pwc ifrs in the us – why it matters today ut arlington emba program november 11, 2011

PwC

IFRS in the US – Why it Matters TodayUT Arlington EMBA ProgramNovember 11, 2011

Agenda

IFRS background

IFRS in the United States

Near-term considerations

Impact on your business

Next steps

Questions and answers

IFRS background

International Financial Reporting Standards (“IFRS”) – The global revolution

Top 10 global capital markets

US US GAAP

Japan Going to IFRS as adopted by the FSA

UK IFRS by the EU

France IFRS by the EU

Canada IFRS by the IASB

Germany IFRS by the EU

Hong Kong IFRS by the IASB

Spain IFRS by the EU

Switzerland IFRS by the IASB

Australia IFRS as adopted locally

More than 100 countries require, permit, or are converging to IFRS

All major capital markets are changing…except the US

Countries converging to IFRSs with the goal of adoptionCountries that require or permit IFRSs

Countries with no current plan to adopt

Slide 4

Standard Setting Structure

IFRS Advisory

Council

IFRS Foundation TrusteesThe Trustees promote the work of the IASB and the rigorous application of IFRSs but are not involved in any technical matters relating to the standards. Six of the Trustees must be selected from the Asia/Oceania region, six from Europe, six from North America, one from Africa, one from South America and two from the rest of the world

Slide 5

Standard-setting

International Accounting Standards Board (“IASB”) – issues IFRSs

IFRS Interpretations Committee – issues IFRICs

appoint informoversee, review effectiveness, appoint and finance

informs

provides strategic advice

IFRS – Who is part of the debate

Europe

Market

FASB

Investors

Auditors

IASB

SEC

Preparers

US GAAP / IFRSConvergence or Change

Academics

Asia


The seeds of revolution…

• October 2002 Norwalk Agreement• Convergence

- Objective is to create one global set of high-quality standards- Beginning: equivalent standards- Now: robust, transparent frameworks with similar principles

• April 2005 SEC “roadmap” (updated in November 2008)• February 2010 – SEC released Work Plan (first progress report was issued October 2010)• Competitiveness of the US capital markets• Simplicity in US financial reporting• Elimination of the US GAAP reconciliation for non-US registrants• SEC Concepts Release


Convergence – Sweeping changes on the horizon• The FASB and IASB established a pathway to converged standards in a Memorandum of

Understanding

• The planned convergence will result in a significant number of new US GAAP standards which will be significantly influenced by IFRS

• It is expected that convergence will not lead to identical standards in the future

• The challenge for Company’s is to address convergence as well as anticipate those areas that will not fully converge

US GAAP

GA

AP

G

AP

2011 2012 2013 2014 2015 2016 2017

Estimated publication of selected converging IASB/FASB standards:

IFRS

2011

Comprehensive Income

Fair Value

Key Remaining Differences

PPE

Inventory

Share-Based

Payments

Extractive Industries

TBD

Income taxes

EPS

Financial Statement Presentation

Pensions

Consolidation and Derecognition

Slide 9

2012

Leases

Revenue Recognition

Discontinued Operations

Financial Instruments


• Convergence efforts have gone relatively unnoticed by many companies• Companies should start planning for two possible alternatives for US reporting:

- Convergence alone- Convergence followed by adoption of IFRS

• Multiple financial reporting outcomes could result from either alternative and lead to extensive business consequences

• Devising strategies around a range of potential scenarios can help companies prepare for those eventualities

Companies can no longer afford to ignore the potential impacts of both Convergence and IFRS in strategic planning, structuring of contractual arrangements, system projects and other business

initiatives

Convergence – Staying ahead of the game

Slide 10


SEC work plan to assess potential use of IFRS by US issuers

• In February 2010 the SEC released Commission Statement in Support of Convergence and Global Accounting Standards which includes details of a Work Plan to be executed by the SEC staff to enhance the Commission’s analysis of the implications of a change to IFRS

