Investors prefer accounting levels close to IFRS: Survey

Majority of investors want the government to keep national accounting standards as close to the international norms (called IFRS) as possible, says a survey conducted by the global accounting firm Ernst & Young.

According to a report — IFRS convergence: an investor's perspective — the firm has found that 55 per cent of Indian investors surveyed are willing to accept only a few departures from the IFRS standards set by the International Accounting Standards Board (IASB), while 28 per cent are in favour of full adoption.

It is to be noted that the Corporate Affairs Ministry has recently notified 35 accounting standards that companies will have to follow while preparing their books as per the International Financial Reporting Standard. The government has been maintaining that IFRS would not be adopted in its purest form, but deviations would be made to suit the needs of the Indian dimension. Thus, calling the norms Indian Accounting Standards.

“There are more than 60 departures from the original IFRS standards, in the norms notified by the MCA. Investors feel that in future, when any upgrading is required and made, the standards should be more closely aligned with the IFRS,” the E&Y IFRS leader Dolphy D'Souza said.

The survey also pointed out that about 89 per cent of the participants said they would prefer to see comparable numbers of two fiscal years, in the first year of adoption itself.

“According to the Ind-AS, companies in the first year of adoption of IFRS, may not provide the comparable figures in their statements,” D'Souza said.

A majority of them also felt that conversion option in a foreign currency convertible bond should be treated as derivative and taken into P&L account at fair value.

While 28 per cent participants believed the requirement in Ind-AS to apply the percentage of completion method to real estate sales was appropriate, 53 per cent were in favour of the completed contract method.

Another 19 per cent felt that an option to choose between the percentage of completion method and complete contract method should be available, the survey revealed.

While the date for the convergence is not yet clear, according to the earlier road map laid by the MCA, in the first phase large firms were to prepare their account books acceding to IFRS norms from April 2011.

The second phase will include companies with a net worth of Rs 500-1,000 crore, which will move to IFRS starting April 2013. Listed companies, having a net worth of Rs 500 crore or less, will converge to the new standards in April 2014.

Primero Amends Financial Statements for Deferred Tax IFRS Transition Adjustment

TORONTO, ONTARIO--(Marketwire - Nov. 8, 2012) -
(Please note that all dollar amounts in this news release are expressed in U.S. dollars unless otherwise indicated.)
Primero Mining Corp. ("Primero" or the "Company") (TSX:P)(NYSE:PPP) announced today that it has re-filed its consolidated financial statements and management discussion and analysis ("MD&A") for the year ended December 31, 2011 to include an IFRS transition adjustment related to deferred income taxes. In addition, the Company has amended its financial statements for the first and second quarters of 2012 but rather than re-filing those statements, has disclosed the amendments in its financial statements for the third quarter of 2012, released today.
In connection with the preparation of its financial statements for the third quarter 2012, the Company identified that during the transition to International Financial Reporting Standards ("IFRS"), it had not taken into account a methodology difference between Canadian Generally Accepted Accounting Principles ("GAAP") and IFRS with respect to translation of deferred tax assets and liabilities denominated in a currency other than the Company's functional currency (the US dollar). IFRS requires that where non-monetary assets and liabilities are measured in the Company's functional currency, but the Company's taxable profit or loss is determined in a different currency (the Mexican peso), changes in the exchange rate give rise to temporary differences that result in deferred tax assets or liabilities. Under Canadian GAAP, these temporary differences were not accounted for. As a result of the appreciation of the Mexican peso against the US dollar in 2010 (after the acquisition of the Company's San Dimas mine) and 2012 and the depreciation of the Mexican peso against the US dollar in 2011, the net cumulative impact of following the IFRS methodology as at June 30, 2012 is a decrease in the deferred tax asset of $12.3 million and an increase in deferred tax expense of the same amount, which subsequently reduced at September 30, 2012 to a decrease in the deferred tax asset of $3.8 million and an increase in deferred tax expense of the same amount. These adjustments do not affect cash taxes payable or the Company's cash flows and, consistent with other companies, are adjusted out of the Company's net income in order to report adjusted net income¹. The 2011 year end and 2012 first and second quarter financial statements have been amended to conform with IFRS.
The amendments to the financial statements of the Company for the years ended December 31, 2011 and 2010 and the six months ended June 30, 2012 are shown below. The amendments for other periods impacted by this adjustment are disclosed in the restated MD&A for the year ended December 31, 2011 or in the financial statements for the three and nine months ended September 30, 2012 which are available on the Company's website at www.primeromining.com and filed on SEDAR at www.sedar.com. The Company has also filed with the United States Securities and Exchange Commission an amendment to its annual report on Form 40-F for the year ended December 31, 2011, which includes the restated financial statements for the years ended December 31, 2011 and 2010 and the amended and restated MD&A for the year ended December 31, 2011. The amendment to the Form 40-F has been filed on EDGAR at www.sec.gov.

