tax implications usgaap to ifrs

8/11/2019 Tax Implications USGAAP to IFRS

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The Road to IFRS

July 23, 2010


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Grant Thornton LLP. All rights reserved.2

Leading todays discussion

Randy Robason

National Partner

In Charge, Tax Accountingand Risk Advisory Services

Dallas

April LittleDirector, Tax Accounting and

Risk Advisory Services

Houston


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3 Grant Thornton LLP. All r ights reserved. Grant Thornton LLP. All rights reserved.3

Disclaimer

This Grant Thornton LLP presentation is not a comprehensive

analysis of the subject matters covered and may include

proposed guidance that is subject to change before it is issuedin final form. All relevant facts and circumstances, including the

pertinent authoritative literature, need to be considered to arrive

at conclusions that comply with matters addressed in this

presentation. The views and interpretations expressed in the

presentation are those of the presenters and the presentation isnot intended to provide accounting or other advice or guidance

with respect to the matters covered.


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Key takeaways

Understand that the world is moving

toward IFRS it is a matter of when,

not if the SEC will permit or require

U.S. registrants to produce financial

statements in accordance with IFRS

Recognize and be conversant on key

issues you will need to consider as you

adopt IFRS

Anticipate tax and tax-related

implications of an IFRS adoption

Understand the resources necessary

to began an IFRS conversion

Countries that require or permit

IFRSs for domestic entities

Countries seeking convergence

with, or pursuing adoption

of IFRSs

Copyright International Accounting Standards Committee Foundation.


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IFRS or Letters now available for reuse!

FASB

FAS

FIN

GAAP*

* Will probably be retained, but will refer to Standards issued by IASB.


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Group check

Has your company begun a formal process to access

the impact of the conversion to IFRS on its

operations?

Yes

No


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Agenda

IFRS: The path to convergence

Key differences between US GAAP and IFRS

First time adoption of IFRSTransition rules

Resource challenges

Final Thoughts Questions and Answers


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8

Overview of IFRS: A Few Basic Concepts

New abbreviations

IASC Foundation

IASB International Accounting Standards Board

IFRS International Financial Reporting Standards IAS International Accounting Standard

SAC Standards Advisory Council

IFRIC International Financial Reporting Interpretations

Committee



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IASB

International Accounting Standards Board

Goal

To provide the worlds integrating capital markets with a common language

for financial reporting.

Mission

Our mission is to develop, in the public interest, a single set of high quality,

understandable and international financial reporting standards (IRFS) for

general purpose financial statements.

Why

Create a worldwide standard

Simpler international principles (than U.S. GAAP)

Enable seamless global markets



10


IASB

How

An independent standard-setting board overseen by a

geographically and professionally diverse body ofTrustees

A thorough, open and transparent due process

Engagement with investors, regulators, business leaders

and the global accountancy profession at every stage ofthe process

Collaborative efforts with the worldwide standard-setting

community



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The standard setting process

IASC

Foundation

IASB

IFRSHigh quality, enforceable and global

IFRICSAC

Monitoring

Board

informs

creates

monitors

reviewseffectiveness

appoints

funds

reports to

approves Trustees

technically advises interprets

Source: IASB.org



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In theory

Common accounting enables ease of comparison

across borders of companies in similar industries

Easier to analyze cross-border acquisitions

Approximately 30,000 pages ofGAAP to 2,900 pages of IFRS

(so easy, even a caveman could do it)


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One set of accounting standards IFRS?IFRS is fast becoming the globally accepted accounting

framework

Countries that require

or permit IFRSs fordomestic entities

Countries seeking

convergence with,

or pursuing adoption

of, IFRSs

Copyright International Accounting Standards Committee Foundation.


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One set of accounting standards IFRS?

Movement toward one set of standards benefits

One set of global standards

Greater transparency, credibility and comparabilityregardless of where company located

Greater cross-border capital flows

Greater investor confidence and understanding

Most efficient allocation of capital


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Movement toward one set of standards - obstacles

National pride

Endorsement process

Legal issues

Standard setters

Language


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Terminology differences

IFRS U.S. GAAP

Shares StockStock Inventory

Reserves Equity

Associate Investee

Provision Accrual

Scheme Plan

True and fair Presents fairly


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One set of accounting standards IFRS?IFRS Foundation Constitut ion changes(effective March 1, 2010)

Former nameRevised name effective

March 1, 2010

The International Accounting

Standards Committee (IASC)

Foundation

The IFRS Foundation

The International Financial

Reporting InterpretationsCommittee (IFRIC)

The IFRS InterpretationsCommittee

The Standards Advisory

Council (SAC)The IFRS Advisory Council


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Principles vs. Rules

U.S.

