IIA Detroit Chapter Meeting May 13 2008 An

IIA Detroit Chapter Meeting May 13, 2008 An Introductory Roadmap to IFRS Convergence Confidential and Proprietary

Agenda • How We Got Here • Seeking a Global Standard – Convergence or Adoption of IFRS • Differences between IFRS & US GAAP • Considerations, Benefits & Opportunities • Be Proactive and Reap the Benefits • Web Based Resources • Q&A Confidential and Proprietary

New Terminology • IASB – International Accounting Standards Board • IFRS – International Financial Reporting Standards (formerly IAS – International Accounting Standards) • SAC – Standards Advisory Council (external) • IFRIC – International Financial Reporting Interpretations Committee (formerly SIC – Standards Interpretation Committee) • Convergence – Effort by the FASB and IASB to make US GAAP & IFRS more compatible • Roadmap – SEC’s plan and timetable for acceptance of IFRS in the US…will be issued later this year Confidential and Proprietary

IASB Structure Confidential and Proprietary

How We Got Here Confidential and Proprietary

2002 “Norwalk Agreement” Reaffirmed in 2005 • The FASB and IASB affirmed their commitment to: – Converge accounting standards through the development of high quality, common standards – Eliminate significant differences between the standards by developing new common standards that improve financial information reported to investors – Promote convergence by replacing weaker standards with stronger standards Confidential and Proprietary

SEC – 2007 IFRS Activity • IFRS Reconciliation to US GAAP – March: SEC Roundtable on US GAAP reconciliation for IFRS filers – July: SEC Proposal eliminating IFRS reconciliation to US GAAP foreign private issuers – November: IFRS to US GAAP reconciliation eliminated • Use of IFRS by US Companies – August: SEC Concept Release on allowing use of IFRS for US companies Confidential and Proprietary

Public Comments on SEC’s IFRS Concept Release • Establish a mandatory IFRS conversion date for US issuers • The coexistence of US GAAP & IFRS should be temporary • IFRS standards are currently of sufficient quality to be accepted as a basis of financial reporting by US issuers • For practical reasons, IFRS should be the single set of high-quality, globally-accepted accounting standards • Allow US issuers the same option foreign issuers have, to file statements with the SEC using IFRS • No advantage to convert for smaller issuers with only US operations Confidential and Proprietary

SEC – 2008 IFRS Agenda • Propose a new “Roadmap” that lays out a schedule for the adoption of IFRS • The new “Roadmap” will be conditioned on appropriate convergence milestones • Pursue mutual recognition of securities market regulation • Lower the barriers to the efficient operation of the world’s capital markets – by rationalizing the different regulatory approaches Confidential and Proprietary

Other Events Supporting IFRS • IFRS is now accepted or required in over 100 countries, including nine of top 10 capital markets • There is strong demand from investors and multinational companies for a uniform set of international accounting standards • EU recently completed conversion to IFRS three years after a European Commission mandate • Big 4 accounting firms favored conversion from US GAAP to IFRS in their comments to SEC Confidential and Proprietary

Not “If” but “When”? EU Adopted IFRS in 3 Years 2 00 8 2 00 9 2011 to 2013? 2 01 0 2009 to 2011? Confidential and Proprietary 2 01 1 2 2 01 01 2 3 Can US Adopt IFRS in 3 Years?

Seeking a Global Standard Confidential and Proprietary

Demand Alternatives • Recognizing the demand, the IASB & FASB have been working toward convergence of US and international accounting standards • However an alternate path has emerged Convergence Adoption of IFRS Confidential and Proprietary Global Standards

Convergence ≠ Sameness • US GAAP • IFRS – Rules based – Principles based – Based on a GAAP hierarchy (level A – D) – No hierarchy, consists of IASs, IFRSs & interpretations – Primary accounting standard setting body is the FASB – Standards and interpretations approved by the IASB – Accounting guidance and interpretation is provided by several bodies e. g. , FASB, SEC, AICPA etc. – Interpretations of IFRIC and its predecessor the SIC Confidential and Proprietary

Convergence ≠ Sameness • Convergence = compatibility by eliminating material differences • Open items – FASB and IASB continue to have differences in in major accounting areas – The FASB and IASB disagree over the project agenda, scope of rulemaking projects, changes to be made and how they should be made Confidential and Proprietary

Adoption of IFRS • Adoption of IFRS = One set of high quality globally accepted set of standards • Open items – No prescribed MD&A equivalent – Governance surrounding IASB activities – IASB funding – Jurisdictional versions of IFRS are being used Confidential and Proprietary