As at and for the year-ended December 31, 2011
(In thousands of United States dollars except per share amounts)
	As previously reported	Adjustment		As restated
Deferred tax asset	15,781	(15,438	)	343
Deferred tax recovery (expense)	7,918	(18,185	)	(10,267	)
Retained earnings (including net income impact for same period)	32,596	(15,438	)	17,158
Net income	67,829	(18,185	)	49,644
Earnings per share ($/share)	$0.77	($0.21	)	$0.56

As at and for the year-ended December 31, 2010
(In thousands of United States dollars except per share amounts)
	As previously reported		Adjustment	As restated
Deferred tax asset	6,555		2,747	9,302
Deferred tax recovery (expense)	(859	)	2,747	1,888
Retained earnings (deficit) (including net income impact for same period)	(35,233	)	2,747	(32,486	)
Net income (loss)	(31,458	)	2,747	(28,711	)
Earnings (loss) per share ($/share)	($0.85	)	$0.07	($0.78	)

As at and for the six months ended June 30, 2012
(In thousands of United States dollars except per share amounts)
	As previously reported		Adjustment		As restated
Deferred tax asset	14,055		(12,299	)	1,756
Deferred tax recovery (expense)	(4,272	)	3,319		(1,133	)
Retained earnings (including net income impact for same period)	66,179		(12,299	)	53,880
Net income	33,583		3,319		36,722
Earnings per share ($/share)	$0.38		$0.04		$0.42

(1) Adjusted net income is a non-GAAP measure. This non-GAAP performance measure does not have any standardized meaning and is therefore unlikely to be comparable to other measures presented by other issuers. The Company believes that, in addition to conventional measures prepared in accordance with GAAP, the Company and certain investors use this information to evaluate the Company's performance. Accordingly, it is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Refer to the year end 2011 MD&A for a reconciliation of adjusted net income to reported net income.

About Primero
Primero Mining Corp. is a Canadian-based precious metals producer that owns 100% of the San Dimas gold-silver mine in Mexico. Primero is focused on delivering superior, sustainable value for all stakeholders with low-risk exposure to precious metals. The Company has intentions to become an intermediate producer by building a portfolio of high quality, low cost precious metals assets in the Americas.
Primero's website is www.primeromining.com.
CAUTIONARY NOTE ON FORWARD-LOOKING INFORMATION
This news release contains "forward-looking statements", within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation, concerning the business and operations of Primero. All statements, other than statements of historical fact, are forward-looking statements. Generally, forward-looking statements can be identified by the use of forward-looking terminology such as "plans", "potential", "expects", "is expected", "promising", "budget", "scheduled", "targeted", "is targeting", "estimates", "forecasts", "intends", "anticipates", "believes", "if realized", "in the near future" or variations of such words and phrases or statements that certain actions, events or results "may", "could", "would", "might" or "will continue", "will allow", "occur" or "be achieved" or the negative connotation thereof.
Forward-looking statements in this news release include, but are not limited to, statements regarding the anticipated implications of amendments to financial statements and management's belief regarding the Company's intentions to become an intermediate gold producer.
The assumptions made by the Company in preparing the forward-looking information contained in this news release, which may prove to be incorrect, include, but are not limited to, the assumptions set forth herein and in the management's discussion and analysis and the Company's annual report on Form 40-F for the year ended December 31, 2011, as amended, on file with the U.S. Securities and Exchange Commission and its most recent Annual Information Form on file with the Canadian provincial securities regulatory authorities as well as the expectations and beliefs of management and that there are no significant disruptions affecting operations; that development and expansion at San Dimas proceeds on a basis consistent with current expectations and the Company does not change its development and exploration plans; that the exchange rate between the Canadian dollar, Mexican peso and the United States dollar remain consistent with current levels or as set out in this news release; that prices for gold and silver remain consistent with the Company's expectations; that production meets expectations and is consistent with estimations; that there are no material variations in the current tax and regulatory environment or the tax positions taken by the Company; that the Company can access financing, appropriate equipment and sufficient labour; and that the political environment within Mexico will continue to support the development of environmentally safe mining projects.
Forward-looking statements are subject to known and unknown risks, uncertainties and other important factors that may cause the actual results, performance or achievements of Primero to be materially different from those expressed or implied by such forward-looking statements, including impact of amendments to financial statements; the timing of financial statement amendments; the ability to maintain effective controls over financial reporting; the risks that the Company may not be able to achieve planned production levels; the Company may not be able to expand production at San Dimas; the Company may be required to change or may experience delay in its development and exploration plans with a negative impact on production; the Company may not discover mineralization in minable quantities; the exchange rate between the Canadian dollar, the Mexican peso and the United States dollar may change with an adverse impact on the Company's financial results; the Company may not be able to become an intermediate gold producer by building a portfolio of high quality, low cost precious metals assets in the Americas. Certain of these factors are discussed in greater detail in Primero's annual report on Form 40-F for the year ended December 31, 2011, as amended, on file with the U.S. Securities and Exchange Commission, and its most recent Annual Information Form and management's discussion and analysis, as amended, on file with the Canadian provincial securities regulatory authorities and available at www.sedar.com.
Should one or more of these risks and uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in forward-looking statements. In addition, although Primero has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.
Forward-looking statements are made as of the date hereof and accordingly are subject to change after such date. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans and allowing investors and others to get a better understanding of our operating environment. Primero does not undertake to update any forward-looking statements that are included in this document, except in accordance with applicable securities laws.