• Proposed phased-in mandatory adoption of IFRS in 2015• The Work Plan identifies six areas of consideration in determining both whether and how to

incorporate IFRS into the financial reporting system for U.S. issuers. - Sufficient development and application of IFRS for the US domestic reporting system- The independence of standard setting for the benefit of investors- Investor understanding and education regarding IFRS- Examination of the US regulatory environment that would be affected by a change in

accounting standards- The impact on issuers, both large and small, including changes to accounting systems,

contractual arrangements and corporate governance- Human Capital Readiness

• SEC will also consider consistency of IFRS around the globe• SEC to vote in 2011 on final mandatory adoption


Status of SEC vote

• SEC floated an “condorsement” approach in May 2011• Rest of world is pushing for US to at the very least just allow IFRS• G20 is weighing in heavily for global accounting standards


IFRS conversion – When might IFRS conversion occur in the US?

SEC’s Roadmap for the potential use of financial statements prepared in accordance with IFRS by US issuers

2008 2010

2009

2012 2014

2011 2013 2015

November 14, 2008SEC issued the proposed roadmap and rule

During 2011SEC to assess progress and confirm path forward – assume proposed mandatory use of IFRS, possibly in a phased approach over 3 years starting in 2015

2016

Convergence

February 24, 2010SEC released Commission Statement in Support of Convergence and Global Accounting Standards including detailed Work Plan

Dual Reporting PeriodIFRS 2 years Comparatives reconciled to US GAAP (annual and interim)

January 1, 2013Transition DateOpening balance sheet

January 1, 2015Adoption DateGo Live

March 31, 20151st quarter IFRS FS + comparative reconciled to US GAAP

December 31, 20151st annual IFRS FS + comparative reconciled to US GAAP


How IFRS is affecting US companies now

Contracts: Consider how

IFRS affects the structure of long-

term contracts and financial agreements

M & A: Understand the implications of IFRS reporting

by non-US targets and acquirers

Customers and vendors:

Know how IFRS influences non-

US counterparties’

negotiation biases

System upgrades:

Anticipate IFRS impact on new company-wide

and subsidiary IT systems

Cost savings:Streamline non-US subsidiaries’

financial reporting via

shared services

Adoption: Manage non-US

subsidiaries’ ongoing adoption

of IFRS

Tax strategies:Prepare for IFRS

effects on tax rate and cash

flow.

US reporting:Plan for business

implications driven by

accounting changes

Convergence

Non

-US

cou

nter

part

ies N

on-US

subsidiaries


Near-term change drivers

• The US path to IFRS will likely be one of convergence, ultimately followed by conversion• Companies face four near-term change drivers:

– Unprecedented level of accounting change driven by continued convergence of standards

– Non-US subsidiaries moving to IFRS as other countries continue to adopt– Customers/suppliers increasing interest in IFRS accounting outcomes– Continued focus on differences between IFRS and US GAAP, as full convergence will

not be achieved• Over the next few years, US GAAP will be significantly influenced by IFRS


Global Adoption of IFRS - IFRS for SMEs next?

IFRS SME (possible) adopters

Austria Portugal

Belgium Russia

Denmark South Africa

Finland Spain

Ireland Sweden

Italy Turkey

Netherlands United Kingdom

Norway

• IASB issued IFRS for Small and Medium Sized Enterprises (SME) in July 2009

• The standard applies to all entities that do not have public accountability - it is a matter for authorities in each territory to decide which entities are permitted or even required to apply the guidance

• The IFRS for SMEs contains several simplifications when compared to full IFRS, including fewer disclosures, various omitted topics, disallowance of certain accounting policy options and simplification of many recognition and measurement principles

• Bridging IFRS for SMEs with full IFRS could result in significant effort and consolidation complexities for US entities with foreign subsidiaries applying the guidance


Slide 17

How is the marketplace reacting

• Companies are performing initial assessments of the impact of an IFRS, specifically identifying:

- Potential US GAAP to IFRS differences

- Impact of IFRS conversion across the business (IT, HR, Treasury, etc.)

