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IFRS- What About Private Companies? Judith H. O’Dell, Chair Private Company Financial Reporting Committee IFRS- What About Private Companies? Judith H. O’Dell, Chair Private Company Financial Reporting Committee October 28, 2008

Outline ► About the Private Companies Financial Reporting Committee ► IFRS for Private Entities Outline ► About the Private Companies Financial Reporting Committee ► IFRS for Private Entities ► Possibilities for U. S. private companies

PCFRC ► Funded by FASB ► Committee consists of 4 users (bankers, VC and PCFRC ► Funded by FASB ► Committee consists of 4 users (bankers, VC and surety), 4 preparers and 4 practitioners from various size companies/firms ► Makes formal recommendations to FASB ► Filter is user needs and cost/benefits

Perspective ► There about 17, 000 public companies in the U. S. ► There Perspective ► There about 17, 000 public companies in the U. S. ► There about 22, 000 private entities in the U. S. ranging from sole proprietorships to billion dollar plus companies ► Accounting standard setting focuses on public companies and needs of investors

Forces Affecting Private Company Accounting ► Convergence with international standards ► Changes in size Forces Affecting Private Company Accounting ► Convergence with international standards ► Changes in size of FASB Board ► FASB emphasis on public co-investor needs ► SEC plans for U. S. Issuers to report using IFRS in 2014 if milestones met ► AICPA recognition of IFRS as GAAP ► Increasing acceptance by users of reports with GAAP exceptions

IFRS for Private Entities An IFRS expressly designed to meet the financial reporting needs IFRS for Private Entities An IFRS expressly designed to meet the financial reporting needs of entities that (a) do not have public accountability and (b) publish general purpose financial statements for external users. ► Users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies. ► Derived from full IFRSs with appropriate modifications based on the needs of users of private entity financial statements and cost-benefit considerations. ►

Timeline ► 2/07 - Exposure draft issued- 7 languages ► 6/07 - Field tested- Timeline ► 2/07 - Exposure draft issued- 7 languages ► 6/07 - Field tested- 116 companies in 20 countries ► 11/07 - Comment deadline- 162 letters ► 1 st QTR 2009 - Final document with educational materials ► See www. iasb. org for document and updates on project

Updating and Training ► Document will only be updated every two years- users will Updating and Training ► Document will only be updated every two years- users will not have to monitor changes in standards ► Document is only 250 -pages self-contained ► Has disclosure checklists and sample statements ► Training materials ready to go

Effect of Private Entities Document in the U. S. ► AICPA has recognized IASB Effect of Private Entities Document in the U. S. ► AICPA has recognized IASB as body authorized to promulgate GAAP ► Once Private Entities Document is approved by IASB, private companies in the U. S. could report using it and it would be GAAP ► May be applicable to private companies who are U. S. subsidiaries of foreign companies ► Would it be more widely adopted?

Possibilities for U. S. Privates When Public Companies Go IFRS Assume Public Companies are Possibilities for U. S. Privates When Public Companies Go IFRS Assume Public Companies are on IFRS 1. IFRS with Private Entities Option 2. U. S. Adapted version of Private Entities 3. IFRS with differential reporting 4. Separate U. S. Private Co GAAP- Revised 5. Separate U. S. GAAP- Maintained and Updated for Private Companies

Model 1 – IFRS with Private Entities Option ► IFRS is already recognized by Model 1 – IFRS with Private Entities Option ► IFRS is already recognized by AICPA as GAAP in the U. S. ► U. S. private companies have the option of following IFRS for Private Entities when adopted by IASB ► If not, then they may elect to follow IFRS or another comprehensive basis of accounting (e. g. , cash-basis, tax-basis. )

Model 1 in Operation ► IFRS for Private Entities is set by the IASB Model 1 in Operation ► IFRS for Private Entities is set by the IASB and updated only periodically ► FASB exists to provide input into the IASB standard setting process ► U. S. private company constituents would influence the standard setting process through the channels established by the IASB and FASB

Model 1 - Pros ► Simplified, self-contained set of accounting principles developed for private Model 1 - Pros ► Simplified, self-contained set of accounting principles developed for private companies ► Based on IFRS, possesses a level of comparability with U. S. public company financial statements and international companies ► Allows for comparability of private company financial statements across borders

