ifrs: current considerations for boards & audit committees 15jan10-deloitte

8/9/2019 IFRS: Current Considerations for Boards & Audit Committees 15Jan10-Deloitte

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IFRS: What should boards and auditcommittees be considering now?


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Contents

3 Foreword by Jim Quigley

4 Where are we now?

5 What are U.S. companies doing today?

6 What should boards and audit committees be considering?

Set the toneFocus on the process

Understand the risks

9 Conclusion

10 Appendix - Issues Guide

This publication contains general inormation only, and Deloitte is not, by means o this publication, rendering accounting, business, fnancial,

investment, legal, tax, or other proessional advice or services. This publication is not a substitute or such proessional advice or services, nor should

it be used as a basis or any decision or action that may aect your business. Beore making any decision or taking any action that may aect

your business, you should consult a qualifed proessional advisor. Deloitte and its afliates and related entities shall not be responsible or any loss

sustained by any person who relies on this publication.


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IFRS: What should boards and audit committees be considering now? 3

Audit committee members play a critical role in the eective unctioning o the capital markets. Their oversight and

experience assists company management teams to navigate rough waters, capitalize on opportunities, operate efciently,

and, o course, provide timely, reliable fnancial inormation to investors.

In an eort to support these important audit committee activities, and to help directors stay current, this publication

provides guidance on an important emerging topic or audit committees: IFRS International Financial Reporting

Standards. This publication has two sections: (1) an overview o IFRS with considerations or the board and audit

committee; and (2) an issues guide in the appendix, a tool that outlines a number o the technical accounting

dierences between U.S. Generally Accepted Accounting Principles (GAAP) and IFRS and provides some key questions touse in meetings with management.

Since 2005, when the European Union required European companies to use IFRS or fnancial reporting, the global trend

has been towards adoption o IFRS and away rom U.S. GAAP. Today, more than 40 percent o Global Fortune 500

companies use IFRS and by 2011 a clear majority will likely do so. The goal o a single set o high quality accounting

standards has been envisioned or many years. The growing acceptance o IFRS brings that vision closer to reality. The

Securities and Exchange Commission (SEC) has solicited comments on a proposed road map to adopt IFRS in the U.S. or

all flers, but the SEC has not yet committed to a date certain or adoption. The Financial Accounting Standards Board

(FASB) and the International Accounting Standards Board (IASB) recently announced their continued commitment to

convergence o U.S. GAAP and IFRS.

The benefts o global adoption o IFRS are signifcant or investors. Global adoption will create a common denominator

rom which regulators and supervisors can assess the operations o the entities and markets they oversee. It will permitinvestors to compare the fnancial position o companies across borders, potentially allowing investors to more efciently

allocate capital on a global basis. And or many global companies, global adoption will likely eliminate the need to keep

multiple sets o books in order to comply with divergent accounting regimes and thus improve the quality o fnancial

statements by reducing the risk o translation errors between dierent accounting standards.

Although converting to IFRS will present challenges, we believe it will be worth the eort. Capital markets do not unction

eectively without a solid oundation o trust and confdence. Comparable, transparent, and reliable fnancial reporting

provides a undamental pillar o trust that enables global markets to unction more eectively, acilitating international

investment, and stimulating the investments necessary or economic recovery.

We hope you fnd this compilation useul. Feel ree to distribute it to your colleagues; i you need additional copies,

contact your Deloitte proessional, who would be happy to provide them.

As always, we value and welcome your comments and eedback.

Jim Quigley

Chie Executive Ofcer, Deloitte Touche Tohmatsu

Foreword by Jim Quigley


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4

Where are we now?

In 2002, the twenty-fve member states o the European

Union (EU) met and decided to require EU companies listed

on EU exchanges to report under International FinancialReporting Standards (IFRS) beginning in 2005. Today,

IFRS is used or public reporting in over 100 countries

throughout the world. Other countries, namely Argentina,

Brazil, Canada, Chile, India, Korea, and Mexico, will be

ollowing over the next couple o years. Japan also is

weighing mandatory use in 2015. In addition, now or in

the near uture, many o these countries will permit or

require the use o IFRS or local statutory purposes.

