Download The Objective

IFRS – Will the Global Accounting
Experiment Succeed?
Sir David Tweedie
Chairman - International Accounting Standards Board - 2001– 2011
President – The Institute of Chartered Accountants of Scotland
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The Objective
Taking Stock
Adoption Update
The Path Forward
Summary
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The Objective
The IFRS Foundation and the IASB are dedicated
to developing and sustaining a single set of
globally accepted accounting standards:
•Aimed at providing high-quality, transparent and
comparable information for investors and other users of
financial information
•Providing the world’s integrated capital markets with a
common language for financial reporting
•Promoting capital market stability through the transparency
and integrity of financial reporting
•Taking appropriate steps with regulators and standard-setters
to help promote consistent application of standards
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Why Global Standards are Needed
• Accounting standards evolved nationally because
companies borrowed and investors invested only
in their home country
• Globalisation is inconsistent with multiple,
national or regional accounting languages that
hinder comparability
 Corporations must consolidate global network of
operations
 Investors seeking diversification and return increasingly
invest outside domestic markets
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Why Global Standards:
Benefits to Capital Markets
Transparent financial markets and free trade
require a high-quality, single, global accounting
language
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Credibility of local market to foreign investors
Greater cross-border investment
Efficient capital allocation
Comparability across political boundaries
Facilitates global education and training
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Why Global Standards:
Benefits to Companies
In the long run, global standard benefit
companies – especially multi-nationals
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Lower cost of capital
Integrated IT systems
Easier consolidation
One set of books
Assist in raising capital overseas
Understand financial statements of overseas
suppliers, customers, subsidiaries
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A Decade of Progress
Pre 2001
2001
IASB is established under Foundation Chair Paul Volcker
2002
Europe leads first wave of jurisdictions to adopt IFRS while convergence
process with FASB begins
2003
IASB issues 1st new standard
2005
Over 7000 public companies in 25 European countries switch to IFRS
2006
FASB and IASB establish a “roadmap” to substantially converge IFRS
and US GAAP (MoU)
2007
Brazil, Canada, and Korea lead second wave of IFRS adoption. ASB
Japan/IASB sign Tokyo Agreement
2008-11
2012
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Multi-GAAP world, no major economies using international stds.
Trustees and IASB prioritise response to global financial crisis; G20
repeatedly calls for rapid move towards global standards. Target end of
IFRS/JGAAP Convergence Programme
On-going work on convergence programme and target date for
SEC/Japanese decision
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Status of Global Standard Use
• Since 2001: Companies in over 100 countries are now
required or permitted to use IFRSs
• Recent new joiners: Brazil, Canada, Korea, Mexico, Russia
• Japan: IFRS permitted for international companies; 2012
decision on mandatory adoption may be delayed; progress
toward IFRS adoption continues as more large companies
move away from US GAAP
• 2012: After ten years, convergence work with FASB winds
down with significant new high quality standards for
revenue recognition, leasing, impairment, classification &
measurement
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The World is Getting Smaller
Over 100 countries require or permit the use of IFRSs for listed
companies
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Source: IASplus/Deloitte
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US investors, companies depend on
cross-border capital flows
Growing cross-border holdings of US
companies and investors
6000
5,248
4,647
Billions of US$
4,329
4000
3,995
3,130
2,814
2,748
2,430
Foreign holdings
of US equities
2,252
2000
US holdings of
foreign equities
567
397
0
1994
Source: US treasury
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2006
2007
2008
2009
2010
Why Global Standards:
Non-US Markets Have Grown
The Globalisation of Capital Markets: Domestic Market Capitalisation
Source: World Federation of Exchanges in $US trillions
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17 (31%)
Trillions of US$
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(9%)
Americas (excluding USA)
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15 (27%)
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1 (3%)
8 (15%)
8 (30%)
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1 (4%)
3 (11%)
2001
Europe, Africa and Middle
East
China
14 (52%)
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USA
10 (18%)
2010
Asia (excluding China)
US is Key Piece of Global Puzzle
(July 2010)
Based on announced
plans
Which GAAP?
