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Are You IFRS Ready?
Frank BrodCorporate Vice President, Finance & AdministrationChief Accounting OfficerMicrosoft Corporation
Agenda
IFRS Overview
FASB and IASB Convergence Activity—Memorandum of Understanding (MOU)
Regulatory Update
IFRS Conversion Strategy
Next Steps in Preparing for IFRS
IFRS – OverviewWhat is IFRS and who is responsible
IFRS is a single set of high quality, understandable and international
financial reporting standards (IFRS) for general purpose financial
statements
IFRS is set by the International Accounting Standards Board (IASB), the
independent standard-setting body of the International Accounting
Standards Committee Foundation (IASC Foundation)
IFRS is developed following an international consultation process,
involving interested individuals and organizations from around the
world and with the support of an external advisory council, the
Standards Advisory Committee (SAC)
The International Financial Reporting Interpretations Committee (IFRIC)
develops guidance to promote consistent practice
IFRS – Overview
What is the FASB doing to address IFRS
In October 2002 the Financial Accounting Standards Board(FASB) and IASB announced the issuance of amemorandum of understanding ("Norwalk Agreement― orMOU), marking a significant step toward formalizing theircommitment to the convergence of U.S. and internationalaccounting standards
In February 2006 the FASB and IASB reaffirmed thecommitment to enhance consistency, comparability andefficiency in global capital markets
IFRS – OverviewWhat is the FASB doing to address IFRS (continued)
The FASB has undertaken six key initiatives to further the goal of convergence of U.S. GAAP with IFRS
Joint projects being conducted with the IASB
Short-term convergence projects
Liaison IASB member on site at the FASB offices
Monitoring of IASB projects
Convergence research project
Explicit consideration of convergence potential in all Board agenda decisions
IFRS – Key Points
Inventory
Research and Development Expenses
Accounting for Share-based Compensation
Provisions and Estimates
Revenue Recognition
Property Plant & Equipment
Financial Statements (Disclosures)
IFRS – Inventory
IFRS inventory should be stated at the lower of cost or NRV
A reversal of a previously recorded inventory impairment is required where thecircumstances that previously caused inventories to be written down belowcost either no longer exist or where there is clear evidence of an increase inNRV or forecasted demand due to changed economic circumstances
The new carrying amount of the inventory would be the lower of cost orrevised NRV
The amount of the reserve of reserve that may be reversed is limited to theamount of the original write-down and is reflected against cost of revenuewhere the original impairment was recorded
Does not specify the P&L classification of the write-down
Requires use of FIFO or weighted average method for inventory costing
Same costing method is required for all inventories having a similar nature anduse to the entity
IFRS – Research and Development
IFRS makes a distinction between the research and development phases.
IFRS makes no distinction between treatment of development costs for internal purposes or to be sold.