The movement toward IFRS has challenged regulators

to revisit current public reporting requirements and the

inormation needs o investors. In 2007, the U.S. Securities

and Exchange Commission (SEC) began allowing oreigncompanies the ability to fle IFRS fnancial statements

in order to ulfll U.S. public reporting requirements.

As a result, those oreign companies that fle IFRS

fnancial statements are no longer required to include a

reconciliation to U.S. GAAP.

The discussion has now turned to the U.S. domestic

environment. Last year the SEC issued or comment its

IFRS Roadmap, proposing an eventual adoption o IFRS

beginning in 2014 or U.S. public companies. The IFRSRoadmap also included a proposal to permit certain U.S.

issuers the option o using IFRS early.

The issuance o the SECs IFRS Roadmap comes at a time

when national governments are addressing issues relating

to the global fnancial crisis. The leaders o the Group o

Twenty countries (G-20) recently reiterated their desire or

a single set o global standards in response to the current

fnancial crisis.

In determining how to move orward with the proposed

IFRS Roadmap, the SEC will likely consider recent

developments related to the fnancial crisis, includingthe loss o confdence in the U.S. capital markets, the

development o capital market alternatives outside the

United States, and the impact on global competitiveness.

IFRS: What should boards and auditcommittees be considering now?

Over the last several years, the worlds capital markets have

undergone tremendous expansion, diversifcation, andintegration. Accompanying these changes has been amovement away rom local fnancial reporting standardstoward global standards.

As proposed, select U.S.

flers will be eligible to fle

IFRS fnancials

2011: SEC to decide

whether to mandate IFRS

January 1, 2012:

Beginning o the frst

comparative IFRS year

December 31, 2014:

Large accelerated flers

could be mandated to

report fnancial results

using IFRS

2009 2010 2011 2012 2013 2014

Transition date Reporting date

Representative U.S. Timeline, as proposed*

* Representative timeline o proposed SEC Roadmap or large

accelerated flers (as proposed, IFRS required or accelerated flers

in 2015 and non-accelerated flers in 2016)


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The increasing use o IFRS around the worldand the

likelihood that IFRS will eventually be required in the

U.S.is driving a growing number o U.S. companies todevelop an IFRS transition strategy.

As U.S. executives await the SECs next steps to ollow

up on the proposed IFRS Roadmap, many are preparing

their organizations or change and mobilizing around

IFRS planning and transition activities. Boards and audit

committees have the important roles o overseeing the

development o a comprehensive transition plan; helping

to ensure that the potential risks surrounding conversion

are being addressed; and helping to set the tone or an

eective IFRS conversion.

What are U.S. companies doing today?

Many companies have undertaken assessment activities to

identiy areas o signifcant impact. According to a recent

Deloitte survey,1 80% o fnancial executive respondents

indicated that their companies are involved with an IFRS

assessment: 40% are perorming or have perormed a

high-level IFRS assessment, while another 40% plan to

perorm one. Survey results also indicate that 60% o

companies that are perorming or have perormed a

high-level IFRS assessment sought or are seeking external

assistance. Approximately 40% are taking on the task

themselves.

1 IFRS Survey Results 2009: Update on views and activities, Deloitte

Development LLC, September 2009. Survey participants were sel-

selected, and responded through a web-based survey. Survey results

are solely the thoughts and opinions o survey participants and are

not necessarily representative o the total population o fnance

proessionals.

Given the broader implications that IFRS may have,

company executives are fnding the need to take a more

holistic approach to those assessments. For example: taxstructures may be aected as a result o IFRS being used

by subsidiaries or statutory reporting purposes; changes

in inormation technology inrastructure may be needed

to address such areas as parallel reporting during the

transition period; and agreements such as loans and leases

may require revisions.

A high-level IFRS assessment generally includes the

ollowing activities:

Identiying the key impacts o IFRS throughout

the organization This involves comprehensively

analyzing the potential impacts o IFRS throughout

the organization, ocusing not only on accounting and

systems impacts, but also on impacts in such areas as

income taxes, sales contracts, loan agreements and

employee compensation arrangements. Companies with

global operations are already getting a taste o IFRS in

countries in which their subsidiaries fle IFRS fnancial

statements or statutory purposes. For such companies,

the assessment process should include determining

which countries require IFRS or statutory reporting

purposes, and assessing that the application o IFRS by

subsidiaries in those countries is appropriate.

