IFRS - Internal Audit Considerations

Presenters:
Duaine Smith/Saad Bounjoua PricewaterhouseCoopers

NYIIAs 36th Annual Audit Seminar

March 20, 2009

Objectives

This sessions objectives

High level overview of the following;
1. What is IFRS?
2. Context and market trends
3. Key differences between IFRS and US GAAP
4. The case for conversion
5. Potential role for Internal Audit
6. IFRS implementation Challenges and Lessons Learned
7. Key Messages
8. Q & A

PricewaterhouseCoopers

Slide 2

What is IFRS?

Why is IFRS going on?

Where is all of this going?

The ultimate goal, we believe, is a common, high-quality global financial

reporting system that can be used for decision-making purposes across the
capital markets of the world.
Thus, we believe that planning for a transition of U.S. public companies to an
improved version of IFRS would be a logical way forward to achieving the goal
of a set of common global standards.

-Robert Herz, Chairman of the Financial Accounting Standards Board

October 24, 2007, Senate Hearing on Global Reporting Standards

PricewaterhouseCoopers

Slide 4

Why is IFRS going on?

Why IFRS?

Create a global accounting language

Allow companies access to global capital markets
Serve information needs of investors
Convergence with US GAAP and elimination of US GAAP reconciliation
requirement by Foreign Private Issuers is driving the move to IFRS
acceptance
in the US

PricewaterhouseCoopers

Slide 5

Context and market trends

Context and market trends

The world has chosen IFRS

More than 100 countries require or permit the use of IFRS, or are converting
Top 10 Global Capital Markets
US

US GAAP

Japan

Converging to IFRS

UK

IFRS

France

IFRS

Canada

Converting to IFRS

Germany

IFRS

Hong Kong

IFRS

Spain

IFRS

Switzerland

IFRS or US GAAP

Australia

IFRS

Countries seeking convergence with the IASB or pursuing adoption of IFRSs

Countries that require or permit IFRSs
Countries with no current plans to convert to IFRS

PricewaterhouseCoopers

Slide 7

Context and market trends

Key standard setters - Global

Standard setterInternational Accounting Standards Board (IASB) founded in 2001 and based
in London
- Goal: Provide the worlds integrating capital markets with a common language for financial
reporting

International Accounting Standards Committee (IASC) Foundation

- Appoint IASB members
- Exercise oversight
- Raise funds
- Similar to Financial Accounting Foundation (FAF)

International Financial Reporting Interpretations Committee (IFRIC)

Standards Advisory Committee (SAC)

Predecessor organization was International Accounting Standards Committee (IASC) founded in 1973

PricewaterhouseCoopers

Slide 8

Context and market trends

Key standard setters - National

SEC Securities and Exchange Commission
Protect investors, maintain fair, orderly, and efficient markets, and facilitate
capital formation
FASB Financial Accounting Standards Board
Designated organization in the private sector for establishing standards of
financial reports
Officially recognized as authoritative by the Securities and Exchange
Commission and the American Institute of Certified Public Accountants
EC European Commission

PricewaterhouseCoopers

Slide 9

Context and market trends

Catalysts of the US transformation

Creation of IASB in 2001

October 2002 Norwalk Agreement
Convergence was the pathway to create one global set of high-quality standards which are
robust and transparent
April 2005 SEC roadmap goal to eliminate reconciliation
Reports on competitiveness of the US capital markets
SEC roundtable discussions in March and December 2007
Focus on simplicity in US financial reporting
March 2008 SEC accepts IFRS from Foreign Private Issuers without reconciliation
August 2008 SEC proposed roadmap of mandatory adoption of IFRS beginning in 2014 by
issuers in the US
August 2008 SEC proposed to allow the optional use of IFRS by certain qualifying domestic
issuers
November 2008 SEC published for public comment a proposal, titled Roadmap for the Potential
Use of Financial Statements Prepared in accordance with International Financial Reporting
Standards by US Issuers