Differences Between IFRS & US GAAP Confidential and Proprietary

IFRS & US GAAP Differences • Financial Statement Presentation • Foreign Currency Issues • Income Taxes • Consolidations, Equity Method • Provisions and Contingencies and Joint Ventures • Revenue Recognition • Business Combinations • Share Based Payments • Inventory • Employee Benefits • Intangible Assets • Segment Reporting • Long-Lived Assets • Earnings Per Share • Impairment of Assets • Interim Financial Reporting • Leases • Subsequent Events • Financial Instruments • Related Parties Confidential and Proprietary

Financial Statement Presentation • US GAAP • IFRS – Deferred taxes shown current & non-current – Deferred Taxes shown noncurrent only – Expenses must be shown by function – Expenses may be shown by function or nature. If function shown must disclose nature in footnotes – Financial instruments with debt & equity components must be classified as liabilities – Extraordinary items shown as unusual & infrequent Confidential and Proprietary – Financial instruments with debt & equity components – focus on settlement method – Extraordinary item presentation prohibited

Consolidations & Equity Method • US GAAP • IFRS – Presentation of noncontrolling interest shown between liabilities and equity (prior to effective date of SFAS 160) – Presentation of noncontrolling interest shown as a separate component of equity – Equity method investments: may account for at fair value (SFAS 159). Equity method required if don’t choose fair value. – Equity method investments: requires equity method (IAS 28). If separate target entity financial statements are presented, can use fair value. Confidential and Proprietary

Business Combinations • US GAAP • IFRS – Fair value = price that would – Fair value = amount for which be received to sell an assets an asset could be exchanged, or or paid to transfer a liability settled. market participant focus – No recognition of assets or – Recognition of an asset or liabilities for operating leases liability if the terms of an with favorable or unfavorable operating lease are favorable terms or unfavorable compared to – Acquire <100% – Identifiable market assets recognized at full fair – Acquire <100% – Identifiable value. Non-controlling interest assets & non-controlling measured at fair value OR interests recognized at fair proportionate share of fair value, value (FAS 141 R) exclusive of goodwill (IAS 27) Confidential and Proprietary

Inventory • US GAAP • IFRS – Last In, First Out – LIFO Prohibited – Recovery of previous write-down is prohibited – Write-downs must be recovered if there is an increase in net realizable value Confidential and Proprietary

Financial Instruments • US GAAP • IFRS – Fair Value Measurement – based on exit price to sell asset or transfer liability – Financial instruments can be measured at fair value except for specific ineligible financial assets & liabilities – May recognize day one gains on financial instruments reported at fair value (even when all inputs to the measurement model are not observable) Confidential and Proprietary – Fair Value Measurement –Fair value is generally the amount that the asset could be exchanged or liability transferred (entry price) – Financial instruments can be measured at fair value provided certain criteria are met – Day one gains are recognized only when all inputs to the measurement model are observable

Revenue Recognition • US GAAP • IFRS – Products: Delivery, sale occurred, fee fixed, fee collectable, no contingencies – Products: Risk/reward transferred, buyer controls goods, fee measurable, benefits flow to seller – Services: delivery, sale occurred, fee fixed, fee collectable, no contingencies – Services: LT contract accounting, including consideration of % complete – Construction Contracts: Percentage of completion or Completed Contract – Construction Contracts: Percentage of completion or cost recovery method only Confidential and Proprietary

Considerations, Benefits and Opportunities Confidential and Proprietary

Considerations • Internal Controls – Initial conversion may be viewed as a significant change in the internal control environment and may require disclosure under SOX § 302 – Conversion could result in changes to significant accounts which could have an impact on: • Current SOX § 404 scoping methodology and processes • Current composition of key controls – Existing ICFR process documentation will have to be redocumented to reflect IFRS induced accounting and financial reporting changes Confidential and Proprietary

Considerations • Internal Controls (cont) – New internal controls will need to be designed and implemented to ensure that IFRS conversion is complete and accurate – Additional internal controls may need to be designed to satisfy temporary dual reporting requirements Confidential and Proprietary

Consideration • IT internal controls – The IT control environment may change if the current IT infrastructure does not easily provide mapping to IFRS information – New IT controls will need to be designed to manage IFRS data conversions – IT application control activities may change as a result of accounting system changes e. g. COA and consolidation entries – Data privacy controls may need to be reviewed from a global perspective Confidential and Proprietary