Determining project interdependencies and

lead-times This involves mapping the necessary

implementation actions and evaluating the time

needed to complete such actions, considering the

interrelationship among activities, both related and

unrelated to IFRS. This also includes actoring IFRS into

current or upcoming systems implementation projects.

Estimating resource needs Based on the outcome

o the previous steps, an estimate o the time and

resources needed to complete the implementation is

developed.

The product o a well-executed IFRS assessment is typically

a company-specifc roadmap designed to enable an orderly

migration to IFRS, while anticipating and mitigating risk,

and acilitating greater value or the organization.


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6

What should boards and audit committees be

considering?

Early and comprehensive oversight by the board and auditcommittee in the development o an IFRS implementation

program can help ensure the program has the appropriate

level o managements attention. It is essential that the

board and its committees, along with management,

begin to orm the companys perspective on IFRS and

begin discussions on the potential risks and benefts

o IFRS. Through insightul discussion, members o the

board and its committees (e.g., the audit committee and

the compensation committee) can begin to coordinate

themselves become aligned with management and

determine the companys IFRS direction and strategy.

To begin to set expectations or the organization, the

board and audit committee should consider the ollowing:

Set the tone. The board and audit committee may

play leading roles in the prioritization o IFRS or the

organization.

Raising the ollowing key questions with management

now can help establish the proper tone at the top:

Has management aligned key stakeholders?

Establishing a steering committee o high-level

executives representing the unctional groups most

aected by IFRS, who are empowered to allocate

resources as needed, is an important element o

achieving buy-in throughout the organization.

What is management doing about

communications? Open and regular communication

with internal and external constituents regarding the

changes around IFRS may contribute positively to

the perception o a company. Investors and analysts

appreciate being kept inormed.


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What steps are being taken to educate the

organization? Generally, training that is timely and

specifc to individual needs yields the greatest beneft.I training is too general and too early, inormation

learned may not be retained. Timely education or the

board and its committees is also important. Building

IFRS profciency will enhance board members ability

to lead productive dialog and provide useul insights in

IFRS planning discussions.

Focus on the process. Both the board and audit

committee members should ocus early on in overseeing

the companys approach, timeline, and budget or

transition. The amount o time companies have to

prepare may be less than many would expect, and a

thoughtul approach to conversion can help to control

costs. Encourage management to consider short- and

long-term planning issues in determining what the

company needs to do now versus later. Be mindul o

opportunities in the IFRS conversion process that could

translate into longer-term benefts.

Key questions to consider raising with management

include:

Has a PMO been established? A dedicated

project management ofce provides a single point

o coordination that can help companies adhere to a

unifed plan by: establishing milestones and monitoring

perormance against them; acilitating a globally

consistent application o IFRS; ostering the creation o

and deploying standard templates; and coordinating

training activities.

Is management taking a resh look at policies?

IFRS provides an opportunity to reresh accounting

policy implementation, with a ocus on achieving

greater transparency and more timely fnancial

reporting. (See Appendix, Issues Guide, or a more

detailed view o key IFRS/U.S. GAAP dierences.)

Is the company monitoring evolving standards?

The Financial Accounting Standards Board (FASB) andthe International Accounting Standards Board (IASB)

are working toward convergence o their standards.

There are currently several active projects, some o

which may result in signifcant impacts. While a goal

o the projects is to achieve ull convergence, some

dierences may remain upon their completion. When

a company adopts a new U.S. GAAP standard, it

should also be considering the related IFRS standard,

and addressing the impact o the dierences that

remain between the two standards. Management

should also consider anticipated changes related to the

convergence agendaand incorporate those into any

long-term plan.

Will the company be ready by the transition

date? Under the SECs proposed Roadmap, largeaccelerated flers would be required to fle their 2014

fnancial statements using IFRS, along with comparative

fnancial statements or 2013 and 2012. For such

companies, this would mean an adoption date o

December 31, 2014, with a transition date o January

1, 2012. To efciently and properly transition to IFRS,

it is advisable to run parallel IFRS and U.S. GAAP

reporting, and this would mean fnalizing the beginning

balance sheet by the transition date.

Is the independent auditor involved? The early

and continued involvement o the independent

auditor can prevent uture surprises and can provide

management with a well-inormed source o assistance

that has a deep knowledge o the company.