GAAPIFRS

Principles

Only

Rules

Only


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Comparability

Jurisdictional variations

Different interpretations

Increased judgment

Increased disclosure


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Convergence the world

(Current count: 120)

Country Status

Europe Required (as adopted by EU)

Argentina Required starting 2012Australia and

New Zealand

National standards described as IFRS equivalent

Include unreserved statement of compliance

Brazil Required starting 2010; optional before

Canada Required starting 2011

Chile Required starting 2009

China Must use Accounting Standards for Business Enterprises, which

are close but not exactly IFRS. Companies listed in Hong Kong

have choice of IFRS or HK FRS

India Required starting 2011


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Convergence the world, continued

Country Status

Japan Japanese GAAP to converge to IFRS by 2011

Some can use voluntarily from FYE March 31, 2010

South Korea Required starting 2011; permitted 2009

Mexico Required starting 2012; listed companies permitted earlier

Singapore Singapore IFRS changed several IFRSs and did not adopt

others; will be fully converged by 2012

South Africa RequiredSwitzerland Permitted

Turkey Permitted

Uruguay Must use IFRS in existence at 19 May 2004

USA Not permitted except FPIs


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I will take a big deep breath and look at this

entire area again carefully, and will not

necessarily feel bound by the existing

roadmap that is out there for comment.

Mary Schapiro

SEC Chairman

January 15, 2009


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We call on our international accounting bodies

to redouble their efforts to achieve a single setof high-quality, global accounting standards

within the context of their independent

standard-setting process, and complete their

convergence project by June 2011.

G20 Fall Meeting in Pittsburgh

September 25, 2009


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I am greatly encouraged by the commitment

of the IASB and the FASB to provide greatertransparency to the standard-setting process

and their convergence efforts. I believe that

these efforts will result in improved financial

information provided to investors.

Mary Schapiro

SEC Chairman

November 5, 2009


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Today's Commission statement reaffirms our

support for a single globally-accepted

standard, describes the issues that need to

be further examined and analyzed, and lays

out the events that must occur between now

and 2011.

Mary L. Schapiro

SEC Chairman

February 24, 2010


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Convergence SEC

SEC Roadmap

Milestones

1. Improvements in accounting standards

2. Funding and accountability of IASCF

3. Improved ability to use XBRL for IFRS4. Education and training on IFRS in the U.S.

5. Limited early use by select few

6. Anticipated future rulemaking

7. Potential implementation sequence FYE on or after 15 December

Large Accelerated Filers 2014

Accelerated Filers 2015

Non-Accelerated Filers 2016

Reconciliation alternatives


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Convergence SEC

SEC Statement on Global Accounting Standards

February 24, 2010 Commission Statement in Support of

Convergence and Global Accounting Standards

Office of Chief Accountant to develop and execute a WorkPlan

Progress reports beginning October 2010

Early adoption proposal rescinded

SEC to decide in 2011 First-time U.S. issuers report under IFRS: 2015 or 2016


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Convergence SEC

SEC Staff Work Plan

Specifically, the Work Plan addresses areas of concern that were

highlighted by comment letters on the SECs proposed Roadmap,

including:

1. Sufficient development and application of IFRS for the U.S.

domestic reporting system

2. Independence of standard setting for the benefit of investors

3. Investor understanding and education regarding IFRS

4. Examination of how the U.S. regulatory environment would beaffected by a change in accounting standards

5. Impact on issuers, both large and small

6. Human capital readiness


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Key definitions

Conversion: Overall transition to new standards

Convergence: Rewriting of one standard at a time


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Convergence IASB/FASB

Definition

Where transactions or events are the same or similar, the

accounting should be the same, or there should be enough

transparency in the disclosures to allow the reader to

understand the differences.

(Plus a continuing effort by standard setters to

reduce differences between systems over time.)


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IASB/FASB convergence efforts

2002 Norwalk Agreement

2006 MOU

2008 Update to MOU

2009 Joint Statement


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Other MoU projects Employee benefits

Joint ventures Income taxes

Other joint projects

Conceptual Framework Emission trading schemes

Insurance contracts


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IFRS and U.S. GAAP Level of Convergence

Standard (IAS/IFRS)Converged?