Expenditures in the development phase must be capitalized if the following six criteria are met regardless of the nature of the development activity (i.e. software, hardware, etc.):
Technical feasibility
Intention to complete and use or sell
Ability to use or sell
Probable future economic benefits
Available resources
Ability to measure
IFRS – Research and Development
Costs to be capitalized in the development phase include:
Costs of materials and services used
Employment costs of direct employees
Legal fees
Registration fees
Absorption of overheads
Borrowing costs that meet the capitalization criteria
IFRS – Share-based Compensation
Based on a fair value approach
For non-employees the fair value of the award is based on the value of the goods and services received; fair value of the equity instruments used only if the fair value of the goods and services cannot be reliably determined
For non-employees the measurement date of the award is the date the entity obtains the goods and services; no performance commitment concept
Compensation cost must be recognized on an accelerated basis
IFRS – Provisions and Estimates
Defines a provision as a liability of uncertain timing or amount
Requires that an outflow of resources be probable and defines probable as a situation in which the outcome is more likely than not to occur, i.e., greater than 50% likelihood
In order to recognize a provision, an entity must have a present obligation (either legal or constructive) resulting from a past event
Unless fair value of obligation is observable in a market, provision is measured at the ―best estimate‖
Provision discounted only if time value of money is material
Restructuring costs are accrued when management has demonstrated commitment to a detailed exit plan
IFRS – Revenue RecognitionDefines revenues as follows:
―Revenue is the gross inflow of economic benefits during the period arising in
the course of the ordinary activities of an entity when those inflows result in
an increase in equity, other than increases relating to contributions from
equity participants‖
When to recognize revenue
Sale of goods
Transfer of risks and rewards of ownership of the goods
No continuing managerial involvement
Revenue can be measured reliably
Probable that economic benefits will flow to the entity
Costs can be measured reliably
Sale of services
Revenue can be measured reliably
Probable that economic benefits will flow to the entity
Stage of completion can be measured reliably
Costs incurred and costs to complete can be measured reliably
IFRS – Revenue Recognition
Limited guidance on the allocation of consideration(multiple elements) although it does emphasize the use ofthe most appropriate method that best reflects theeconomics of the underlying transaction; acceptablemethods include:
Relative fair value
Costs plus a reasonable margin
Residual method
Reverse residual method (extremely rare)
Fair value is the ―amount for which an asset could beexchanged, or a liability settled, between knowledgeable,willing parties in an arm‘s length transaction‖
Companies using IFRS cannot default to VSOE fair valuethreshold to avoid or delay revenue recognition
IFRS – Revenue Recognition
Approach to determining consideration to individual elements
Identify deliverables
Determine substance of arrangement
Examine the overall arrangement economics
Evaluate whether deliverables are ―inconsequential or perfunctory‖
Service revenue is required to be recognized by reference to the stage of completion (percentage of completion, surveys of work performed, etc)
IFRS has no rules specifically dedicated to software revenue recognition
IFRS – Property, Plant and Equipment
An entity may elect by class of asset either the Cost Model or theRevaluation Model for subsequent measurement of PP&E or intangibleassets
Use of the Revaluation Model for intangible assets requires an ―activemarket‖
Requires significant components of an item of PP&E be recorded anddepreciated separately
If a component is replaced, the cost of the replacement is recorded atcost and any remaining value of the old component is de-recognized
Any gain or loss arising from de-recognition of an item of property,plant and equipment included in profit or loss when the item isderecognized; gains are not be classified as revenue
IFRS – Property, Plant and Equipment
Substance rather than legal form is applied in determining lease classification and there are no ‗bright-line‘ percentage indicators
IFRS uses the term finance lease as opposed to capital lease under US GAAP
Requires a review at each financial year end, at a minimum, of useful lives for PP&E and intangibles
IFRS – Financial Statements (Disclosures)
Critical accounting estimates and assumptions