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8

Lessons rom the European experience

U.S. companies have the advantage o learning romcompanies in countries, such as those in the European

Union, that have already transitioned to IFRS. Consider

these cautionary lessons (based on the observations

and experiences o Deloitte proessionals in the feld)

in an attempt to avoid common pitalls and overcome

challenges.

The eort was oten underestimated The

original misconception that conversion was solely

an accounting issue was replaced with a growing

realization that the initiative was larger and more

complex.

Projects oten lacked a holistic approach

Because o the limited view cited above, companies

requently did not take the collateral eects into

consideration, such as the impacts on inormation

technology, human resources, and tax.

A late start oten resulted in escalation o

costs Those ew companies that anticipated

conversion and took steps to prepare or it were

oten in much better shape than those that d id not.

Companies that delayed their response oten paid a

price, in terms o higher costs and greater diversion

o resources.

Many companies did not achieve business

as usual state or IFRS reporting The highest

quality fnancial data is obtained when companies

ully integrate IFRS into their systems and processes.

The compressed timerames oten precluded this

possibility; instead, frst-year fnancials were in many

cases produced using extraordinary, labor intensive,

and unsustainable measures.

Several companies are only now starting to

explore benefts rom IFRS implementation Due to multiple constraints, the frst-year eort

in the EU was ocused more on getting it done.

Potential benefts in terms o reducing complexity,

increasing efciency, decreasing costs, and

improving transparency had to be deerred.

Understand the risks Work with management

to be aware o potential risks up ront, includingunderstanding the risk o waiting too long to develop

a plan. Also, IFRS contains less detailed guidance

than U.S. GAAP and thereore requires the use o

more proessional judgment. How will the board and

audit committee address the risk that IFRS is applied

consistently throughout the organization?

Key questions to consider raising with management

include:

Is management preparing or an increased use

o judgment? In contrast with U.S. GAAP, IFRS has

ewer bright-line rules, resulting in the need or the

increased application o judgment. Depending on such

actors as complexity and level o decentralization, a

company may need to develop a ramework or how

judgments will be made, ocusing on transaction

analysis, accounting research, and decision making.

With the increased use o judgment, it is also expected

that the level o d isclosure will increase. As IFRS

policies are considered or adoption, it is important to

understand whether management's policy selections

may be overly aggressive or conservative, and how

such selections stack up against peers in the industry.

What is the company doing about statutory

conversions? Centrally managed IFRS

implementations by subsidiaries should be considered

to potentially avoid inefciencies and inconsistencies

when IFRS is adopted or consolidated reporting in

the U.S.; to identiy shared service opportunities; and

to develop individuals whose IFRS experience can be

leveraged in uture conversion activities.

What are the Sarbanes-Oxley (SOX)

implications? To guard against alling out o

Sarbanes-Oxley compliance during the IFRS conversion

process, as process changes are designed, it makes

sense to consider the eects o such changes on

existing internal controls.


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IFRS What should boards and audit committees be considering now? 9

Conclusion

With IFRS so clearly on the horizon, boards and audit

committees should consider asking the key questionsand engaging management now. Establishing processes

or requent updates and communications can help drive

a sustainable plan going orward. Underestimating the

planning involvedand the time requiredor a change

rom U.S. GAAP to IFRS could prove risky. The board and

audit committee can serve as a guiding orce in positioning

a company to achieve strategic, operational, and economic

benefts rom a transition to IFRS.

In the appendix, an Issues Guide is provided, outlining

some o the key potential accounting dierences between

IFRS and U.S. GAAP, along with the related broader

impacts o those dierences, and presenting questions

that board and audit committee members should consider

asking as they help to guide their companies down the

path o IFRS implementation.


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10

Appendix Issues Guide

11 Inventory

11 Consolidation Policy

12 Financial Statement Presentation

12 Revenue

13 Business Combinations

13 Investments in Associates & Joint Ventures

14 Long-lived Assets

14 Asset Impairment

15 Intangible Assets

15 Leasing

16 Provisions and Contingencies

16 Income Taxes

17 Employee Benefts

17 Share-based Payments

18 Financial Instruments Presentation and Disclosure

18 Financial Instruments Recognition


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