there may be differences in the timing and

  possible outcomes equally likely                                             measurement include litigation provisions, restructuring

• Discounting of provisions is required, if material   charges, decommissioning liabilities, and uncertain tax

• Several disclosures are required, although “prejudicial”         provisions

  items are not required to be disclosed                                    • “Prejudicial” items are not required to be disclosed

                                                                                                • Contingent assets are not recognized unless their

                                                                                                  realization is virtually certain

 Implementation Considerations

• Determining liability recognition and corresponding disclosures will require increased judgment

• The legal department and outside counsel will need to be educated on the threshold for recognition of provisions

• Processes and data capture for provisions may be more detailed, which could lead to information system changes

• Changes in the timing and measurement of provisions may affect income taxes

• Changes pending: The IASB is currently in the process of finalizing amendments to IAS 37 as part of the Liabilities

  project to converge guidance for restructuring provisions and termination benefits under IAS 19 with U.S. GAAP and

  improve the overall recognition and measurement of provisions.

Income Taxes

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IAS 12                                                   • Initial recognition exemption; other items may have a

• Guidance is based on the “temporary difference”   tax effect that are scoped out under U.S. GAAP

  approach; deferred tax items are recognized for                    • Tax rates used to measure deferred tax items

  differences between the carrying amount of an asset             • Must use rate applicable to undistributed profits to

  or liability in the statement of financial position and                measure deferred tax on undistributed earnings of a

  its tax base, and for operating loss and tax credit                    subsidiary

  carryforwards                                                                        • Deferred tax items are considered noncurrent for

• Deferred taxes not recognized on the initial                            classification on the statement of financial position

  recognition of an asset or liability that is not related to          • Allocation of tax to equity components – “backward

  a business combination or that does not affect book               tracing”

  or tax profit                                                                           • Particular areas with a different tax treatment include

• Deferred tax assets are recognized when they are   share-based payments, leveraged leases, and uncertain

  “probable” of realization (i.e., more-likely-than-not)               tax provisions

• Deferred tax items are measured based on

  the applicable tax rates that are enacted or

  “substantively” enacted

• Deferred tax items are considered to be noncurrent

Implementation Considerations

• The tax department should be educated on the different tax accounting requirements and their effect on tax

  planning

• Processes and data capture for deferred tax items may be more detailed, which could lead to information system

  changes

• Changes pending: The IASB issued an ED to clarify and improve the accounting for income taxes as well as reduce

  differences with U.S. GAAP. The IASB is currently in the process of analyzing the comments received on the       Exposure Draft and expected to determine the direction of the project after this consideration process.

Business Combinations

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standard – IFRS 3                                                   • May account for noncontrolling interests at either full

• Based on the “control” notion                                                 fair value or the fair value of the proportionate share of

• Guidance addresses the accounting by the acquirer;               the net assets acquired; accounting policy choice on a

  requires use of the acquisition method for the                         transaction-by-transaction basis

  recognition and measurement of assets acquired,                  • Acquisition of noncontractual liabilities are initially

  liabilities assumed and any noncontrolling interests in            recognized at fair value; subsequent measurement may

  the acquired entity                                                                   be different

• Restructuring provisions are generally prohibited from        • Accounting for common control transactions are not

  recognition as acquired liabilities                                             addressed

• Transaction costs are expensed                                             • Related pro forma financial information is required for

• Guidance addresses the accounting for goodwill;   all entities (public and nonpublic)

  annual impairment test is required; no amortization,

  and the deferral of “negative goodwill” is prohibited

• Scope includes transactions involving mutual entities

  and control by contract; does not address common

  control transactions

Implementation Considerations

• Processes for the capture of financial information related to business combinations will need to be developed,

  particularly for fair-value information related to contingent liabilities

• Changes in the amount of certain items acquired or assumed in a business combination and the related goodwill may

  affect income taxes

• Changes pending: None

Investments in Associates / Joint Ventures

General Requirements                                     Potential Differences from U.S. GAAP

• Primary standards – IAS 28 and 31                                      • Exception from equity accounting for associates / joint

• Key issue is determining whether “significant                        ventures held for sale

  influence”/“joint control” exists                                             • Potential voting rights must be considered in assessing

• Significant influence is the power to participate                      whether significant influence / joint control exists

  in financial and operating policy decisions of the  • The accounting policies of all associates / joint ventures

  entity Entities where significant influence exists are                must be conformed

  considered to be “associates” and are accounted for              • The reporting dates of all associates / joint ventures

  using the “equity method”                                                       must be conformed

• Investment in an associate is initially recognized at               • If losses exceed the interest in associate, discontinue

  cost; subsequent carrying amount is increased or                    recognition unless a legal obligation exists

  decreased based on investor’s share of profit/loss of            • Impairment testing not based on an “other than

  associate; distributions reduce the carrying amount                 temporary” notion

• There are scope exceptions for “investment”                        • Proportionate consolidation, used in some industries

  companies and investments “held for sale”                             (e.g., oil and gas, real estate) under U.S. GAAP, to be

• Joint control exists when the financial and operating              discontinued as a policy option under IFRS

  policy decisions require the consent of all venturers

  through the contractual sharing of control

• Investments in jointly controlled entities may be

  accounted for under either the equity method of

  accounting or the “proportionate consolidation”

  method. The proportionate consolidation method is

  expected to be eliminated

Implementation Considerations

• Determining whether entities should be considered associates or jointly controlled entities will require increased

  judgment

• Processes and controls will need to be developed for monitoring potential voting rights and whether they are

  currently exercisable or convertible

• Processes for the capture of financial data for all entities being accounted for as associates or jointly controlled

  entities will need to be developed, and accounting policies and reporting dates will need to be conformed

• Changes in the reporting entity as a result of more or fewer entities being accounted for as associates or jointly

  controlled entities may affect income taxes

• Changes pending: The IASB’s Exposure Draft for the Joint Ventures project proposed the elimination of the        proportionate consolidation accounting policy option. The IASB is currently in the process of finalizing the new Joint    Arrangements standard.