Model 1 - Pros Cont. Time and effort to prepare private company financial statements Model 1 - Pros Cont. Time and effort to prepare private company financial statements reduced ► No effort required to develop differential standards for private companies in the U. S. ► Greater emphasis on principle-based standards and the need for professional judgment, less reliance on detailed rules ► Certain differential standards, thought to be needed for private companies in the U. S. , may already be addressed in the IFRS for Private Entities ►

Model 1 - Cons ► IFRS-based accounting provides little benefit to private companies and Model 1 - Cons ► IFRS-based accounting provides little benefit to private companies and is mostly useful to public companies that need to operate internationally ► Positions taken on some important technical issues in IFRS for Private Entities may not find general acceptance in the U. S. private company marketplace ► Conversion to IFRS for Private Entities would cause significant increases in costs and workload ► Conversion costs outweigh benefits

Model 1 - Cons Cont. ► Preparers, users and practitioners who work with private Model 1 - Cons Cont. ► Preparers, users and practitioners who work with private company financial statements are unfamiliar with IFRS. The learning curve would be difficult-- this will change ► Considered a “dumb-downed” approach and second class ► More principles-based -- may not be adequate in the litigious U. S. marketplace ► When a private company has an issue that is not addressed under IFRS for Private Entities, inconsistent accounting can occur, reducing comparability ► Loss of industry-specific accounting guidance

Model 2 -U. S. Adapted Version of Private Entities Document The IFRS Private Entities Model 2 -U. S. Adapted Version of Private Entities Document The IFRS Private Entities Document is tailored to suit the needs of private company financial reporting constituents in the U. S.

Model 2 in Operation ► An accounting board in the U. S. would need Model 2 in Operation ► An accounting board in the U. S. would need to exist to adapt the IFRS Private Entities standard to suit the needs of U. S. private company constituents and develop changes to the literature to reflect needs and circumstances in the U. S. private company marketplace. ► A funding mechanism would need to be identified for this board and effort. ► Private company constituents would influence the standard setting process by commenting to this board and to the IASB on proposed standards.

Model 2 - Pros ► Needs of U. S. private company financial reporting constituents Model 2 - Pros ► Needs of U. S. private company financial reporting constituents are prioritized and incorporated ► Linkage to IFRS for Private Entities, resulting in some comparability ► Simplified, self-contained set of accounting principles developed for private companies ► Avoid current problem of GAAP requirements that lack relevance/decision usefulness for users

Model 2 - Pros Cont. ► Condensation and simplification would provide a more manageable Model 2 - Pros Cont. ► Condensation and simplification would provide a more manageable reference ► Advanced starting point ► Places greater emphasis on principle-based standards and the need for professional judgment, with less reliance on detailed rules ► Maintain certain industry-specific accounting guidance

Model 2 - Cons Same as Model 1 but: ► Confusion will result trying Model 2 - Cons Same as Model 1 but: ► Confusion will result trying to incorporate U. S. differential standards into the IFRS for Private Entities ► Diminished ability to compare U. S. private companies with those in other countries, especially if a large number of differences are allowed

Model 3 - IFRS with Differences for Private Companies IFRS is modified to suit Model 3 - IFRS with Differences for Private Companies IFRS is modified to suit the needs of private company financial reporting constituents by deleting some requirements or embedding different treatments in the standards.

Model 3 in Operation An accounting board in the U. S. would need to Model 3 in Operation An accounting board in the U. S. would need to exist to rule on differential standards for private companies ► Board would continue to maintain the literature, modifying IFRS as necessary to reflect the needs of users of U. S. private companies ► A mechanism would need to be identified to fund this board and their work ► Private company constituents would influence the standard setting process by commenting on proposed IFRS standards and proposed differential standards ►

Model 3 - Pros Strong linkage to IFRS- so a level of comparability with Model 3 - Pros Strong linkage to IFRS- so a level of comparability with U. S. public company financial statements and international companies ► Applies an approach already undertaken with U. S. GAAPsome differences for privates ► Minimizes possible confusion stemming from two sets of GAAP in the U. S. ► Places greater emphasis on principle-based standards and the need for professional judgment, with less reliance on detailed rules ►

Model 3 - Pros Cont. ► Reduces the risk of different interpretations of IFRS Model 3 - Pros Cont. ► Reduces the risk of different interpretations of IFRS that apply equally to public companies and private companies ► Needs of private company constituents would be accommodated within a single set of accounting standards ► Time and effort to prepare private company financial statements reduced, compared to pubic companies complying with full IFRS