Mostly Some No

1 Presentation of financialstatements

X

2 Inventories X

7 Cash flow statements X

8 Error corrections and policychanges

X

10 Events after the balance sheet X

11 Construction contracts X

12 Income Taxes X

16 Property, plant & equipment X

17 Leases X

18 Revenue X

19 Employee benefits X

21 Effects of changes in foreignexchange rate

X

23 Borrowing costs X

24 Related party disclosures X

27 Consolidated financial statements X

28 Investment in Associates X

Standard (IAS/IFRS)Converged ?

Mostly Some No

29 Financial reporting inhyperinflationary economies

X

31 Investment in joint ventures X

32 Financial Instruments - presentation X

33 Earnings per share X

34 Interim financial reporting X

36 Impairment of assets X

37 Provisions, contingent assets andcontingent liabilities

X

38 Intangible assets X

39 Financial Instruments recognition& measurement

X

40 Investment in property X

41 Agriculture X

2 Share-based payment X

3 Business combinations X

5 Discontinuing operations X

7 Financial Instruments - disclosure X

8 Segment reporting X


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Agenda



First time adoption of IFRS

Transition rules

Resource challenges

Final Thoughts

Questions and Answers


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Tangible fixed assets/PP&E

Asset componentization

Physical or non-physical

May need to redo systems for more detail

Track individual components Track depreciation and useful lives

Derecognize components

Earlier disposal or retirement

Residual asset valuesReview each balance sheet date

Carrying basis

Revaluation upward to fair value allowed

Must show PP&E rollforward


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Revenue recognition

U.S. GAAP highly specialized; IFRS more basic

IFRS revenue for sale of goods Probable economic benefits flow to entity

Revenue can be measured reliably Costs identified and measured reliably

IFRS revenue for construction contracts Percentage of completion method

Completed contract method prohibited

Must be able to estimate outcome and measure stage of completion reliably IFRS revenue for service transactions

Percentage of completion method

If cannot measure outcome reliably, recognize revenue to extent of costs

incurred


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Impairment testing

Indicators of impairment similar

One-step impairment approach

Loss is amount book values exceed recoverable amount Recoverable amount is higher of

Value in use and fair value less costs to sell

Impairment could occur sooner than under U.S. GAAP

Reversal of impairment loss allowed

Ceilings on reversal amount

Need to track multiple values after write-down


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Agenda



First time adoption of IFRS

Transition rules

Resource challenges

Final Thoughts

Questions and Answers


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First-time adoption impact

Key elements of IFRS 1

Establish a conversion date (opening balance sheet date for comparative

periods presented)

Apply all IFRS standards retrospectively - excluding certain allowable

exemptions

All comparative financial statements and disclosures must be in full compliance

with IFRS

Significant disclosure is required in the first set of IFRS financial statements to

explain the effect of transition A reconciliation footnote

Each equity component at the transition date and most recent reporting date

Profit or loss for the most recent reporting period


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130 reconciliations from foreign filers in 2006

(The Analysts Accounting Observer, Volume 16, No. 11 - September 24, 2007)

Impact to income:

2/3 showed income increases (median 12.9%)1/3 showed lower income (median 9.1%)

Two companies had the same income

Impact to equity:

Slightly more than half showed higher equity (median 6.6%)

Slightly less than half showed lower equity (median 12.7%)

One company showed no change to equity

Significant differences were caused by: deferred taxes, property, plant and

equipment, pensions, minority interests, purchase price accounting and asset

impairment


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Financial

Reporting

andAccounting

Operations People

IT Systems

and

ControlProcesses


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As a chief tax officer, why should I

be concerned about IFRS and what

action steps should I take?


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Direct Hit/Collateral Damage

Good news and bad news

The Good News

Tax Rules are not changing!

The Bad News

Everything else is!


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IASB

Convergence of accounting for income taxes

Process began in 2004

ASC 740 and IAS 12 similar, but different

Started, then stopped convergence process

March 31, 2009, Exposure Draft, Income Taxes released byIASB for comment by July 31, 2009

Many differences between IAS 12 and FAS 109 tentative

conclusions substantially eliminated if converged

Definitions of tax basis and temporary differences primarilyreconciled

Initial recognition exception for temporary differences

eliminated


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FASB

Convergence of accounting for income taxes

Significant progress toward convergence made

IASB goal is to issue a final standard in 2010

FASB to solicit feedback on IASB Exposure Draft,Income Taxes

Depending on feedback, FASB may add an

agenda item to reopen discussion of incometaxes with a view of adopting Exposure Draft,

Income Taxes


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Collateral Damage

There is a strong probability that the collateral

damage will have greater initial implications in thetax world than the changes to IAS 12/34


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Collateral Damage: The role of Treasury and

Congress

Treasury/Big 6/Dow 30 Dialogue

Hot 5

Inventory

Transfer pricing

Accounting methods

Revenue recognitionE&P


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Will LIFO be repealed prior to IFRS conversion?

