Implications of EU adoption of IFRS for practice. AAA IAS Luncheon San Francisco, 8 August 2005 Andreas Barckow National IFRS Experts Leader, Germany. Disclaimer: All views expressed are my own and do not necessarily represent the views of Deloitte or any of its member firms.
The mood in Europe as regards IFRS: IFRS in Europe 2000 IFRS in Europe 2005 Is the party over? AAA Annual Meeting 2005 2
Overview The legal framework: the EU Commission s s IAS Regulation Issues frequently seen on conversions Possible issues for future research AAA Annual Meeting 2005 3
Financial reporting in Europe: an overview 1978: 4 th Directive (Individual Accounts) 1983: 7 th Directive (Consolidated Accounts) 1995: EU Commission agrees on new accounting strategy (follow IAS instead of developing the directives further ) 2000: Commission announces plan to require IAS for group accounts of listed companies by 2005 2001: Fair Value Directive (require/allow for fair value measurement of certain financial instr.) 2002: IAS Regulation (listed groups must follow IAS) 2003: Modernization Directive (enhance financial reporting by brushing up directives IFRS) AAA Annual Meeting 2005 4
The Commission s IAS Regulation Companies with listed securities Companies with no listed securities Individual accounts member state option member state option Group accounts IFRS mandatory from 2005/7 member state option AAA Annual Meeting 2005 5
Germany s* implementation pursuant Para. 315a CC Companies with listed securities Companies with no listed securities Individual accounts German GAAP accounts still mandatory! May file IFRS accounts with the Federal Register Group accounts IFRS mandatory from 2005/7 company option * For a full list of member states implementation go to http://www.iasplus.com AAA Annual Meeting 2005 6
The EU s process of adopting IFRS ESBG EFFAS EFB EFAA CEA FEE FESE GEBC UNICE UEAPME European Financial Reporting Advisory Group (EFRAG) Technical Experts Group EU Commission Accounting Regulatory Committee 4 th Directive 7 th Directive AAA Annual Meeting 2005 7
Some reasons for recent setbacks Regulation overload too many changes occurring at about the same time (FSAP: IFRS, Basle II, Prospectus Directive ) Failure to realize the degree of change on FTA technical differences to local GAAP timing: conversion could last up to 24 months necessary system changes/enhancements Shortage of well-trained personnel Perceived lack of influence on the IASB they do neither understand nor listen AAA Annual Meeting 2005 8
Some widely expected implications of an IFRS conversion on P&L and equity Capitalization of Development Cost Non-Amortization of Goodwill Change of Depreciation Methods Reclassification of Leases Fair Value Measurement of Securities and Derivatives Change in Measuring Inventory Change in Recognition of Provisions Increase in Pension Liabilities Comprehensive Recognition of Deferred Taxes Consolidation of SPEs P&L Equity AAA Annual Meeting 2005 9
Expected implication of an IFRS conversion on equity local GAAP Equity IFRS Equity Assets Debt Assets Debt AAA Annual Meeting 2005 10
might turn out as this: Assume, company is partnership / coop / mutual entity local GAAP IFRS Assets Equity Assets Debt Debt AAA Annual Meeting 2005 11
Most prominent technical issues IAS 12 Temporary differences approach IAS 32/39 Debt/Equity mandatorily redeemable capital Derivatives detection of embedded derivatives, measurement Derecognition many securitizations fail Impairment loan loss provisioning Hedge Accounting macro hedging strategies IFRS 3 Impairment Test AAA Annual Meeting 2005 12
IT issues in converting to IFRS (1) Consolidated Accts Accounts local GAAP IFRS ±Δ Reconcialiation Consolidated Accounts IFRS Individual Accounts local GAAP Tax Accounts N.B.: Most European companies converting to IFRS in the late 90s applied this approach. Bookkeeping Systems AAA Annual Meeting 2005 13
IT issues in converting to IFRS (2) But: Backwards tracing of reconciling items when standards change may become quite onerous! Consolidated Accounts IFRS Individual Accounts local GAAP Tax Accounts Reconciliation ±Δ Individual Accounts IFRS Bookkeeping Systems AAA Annual Meeting 2005 14
IT issues in converting to IFRS (3) The Vision effective but costly! Consolidated Accounts IFRS Individual Accounts local GAAP Individual Accounts IFRS Tax Accounts Financial Database AAA Annual Meeting 2005 15
Possible issues for future research Does/did mandatory implementation of IFRS in Europe enhance comparability of accounts? decrease stock market volatility? lead to lower cost of capital? (all as compared to previous GAAP) Is there (still) a preference for IFRS accounts over local GAAP accounts across users of financial statements? across Europe? Impact on enforcement? convergence?? AAA Annual Meeting 2005 16
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu", or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein. Copyright 2005 by Deloitte Touche Tohmatsu. All rights reserved. Member of AAA Annual Meeting 2005 17 Deloitte Touche Tohmatsu