International Financial Reporting Standards: What You Need To Know

There are many accounting standards in the world, with each country using a version of their own generally accepted accounting principles, also known as GAAP. These allow firms to report their financial statements in accordance to the GAAP that applies to them. The complication lies within whether the firm does business in multiple countries. How can investors then deal with multiple standards, which ones are accurate, and how can corporations be compared based upon their financials? The answer to these questions lies within the adoption of the International Financial Reporting Standards, or IFRS, which is being developed and supported by the International Accounting Standards Board (IASB).
With more and more countries adopting the IFRS as their accounting standard, over 120 as of April 2011, investors and analysts should be well advised on how this transition affects company's reporting, and what it means moving forward. To do this, this article will look at the background of IFRS, the benefits, its goals, the fundamental differences between IFRS and U.S. GAAP, and go into a few of the major changes that occur within the various financial statements when converting to IFRS from U.S. GAAP.


Background and Overview of IFRS
International Financial Reporting Standards (IFRS) is a set of international accounting standards that states how certain transactions and events should be reported in financial statements. It is based upon principles rather than hard set rules, which is in contrast to U.S. GAAP, a rules-based accounting standard. As a result of this fundamental difference, IFRS allows management to use greater discretion and flexibility when preparing a company's financials.
In recent years, there has been a trend towards a common globalized accounting standard with IFRS used in many parts of the world, including the European Union, Hong Kong, Australia, Russia and Singapore, among other nations. In January 2011, Canada officially adopted the IFRS standard, with more countries switching from their own accounting requirements to the IFRS standard. As of December 2011, the United States still operates under U.S. GAAP, so it remains to be seen if they will switch as well.


Benefits of IFRS
It is believed that IFRS, when adopted worldwide, will benefit investors and other users of financial statements by reducing the cost of investments and increasing the quality of the information provided. Additionally, investors will be more willing to provide financing with greater transparency among different firms' financial statements. Furthermore, multinational corporations serve to benefit the most from only needing to report to a single standard and, hence, can save money. It offers the major benefit where it is used in over 120 different countries, while U.S. GAAP is used only in one country.


The IASB, in regards to IFRS, has four stated goals:

1. To develop global accounting standards requiring transparency, comparability and high quality in financial statements
2. To encourage global accounting standards
3. When implementing global accounting standards, to take into account the needs of emerging markets
4. Converge various national accounting standards with the global accounting standards


Impact of IFRS on Financial Statements

Differences in the Balance Sheet
A few of the differences on the balance sheet between U.S. GAAP and IFRS include the way inventory, property and equipment, and goodwill, is explained.
Inventory
Two inventory method standards normally used in the past were FIFO (first-in, first-out) and LIFO (last-in, first-out). However, LIFO is not allowed under IFRS, so firms that have used LIFO in the past under U.S. GAAP will soon have to change their inventory method to FIFO.


Property and Equipment
Also known as the fixed assets of the firm, property and equipment are reported at their initial cost less the accumulated depreciation. U.S. GAAP does not allow any upward adjustments of property and equipment, whereas under IFRS they can. This can have a profound impact on a firm's reporting. For example, if equipment is marked down, it results in a loss on a firm's income statement. However, if the asset is then marked back up under IFRS from an increase in value, then the adjustment is recorded as a gain, up to the initial cost. Any further upward adjustment will be reported directly to equity.
Goodwill
An intangible asset, goodwill is treated similarly to property and equipment. Just like with property and equipment, it is reported on the balance sheet at the initial cost less accumulated amortization. Any downward revaluation will cause a loss on the income statement and if it is marked up, which is not allowed under U.S. GAAP, and then a gain is recorded up to the initial cost amount. Any adjustment beyond that will be reported directly to equity.
Differences in the Income StatementThe criteria for revenue and revenue recognition under U.S. GAAP and IFRS are slightly different. The main philosophies are similar but U.S. GAAP provides more industry specific guidance than IFRS. A few of the differences lie within how cost of goods sold is determined, the operating expenses of the firm, and construction contracts.
Revenue Differences in Regards to Construction Contracts
Depending on the accounting method adopted, the revenue and profit for construction projects can be affected. Under U.S. GAAP, if the outcome of a project cannot be estimated, then the completed contract method is required. However, under IFRS, if the outcome of a project cannot be estimated, revenue is recognized only to the extent of contract costs, and profit is only recognized at project completion.
Cost of Goods Sold
Since LIFO is not allowed under IFRS, LIFO firms have to convert their inventory into FIFO terms in the footnotes of the financials. This difference is known as the LIFO reserve, and is calculated between the COGS under LIFO and FIFO. The benefit in doing this is an increase in the comparability of LIFO and FIFO firms. However, since everything is moving towards IFRS, FIFO will be the standard moving forward if the U.S. passes the legislation.
This has an effect on the financials of a firm. In particular, during periods of high inflation, a firm that uses LIFO will report higher COGS and lower inventory as compared to a firm that uses FIFO. Higher cost of goods sold results in lower profitability and lower profits results in lower income taxes. Lower profits will also result in lower equity for the firm, which affects retained earnings in a negative way. In contrast, in a low inflationary period, the effects mentioned are reversed. Something to keep in mind for analysts converting LIFO firms to FIFO.
Operating Expenses
IFRS does not differentiate between expenses and losses, but U.S. GAAP does. With IFRS, any losses that are due to a firm's main business are included in its operating expenses.
Impact of IFRS on Financial Ratios
Beyond the scope of this article, but important to note, is that there's an impact on more than one financial ratio when converting U.S. GAAP to IFRS. Some of them include the current and quick ratios (due to the difference in inventory methods), the interest coverage ratio (as EBIT can be affected by the difference in COGS) and return on assets (net income is affected by the COGS as well), among others. It is up to the analyst or investor to keep these in mind when making an investment decision.
Deadlines for U.S. Adoption
As of December 2011, the SEC has decided it needs a few more months before coming to a final decision on whether the U.S. will adopt IFRS. However, with over 120 countries having already adopted IFRS, the U.S. may not be far behind.
The Bottom Line
There are numerous differences between U.S. GAAP and IFRS, and this article has only touched on a few of the major changes. However, it is evident that IFRS will be the dominant accounting standard moving forward. With this in mind, analysts should take heed when comparing the financial statements of IFRS and U.S. GAAP. They should also make sure to understand the primary characteristics of IFRS, as it may be only a matter of time before the U.S. converts from U.S. GAAP to this standard