Considerations • Corporate Governance – Tone at the top - support of Senior Management – Impacted business units and corporate functions are accountable for implementing changes in their area – Reviewers will need the knowledge and authority to police sufficiency of disclosures – Adequacy of current process and policies – Sufficiency of compensation schemes and performance evaluation Confidential and Proprietary

Considerations • Training and Communication – Shareholders, investors, analysts and rating agencies – Audit Committee, senior executives, business units and other corporate functions regarding the flexible nature of IFRS – Periodic transfer of knowledge from external consultants and sub-contractors throughout transition – Continuous professional education for employees Confidential and Proprietary

Considerations • Expertise – Lack of auditor scrutiny skills – Internal resources – Need for assistance from external consultants • Regulatory Challenges – SEC and foreign regulation scrutiny – Determining the “correct” interpretation of standards and resolving differences with auditors Confidential and Proprietary

Considerations • FAS 109 vs. IAS 12 Income Taxes – Currently 15 -20 differences between • Anticipated high-impact areas – LIFO – Accounting for Revenue – Asset Impairments – Hedging activities – Stock-based compensation Confidential and Proprietary

Considerations • Other – Contractual obligations – Debt covenants & hedging contracts – Lenders may require conversion Confidential and Proprietary

Benefits of Conversion • Reduces cost of raising capital • Improves transparency of business transaction reporting • Reduces compliance costs for multinational companies by creating synergies • Reduces complexity resulting in fewer potential accounting errors • Increases US and worldwide competitiveness • Improved Comparability(? ) Confidential and Proprietary

Opportunities • Centralize finance and control functions • Streamline accounting & financial reporting • Expand merger & acquisition activities • Refine existing policies & procedures • Train employees in accounting policies & procedures • Expand Stock and Debt Offerings • Streamlines tax strategy and planning development Confidential and Proprietary

Be Proactive and Reap the Benefits Confidential and Proprietary

Estimated Cost of Implementation • Estimated cost of preparing the first IFRS consolidated financial statements of publicly traded companies is: • Estimated costs of preparing IFRS consolidated financial statements in following financial years is: N=162 Source: EU implementation of IFRS and the Fair Value Directive, October 2007 Confidential and Proprietary

Lessons Learned N=162 Source: EU implementation of IFRS and the Fair Value Directive, October 2007 Confidential and Proprietary

Lessons Learned • Set a firm adoption date for the company to encourage employee/participant buy-in. • Implement some conversion steps along the way to reduce procrastination (e. g. proformas, policy review) • Consider IFRS only in determining accounting policies (to avoid adopting a US flavor of IFRS) • Audit fees were the 2 nd and 3 rd highest costs. Support provided by auditors with the introduction of IFRS included: – giving advice on selection of accounting policies; – providing model IFRS financial statements; – issuing publications/guidance notes; – giving training seminars; and – giving advice on developing accounting policies Confidential and Proprietary

IFRS Project Team Composition • 32% - External Consultants played advisory role • 30% - Impacted Business Units/Corporate Function were represented in relevant project team • 27% - Impacted Business Units/Corporate Function were represented in central project team • 11% - External Consultants played a major role or led in the project team • 0% - Sub-contractors were used to implement changes Confidential and Proprietary

Extent of System Changes Required • 40% - Implement new information systems • 32% - Modified existing information systems • 8% - Plan to implement new information systems • 4% - Plan to modify existing information systems • 16% - Do not plan to modify existing information systems Confidential and Proprietary

Get Ahead of the Game • Get educated and be proactive to stay educated • Look for opportunities to build your team expertise • Educate your internal and external stakeholders • Establish a Project Management Plan, including milestones Confidential and Proprietary

Get Ahead of the Game • Identify project resources (company wide representation) Accounting & Reporting Operations & Processes Governance IT systems Confidential and Proprietary Human Resources

Get Ahead of the Game • Conduct a preliminary business impact assessment – Financial Results - SOX 404 Compliance – Processes - Risk Management – Policies • Actively manage project issues • Utilize change management discipline Confidential and Proprietary

Web Based Resources: • Website Resources – www. iasb. org – www. fasb. org – www. sec. gov – www. cfo. com • Website Resources – www. aicpa. org – www. complianceweek. com – www. accountingweb. com – www. executiveboard. com • Jefferson Wells and Regional IFRS SME – maurene. carlson@jeffersonwells. com Confidential and Proprietary

Comments and Discussion Confidential and Proprietary