Presidents budget proposal

Are some industries more vulnerable

Could LIFO still be used for Federal tax purposes

after IFRS conversion?Legislative change

IRS regulatory authority

Collateral Damage: Accounting methods

LIFO


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Changing from LIFO to another method for valuing

inventories

First in, first out (FIFO) Rolling-average method

Recapture of LIFO reserve Current four-year recovery period

Will Congress/IRS provide for a longer period?


LIFO

C ll l D A i h d


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Changes in methods of accounting

Considerations when changing book method

Is the new method a proper method for tax?

Will the new method create a book-taxdifference?

How will method change the calculation of an

existing book-tax difference? Is a Form 3115 Application for Change in

Accounting Method required?

C ll t l D A ti th d


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Will the IRS provide special procedures for

companies making the conversion?

Issues for IRS to consider Allowing global method change upon conversion

oGrouping of method changes

oClean-up of improper methods

Information required for method change

Automatic or Advance Consent

Period for section 481(a) adjustment



C ll t l D A ti th d


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Opportunity for accounting methods review

Consider impact on income tax reporting and cash

taxes payable

Take global approach

Begin planning now



C ll t l D I t ti l T


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Collateral Damage: International Tax

International tax implications

Several international tax regulations specifically reference GAAP

These international tax regulations include:

1.482.9T(e)(2)(iii) (GAAP reference)

1.861-9T(g)(2)(ii)(A)(2) (U.S. GAAPreference)

1.864-4(c)(4) (GAAP reference)

1.897-1(o)(4)(i) and (ii) (both U.S. GAAP

reference)1.897-2(b)(2)(ii) (U.S. GAAP reference)

1.964-1(b) (accounting principlesgenerally accepted in the United States)

1.985-1(b)(2)(ii)(D) (U.S. GAAP reference)

1.985-3(b)(2) (U.S. GAAP reference)

1.985-4(b) (U.S. GAAP reference)

1.988-1(f)(1)(ii)(B) (U.S. GAAP reference)

1.6038-2(g) (GAAP reference)

1.6038A-3(c)(2)(ii) (U.S. GAAP reference)

1.6046-1(b)(10) (GAAP reference)

1.6046-1(g) (U.S. GAAP reference)

C ll t l D I t ti l T


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Additionally, several international tax reporting forms specifically reference

GAAP

Some of the international tax forms that reference GAAP include:

Form 5471 Information Return of U.S. Persons with Respect to CertainForeign Corporations

Form 8858 Information Return of U.S. Persons With Respect to Foreign

Disregarded Entities

Form 8865 Return of U.S. Persons With Respect to Foreign Partnerships

As the movement toward IFRS continues, the IRS and Treasury will need to

address the reference to GAAP in these regulations and forms.

See AICPA letter to IRS and Treasury on October 10, 2008 discussing

theses issues in the context of IFRS

Collateral Damage: International Tax

International tax implications

C ll t l D T f P i i


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Collateral Damage: Transfer Pricing

Stating the obvious

Covering the not-so-obvious

Proactivity and projections

In the land of APAs

C ll t l D T f P i i


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The good, the bad, and the ugly

Similarly situated taxpayers

Expected guidance

The big finish

Collateral Damage: Transfer Pricing


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Final thoughts:


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Final thoughts:

How companies are impacted by IFRS

Changing an organizations basis of accounting from U.S.

GAAP to IFRS impacts an organizations accounting and

reporting requirements, which will require its people to obtain

new skills and knowledge, change internal processes, and

likely impact an organizations systems

Four areas that will be impacted in an organization from

implementing IFRS:

Accounting and reporting Processes

Systems

People


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Final thoughts:


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Anticipated changes to a companys processes

Final thoughts:

How companies are impacted

Changes to financial statement preparation include:

Accounting processes that will support changes based on documentation needs

Change of internal control documentation to reflect changes in processes

Need to change scoping methodologies

Understanding changed to develop new controls

Developing a new test approach to incorporate IFRS methodologies

Changes in policies and procedures to address changes reflected from accounting

policy

New processes will need to be developed to capture information that was notpreviously developed

Will impact the use of the specialists for valuations based on the changes to

impairment guidance

Contracts, including debt agreements and covenants, will be impacted and will need to

be addressed to understand the impact of the companys compliance

Final thoughts:


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Anticipated changes to a companys systems

Final thoughts:

How companies are impacted

Changes to the chart of accounts

Consolidating entities

Dual reporting (transitional) Changes in calculations

Creation/Deletion of system reports

Presentation of information within the system

Compliance with IFRS along with other regulationssimultaneously

Data fields and data requirements

Final thoughts:


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Final thoughts:

Where do I start?