2011
2013 If Japan 2015
IFRS and word-forword equivalents
42%
44%
58%
US GAAP
31%
31%
27%
National GAAP
27%
25%
15%
100%
100%
100%
Totals
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(source: Fortune Global 500)
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After 2013, remaining non-IFRS
(listed companies)
Comments
China
Adopted main IFRS principles
Colombia
IFRSs under discussion
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India
Proposed many modifications to IFRSs
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Japan
Seriously considering: 2016?
Russia
IFRSs adoption approved
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68
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Saudi Arabia
1
Thailand
1
USA
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No. G500 co’s
SEC Roadmap and Work Plan
(source: Fortune Global 500)
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(51 J-GAAP &
17 US GAAP)
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The Objective
Taking Stock
Adoption Update
The Path Forward
Summary
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Factors Behind Success
Organisational governance and structure
supporting high quality standards
•High quality standards: Internationally, users recognise IFRS
as high quality – supported by academic research
•Independent board: A transparent and independent standard
setting process assures quality is maintained
•Internationally accepted: EU decision to adopt IFRSs served
as catalyst for broad adoption across Asia, Oceania, Africa,
Americas
•Convergence with the US: Close cooperation with FASB has
led to higher-quality standards and a significant reduction in
differences between the two sets of standards
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Corporate Governance – Three Tier Model
US Model
Global Model
Securities and
Exchange
Commission (SEC)
Public accountability
to securities
regulators
Monitoring Board
FAF Trustees
Overseen by Trustees
IFRS Foundation
Trustees (5/22 US)
Financial Accounting
Standards Board
Independent
standard-setter
International
Accounting Standards
Board
Independent and publically accountable
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Key Challenges Ahead
The ultimate goal of global standards is still not
fully achieved and there are challenges ahead…
•Pending decisions on IFRS adoption for major
economies like Japan, China, India and the US
•Consistency and high-quality implementation of
IFRSs across jurisdictions
•On-going need to always evaluate, enhance and
then implement improvements to IFRS
organisation and process
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The Objective
Taking Stock
Adoption Update
The Path Forward
Summary
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IFRS – FASB Convergence Process
2001 – 2004
SEC reaction to US investor
desire for improved, global
standards following EM crisis and
US financial scandals
IASB is established; IASB-FASB
reach Norwalk Agreement on
convergence
2005 – 2007
Growing IFRS adoption by major
economies; concern over US loss
of IPOs; desire to cement IFRS
MoU accelerates convergence, sets
targets and removes requirement
for FPI’s to reconcile with GAAP
2008 – 2009
Financial crisis; G20 consensus
on convergence and adoption;
focus on remaining major joint
projects
Updates to MoU with 2011 targets
and SEC roadmap
2010 – 2012
Stakeholder concerns for high
quality standards vs convergence
timetable
Modified convergence strategy
prioritizes joint projects for 2012
SEC decision
Convergence is not the end point
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What has been accomplished to date?
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Nonmonetary exchanges
Inventory accounting
Accounting changes
Business combinations
Non controlling interests
Share-based payments
Segment reporting
Borrowing costs
Conceptual Framework – objective and
qualitative characteristics
• Joint ventures
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Conceptual Framework Issues
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The objectives of financial reporting
Qualitative characteristics
Definitions of assets and liabilities
Recognition
Measurement
Presentation and disclosure
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Debit =
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Asset
or
Expense
Debit =
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Asset
or
Expense
or
Whatsit
Role of Valuation
• Value inherent in asset/trading
value
• Value in productive ability
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Fair
Cost
Income
Profit and Loss Account
•Trading activities
Other Comprehensive Income
Long-term Non Trading Gains and Losses
•Cross holdings
•Revaluation of buildings
•Changes in pension fund surpluses and deficits
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The Major Projects
Crisis (MoU)
Other (MoU)
 Financial Instruments  Revenue Recognition
 Fair value
measurement
 Leases
 Post-retirement benefits
 Consolidation
Financial statement presentation
 Derecognition
Liability / Equity
Other (Non MoU)
 Insurance contracts
IASB working to reach as much convergence as possible on
three remaining MoU projects
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Pensions
Deficit
Less 10% of liabilities
$
1000
400
600
Spread over 10 year working life
Deficit per accounts - $60m
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Leases – Equipment Leases
2008
2009
Total Annual leasing volume $644bn $557bn
N. America
21%
34%
Europe
49%
38%
Asia
19%
20%
Rest of world
11%
8%
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2010
$617bn
35%
34%
24%
7%
Decision on US Incorporation
SEC Staff Paper released in May 2011 detailed a formal path to
US adoption through an incorporation mechanism
 US companies minimise implementation costs using phased
approach
 FASB stops writing new standards – preventing divergence
 Existing, converged standards are incorporated into GAAP
 IASB active projects will be completed, then incorporated
 FASB incorporates remaining, non-converged standards over
5-7 years
 FASB remains the US national standard setter with
responsibility of endorsing new standards as they are issued
“Incorporation of IFRSs into national GAAP” is the path used
by virtually all other countries
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Final SEC Staff Report
• Published July 2012
• Provides comprehensive assessment of preparedness of US,
but little new information
• Reflects an SEC overwhelmed with rulemaking
• Important to note:
• No decision, not a ‘no’ decision
• Conclusions broadly consistent with recently completed
strategy and governance reviews
• With political will, the challenges of transition can be
overcome
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What happens Next?
