PwC Why the move to IFRS in the US is inevitable April 28, 2008 St. Louis, MO.

Why the move to IFRS in the US is inevitable

April 28, 2008

St. Louis, MO

Welcome and introduction

- Bo Butters- Troy Pingsterhaus

PricewaterhouseCoopers

Why the move to IFRS in the US is inevitable Agenda:

A financial reporting revolution outside the US

A financial reporting revolution in the US

IFRS considerations for US companies

US GAAP and IFRS potential differences

Challenges and other points of consideration

Questions and answers


The world is adopting IFRS

• All Major Non-US Capital Markets Impacted• Adoption of IFRS in the EU in 2005

- 8,000 companies

- Accelerated transition to IFRS globally

• More than 100 countries around the world require or permit International Financial Reporting Standards (IFRS)

• Countries converging or planning to converge to IFRS:

Canada China

South Africa Singapore

New Zealand Brazil

Why the move to IFRS in the US is inevitable: A financial reporting revolution outside the US


IFRS Developments – What’s the big deal

Top 10 Global Capital Markets

US US GAAP

Japan Converting to IFRS

UK IFRS

France IFRS

Canada Converting to IFRS

Germany IFRS

Hong Kong IFRS

Spain IFRS

Switzerland IFRS

Australia IFRS

The Momentum Towards Global IFRS Adoption

More than 100 countries require or permit the use of IFRS or are converging with the IASB’s standards.

Countries seeking convergence with the IASB or pursuing adoption of IFRS

Countries that require or permit IFRS

Why the move to IFRS in the US is inevitable: A financial reporting revolution outside the US


Reasonable timeline for the US transition to IFRS

2008 2010

2009

2012 2014

2007 2011 2013 2015

March 2007

SEC roundtable on US GAAP reconciliation for IFRS filers

July 2007

SEC proposal eliminating US GAAP reconciliation for IFRS filers

August 2007

SEC concept release on use of IFRS for US registrants

December 2007

Reconciliation eliminated

Between January 2009 and 2010

Potential voluntary application of IFRS permitted for US registrants

Between January 2013 and 2015

Potential mandatory application of IFRS for US registrants

Why the move to IFRS in the US is inevitable: A financial reporting revolution in the US

A reasonable timeline for transition to IFRS?


The early “fires” of revolution…

• October 2002 Norwalk Agreement• Convergence

- Objective is to create one global set of high-quality standards

- Beginning: equivalent standards

- Now: robust, transparent frameworks with similar principles

- “Convergence means change” – Bob Herz, FASB Chairman

• Competitiveness of the US capital markets• Simplicity in US financial reporting• April 2005 SEC “roadmap”

- Goal to eliminate the reconciliation as early as possible and no later than 2009



The early “fires” of revolution…(continued)

• SEC Roundtable on US GAAP Reconciliation – March 2007

- Broad support for roadmap and elimination of reconciliation

- Support for convergence

• August 2007 Concepts Release

- Should domestic issuers be allowed to use IFRS?

- Most constituents agree some form of transition to IFRS in the US is preferred

• SEC eliminates reconciliation

- Foreign companies filing under IFRS as issued by the IASB will not have to reconcile to US GAAP for fiscal years ending after November 15, 2007

• SEC Roundtable on IFRS – December 2007



Key Messages from Concept Release Responses and SEC Roundtable Discussions

• Broad support for mandatory change; mixed support for allowing early adoption; a reasonable transition period is within five years

• Reconciliation back to US GAAP is a disincentive to IFRS adoption

• Regulatory environment is important – US GAAP and IFRS reporting quality are similar in the same regulatory environment

• Cooperation, communication, consistent interpretation and respect for professional judgment by regulators are imperatives

• Comparability and cost efficiencies are key benefits – initial cost /time commitment will be high; but worthwhile

• IFRS and US GAAP convergence efforts should continue

• IASB independence, including funding, should be ensured

• Education and licensing are not seen as large hindrances



PwC’s View on IFRS in the US

• Globalization will drive a change to IFRS in the US• Domestic registrants should have the same option as FPIs• Ultimately the US markets will have only one GAAP and it will be IFRS• Transitioning to IFRS will be at a cost, but it will be worthwhile

- Enhance efficiency of capital allocation- Cost savings for harmonized global reporting systems

• The current convergence model is a challenging proposition• IFRS provides opportunities to

- Increase global comparability- Reduce complexity and simplify financial reporting - Implement a principles-based framework in the US- Reduces complexity; allows for greater use of professional judgment



Market Considerations Why now?