SEC Staff Paper explores a possible approach to incorporating IFRS

Overview
The staff of the Securities and Exchange Commission (SEC) has published a Staff
Paper1 outlining a possible approach for incorporating IFRS into the US financial
reporting system. This approach was first described by Deputy Chief Accountant,
Paul Beswick, in December 2010 colloquially referred to as “condorsement”.
The approach would establish an endorsement protocol for the Financial Accounting
Standards Board (FASB) to incorporate new or amended IFRSs into US GAAP. During
a defined transition period (e.g., five to seven years), the FASB would eliminate
differences between IFRS and US GAAP through standard setting.
The staff notes that this approach is one of several ways that IFRS could be
incorporated into the US financial reporting system and that the SEC has not yet
decided whether to move ahead with incorporation. SEC Chairman, Mary Schapiro,
has indicated the SEC expects to make this decision in 2011.

The SEC expects to make a decision in 2011 on whether, and
if so, when and how to incorporate IFRS into the US financial
reporting system.

Background
The SEC staff has been studying issues
outlined in its 2010 Work Plan2 to help the
Commission decide whether, and if so,
when and how to incorporate IFRS into
the US financial reporting system.
As noted in the staff’s October 2010
Progress Report3 on its Work Plan and
again in the Staff Paper, other jurisdictions
have generally incorporated or intend to
incorporate IFRS into their reporting
requirements for listed companies by
either: (1) full use (without intervening
review) of IFRS as issued by the IASB; or
(2) use of IFRS after a national or
multinational incorporation process, which
could lead to the full use of IFRS as issued
by the IASB or to a local variation of IFRS.
Note that local variations of IFRS would not
constitute compliance with IFRS as issued
by the IASB.
Jurisdictions using a national
incorporation process generally have
either converged their local standards
with IFRS without fully incorporating IFRS
(the convergence approach) or they have
endorsed IFRS by incorporating individual
IFRSs into their local standards (the
endorsement approach). In his speech
in December, Mr Beswick proposed
combining these two approaches.
Framework
The staff notes that the following
approaches for incorporating IFRS have
been discussed:
• Full adoption of IFRS on a specified date
without any endorsement mechanism
• Full adoption following a transition period
• An option for US issuers to apply IFRS
And
• Continued convergence of US GAAP
with IFRS
The SEC staff believes the approach
described in its paper could achieve the
goal of a single set of high-quality
accounting standards and could minimise
the cost and effort needed to incorporate
IFRS into the financial reporting system
for US issuers. Under this possible
framework, the FASB would be retained as
the US standard-setter and IFRS would be
incorporated into US GAAP during a
transition period of, for example, five to
seven years. At the end of this period, the
objective would be that a US issuer
compliant with US GAAP should also be
able to represent that it is compliant with
IFRS as issued by the IASB. Following the
transition period, the SEC staff envisages
the roles of the FASB and the SEC and
their constituents as follows:
Role of the FASB in the US
The SEC staff believes the US should
play an active role in international
standard-setting, proactively identifying
financial reporting issues and ensuring
that US interests are addressed. The staff
believes the FASB would be best suited to
fill this role. The staff envisages the FASB
participating in the development of IFRS,
rather than focusing on developing or
modifying US GAAP.
The Staff Paper describes the FASB’s role
in international standard setting as:
• Providing input and support to the
International Accounting Standards
Board (IASB) in standards development
• Advancing the consideration of US
perspectives
• Incorporating IFRS into US GAAP
through an endorsement process
• Educating US constituents about IFRS
2In the endorsement process, the FASB
would have the authority to modify or add
to the requirements of IFRSs. However,
the staff said it expects modifications to
be rare. Any modifications would be
subject to an established protocol, which
could consider whether a standard meets
an established threshold (e.g., a threshold
that considers the public interest and
the protection of investors). The FASB
would also retain the authority to add
supplemental or interpretive guidance to
US GAAP as needed.
Role of the SEC
The SEC would continue to oversee the
FASB and would actively follow — but
not directly oversee — the IASB’s
standard-setting activities. The staff notes
that, under any incorporation approach,
the SEC would continue to be responsible
for protecting investors, maintaining fair,
orderly and efficient markets and
facilitating capital formation. The SEC
would therefore maintain its authority to
prescribe accounting principles and
standards for US issuers. However, the
staff would expect to issue guidance or
interpretations infrequently to avoid
conflict with IFRS.
Role of US constituents
To ensure that US constituents have a
voice in the IASB’s standard-setting
process, the staff says they would have
to engage with the IASB, as they now do
with the FASB. While the FASB would
continue to operate and would work with
the IASB, individual constituents should
not rely on the FASB’s interaction with
the IASB to ensure that their opinions
are heard.
Transition to IFRS
The Staff Paper describes a possible
transition period during which current
US guidance would be replaced with the
guidance in IFRS. IFRS would be fully
incorporated into US GAAP following an
implementation programme developed
and executed by the FASB, under the
oversight of the SEC. The paper discusses
possible transition plans for three
categories of standards.
MoU projects
The FASB and IASB plan to complete
certain joint projects described in the
Memorandum of Understanding (MoU) in
2011. The Staff Paper assumes that the
projects will result in reasonably converged
standards.
IFRSs subject to standard setting
The FASB would identify IFRSs expected
to be issued or significantly modified
in the near term. The FASB would
participate in the IASB’s standard-setting
process for these standards, and US GAAP
in these areas would remain unchanged
until the IASB issues new or modified
standards. The FASB would review the
new or modified standards to assess how
to incorporate them into US GAAP.
IFRSs not subject to standard setting
The FASB would first assess IFRSs that
are not subject to standard-setting for
incorporation into US GAAP. The FASB
would then determine whether these
IFRSs should be incorporated into US
GAAP at the same time or whether they
should be phased in. If the FASB chose to
phase them in, the FASB would need to
carefully manage the transition. The
transition plan for these IFRSs would allow
for prospective application when possible.
Benefits and risks
The Staff Paper describes the benefits
and risks of this approach, including:
• The framework may allow for a flexible
transition that is tailored to the needs
of US constituents, but any benefits
might evaporate if the transition plan is
not well-developed, comprehensive and
responsive to changing circumstances.
• The framework could provide a gradual
transition that would cost less than
incorporating all of IFRS at a point in
time, but some US issuers may prefer
full adoption or the option to adopt IFRS
on a single date. A gradual transition
also could be perceived as a lack of
US commitment to IFRS and could
potentially confuse US constituents
during the transition period.
• The framework could provide greater
investor protection than direct
incorporation of IFRS. However, if
modifications to IFRS are more
than infrequent, the US would risk
developing its own version of IFRS.
• The framework retains US GAAP as
the basis of financial reporting for
US issuers, which would be significant
because of US laws, regulations and
contracts that cite US GAAP.