- An IFRS training plan for their employees

- Plan for next steps of conversion

• Companies are waiting to see if the SEC is really going to mandate a move to IFRS.


Slide 19

What does a change in GAAP impact?


Changing numbers

Performance management to be embedded across: Performance measure/KPIs Management accounts Remunerations/bonuses Budgeting/forecasting Financial and Business impact analysis: debt covenants Different valuations

Communication Internal External

Training At different levels Not only finance people

Existing processes to be enhanced

New processes created

Budgeting & forecasting

Internal controls revisited

Data availability and system requirements

New systems components: data warehouse, calculation engine

Re-alignment of management information systems

Multi-GAAP solutions

Primary GAAP changeover

Changing people:a new business language

Changing processes Changing systems

Changing business

Addition of another GAAP and/or change in primary GAAP – accounting policies determination; chart of accounts review, opening balance sheet, comparative financial statements, quarterly financial statements

Key differences between IFRS and US GAAP

Classification and measurement of financial instruments

Measurement of inventories

Revenue recognitionSecuritizations/Derecognition

Asset retirement obligations

Derivatives and hedge accounting

Capitalization of R&D

Recognition and measurement of provisions

Impairment testing methods

Tax accounting

Consolidation of entities

Business combinations

LIFOEmployee stock compensation

Debt and equity classification

Accruals


Challenges in a conversion to IFRS• Application of judgment within a principles-based framework• Policy setting and control challenges due to fewer “rules” in IFRS• Adopters finding many more differences than expected• Data gaps resulting from increased disclosures• Systems capabilities• US GAAP deficiencies (i.e., conversion to IFRS uncovering challenges with historical US

GAAP accounting)• Sufficient, trained resources• Change management


Slide 22

Next steps

Next steps

• Focus on the challenge address upcoming major US financial reporting changes• Perform an assessment to identify business, accounting, tax, investor, systems, controls

and workforce-related issues• Stay current on convergence projects• Be ready to adapt to ongoing change using scenario planning to incorporate likely

convergence and IFRS adoption expectations into your strategic thinking and business planning

• Monitor actual changes and consider how they will influence your non-US counterparties (customers and vendors) and affect your reporting, long-term contractual commitments, tax structures, financings, systems and controls

• Maintain corporate oversight to influence transition timing, strategies, and policy decisions of non-US subsidiaries that are, or may soon apply IFRS

• Identify what you can do now, being mindful of the specific aspects of convergence and conversion that will take the longest and consider smaller controlled one-off projects and “easy wins” where desirable

Contact InformationMargaret Montemayor

Pioneer Natural Resources

Director of Financial Reporting and Technical Accounting

Phone: (972) 969 3628

Email: [email protected]

Margaret joined Pioneer Natural Resources, a large independent exploration and production company in June 2010 as the Director of Technical and Equity Accounting. Margaret was previously employed with PwC as a manager in the Accounting Advisory and Financial Reporting group of Transaction Services in Dallas, Texas where she provided US GAAP, SEC and IFRS expertise to clients in various industries.

In August 2008, Margaret returned from a four year tour in Zurich, Switzerland with the PwC Capital Markets Group where she provided European companies with advice on complex accounting issues, SEC regulatory issues and IFRS, local GAAP and US GAAP accounting conversions. Prior to Margaret's role in Transaction Services she spent two years in Audit at PwC in Dallas, Texas and 2 years at Arthur Andersen in San Antonio, Texas.

Margaret has a Master of Business Administration and a Bachelor of Business Administration in Accounting from St. Mary’s University in San Antonio, Texas. She is a Certified Public Accountant and a member of American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants.

pwc ifrs in the us – why it matters today ut arlington emba program november 11, 2011

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