IFRS 2 Key issues to consider now Chuong Pham, Bryan Anderson and Ere Furbino April 9, 2009.
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Transcript of IFRS 2 Key issues to consider now Chuong Pham, Bryan Anderson and Ere Furbino April 9, 2009.
IFRS 2Key issues to consider now
Chuong Pham, Bryan Anderson and Ere Furbino
April 9, 2009
2Copyright © 2008 Deloitte Development LLC. All rights reserved.
Caveats
The following discussion and examples do not necessarily represent the official views of Deloitte Tax LLP with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time.
3Copyright © 2008 Deloitte Development LLC. All rights reserved.
Agenda
Regulatory Update Page 3
Journey through an IFRS Conversion Page 15
IFRS 2, Share-Based Payment Page 26
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Regulatory Update
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IFRS in the U.S.: Recent developments
December 2007– Foreign private issuers can file under IFRS without a reconciliation to U.S. GAAP
November 2008 – SEC issues proposed roadmap and rule changes
– Roadmap describes milestones for the mandatory transition to IFRS starting in 2014
– Proposed rule change permits the largest U.S. companies (by market cap) in IFRS predominant industries an option to adopt IFRS starting in 2009
December 2008– The G-20 adopted, as a medium-term priority, the implementation of a globally consistent set of
accounting standards
January 2009– Mary Schapiro, SEC Chairman, in her Senate confirmation hearing, responded to questions from
Senator Jack Reed, stating that she would carefully review the existing IFRS roadmap and proposed rule and would consider various factors, including the cost of implementation and independence of the IASB
– Paul Volker, chairman of the Economic Recovery Advisory Board under President Obama, reiterated his support for IFRS
February 2009– SEC extends comment period on roadmap from February 19 to April 20, 2009
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SEC Roadmap: Milestones to be considered in 2011 before future mandate
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SEC Roadmap: Transition milestones and other considerations
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SEC’s Proposing Release on early adoption of IFRS
Rationale for giving certain U.S. issuers an option
Identifies categories of U.S. issuers whose use of IFRS would promote comparability with global competitors
Provides information on how to assess eligibility
Instructs issuers to submit their criteria for eligibility to the Division of Corporate Finance and receive a “letter of no objection” permitting the use of IFRS– Process to follow when requesting eligibility
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SEC’s Proposing Release on early adoption of IFRS (cont’d)
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What’s happening now in the U.S.
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Putting principles into action
U.S. GAAP
IFRS
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The Road to IFRS in the U.S.
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Recent Company Feedback on IFRS
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Journey through an IFRS Conversion
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IFRS Conversion Approaches
Top-Down– Convert the consolidated financial statements
Bottom Up– Convert statutory/subsidiary financial statements first
Journey is based on a “Top-Down” approach
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IFRS Conversion – Project Approach
Systems & Process
Systems & Process
Communication / Training
Communication / Training
Financial StatementsFinancial
Statements
• Compare IFRS to US GAAP• Document differences • Quantification of Differences• Redraft Policies • Coordination with Auditors
• Oversee the System & Process stream of work• Assessment• Development of Roadmap• Short Term Solutions• Long Term Solutions
• Statutory Requirements
• Presentation of Financial Statements
• Disclosures• Adoption Release• Investor information
• WebEx Presentation • Segment Presentations • Training and Communication needs identified
through the system & process assessment• Launch and maintenance of website
Assessment of Differences
Assessment of Differences
17
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Begin the Journey Early!
Assessment – Be mindful of “High-level” vs. “detailed” assessment
– Identification of GAAP difference vs. an error
– IFRS 1 election
Documentation– Proving a difference is not material or not applicable
Quantification– Key step to identification of process changes
– Hard to assess impact on organization without concluding on how to calculate the change
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Systems & Process
Need to understand current process– Process documentation may be out of date or not present
Summarize expected changes
Develop detailed implementation plan– Short-term fix
– Long-term objectives
Conversion of Systems to IFRS– Develop process to keep US GAAP historical data
– Pushing entries down in to subsystems can be challenging
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Current Process – Share Based Payments
Current Process Features
Calculations for RSU, Stock Options, SAR, PRSU and PPRSU are all done using US GAAP Excel templates, entries for PRSU and PPRSU are communicated to the BUs for entry to SAP. Other entries are booked at a corporate level in SASFM
Fair value calculations are performed for newly granted Stock Options only and are done by 3rd Party Provider whenever there is a new grant
`
`
`
INPUT
BU
SIN
ES
S
UN
ITS
CO
RP
OR
AT
E
PROCESSING & ADJUSTMENTS G/L CONSOLIDATION
` `
SBP Data Warehouse
3rd Party Provider
computes fair values for new
grants
Extract PRSU / PPRSU / MSU / DSU information
Extract RSU transactions
TH
IRD
PA
RT
Y
Receive calculated
number from Corporate
USGAAP Template Perform
USGAAP calculations in the template
Send US GAAP numbers
calculated to SBU’s
Book entries to general ledger SAP G/L
SAP G/L
Sta
rt
Extract Grant, Exercised, Expired and Forfeited Stock Options information
End
New Grant?