How we see it
Many questions remain about how this
approach would be implemented. The
transition the staff envisages, for
example, might conflict with the general
premise of IFRS 14, which requires
companies to apply IFRS as if it had
always been followed. Because of this
requirement, it may be difficult for US
issuers to meet the staff’s stated goal of
asserting compliance with IFRS as issued
by the IASB. Also unclear is how the
FASB would determine what is in the
best interest of the public and investors
and what would happen if the FASB and
the IASB cannot agree.

Public Accountability - who’s in and who’s out?

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Public Accountability - who’s in and who’s out?

Tuesday, May 17, 2011 | Posted by: Grant Thornton
Categories: UK GAAP | Tags: IFRS, UK GAAP, ASB

Our comment letter on the future of UK GAAP has now been submitted, two days before the 30 April deadline. Why is it that no matter how organised you try to be, these things always go down to the wire? I suppose that when the subject is this big and this important, then discussion of the issues will always expand to fill the time available.

One of those issues has been the definition of public accountability, and therefore which entities will need to adopt full IFRS. There is a widely-held view that the current guidance isn’t clear enough, but how to fix it isn’t as obvious.

The ‘publicly-traded’ part of the definition isn’t the problem. This is pretty clear cut; either your shares or loan notes are listed or they aren’t.

No, the issue is with the second part of the definition; ‘holds assets in a fiduciary capacity for a broad group or outsiders and/or it is a deposit taking entity for a broad group of outsiders’. The draft standard includes some guidance about who is an ‘outsider’, but there is still uncertainty around the words ‘holds assets’, ‘broad’ and ‘group’.

For example, to ‘hold assets’ do they have to be on your balance sheet? What if they are held in escrow? Is a group of company directors considered to be ‘broad’? What about a group of employees of the same company? And how many outsiders do you need to make a group? 10? 5? 2?

The issues really arise around the borders of the definition. We really don’t want to get in a situation where management say their company isn’t publicly accountable but their auditor says it is. That would be a disagreement with a major impact on the audit report!

So, what’s our solution? Well, we think that the best option is a relatively narrow interpretation of ‘broad group of outsiders’ so that it is taken to mean the general public.

This would mean that banks and building societies which take deposits from the public would be publicly accountable, but a credit union whose membership is restricted to a small pool of people would not. An insurance company offering life cover to the general public would be caught, but a pension scheme which is restricted to employees of a particular company would not.

We think that this solution would lead to a more sensible list of entities which would be considered publicly accountable. It would also remove the need of an exemption for small, prudentially regulated entities since, if they are small because they have few members, they wouldn’t meet the definition in the first place.

IFRS 13 unites fair value standards

Among a wave of new standards issued last week was IFRS 13 ‘Fair Value Measurement’, which will unite international and US GAAP treatments from 1 January 2013.

