PwC IFRS blog

Work ahead for Boards as convergence continues

Doesn’t time fly! It is almost a year since my last posting on the subject of IFRS adoption in the US. You may recall that the SEC had just released for comment its long-awaited proposed roadmap, and moves towards IFRS adoption seemed to be gathering pace.

Around 220 comment letters were received in response to the proposed roadmap. These revealed overwhelming support for a move toward a single set of globally accepted high-quality accounting standards, although views differed on the most suitable approach to get there.

One of the benchmarks established in the proposed roadmap was for continued improvements to IFRS, consistent with the Memorandum of Understanding (MoU). This so-called convergence agenda has had a high profile over the past year, with the G20 leaders, the Financial Crisis Advisory Group and other stakeholders expressing support.

However, the financial crisis has also highlighted differences between current IFRS and US GAAP, as well as differences in views about the best ways in which to resolve them. While the IASB and FASB have repeated their commitment to completing the convergence projects identified in the MoU by 2011, they have recently had difficulty in reaching common views in some areas, such as the use of fair value.

The Boards issued a joint statement last month, once again confirming their commitment to convergence. This was accompanied by a joint statement from the Trustees of the International Accounting Standards Committee Foundation and the Trustees of the Financial Accounting Foundation, the respective oversight bodies of the IASB and the FASB.

The Trustees said they were aware of concerns that differing project timetables for certain projects on each Board’s agenda may pose obstacles in reaching the goal of convergence. But they agreed to interact formally and regularly to monitor the progress and to help resolve issues.

Developments over the past year will no doubt have been of interest to the SEC as it considers what to do next. Notwithstanding the challenges, I remain of the view that the US will ultimately transition. What we don’t yet know is when and how.

The SEC has said that it will increase transparency around IFRS considerations, so there is likely to be more visible activity on IFRS later this year and/or early in 2010. Any final decision on a mandatory adoption date is still anticipated during 2011, or shortly thereafter. In response to preparer concerns, there are indications that the SEC may allow more than the three years proposed in the roadmap to effect a conversion. This means that the start of any mandatory conversion period is likely to extend beyond the original 2014 date.

Once the mandatory conversion timetable is established, I expect the SEC will allow a broader early-adoption option.

No matter what the outcome or timing of the roadmap may be, the ongoing convergence of standards will result in significant changes to both IFRS and US GAAP. This, together with regulatory changes caused by the financial crisis and continued global adoption of IFRS, will result in an extended period of substantial change for which companies should prepare.

As always, I am interested to hear your views, either by commenting here or by email.

What should the future hold?

In a previous posting, I commented on the IASCF’s proposals to make the IASB more accountable – for example, by requiring the Board to consult with the Trustees and the Standards Advisory Council (SAC) on agenda decisions. Although still a proposal and not yet part of the Constitution, as usual the papers for this month's SAC meeting were available in advance on the IASB’s website.

The IASB’s focus continues to be on the convergence agenda consistent with its Memorandum of Understanding with the FASB. However, an important topic for discussion by the SAC this month was the IASB’s agenda beyond 2011. At that juncture the Board could change strategy, focussing not on wholesale change but on post-implementation reviews and ‘repairs and maintenance’ of existing standards. Alternatively (or in addition), it could focus on a few larger projects.

A paper presented to the SAC noted five projects that had come to the attention of the IASB in recent years that could be considered..

• Disclosure framework. A comprehensive reconsideration of required disclosures, building on work already started by the FASB.

• Extractive industries. By September 2010, the IASB expects to have analysed comment letters in relation to its request for views on the discussion paper prepared by national standard-setters.

• Foreign currency translation. The IASB has received several requests to review the current standard by jurisdictions moving to IFRS.

• Impairment of non-financial assets. The IASB started a joint project with the FASB but decided to focus on other priorities in the short term.

• Intangible assets. The IASB previously considered this topic on the basis of research undertaken by the Australian Accounting Standards Board, but decided in 2007 not to add the project to its agenda.

Do these sound like the most important subjects that the IASB ought to address? Is there anything else that needs attention? One thought could be to complete the conceptual framework, or perhaps tackle the question of performance reporting and what ‘other comprehensive income’ represents. Or would you welcome a period of reflection in which care and maintenance of existing standards is the order of the day?

As always, I am interested to hear your views, either by commenting here or by email.

Business combinations: Soon we will see the ‘new’ standard’s effects

It feels like a long time (approaching two years) since my posting on the subject of the IASB’s revised business combinations standard. It was probably the most controversial accounting topic of its day; but now, of course, the debate has moved on, and subjects such as fair value and financial instruments are taking centre stage.

There have been few high-profile deals since the revised versions of IFRS 3 on business combinations and IAS 27 on consolidated financial statements were issued in January 2008. However, there are signs in some parts of the world that M&A activity is starting to pick up, and the timing could not be better as the revised standards are effective for years beginning on or after 1 July 2009. Although many companies with calendar years will not apply the revised standards until 2010, some of the potential deals currently attracting media attention may not be completed until next year, and these may fall to be accounted for under the new approach. This could have an impact on earnings and may influence the way in which deals are structured

Here’s a reminder, at a very high level, of some of the revised standards’ implications:

• The cost of a business combination includes cash paid, shares issued and any payments that are contingent on future events. Items traditionally considered as part of the cost of the business combination may no longer be so. In particular, transaction costs, such as legal and accountants’ fees, will be written off as incurred.
• The consideration also, in effect, includes any previously held interest in the acquired business. When control is obtained, the previously held interest will in future have to be re-measured to fair value and a gain or loss recognised in the income statement. The converse is also true: when control is lost – for example, when a former subsidiary becomes an associate – the remaining interest is also fair valued through the income statement.
• Many acquisitions are made with an element of the payments being contingent on, for example, the future performance of the acquired business. Previously, contingent payments were accrued only when probable, and they were added to and adjusted against goodwill. Under the new approach, all contingent payments are measured at fair value at the time of the acquisition. They are subsequently re-measured to fair value through the income statement. So, if an acquired business does better than originally assumed and the fair value of the liability increases, it may, paradoxically, result in a debit in the income statement; on the other hand, if the opposite occurs it would be a credit.

Most companies follow a ‘parent-company’ approach to consolidation, which means that a purchase of a minority interest (or non-controlling interest, as it is now known) leads to goodwill, while a sale of shares to a minority results in a gain or loss. The new standards take the 'economic entity' view (a concept in my view that has yet to have the benefit of an adequate debate), whereby minorities are viewed in the same way as the parent shareholders, as just another class of equity. This means that transactions with them under the new standards will not result in goodwill or gains: all effects will be recorded in equity.

These are just some of the ways in which earnings may be impacted by the revised standards. There are many reasons why an acquisition makes economic sense, but will the potential for increased volatility in the income statement influence decisions? Good deals will remain good deals, but will the structure of transactions change?

As always, I am interested to hear your views, either by commenting here or by email.