Obtain FV calculations from
Towers Perrin
Yes
NoReview US GAAP numbers received
and prepare consolidated entries
in SAS FM
Extract SAR transactions
PRSU / PPRSU?
Yes
No
20
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# Revised Process Features Owner1 The changes to the template which are required for IFRS have already been incorporated into the Share Based Payment spreadsheet currently used for us
CGAAPJohn Doe
2 3rd Party Provider will need to adjust the Fair Value calculation to an accelerated method from the straight line method currently used and perform the fair value calculation quarterly instead of annually
3rd Party Provider
3 The SAR FV calculation template will need to change to adopt a FV calculation from intrinsic value currently used John Doe
4 PRSU & PPRSE expense continues to be booked at the BU level John Doe comm. to BU’s
5 DTA numbers are calculated in the IFRS template (The template already calculates the required numbers) and entries will be booked at a consolidated level in SAP G/L by Corporate.
John Doe
6 The calculation of deferred payroll tax is carried out within the IFRS template (The template already calculates the required numbers) and entries will be booked at a consolidated level in SAP G/L by Corporate.
John Doe
7 Future-state automation of the IFRS calculations may involve performing the IFRS calculations in SBP Data Warehouse John Doe
Revised Process – Share Based Payments`
`
`
INPUT
BU
SIN
ES
S
UN
ITS
CO
RP
OR
AT
E
PROCESSING & ADJUSTMENTS G/L CONSOLIDATION
` `
SBP Data Warehouse
3rd Party Provider computes fair values for new grants
Extract PRSU / PPRSU/ MSU /
DSU information
Extract RSU transactions
TH
IRD
P
AR
TY
Receive calculated number from
Corporate
Send number to be booked at
BU’s
Book entries to general ledger SAP G/L
SAP G/L
Sta
rt
Extract Grant, Exercised, Expired and Forfeited Stock Options information
End
IFRS TemplatePerform IFRS
calculations and send to director of consolidation team
New Grant?
Obtain IFRS FV calculations from
3rd Party Provider
Yes
No
Review IFRS numbers received
and prepare consolidated entries
DTA Accural Calulcation
1
Extract SAR transactions
FV Calculation (in IFRS template)
HR Obtain information on Grants for FV
calc
Payroll Implication
Payroll Calculation
No
Yes
PRSU / PPRSU
Yes
No
2
4
5
6
3
7
21
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There are a number of accounting changes which impact the calculation of Share Based Payments (SBP). These changes impact Stock Options, SARs, RSUs, PRSUs and PPRSUs. All of the changes for Share Based Payment impact at the corporate level, there is not direct impact on the Business Units.
• Grade Vesting : This change has no implication on the process however [3rd Party Provider] will need to be informed of the change for the Fair Value calculations. (There will be change in the process as company will have to now calculate expense on accelerated method then straightl-ine method.)
• Fair Value / Intrinsic Liability: The templates used for the SAR calculations will need to be updated to reflect the accounting change on conversion to IFRS. (not applicable to US company as USGAAP/IFRS has same treatment for liability plan)
• Forfeiture – Actual vs. Estimated : For Stock Options and SARs currently the Company does not accrue for forfeiture estimate and recognized as vested. Under IFRS, the Company will be required to estimate the number of equity instruments expected to vest and then revised estimate as required. This will add an additional process to the current workflow. (no difference between IFRS and US GAAP)
• DTA : All SBP types are affected by this change. This results in an additional process and journal entry for the accrual.
• Payroll Taxes : Currently payroll taxes are expensed as incurred, i.e. at the time of exercise. Under IFRS the Company should accrue for Payroll tax during the award life. The accrual process is additional step to the current workflow.
IFRS Process & Systems Impact
John Doe: Corporate Accounting Owner
Business Unit: Corporate
Business Area: Share Based PaymentsBusiness
Unit & Area
Summary – Share Based Payments
22
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• Spreadsheets containing the adjustments required for IFRS have already been developed. Further updates to the spreadsheets may be required to remove US GAAP as a step within the calculations.