The IASB characterised IFRS 13 as a five-year consolidation project that brought together existing requirements around the use of “mark to market” valuations into a new document that will be “nearly identical” to the guidance issued by the US Financial Accounting Standards Boards (FASB).

However volatile market-based valuations were identified by many bankers and analysts as a contributory factor to the global financial crisis, so IFRS 13 also represents the IASB’s response. There was a heavy focus on financial instruments because of the global financial crisis, but IFRS 13 is wider than that, explained board member Warren McGregor in an IASB webcast. “This is a standard that applies to any asset or liability that requires you to make a valuation,” he said.

The new standard does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs or US GAAP, the board said.

Aside from the close alignment with US GAAP, the most significant point within IFRS 13 is the stipulation that the exit price will stand as the single definition for fair value measurement and disclosure.

Pre IFRS 13, the definitions used didn’t match any concrete formulations for buyers or sellers, so companies applied it differently, explained IASB project manager Hilary Eastman in the webcast. The standard-setters wrestled with a number of options before choosing the exit price.

IFRS will apply from 1 January 2013, but early adoption will be permitted. The ISAB will not require disclosure of comparatives going forward when it comes into effect. Further information on IFRS 13 is available from the IASB's fair value measurement page.

Origins and Rationale for IFRS Convergence

Table of contents

* Executive Summary
* Introduction
* Why Convergence Is Necessary
* The Development of Global Standards
* Use in International Capital Markets
* Convergence on a Worldwide Standard
* Conclusion
* Case Study
* Making It Happen

Executive Summary

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Worldwide convergence on international standards for financial reporting will make investment and financial reporting more efficient.
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Investors gain access to more investment opportunities and the cost of capital comes down.
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As more countries use International Financial Reporting Standards (IFRS), so international groups can use them for subsidiary reporting and group reporting.
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The International Accounting Standards Committee, the international standard-setter, came into existence in 1973 as an initiative by the accounting profession to address the emerging needs of cross-border business.
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The standard-setter negotiated a role with the international co-ordinator of stock exchange regulators as a supplier of rules for secondary listings.
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The International Accounting Standards Board, the successor body, was created in 2000 at the time when the European Union announced it would adopt IFRS for listed companies.
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IFRS are now mandatory or permitted in more than 100 countries. China, Japan, India, Canada, Brazil, and South Korea are set to adopt IFRS in 2011.
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Companies using IFRS can list in the United States without preparing a costly reconciliation of their numbers to US GAAP.

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Introduction

How did an internal phone call in a Sydney hotel in 1972 lead 40 years later to a worldwide movement that is changing financial reporting radically and opening up international investment?

Thanks to that conversation, companies can more and more easily access different stock markets, and investors can step across national and cultural boundaries. Investment should be getting more efficient. Since 2001, International Financial Reporting Standards (IFRS) have been set in London by the International Accounting Standards Board (IASB), a privately financed independent body. Their standards are used for listed companies within the European Union and in many other places. In 2011 China, Japan, India, Brazil, and South Korea will start using them. Even the United States is considering abandoning its rules in favor of the international ones.

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Why Convergence Is Necessary

Evidently, having different national accounting systems is costly for companies and investors. Companies have to keep duplicate accounting systems, and investors are wary about buying shares of companies whose accounts they do not understand. The problem arises because accounting regulation has developed over a couple of centuries in national economies whose needs have differed from each other, and whose ways of regulating people’s activities have also differed. What people are looking for from accounting is often different.

Much accounting regulation is contingent: you get an accounting failure, then you get rules to shut the stable door; so, for example, the Enron debacle was followed by the Sarbanes–Oxley Act. This has been going on ever since there were accounting rules. The first government requirements were developed because of a spate of bankruptcies in Paris in the seventeenth century. Consequently, while much of the basic methodology (double entry bookkeeping, balance sheet, etc.) is the same everywhere, the details can differ—especially when it comes to the more complex situations where there is no obvious best solution.

This has a number of consequences, which in turn bring costs. Internally within a multinational group there is usually a network of national subsidiaries (e.g. Nestlé has more than a thousand) spread across the world. They have to report nationally using their national GAAP (Generally Accepted Accounting Principles) and also have to report to the parent, which has to prepare consolidated statements using parent company GAAP. This means that either the subsidiary has dual accounting systems, or the parent has to maintain a special team to adjust the accounts of subsidiaries to parent GAAP. This is costly, and it also means that it is not that easy to transfer accounting staff around the world because of the different local requirements, and it is more expensive to train them.

The group consolidated financial statements are then used to communicate to present and potential shareholders. If the company is listed on several stock exchanges, this means the possibility of having to provide information adjusted to the requirements of the individual foreign stock exchanges—as in the case of the SEC reconciliation to US GAAP. Investors are not comfortable with financial statements that are not prepared under the GAAP they are used to. Consequently they either do not invest, or they will require a higher risk premium to do so.

This situation has the effect of limiting the extent to which international capital markets are truly international. A company may choose not to list in a major market because of the reporting costs, and therefore cuts itself off from investors based there who for legal, cultural, and other reasons will not invest outside that market. Equally there is a cost for investors because their choice is restricted. The US investor cannot directly compare Whirlpool with Electrolux or Siemens. If they could directly compare all washing machine manufacturers around the globe, they could choose the most efficient, and global wealth would increase.

