Financial statements in an IFRS world: are they really comparable?

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Financial statements in an IFRS world: are they really comparable?


Clip one

Nancy Salisbury“One of the more significant changes that they should be paying attention to is how many periods are going to be required to present. There are differences between what the IFRS standards require in terms of periods and what the SEC requirements require. So, right now, US registrants are used to presenting two balance sheets and three comparative periods of all of the other statements. However, when foreign private issuers moved over to IFRS, the SEC gave them an exemption — or gave them relief — and only required two comparative periods for all of the statements. We’re not clear whether or not the SEC will consider doing that. It seems unlikely, but we’re just not sure whether the SEC would grant that relief. Adding complexity to that is that the IFRS 1 standards require that companies include an opening balance sheet in a company’s initial IFRS financial statements, creating a third period that would have to be presented as well.”
Moderator, Nick Prior Cosmetically, does an IFRS balance sheet look the same as a US GAAP balance sheet?”
Nancy Salisbury“There’s no clear requirement in IFRS as to how things are to be presented, but the current convention we’re seeing is that companies are presenting least liquid to most liquid on the balance sheet, so cash, for example, moves from the top down to the bottom of the balance sheet, so it will surprise and look quite different.”

Clip two

Ken Marshall “I think that from a US GAAP to IFRS perspective, we’re actually starting with fairly similar disclosure requirements, so we don’t really expect that type of incremental growth in the footnotes — at least I hope we don’t see that type of growth. Where there will be some additional disclosure, though, is probably noteworthy in three spots. First, when you footnote one or footnote two or significant accounting policies, that’s likely to expand. We’re going to have to move away from boilerplate. As a matter of fact, it’s one of the fairly routine comments that the SEC has been giving foreign private issuers as they’ve reviewed financial statements — “Please expand on your accounting policy for this particular transaction or set of transactions” — because it’s principle-based and the reader needs to know how you’ve applied the principle and it may differ from company to company. So, that’s an area where we see more robust, probably bigger, disclosure. Second is on the roll-forward of certain accounts.

Nancy will talk about PP&E later, but also certain estimates almost built in auditability to financial statements. And then lastly, in financial instrument reporting, a lot of the risk information surrounding financial instruments in the use of that are contained in the standard called IFRS 7. That brings in a number of disclosures that we in the US would typically have put in the fore-section of our 10(k)s and not in the “f” pages and not in the financial statements proper. Examples of that are value at risk and other measures. They come in to the footnotes, and by the way, if included in the footnotes obviously they are audited, so it does need a little bit more focus.”

Clip three

Tai Danmola “When companies go from one GAAP to another, they need to transition. And…if you take a look at the way that foreign private issuers transition to US GAAP when they come here, they would literally have to go back and pretend as if they’ve always been on US GAAP, so you have to reconstruct a lot of history. Now, what happened in Europe, when the Europeans were transitioning to IFRS, is they realized that this is a monumental task — that they really need to go back and reconstruct a lot of information. What they had to do was appeal to the IASB [International Accounting Standards Board], which is the board that governs or issues IFRS, and say, look, the cost of actually fully complying with the previous first-time adopter rules is going to be astronomical. Is that what you want, while the user is not going to really see the benefits? So, we need some relief here.

What the standard has done was to really write rules that are geared towards really accommodating that transition, helping people transition from old GAAP to new GAAP. And the way you do that is by giving them a lot of elections to make during that transition. We’re going to go through this in more detail, but what you’ll find is as people prepare to transition — as they look at the various standards they are transitioning to — they’ll have to look to about 14 available elections that they can make to help them transition. What does that do? It basically introduces some level of diversity in terms of when you compare financial statements from one company to another. As Ken indicated, those tend to wear later on and comparability becomes better. But initially, it’s going to affect comparability.”

Clip four

Tai Danmola“Business combinations was an area that was very difficult for the Europeans, as I indicated before. You were going from the UK, for example, where the previous rules were very well-structured, through other locations where there weren’t a lot of rules around accounting for business combinations. People just took whatever the balance sheet was of a target company they just acquired and slapped it onto theirs and that was their business combination accounting. You’re going now to a set of rules that says when there’s a change of control, you need to then revalue all of the assets acquired and liabilities assumed and recognize something called goodwill.

There was a lot of angst amongst people in those areas where they never collected the contemporaneous information to actually go back and retrospectively apply IFRS 3. So, the board decided that the best way to accommodate both constituencies (both extreme sides) is to actually give them an election. And the election basically says you will have the opportunity to go back — or to decide whether you want to go back — and restate for prior business combinations to comply with IFRS 3 (or that US companies will be adopting when we do go to IFRS), or you may decide to continue old GAAP. But the catch is, once you decide to restate, you will have to restate all prior business combinations that occurred. If you go back in time to restate from one business combination, you will then have to restate for all business combination transactions that occurred since that time, because they didn’t want people to cherry-pick between one acquisition or the other.