• Third Party providers need to be informed of the calculated changes that are required, initial communication has already been held a formal communication should be made
Overview
Implementation Plan – Share Based Payments
Technology
Process
Organization
Comments
Validation of IFRS Templates
Investigation into use of SBP Warehouse for automated calculations
Template Training
Process investigation for SBP Warehouse
Third Party Communication
The Updated IFRS excel calculation templates have already been developed
Templates to be reviewed and approved by the Company for ongoing use
Potential to use the SBP Data Warehouse to automate processes to be investigated.
Determine need to dual run US GAAP & IFRS templates
No organizational impact is anticipated
Communications are focused on corporate because of no impact on Business Units
Formal communication required for third parties
Target Date
US GAAP Requirements
Validation of IFRS Templates
x/x/xx
x/x/xx
x/x/xx
x/x/xx
x/x/xx
x/x/xx
x/x/xx
x/x/xx
Streamlining of IFRS template
-2 m -1 m +1 m +2 m +3 m +4 m0
23
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Communications and Training
Creating IFRS Company Web-page– Blog for Q&A
– Excellent avenue to post materials, presentations, draft policies
Training needs may vary depending on issue and number of people impacted
– Share based payment may not impact that many individuals
– Revenue or cost changes tend have significant enterprise wide impacts
Impact on Internal Budget/Forecast– How will the accounting change impact my budget?
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Financial Statements
IFRS 1 disclosures– Describe accounting differences between US GAAP and IFRS applicable to
the Company
General disclosure differences– No major SBP disclosure differences
– Redrafting of significant / critical accounting policies
– Changes in financial statement presentation Income Statement and Other Comprehensive Income Equity
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Observations / Lessons Learned
Resource Constraints– Presumably you are already too busy, how do you “free” up time for IFRS?
Lack of rules, detailed guidance – Mind shift to principles based thought process is difficult– IFRS 1 adoption impact on retained earning
Easy to delay/shorten planning phase– Hard to spend $$ in planning during recession – Belief that the issues are simple and easy fixes
Not enough Communication – If you don’t communicate early and often, others will and the message is usually not
accurate
Patience & Flexibility– New facts or unexpected issues will arise– Previous decisions revisited or changed entirely
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Share Based Payment
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Classification of Awards
Award Features US GAAP IFRS
Redemption for cash at the employee’s option after 6 months
Equity
(FAS 123(R).31)
Liability
Net settlement to satisfy minimum tax withholding obligation
Equity
(FAS 123(R).35)
Depends on facts
Awards granted by a subsidiary but settled in parent company stock
Equity Liability
(IFRIC 11)
Vesting condition other than service, performance or market condition
Liability Equity (IFRS 2.21A)
Number of shares issuable is variable Liability Equity
(IFRS 2.BC110)
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29
Awards with Graded Vesting Features
US GAAPAccounting policy choice: An entity may choose to measure graded vesting share-based payment awards as either a single award (Single Life Method) or, in substance, as multiple awards (Multiple Life Method).
Multiple life method requires estimation of valuation assumptions for each tranche.
Holding other input assumptions constant, estimating an expected life of each tranche will cause the overall value of the award to decline slightly.
Estimating volatility for each tranche may have a significant impact on valuation.
IFRSMultiple Life Method: Determine option value based on separate valuations of each tranche. (Paragraph IG11 of IFRS 2)
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Graded Vesting Example– Upward Sloping Volatility
Number of Tranches 3
Stock Price $10.00
Strike Price $10.00Dividend Yield (%) 0.00%Risk free rate (%) 3.33%Volatility (%) 35.0%Contractual Term (Years) 10.00
GAAP-123(R) Value $3.23IFRS 2 Value [1] $3.07
Difference ($) -$0.16
Difference (%) -5.06%
Notes
Inputs Volatility Term Structure
[1] Under IFRS 2, the expected term for plain-vanilla options is estimated for each individual tranche. The IFRS value shown is the weighted-average value of each of the individual tranches. The overall weighted-average expected life is set equal to the expected life assumed under GAAP. We have assumed that the expected life of each tranche is equal to a fixed amount of time plus the individual tranche's vesting period, such that the weighted-average expected life of the tranches is equal to the expected life under GAAP.
Summary 0%
10%
20%
30%
40%
50%
60%
70%
1 2 3 4 5 6 7
Expected Term (Years)
Vo
lati
lity
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Expense for Awards with Graded-Vesting
US GAAPAn entity has an accounting policy choice to either
(1) recognize a charge on an accelerated basis (similarly to the method under IFRSs) or
(2) amortize the entire grant on a straight-line basis over the longest vesting period.
IFRSA compensation charge is recognized on an accelerated basis by treating each separately vesting portion of an award as a separate grant.
• Accounting differences between U.S. GAAP and IFRSs will arise for an entity that adopts the straight-line method under U.S. GAAP for awards with graded vesting.