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The Development of Global Standards

The 1972 phone call that launched what are now the International Financial Reporting Standards, or IFRS, was made by Douglas Morpeth, then a partner in the international audit firm Touche Ross (now Deloitte) and also president of the Institute of Chartered Accountants in England and Wales, to Henry Benson, a partner in Coopers & Lybrand (now part of PricewaterhouseCoopers). They were at a conference of the international accounting profession. Benson had just made a presentation about the future international organization of the profession. Morpeth asked why Benson’s committee had not also suggested setting up an international standard-setter.

They called a meeting with representatives of the US and Canadian professional bodies, and by June the next year the board of the International Accounting Standards Committee (IASC), comprising representatives of nine national professional bodies, was holding its first meeting in London.

The initiative should be seen in context: international trade started to grow significantly from the 1960s, and by the early 1970s was starting to register as an issue that needed to be addressed. People were staring to transact more frequently across borders and would need a common accounting language, or at least Morpeth and Benson thought so. The second current was the development of standard-setters. The present US standard-setter, the Financial Accounting Standards Board (FASB) also started work in 1973. The United Kingdom’s first standard-setter started to appear in 1969. Douglas Morpeth was deputy chairman of the Accounting Standards Committee as the UK body was eventually called. He thought that the United Kingdom’s new standards could be usefully recycled for international use.

Benson was the first chairman of the IASC. It was a very small organization with a single employee based in London and a voluntary chairman and board members supported by professional accounting associations. After the initial enthusiasm for doing something international, two problems emerged. It became clear that the national bodies were doing very little about getting International Accounting Standards (IAS) adopted in their home countries, so no one was actually using these standards. Second, as standards were being developed, individuals were reluctant to see their national practices banned or ignored, and so IAS were written that included options within them. Two companies could adopt radically different stances on an issue and both be in compliance with the same standard.

By the 1980s the IASC’s standards were being voluntarily adopted by multinationals in countries such as Switzerland, France, and Italy (e.g. Nestlé, Roche, Aérospatiale, Cap Gemini) to make up for a lack of detailed rules for consolidated financial statements. They were also being used as a model in developing countries that were members of the British Commonwealth to build on to the model they had inherited from the British Empire. Outside that use, they were much cited in debates about standards, but very rarely directly applied. When they were used voluntarily by individual companies, often those companies followed some but not all of the standards.

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Use in International Capital Markets

However, change was on its way. From 1985 a new secretary general, David Cairns, set about transforming the situation. He initiated an agreement with the International Organization of Securities Commissions (IOSCO), a body that links national stock exchange regulators, for the IASC to supply standards to be used in conjunction with secondary listings. At the time, most stock exchanges required foreign issuers either to provide financial statements according to local generally accepted accounting principles (GAAP) or to provide reconciliations to them. IOSCO’s idea was that all stock exchanges would sign up to a single set of listing requirements for foreign issuers, so dramatically cutting the costs of a secondary listing.

At the same time Cairns set out to widen the funding base of the body so that he could expand its work, and to try to involve national standard-setters as well as professional bodies. The idea that the accounting profession should set its own standards was disappearing and standards were increasingly being set by dedicated independent committees. He agreed with IOSCO a program to improve International Accounting Standards by removing options and also by extending the range.

The road proved to be rocky, and took more than ten years. Cairns resigned in 1994, to be replaced by Bryan Carsberg, an accounting practitioner turned academic turned government regulator (he had been director-general of fair trading in the United Kingdom). Under Carsberg the program was finally completed, including the difficult standard on financial instruments, IAS 39. A strategy committee was also established to recommend how the future standard-setter should be organized.

The year 2000 was pivotal. In May IOSCO voted to approve the body on International Accounting Standards (if with some reservations). In June, the European Commission announced that it was going to propose legislation to require the use of the standards by EU listed companies from 2005, and in July the international accounting profession, meeting in Edinburgh, agreed to relinquish its control of the IASC and let the IASB be set up in its place.

The IASB is a small committee of professional standard-setters. It has a large technical team, based in London still, and is funded through voluntary contributions from companies, audit firms, and various institutions, both national and international. It adopted the predecessor body’s standards, but used a different name (IFRS instead of IAS) for its own standards. IFRS is also the generic term for all the standards together with the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC).

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Convergence on a Worldwide Standard

Where the IASC was part of a world of “harmonization”—or movement toward each other—the IASB is firmly committed “to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards” and “to bring about convergence of national accounting standards and IFRSs to high quality solutions” (Preface to IFRS, London: IASC Foundation). Though it has not focused exclusively on the United States, the IASB’s main driver is convergence with US GAAP. It entered into an agreement with the FASB in 2002 to pursue convergence through a joint program of removing differences and developing new standards together.

This program yielded a big prize in 2007. The Securities and Exchange Commission decided that it would recognize financial statements prepared under IFRS as issued by the IASB as equivalent to US GAAP. Until then, foreign registrants with the SEC were obliged to file annually either a set of accounts using US GAAP, or a reconciliation of annual earnings and equity at balance sheet date with how they would have been measured under US GAAP. This was a big burden to companies listed on the New York Stock Exchange or NASDAQ and a major disincentive to foreign companies to list there. In 2007 the chief financial officer of AXA told the SEC at a round table that the company budgeted $20 million a year to produce the reconciliation. Another part of the cost is that the companies end up publishing two, or even three, sets of figures (see the Cadbury case study) and then having to discuss with analysts and journalists which is the “correct” profit.