PricewaterhouseCoopers

Slide 10

Context and market trends

Expected timeline for US transition

PricewaterhouseCoopers

Slide 11

Context and market trends

Is there a case for 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 should have only one GAAP
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
- Competitiveness of the US capital markets
- Simplicity in financial reporting
- Elimination of the US GAAP reconciliation for non-US registrants
- Return to a more purely, principles-based framework in the US
The earlier a company plans strategically for this transition, the better

PricewaterhouseCoopers

Slide 12

The case for conversion

Benefits and first-mover advantages

Improved
transparency and
comparability
for investors and
rating agencies
More effective
procurement with
vendors and
customers reporting
under IFRS

Industry perception
of market leadership
Ability to secure
scarce IFRS
knowledge resources
and optimize human
capital deployment
decisions

IFRS:
Uniform
Global
Accounting
Language

Streamlined
M&A activity

Sufficient time to
adequately debate
strategic first time
adoption in
particular with look
back provision

Ability to analyze
impact on
tax-related issues
Reduced cost of
financial reporting for
global companies

PricewaterhouseCoopers

More efficient
access to capital for
global corporations

More room for

managements
judgment and truer
reflection of
economic reality with
principles-based
GAAP

Ability to understand
interaction with
strategic initiatives
to generate value
from synergies

Slide 13

Key differences between IFRS and US GAAP

Key differences between IFRS and US GAAP

Major differences between IFRS and US GAAP

Principles vs. rules
Both frameworks built under principles-based methodology
However, US GAAP is more prescriptive and rules-based addressing
specific industries and types of transactions in many areas
2,500 pages vs. 25,000 pages
Simple vs. complex
Fair value accounting
Greater use of FV under IFRS than US GAAP (e.g., revaluations of PP&E,
Investment Property and Intangibles)

PricewaterhouseCoopers

Slide 15

IFRS vs US GAAP key differences

Principles versus Rules

Faithful presentation
of economic reality

Responsive to users
needs for clarity
and transparency

Consistency with a
clear conceptual
framework

Criteria for
principles-based
standards
Based on an
appropriately
defined scope

PricewaterhouseCoopers

Written in clear,
concise and plain
language

Allows for use of

reasonable judgment

Slide 16

Key differences between IFRS and US GAAP

Key differences between IFRS and US GAAP

Business
Combinations

Consolidation of
entities

Tax accounting

Recognition and
measurement of
provisions

Derivatives and
hedge accounting

Impairment testing
methods

Capitalization of
R&D

Asset retirement
obligations

Securitizations /
Derecognition

Revenue
recognition

Measurement of
inventories

Classification and
measurement of
financial
instruments

Accruals

Debt and equity

classification

Employee stock
compensation

LIFO

PricewaterhouseCoopers

Slide 17

IFRS vs. US GAAP differences & benchmarking information

Entity

IFRS vs. US GAAP

Number of

Net
income

reconciling
items

BASF

Equity

Key differences

-4%

2%

Pensions

Acquisitions

Deferred taxes

Akzo Nobel

-13%

73%

16

Income taxes

Derivatives

Pensions and OPEB

Syngenta

-21%

-11%

13

Purchase accounting

Grant of put option

Pensions and OPEB

Rhodia

-76%

19%

Pensions

Cumulative translation
adjustment

Capitalized development
costs

Depreciation on revalued
PP&E

Capitalized interest

n/a

Sinopec

1%n/a

Sanofi-Aventis

1%

1%

Application of IFRS1

Business combination

Restructuring

Eni

9%

-4%

10

Successful efforts
accounting

Inventory valuation

Gain of sale of business

Royal Dutch Shell

-3%

-6%

Retirement benefits

Currency translation
differences

Reversals of impairments

Total SA

-3%

78%

10

Acquisition

Financial instruments

Tax effect of intercompany

transfers

This information is derived from Form 20-F

PricewaterhouseCoopers

Slide 18

The case for conversion

The case for conversion

Transition IFRS conversion methodology

Developed and refined over 10 years of successful conversions in Europe,

Asia and the US
Implemented by a broad network of experienced conversion specialists.
Considers the broader impact on the business - accounting policies, people,
financial reporting, tax and other business processes and systems,
stakeholder management, statutory reporting and communications
Used by more than 1,300 companies
Scalable and responsive to the unique complexities of each clients business
Establishes clear objectives with the client in the planning stage
Applies a phased approach to IFRS conversions
Is a framework that is supplemented by deep business process and
technical accounting and systems skills.