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Income Taxes
Areas US GAAP IFRSDeferred tax Deferred tax is based on GAAP
expenseDeferred tax is based on expected tax deduction under applicable tax law
Income statement impact
Deferred tax benefit is recorded as reduction in tax expense and trued up (through APIC pool or P/L) when tax benefit is realized
Deferred tax benefit is recorded as reduction in tax expense up to IFRS expense times tax rate (limit not applicable to liability awards)
ISO and ESPP
Cannot record a DTA based on anticipated deduction
Initial reaction is to follow FAS 123R
• Deductible amount, calculation methodology, and timing will need to be tracked for each jurisdiction at each reporting date
• Tax expense will vary independently from book expense resulting in an increase in effective tax rate volatility
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Deferred Tax Example
Grant date January 1, 2007 Options granted 1,000 Grant-date fair value $10 Exercise price $23 Vesting 4-year cliff FMV at 12/31/2007 $25 Tax rate 40%
GAAP Deferred Tax Asset: GAAP Expense x tax rate
(1,000 * $10 * ¼) * 40% = $1,000
IFRS Deferred Tax Asset: Intrinsic value at reporting date x tax rate
(1,000 * ($25-$23) *1/4) * 40% = $200
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Impact on Effective Tax Rate
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Payroll Taxes
US GAAPLiability is recognized when the taxes are levied (e.g., on exercise of an option). (Issue 00-16).
IFRSLiability is recognized over vesting period, subject to re-measured at each balance sheet date until settlement.(IAS 37 and IAS 19).
• Fair value or intrinsic value?• Application of Social Security wage base• Application of estimated forfeiture rate
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Overview of Differences and Implications
Key PotentialDifferences
Potential Implications
Financial Statement
Process/Systems
Other
Award Classification
Measurement
Expense
Tax Accounting
Payroll taxes
Differences in timing, amount and volatility in compensation expense recognition
Differences in tax effects on balance sheet, income statement and effective tax rate
Process and data capture around tranche-by-tranche measurement and expense amortization
Process and data capture for income and payroll tax accounting based on applicable law
Tracking employee mobility for tax accounting
Program design due to differences in classification, measurement and financial performance metrics
Impact on cash tax deduction, chargeback and transfer pricing arrangements
Sh
are Ba
sed
Pay
men
ts
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About Deloitte
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IFRS resources
Tools and/or publication Description
IFRS Insights Newsletter Periodic newsletter covering a spectrum of key issues for U.S. companies related to IFRS. http://www.deloitte.com/dtt/article/0,1002,cid%253D214443,00.html
Deloitte IFRS Courses IFRS e-learning modules, available online for freehttp://www.iasplus.com/dttpubs/elearning.htm
IAS Plus Website Leading online IFRS resource.http://www.iasplus.com/index.htm
IFRS in your Pocket 2008 Details information about the IASB, use of IFRS around the world, summaries of IFRS standards and other useful IASB information.http://www.iasplus.com/dttpubs/pocket2008.pdf
Presentation and Disclosure Checklist
Checklist incorporating all of the presentation and disclosure requirements of Standards. http://www.iasplus.com/fs/2007checklist.pdf
Model Financial Statements Model financial statements illustrating the presentation and disclosure requirements of IFRS. http://www.iasplus.com/fs/2007modelfs.pdf
First-Time Adoption: A Guide to IFRS 1
Application guidance for the “stable platform” standards effective in 2005. http://www.iasplus.com/standard/ifrs01.htm
Share-Based Payment: A Guide to IFRS 2
Guidance on applying IFRS 2 to many common share-based payment transactions. http://www.iasplus.com/dttpubs/shbased.pdf
Business Combinations: A Guide to IFRS 3
Supplements the IASB’s own guidance for applying this Standards http://www.iasplus.com/dttpubs/ifrs3.pdf
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Panelists' Contact Information
Chuong PhamTax Director | Global Employer Services Deloitte Tax, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA
Tel/Direct: +1 212 436 6649 | Fax: +1 212 653 6065 | Mobile: +1 973 270 8219 [email protected] | www.deloitte.com
Bryan AndersonSenior Manager | Global IFRS and Offerings Services Deloitte & Touche, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA
Tel/Direct: +1 212 436 4914 | Fax: +1 212 653 5982 | Mobile: + 1 203 293 5196 [email protected] | www.deloitte.com
Ere FurbinoSenior Manager | Global IFRS and Offerings Services Deloitte & Touche, LLP New York WFC, 2 World Financial Center, New York, NY 10281-1414, USA
Tel/Direct: +1 212 436 5186 | Fax: +1 212 653 4708 | Mobile: + 1 917 288 9216 [email protected] | www.deloitte.com