• Ease of access to other capital markets (potentially reduced cost of capital)

• Stakeholders may request IFRS information• Global competitors are already applying

IFRS (benchmarking)• Certain US domestic-listed companies with

global operations are beginning to prepare for IFRS (best-in-class finance function)

• IFRS influences US GAAP

• IFRS is globally accepted- Over 100 markets require or permit a form of IFRS- Other large capital markets (Canada, Japan, China, Brazil and Korea) plan to adopt or converge

with IFRS • IFRS is gaining momentum in the US and its eventual adoption is inevitable

- SEC has agreed that foreign private issuers can use IFRS instead of US GAAP- Voluntary adoption for some US domestic companies could be allowed as early as 2009

• You want to be ready if IFRS becomes an option or is mandated in the US- Knowing the impact of IFRS for transactions and stakeholder communications requires planning

(e.g., stock compensation, debt/equity classification, covenants)- IFRS requires complete and clear documentation upon adoption (e.g., hedging)- A conversion and embedding project takes time - on average 18 to 30 months- Changes to systems and controls need to be considered (e.g., SOX compliance)- IFRS conversion is not just an accounting matter, but a business-transformation project impacting

people, processes, systems and tax

Internal Considerations / Benefits Why now?

• Potential to reduce cost of compliance• Standardizing consolidation procedures and

controls (cost and error reduction) • Quality of financial information• Coordinating Group-wide system

implementation with adoption of IFRS• Build IFRS knowledge in the company• Cross border transactions may require IFRS

knowledge• Non-US subsidiaries may be permitted or

required to report under IFRS locally • Fewer rules but more judgment

• The Group can develop global IFRS policies and procedures to roll out through the organization which might also be used for regulatory and tax purposes in some jurisdictions, thus reducing conversion costs and the number of GAAPs being reported

• IFRS policy decisions taken by non-US subsidiaries may limit policy options when the US consolidated group converts to IFRS

• Development of IFRS policies at a central level can help ensure:- Consistency - Issues are resolved once rather than multiple times, which helps reduce costs - Increased IFRS knowledge within the Group

• IFRS (together with US GAAP) can be included in the Group’s global chart of accounts; streamlining the reporting process for both group and local regulatory reporting

• Potentially better matching of economics with accounting using IFRS

Why the move to IFRS in the US is inevitable: IFRS Considerations for US Companies


IFRS vs. US GAAP

Areas of Key Differences

Complex technical areas requiring special attention —

• Consolidation

• Revenue

• Impairment testing

• Intangible assets

• Financial instruments and hedging

• Securitizations

• Debt / equity classification

• Inventories

• Employee benefits

• Stock-based compensation

• Provisions

• Tax accounting

• Presentation and disclosure

• First time adoption of IFRS

Entities consolidated under IFRS but not under US GAAP; Differences in revenue recognition criteria; Differences in the level of impairment testing; Differences in capitalization of R&D costs; Differences in the classification and measurement of various financial instruments; Differences in derivatives and hedging criteria; Differences in the measurement of inventories; use of LIFO prohibited; Greater use of fair value measurement in certain areas ; Timing differences in the recognition of expenses relating to certain share-based

and pension-related employee benefits; The tax consequences of these differences; Additional disclosures; and First-time adoption elections.

Why the move to IFRS in the US is inevitable: US GAAP and IFRS Potential Differences


Why the move to IFRS in the US is inevitable: Challenges and other points of consideration

Key challenges:

• Loss of sovereignty (pride and politics – both sides)

• US culture, politics and legal environment

• Adapting to a global standard setter (IASB versus FASB)

• Professional training and accreditation

• US education and licensing (currently at state level)

• Capital market education

• Adapting to a principles-based environment

• Understanding how IFRS affects financials

• Capturing cost and process efficiencies

Other considerations:

• Private companies (US)• Internal controls (Sarbanes Oxley)


Why the move to IFRS in the US is inevitable: Questions and answers

- Questions and answers

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PwC Why the move to IFRS in the US is inevitable April 28, 2008 St. Louis, MO.

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