PricewaterhouseCoopers

Slide 20

The case for conversion

TransitionIFRS methodology

PricewaterhouseCoopers

Slide 21

The case for conversion

What does a conversion impact

Changing Numbers
Addition of another GAAP and/or change in primary GAAP - Accounting policies determination; Chart of Accounts review, Opening
Balance Sheet,.
Changing People
(a new business language)
Communication
- Internal
- External

Training:
- At different levels
- Not only Finance people

Changing Processes
Existing processes to be enhanced:
- Not adequate with volume
- As alternative to system change

New processes created

Budgeting & forecasting
Internal controls revisited

Changing Systems
Data availability and system
requirements
New systems components: data
warehouse, calculation engine
Re-alignment of management
information systems
Multi-GAAP solutions
Primary GAAP changeover

Changing Business
Performance management to be embedded across :
- Performance measure/KPIs
- Management accounts
- Remunerations/bonuses
- Budgeting/forecasting
- Financial and Business impact analysis: debt covenants
- Different valuations

PricewaterhouseCoopers

Slide 22

Potential Internal Audit Roles

Potential Internal Audit Roles

Now Before the process begins, serve as a resource for
Board / Audit Committee
Finance Staff
Business Unit Personnel

Phase 1 Preliminary Study

Assist in planning / Scoping the project
Ensure all aspects (people, processes, systems, operations) are
addressed
Review diagnostic questionnaires / summaries prepared
Ensure all significant constituencies participate in the process
Monitor progress
Participate in report to the Board / Audit Committee /
Stakeholders

PricewaterhouseCoopers

Slide 24

Potential Internal Audit Roles

Phase 2 Project Set Up; Component Evaluations and Issue Resolution;
Initial Conversion
Review project governance structure / related responsibilities
Monitor completion of detailed component evaluation
Review management assessment of alternative policies / issue
evaluation process
Monitor plan for training/ knowledge transfer
Review prioritized plan for process / system changes
Monitor plan for dual reporting periods
Review controls over initial IFRS conversion
Monitor progress and report to stakeholders

PricewaterhouseCoopers

Slide 25

Potential Internal Audit Roles

Phase 3 Integrate Change

Monitor implemented process / system changes
Ensure process and control changes are embedded in organization
Ensure contractual agreements/ financial covenants reflect the new
basis of accounting
Review revised SOX scope, based on process/ systems changes
Monitor SOX testing of new control environment
Monitor progress and report to stakeholders

PricewaterhouseCoopers

Slide 26

IFRS Implementation Challenges and Lessons Learned

Key Challenges in an IFRS Implementation

Underestimation of time required

- Project management essential
Not enough focus on correlative effects
- Investor relations and market communications
- Contracts and agreements
- Tax related issues
- Bonus and compensation plans
- Effects on IT systems
Lost opportunities
- Too many workarounds
- IT not used as effectively as it could have been

PricewaterhouseCoopers

Slide 28

Key Challenges in an IFRS Implementation

Inefficiencies
- Not enough coordination between the parent and subsidiaries
- Lack of knowledge transfer
Increased risk over financial reporting
- Need for topside entries
- Ensuring process and controls reflect the changed accounting
standards and language
Focus on recognition and measurement
- What will the accounts actually look like
- Education around depth and extent of new disclosures