Significant areas of estimation and uncertainty underlying the quantification of key assets and liabilities
Variables and assumptions underlying management‘s most difficult, subjective or complex judgments
Nature of the assumption, a sensitivity analysis and expected resolution, where possible
Significant judgments
Significant judgments that management has made in its application and interpretation of accounting policies and literature
IFRS – Financial Statements (Disclosures)
Financial statement risk
Discussion of risk through the ―eyes of management‖
Extensive qualitative and quantitative disclosures on the nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages them
Quantitative data for each type of risk (i.e., credit, liquidity and market risk) based on information collated and monitored by the Company for risk management purposes
Quantitative disclosures on market risk should include sensitivity analysis for each type of market risk (currency, interest and other price risk)
IFRS – Financial Statements (Disclosures)
Executive compensation
Key management compensation in total for each of the followingcategories:
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payments
Roll-forwards
Detailed roll-forwards for classes of components of certain financialstatement line items such as property, plant and equipmentdeveloped technology for intangible assets, land for investmentproperty and legal contingencies for provisions
IFRS – Financial Statements (Disclosures)
Impairment of non-financial assets
Impairment of non-financial assets, including significantassumptions made and sensitivity analysis
Investment property
Assets that meet investment property definition should beseparately presented in the balance sheet; management will haveto determine, formally document and disclose the fair value ofinvestment property at each reporting period (including interimreporting periods)
Implications of Proposed SEC Roadmap
Implications of Proposed SEC RoadmapMicrosoft is not likely included in the SEC‘s initial list of 110 eligible ―pilot‖ adoptioncompanies, but could petition to be included
Potentially, Microsoft will have the option of adopting IFRS in 2011 (MS FY 2012)
Denotes two-year dual reporting and reconciliation
2008
2009
2010 2012
2011 2013
2014
2015
Calendar Year
Ending
OPTION 1 :
“Pilot” adoption
point for Microsoft
Qualified
companies can
adopt IFRS
Potential mandatory
adoption of IFRS for
large accelerated filers
OPTION 2:
“Early” adoption
point for Microsoft
OPTION 3:
“Mandatory” adoption
point for Microsoft
SEC will evaluate the progress
and success of early adopters
against pre-defined milestones
General Themes of Comments Letter on Roadmap
84% of respondents supported moving to a single set ofglobal accounting standards
IFRS is only viable option, but needs improvement
Views varied on the path to IFRS, but many asked for moretime
Independence and accountability of the IASB is important
The change to IFRS proposed by the Roadmap will have amuch wider impact than expected
Microsoft 's Comment Letter on Roadmap
The milestones are appropriate
SEC should undertake a study on the implications for investors and other market participants of the implementation of IFRS
Proposed date is challenging leading to condensed implementation time and increased costs and decreased quality and efficiency; alternative is two years of financials
Concerned with volume of activity in the MOU; quiet period is necessary
Cost estimate of .125% of revenue appears reasonable but there could be great variability
Canadian Roadmap
IFRS will be mandatory beginning 2011 for ―publicly accountable enterprises‖ (PAE) Debt or equity securities in a public market
Assets in a fiduciary capacity for a broad group of outsiders
IFRS will be optional for organizations that are not a PAE
Canadian Securities Administrators (CSA) adopting IFRS as promulgated by the IASB as part of Canadian GAAP but has the authority to modify
2008 2009 2010 2011
2010 IFRS data needed for
2011 IFRS reporting
Canadian GAAP Reporting
Calendar Year
Ending
IFRS Reporting
MD&A disclosure about
IFRS transition and
possible impact
IFRS Conversion …It‘s More Than Accounting
Determine where you want to be from anoperational readiness perspective*
Establish detailed IFRS accounting policies andcomplete analysis of tax impacts
Prioritize components by complexity, resourcesand required time of completion
Assess subsidiaries to determine current IFRSactivities, system requirements and processchanges
Drive conversion on a corporate level and drivechange through to foreign subsidiaries
Manage communication and training programsfor impacted external and internal stakeholders
* Operational readiness from the manual vs. automated process perspective
What Has Microsoft Done to Address IFRS?