The removal of the reconciliation requirement means that, for example, European companies that are using IFRS can simply file with the SEC the same accounts that they file with their primary stock exchange. Of course the SEC has other requirements that still have to be complied with, including management’s discussion and analysis of results. However, companies no longer have to be able to restate their figures to US GAAP, nor retain teams to monitor US GAAP.

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Conclusion

Convergence on IFRS is taking us to a bright new world where investors can indeed take their pick from around the globe, and where companies maintain a single accounting basis throughout their network. IFRS are already either compulsory or permitted for listed companies in more than 100 countries around the world. When the next wave of adopters joins in 2011, a large slice of the world economy will be IFRS conversant.

It will take time for investors to become confident about reading IFRS accounts—although that happened quickly within the European Union. But multinational companies should quickly reap the benefits of having uniform systems across the globe and will be able to exploit the opportunities of being listed on several stock exchanges at much lower cost.

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Case Study
Cadbury Changes to IFRS from UK GAAP

In common with all companies listed on EU stock exchanges, Cadbury PLC (at the time Cadbury Schweppes PLC) officially switched to IFRS in 2005, as required by the EU IAS Regulation. In practice, the real transition moment was the beginning the 2004 financial year: IFRS require that a company provides previous-year comparative figures with the annual financial statements. Consequently, when reporting the 2005 results, the company had also to provide 2004 figures according to IFRS. However, the company had also had to report 2004 under local GAAP (in Cadbury’s case, UK GAAP), and IFRS 1, the standard dealing with transition, requires that a company also provide a reconciliation between the local GAAP figures for 2004 and the IFRS figures for 2004. From an investor’s perspective, therefore, every company provides a statement comparing its pretransition figures with the same transactions reported under IFRS.

Cadbury is also listed in the US and therefore is registered with the Securities and Exchange Commission. Consequently, at that time it was also obliged to provide a reconciliation of its annual earnings and its equity to US GAAP. This means that, for 2004, an investor could observe the earnings and net assets of Cadbury under three different sets of GAAP: UK GAAP, IFRS, and US GAAP. The figures show that—despite the fact that all three sets of accounting rules belong to the same underlying tradition of Anglo-Saxon accounting, with financial reporting oriented toward informing investors—there still remain significant differences of measurement at a detailed level. This illustrates how difficult it is to compare the results of companies that are using different comprehensive bases of accounting, and why investors and international companies are keen to move to a different global standard.

If we take equity—the net worth of the group after deducting all liabilities from assets—the Cadbury figures at the end of 2004 were:
£ million
UK GAAP 3,088
IFRS 2,300
US GAAP 3,998

There is a presentational difference in that the US definition of “equity” at the time excluded minority interests. For comparative purposes I have added these to the US GAAP number in the above table.

It is not particularly productive to make a detailed analysis of why the differences occur. Basically, they reflect different ways of accounting for business combinations that had occurred in the past, different treatment of pension liabilities, and the significantly different treatment of deferred tax in the United Kingdom from that under IFRS and US GAAP. There is a detailed analysis in the notes to the 2005 Cadbury (Cadbury Schweppes) annual report.

If we take net earnings, the numbers are:
£ million
UK GAAP 453
IFRS 547
US GAAP 484

We can see that in 2003 investors had two sets of figures to choose from, while in 2004 the convergence initiative meant that in the transitional phase they had three different measures of the same performance. However, in 2007, when the SEC removed the US GAAP reconciliation requirement, they would have come down to a single view of performance which was comparable to that used in 100 countries.

It should be emphasized that, of course, the company’s cash flows do not change with the different accounting bases: what drives the differences is different timing assumptions, different measurement rules for some transactions, and different allocations across time periods.

You can only know absolutely how much profit a company has made when it has stopped trading and all its assets and liabilities have been liquidated. The only profit that is irrefutable is the lifetime’s net increase or net decrease in cash.

This is not much help for investors, and financial reporting is a means of estimating what part of the lifetime profit has been earned in a particular year, in order to help investors decide whether to buy, sell, or hold the company’s securities. However, the annual profit is only an estimate, it is not a fact. All estimates are based on assumptions—change the assumptions and you have a different profit.

So none of the three sets of figures Cadbury published for 2004 is “correct” or “incorrect”—they are all justifiable estimates. It is not surprising that investors ask for a single agreed accounting standard.

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Making It Happen

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Using IFRS at group level is mandatory in many countries, but is voluntary in some. It is often voluntary at subsidiary level: both parent and subsidiaries need to choose this option to access the benefits.
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Using IFRS makes access to capital markets outside the country where the group has its primary listing much easier and cheaper. In what markets would there be special benefits for your company? Remember that a secondary listing is not just about access to foreign investors, it is about credibility and flexibility in that market.
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Are your group accounting and internal audit professionals able to move easily from one foreign subsidiary to another? Using IFRS would facilitate their work and potentially improve internal control.
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Do professional fund managers and analysts that you deal with understand IFRS? Talk to them about whether they are IFRS literate and ask if they see benefits in switching.
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What do your group auditors think? The large international firms are fully geared up for IFRS. They will help you switch.