Model 3 - Cons ► Considered a “dumb-downed” approach and second class to full Model 3 - Cons ► Considered a “dumb-downed” approach and second class to full IFRS ► Confusion will result trying to incorporate U. S. differential standards into IFRS ► Diminished comparability with companies abroad ► Would be considered IFRS with a “local flavor”

Model 4 -Separate US Private Company GAAP- Revised Current U. S. GAAP is reviewed, Model 4 -Separate US Private Company GAAP- Revised Current U. S. GAAP is reviewed, modified, and developed into a comprehensive and self contained set of accounting standards for private companies. This GAAP would be for private companies with and without significant external financial statement users, and would be sensitive to the needs of owner managed enterprises.

Model 4 in Operation ► An accounting board would need to exist to review Model 4 in Operation ► An accounting board would need to exist to review and modify current U. S. GAAP ► Would need to be maintained and updated, similar to the current process for setting U. S. GAAP ► Private company constituents would influence the standard setting process by commenting on proposed standards ► Identify a mechanism for funding the standard setting board and its work

Model 4 Pros ► The needs of U. S. private company financial reporting constituents Model 4 Pros ► The needs of U. S. private company financial reporting constituents are prioritized ► Simplified, self-contained set of accounting principles developed for private companies ► Avoid current problem of GAAP requirements for public companies that lack relevance/decision usefulness for private company financial reporting constituents

Model 4 - Pros Cont. ► Eliminate needless accounting complexities and costs for private Model 4 - Pros Cont. ► Eliminate needless accounting complexities and costs for private companies ► Private company constituents already know U. S. GAAP and therefore, intensive education or training efforts would not be necessary ► No conversion costs ► Maintain industry-specific accounting guidance ► Time and effort to prepare private company financial statements reduced

Model 4 - Cons ► Not based on IFRS-makes comparability with U. S. public Model 4 - Cons ► Not based on IFRS-makes comparability with U. S. public company and international company financial statements more difficult ► Hampers credit rating agencies and lenders trying develop cross border ratings ► Comparability with suppliers and other business relationships overseas

Model 4 - Cons Cont. ► May not be helpful to equity investors ► Model 4 - Cons Cont. ► May not be helpful to equity investors ► Adds confusion to the marketplace ► Private companies wishing to “go public”, would need to convert to IFRS ► More rules-based and less principles-based ► “Second class” compared to IFRS ► Students would have to learn two standards

Model 5 - Separate U. S. GAAP Maintained and Updated in Future ► Current Model 5 - Separate U. S. GAAP Maintained and Updated in Future ► Current U. S. GAAP would be maintained, as is, for use by private companies ► Periodically literature updates for needed changes and improvements specific to private companies ► No initial review and modification of current U. S. GAAP, as in Model 4

Model 5 in Operation ► An accounting board exists to monitor current U. S. Model 5 in Operation ► An accounting board exists to monitor current U. S. GAAP and update it in the future ► Private company constituents would influence the updating process by commenting on proposed revisions ► A mechanism for funding the board to be identified

Model 5 Pros Needs of U. S. private company financial reporting constituents are prioritized Model 5 Pros Needs of U. S. private company financial reporting constituents are prioritized ► Avoid requirements that lack relevance/decision usefulness ► Avoid any further needless accounting complexities and costs ► No intensive education or training efforts would be necessary ► No conversion costs ► Maintain industry-specific accounting guidance ►

Model 5 Cons ► Same as Model 4 except maintaining current U. S. GAAP, Model 5 Cons ► Same as Model 4 except maintaining current U. S. GAAP, as is, does not allow for modifications that would eliminate current standards that lack relevancy and decision usefulness for private company constituents ► Accounting students will be learning IFRS

WHAT DO YOU THINK? ? ? WHAT DO YOU THINK? ? ?

How Can You Participate? ► Become a member of our Resource Groupsign-up on Web How Can You Participate? ► Become a member of our Resource Groupsign-up on Web site and receive notification of meetings and meeting summaries ► Resource Group will be tapped for special task forces and input on projects ► Attend meetings and speak during open-mic session ► Email chair with ideas and opinions

Questions? www. pcfr. org judyodell@dmv. com Questions? www. pcfr. org judyodell@dmv. com