Conducted a feasibility study (Phase 1) focusing on thefinancial and operational impacts of 11 accountingcomponents
Targeted training to finance personnel on existingstandards
Prepared high-level IFRS proforma financial statements forfiscal year 2008
Partnered with other companies and trade organizations toshare best practices and leverage findings
Responded to SEC Roadmap
Microsoft IFRS Phase 1 Executive Summary
Irrespective of adoption decision between FY 2012 and 2015,there are activities that need to be started immediately
Certain strategic foreign subsidiaries will already be permitted orrequired to report under IFRS before the SEC proposedmandatory adoption in 2015
Revenue recognition provides the greatest accounting, systemsand process challenges to Microsoft‘s conversion
Microsoft will need to develop a centralized IFRS accountingpolicy decision and conversion protocol process
The tax implications of conversion to IFRS may have cash flowimpacts
Evaluating Microsoft's Conversion Options
Major systems implementation completed
Foreign subsidiary conversion in conjunction with corporate
High degree of complexity and burden on resources
Microsoft would shape the application of IFRS in tech sector
Confirmation of SEC positions on IFRS and stable platform of IFRS
Level of 404 compliance risk due to manual vs. automated controls
low high
Degree of Benefit
―Pilot‖
FY 2010
―Early‖
FY 2012
―Mandatory‖
FY 2015
Microsoft IFRS Pilot Study
The “pilot“ study assessed the accounting and operational impacts in the following components:
High Research & Development
Revenue
Business Combinations
HighLow
Accounting Impact
OperationalImpact
Financial Statements
Share Based Compensation
PPE
Inventory
Tax
Financial Instruments
Impairment
Provisions & Contingency
Key Operational Impacts
Level of Future Work Description of Future Activities
Research & Development
• Establish policy on technical feasibility to determine period of development cost capitalization
• Develop systems and processes to support tracking and capitalization of incremental costs and cost types for software and hardware development
Revenue
• Evaluate the structure of existing contractual arrangements to achieve desired subscription accounting
• Assess data and system requirements to support separation of bundled arrangements for Volume Licensing programs
Share Based Comp
• Update Options Manager System to process graded vesting, social costs and deferred taxes
• Revise employee award and withholding tax settlement process• Develop integrated processes between accounting, HR, tax and treasury
Low High
Key Operational Impacts
Level of Future Work Description of Key Activities
PP&E
• Develop processes and systems for implementing componentization (embedded base and ongoing)
• Affirm estimates of depreciable lives on an annual basis• Obtain third-party valuation for investment properties
Financial Statements
• Develop processes and controls to capture liquidity, credit and market risk• Incorporate uncertainty analysis and key management judgments• Assess data gaps and ability to meet requirements for non-financial assets and
provisions
Financial Instruments
• Create processes and controls for the creation and review of valuation models for non publicly traded equities and derivatives
• Develop new impairment processes• Create IFRS specific hedge accounting policies and programs
Low High
Key Operational Impacts
Low High
Level of Future Work Description of Key Activities
Low High
• Assess compliance costs and risks as book/tax differences change • Adjust methodologies for compiling cost sharing pool for R&D, IPR&D and
share based compensation• Adapt systems and process to ensure data integrity and accurate tax reporting
Tax
• Assess impact of lower recognition threshold and discounting• Develop process to calculate interest expense amortization• Restructure systems to monitor changes in provisions and contingencies
Provisions & Contingency
Key Operational Impacts
• Incorporate IFRS 3R knowledge transfer and training as a component of implementation of FAS 141R
• Assess ability of systems to handle increased volume of IPR&D projects• Identify specialists and processes for assessment of contingent liabilities
Business Combination
Inventory• Assess platform approach for inventory measurement• Evaluate if impairment analysis should be automated or manually calculated• Develop communications structure between Finance and BU controllers
Level of Future Work Description of Key Activities
Low High
Impairments• Increase resources and technical expertise to perform impairment testing• Update processes to facilitate value in use model• Develop process to evaluate impairment of capitalized R&D and IPR&D
Key Next Steps
Monitor the regulatory and standard setting environment
Formalize IFRS at corporate level for overall conversion strategyand accounting policies for critical components
Assess foreign subsidiaries knowledge, activities and readiness withrespect to IFRS
Use selected IFRS accounting component policies to map datagaps, system requirements and process changes
Conduct detailed analysis on the required process and systemchanges for both corporate and foreign subsidiaries
Develop a detailed estimated cost of conversion budget andimplementation plan
© 2009 Microsoft Corporation. All rights reserved. Microsoft, Windows, Windows Vista and other product names are or may be registered trademarks and/or trademarks in the U.S. and/or other countries.The information herein is for informational purposes only and represents the current view of Microsoft Corporation as of the date of this presentation. Because Microsoft must respond to changing market
conditions, it should not be interpreted to be a commitment on the part of Microsoft, and Microsoft cannot guarantee the accuracy of any information provided after the date of this presentation. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.
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