If you decide not to restate, you can continue your previous GAAP. But, then you have to go back and look at the balance sheet to determine whether you have recognized assets that no longer qualify to be recognized under IFRS. You take those back, or you can also find new assets that you acquired but you never recognized because there were no standards for recognizing intangibles generally from under your old GAAP. And this will qualify for recognition, but only at the acquiree level because now the acquirer has decided not to restate for those. So, only those assets qualify for recognition at the acquiree level, then you can put those back in. Previously, those were deemed to be subsumed into goodwill then you could change numbers for those new assets that were recognized.”

Clip five

Nancy Salisbury“Well, employee benefits, what IFRS provides in election — that companies for their defined benefit pension plans can decide upon adoption of IFRS — is to wipe the slate clean per se of all their unrealized actuarial gains and losses. The reason this is important and why they granted this is because there are differences in how the actuarial calculation is done. And that number, that unrealized gain, is a cumulative number so if they didn’t grant this and allow people to wipe it out, people would actually have to go back to the inception of the plan and do actuarial calculations all over from day one.

Something important to remember, though, is that even though you do get to wipe it out as part of your adoption of IFRS, you are likely going to have to get a new actuarial calculation done because of these differences in the actuarial calculations. You’re going to have to get an actuarial calculation done in accordance with IFRS. And so companies are going to want to make sure that they’re ready to do that, but also that their actuaries are ready to do that, and that their actuaries understand the details of what these differences in the calculation are.”

Clip six

Ken Marshall “This issue has to deal with the stand-alone financial statements of subsidiaries, in context with the parent that is now adopting IFRS. What it allows for is — let’s take it first from what we’re likely to face in the US — a situation where a parent is now adopting IFRS but some of its subsidiaries which have had statutory standalone reporting requirements in various jurisdictions have already adopted IFRS. And in those cases, what the standard requires is that any measurement of assets and liabilities in those financial statements where there has been an unreserved statement that they are now IFRS-compliant are the measurements to be used in the parent’s financial statements — you go back and try to re-measure.

If you go the other way, in a situation where the parent has adopted and now the subsidiaries are adopting IFRS for their standalone accounts, the standard allows you an option. It either allows you to use the measurement basis that the parent used, or it allows you to look to IFRS 1 for exemptions. So, that’s the skinny of it. What’s important, though, is that IFRS 1, when you make that unreserved statement of adoption of IFRS in a subsidiary’s standalone accounts — and we mentioned this on the last webcast — that will bind you into those exemptions in that statutory report. If the parent comes along later, which is what’s going to happen in the States for US registrants, it doesn’t get another bite at that IFRS 1 apple for those standalone accounts. You don’t wipe it off and start fresh again.

What we could end up with is a situation on business combination, pension accounting, you name it, having made a choice here as a subsidiary which is not the same choice that the parent company — we end up creating some fairly permanent differences, even though both accounts are being done on IFRS. So, clearly, I think a parent company now in the States, if you have a footprint outside of it, should start to look at which subsidiaries are on IFRS, where have you made those elections, and as you start moving in certain subsidiaries begin adopting IFRS, you want to make sure they’re doing the type of adoption you would want, so that we don’t build in those inefficiencies.”

Clip seven

Tai Danmola “I have to tell you that IFRS 1 is very important, because it’s the transition document from old GAAP to new GAAP. The new IFRS 1 was written to again accommodate some of the challenges that Europeans had. If they were not proactive, in looking forward to those challenges, they wouldn’t have had or given the board the opportunity to rewrite the standard. The Canadians have now started to look at their adoption and have petitioned the board for them to consider adding some additional relief for Canadian companies. US registrants need to start now and anticipate what those challenges are, so that our representatives, our constituents can petition the IASB [International Accounting Standards Board] to consider certain unique aspects for US issuers that they need to make amendments with respect to IFRS 1. So, suffice to say, this is a living document. I will expect that by the time the US decides to go forward with IFRS that the document will change somewhat to add more relief. But again, if people are not proactive to get those things out there so that our representatives know what to petition the IASB for, I think we will miss an opportunity to do that.”

Clip eight

Nancy Salisbury ] “I think I would probably leave the audience with the importance of the actions of the SEC in this area. I think we highlighted throughout our discussion today that beyond just providing us a date and letting us know whether it’s going to be a date certain or it’s going to be an optional event, the way in which the SEC approaches this and the regulations they put around this are going to have a significant impact on US companies, how we can get this done, how we’re allowed to approach it, the rules we’re going to and all that. So companies really need to monitor what the SEC’s doing, provide feedback, stay involved and help so that we can all have something that’s workable.”

Clip nine

Ken Marshall “Last word is: convergence, or, I’m sorry, conversion, yes, in the short term is likely to lead to some lack of comparability. But what I wouldn’t want people to take from this is that it will be total anarchy. IFRS, again, we talked about principle-based accounting leading to multiple conclusions — that is not likely to happen. The lack of comparability I’m talking about is built into the system. It will be well-disclosed and should assuage most constituents’ concerns. And that short-term discomfort, I think, is going to go a long way to helping the capital markets globally function a lot more efficiently and effectively and will be both to the benefit of US companies as well as our investor constituents. So again, a little bit of discomfort now is going to go a long way for the long run.”