IFRSGAAP TAX

?

? ?

??

?

Final thoughts:


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Final thoughts:

Im lost. . .What do I do?

#1 Dont panic

#2 Be comforted by the thought that you are part of a large

group! And help is available.

Final thoughts: Establish a game plan


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Final thoughts: Establish a game plan

Elements could include

Vision for the outcome

Direction

Execution

Acceptance by all stakeholders

Monitor and measure resultsConfirm management/Board support

Final thoughts:


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g

Examine broad areas of potential impact and devise a

sub game plan for each

GAAP/IFRS Comparison: Which FAS apply to my

company and how do IFRS change the

accounting?

Debt arrangements: Do IFRS impact

classification?

Compensation plans: Do IFRS results change

behavior?

Final thoughts:


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IT: What do I keep, toss or acquire

Entities: Keep or eliminate

Transfer Pricing: Do IFRS reflect economics

anticipated in agreements

Treasury function: Does my repatriationstrategy change?

Final thoughts:

Next steps

Final thoughts:


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g

Identify other impacted groups and coordinate approach

Investor relations

Human resources

Internal audit

Treasury

Accounting and Finance

IT

Final thoughts:


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Final thoughts:

Next steps

Establish conversion timeline and schedule

deliverables

Design a training program for each individual

Communicate, Communicate, Communicate

Internal stakeholdersExternal stakeholders

Publications issued / planned


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Joint IASB/ FASB convergence projects Q2/Q3 2010

Financial statement presentation

discontinued operations

ED (May)

Financial statement presentation

organization and presentation

ED (May)

Revenue recognition ED (June)

Leases ED (July)

Financial instruments with characteristics of

equity

ED (June)

Insurance contracts ED (June)



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IASB only convergence projects Second quarter 2010

Post employment benefits defined benefit

plans

ED (April 29)

Financial instruments classification and

measurement

ED (May 11)

Financial instruments hedge accounting ED (Q3-2010)

Consolidation disclosures SPEs/structured

entities

IFRS (June)

Joint ventures IFRS (June)

Derecognition ED (Q3-2010)

IFRS for SMEs


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IFRS for SMEs

What is the IFRS for SMEs?

Published July 2009

Separate framework foraccounting and financial

reporting

Simplified version of IFRS

but consistent principles and

concepts

No specific effective date

IFRS for SMEs


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IFRS for SMEs

Who is it aimed at?

No size-related limits

Non-publicly accountable entitiesthat must or would like to produce

general purpose financial statements- Securities not publicly traded

- Not a financial institution

- Not holding assets in fiduciary

capacity as one of its primarybusinesses

Subsidiary of a listed company canuse it if the sub itself is not listed

IFRS for SMEs


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IFRS for SMEs

How is IFRS for SMEs simplified (overview)?

Simplified drafting easier to read and no black letterparagraphs

Some topics omitted if irrelevant to majority of SMEs

Segment reporting

Interim reporting

EPS Insurance

Assets held for sale

Substantially stand-alone

If reported voluntarily, describe

basis for preparation and

presentation


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IFRS for SMEs


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IFRS for SMEs

How is IFRS for SMEs simplified (overview)? (continued)

Recognition and measurement simplifications - examples

Goodwill Amortized (10 year life if no reliable estimate exists)

Impairment testing only needed if indicators exist

Research and

development

All costs are expensed

Borrowing costs All costs are expensed

Financial

instruments

Only 2 categories (amortized cost or FV through P&L)

Much simplified (although restricted) rules on hedgeaccounting

IFRS for SMEs


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IFRS for SMEs

How is IFRS for SMEs simplified (overview)? (continued)

Full IFRS IFRS for SMEs

Numbered by standard Organized by topic (e.g. inventories)About 3,000 potential disclosures About 300 potential disclosures

About 2,800 pages Less than 230 pages

Updated several times a year To be updated every 3 years

Fast facts


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Grant Thornton LLP


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IFRS Resources

IFRS Resource Centerwww.GrantThornton.com\IFRS

Grant Thornton ThinkingG tTh t \IFRS


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www.GrantThornton.com\IFRS

IFRS Publicationswww GrantThornton com\IFRS


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IFRS Publications


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