• Both boards have concluded that convergence has served its
purpose, now approaching diminishing returns
• IASB dedicated to completing the three MoU projects, but in
transition to a new agenda
• Ambiguous posture by the US may slow global standard
momentum:
 Risk of IASB and FASB divergence
 Continued uncertainty for business community
• However:
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Momentum behind IFRS as global standards is irreversible
The endpoint will be global accounting standards
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The Objective
Taking Stock
Adoption Update
The Path Forward
Summary
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Changing Standard Setting
• Deadlines can be effective - but quality paramount
• More time taken does not mean better standards
• World and standard setting has changed since financial
crisis
 Proactive engagement reaches outside the traditional financial
reporting community
 Globally consistent answers must be reached – “similar” is not
good enough
 New ways of working – technology and cooperation improve
efficiency
• Support for post-implementation reviews
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Future Agenda Issues
Old Standards
• Government grants
• Agriculture
• Intangibles
• Share-based payments • Foreign currency translation
• Income taxes
• Pensions
• Associates
• Performance reporting
• Disclosure framework
Other
• Extractive activities
Post-implementation review • Common control
• Segments
• Business combinations
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Principle-Based Standards
• No exceptions
• Core principles (objectives)
• No inconsistencies
• Tied to conceptual framework
• Judgement
• Minimum guidance
Principles
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Rules
Preparing for the Next 10 Years
IFRS Foundation Trustee Strategy Review
Reflecting on progress of past ten years and
acknowledging there are challenges ahead, the
review prepares for IFRS as the global standard.
• Independence must be maintained –Monitoring Board,
Trustees, IASB structure is appropriate
• Global adoption, and not convergence, is the goal
• IFRSs should provide a faithful representation of an entity’s
financial position and performance – underpinning the
transparency / integrity of financial reporting and capital
market stability
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Preparing for the Next 10 Years
• Vested interest in consistent application of IFRSs
requires taking appropriate steps with regulators and
standard-setters to identify differences
• National carve-outs can be best eliminated and
consistency of application improved through
successful due process in the standard-setting
process and post-implementation reviews
• Funding of IFRS must maintain independence in
standard-setting while providing organisational
accountability
 Significant progress has been made to migrate away from
voluntary contributions on a global basis
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Monitoring Board: Governance review
Key conclusions
• Reaffirmed support for three-tier structure:
• Monitoring Board: Public accountability
• Trustees: Governance and oversight
• IASB: Independent standard-setter
• Clearer delineation of responsibilities across
three tiers
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Key conclusions - continued
• Monitoring Board membership
• Permanent membership criteria to be assessed based
on ‘use of IFRSs’
• Membership to be expanded, to include major emerging
markets plus rotating seats
• Greater transparency in Monitoring Board
activities and closer dialogue with Trustees and
IASB
• Trustees and Monitoring Board will coordinate
future actions
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The Objective
Taking Stock
Adoption Update
The Path Forward
Summary
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Goal of Global Accounting Language is Close
• G20 adoption represents 90% GDP; 80% trade; 2/3 of
population
• IASB dedicated to developing and sustaining high quality,
globally accepted standards –
 Consultation and transparency are critical to setting new agenda
• IASB/IFRSF accepts and is prepared for the responsibility
of being the global standard setter
• Japan and Asia to become more assertive – if adopt IFRS!
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Questions?
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