PricewaterhouseCoopers

Slide 29

The case for conversion

Accounting changes that impact more than Financial reporting

Business
Consideration

IFRS is not simply a financial reporting issue - it is pervasive across the business
An IFRS conversion can take on average 18 to 30 months
IFRS resources are scarce and companies should begin to increase their IFRS knowledge
Audit Committees and Boards are starting to ask about IFRS

Policy
Consideration

IFRS could be impacting you today if a subsidiary is adopting IFRS and determining

certain first time adoption exemptions

There are numerous policy choices within IFRS; these need to
be
strategically analyzed
Suppliers
HR
It takes time to resolve any issues that may arise, e.g., redesign
of debt covenants

IT
IFRS requires comprehensive and clear documentation on Day 1 e.g. hedges
Acquisition
Integration

Market
Consideration

Additional flexibility in capital raising initiatives

Cross border acquisition and divesture activities may require IFRS knowledge
Increased investor interest; effective market communications
Benchmarking with peers
Take steps to influence regulators and tax authorities around the impact and acceptance of

IFRS
Being seen as a front runner in the adoption of IFRS in the US
PricewaterhouseCoopers

The case for conversion

Financial reporting process considerations

Opportune time to address any issues or enhance financial reporting processes

Potential for reduced cost of compliance
- Centralized IFRS policies and shared services department can be developed
and used by all in the Group
- Potential to reduce the number of reported GAAPs and costly conversion efforts
(converge the statutory reporting)
What is the most efficient method to incorporate multiple GAAPs in the financial
reporting processes and systems
Synergies with other business initiatives and the opportunity to build IFRS reporting
capability
Consistent policies among the group can help improve quality; one version of the
truth
Ensure that the IFRS policies have adequate processes and controls (Sarbox)

PricewaterhouseCoopers

Slide 31

The case for conversion

Financial reporting challenges

Companies enhancing standardization (challenge and benefit)

Application of judgment within a principles-based GAAP IFRS versus rulesbased US GAAP
Policy setting difficult because IFRS provides options
Finding many more differences than initially expected
US GAAP reporting often done using global materiality
Local IFRS reporting done using local materiality
Data gaps resulting from significantly increased disclosures

PricewaterhouseCoopers

Slide 32

The case for conversion

Financial reporting challenges (continued)

Multi-GAAP reporting (systems capability, many different reporting systems and

processes within the reporting units)
Many hand-offs are required to prepare consolidated financial results (A lack of
automation in the transfer of financial information)
Different sets of data and process flows are used to support statutory, regulatory
and management reporting requirements
- A lack of standard processes and systems in the recording and consolidation of
financial information across the Group
- Varying levels of ownership of the consolidation processes at Operating
Company level

PricewaterhouseCoopers

Slide 33

The case for conversion

Other organizational aspects

Significant effort to integrate a new accounting

language throughout an organization
Numerous tactical workarounds versus
strategic fixes
It takes time for companies to get comfortable
with the new principles
- Maintain previous GAAP for a period of time
- Non-IFRS measures still widely used to
communicate performance
- Level of transparency varied
- New performance standards (e.g. job
descriptions, hiring practices)
- Communication needs across organization
- Local regulatory reporting requirements

PricewaterhouseCoopers

Two birds, one stone

As several multinational Fortune
50 companies have already
discovered, transition-related
changes have the potential to
deliver future dividends, such as
streamlined operations and
reduced costs. With this outlook,
companies can approach their
conversion efforts strategically
(e.g., overhaul an inflexible
information technology system or
rethink accounting choices), not
just treat them as a compliance
exercise

Slide 34

Driving value through an IFRS conversion

IFRS Lessons learned from 100 countries

Establish a clear vision and plan at the start

Establish the tone at the top and set up the right governance structure and clear
decision-making powers.

Plan and execute appropriately considering impacts across the business.

Dont outsource the conversion process grow your own resources.

Develop a conversion plan that takes into account peaks and valleys of activity
(e.g. quarterly reporting).

Consider how IFRS will impact KPIs and your internal and external
communication strategy.

Take steps early to communicate with and influence regulators, tax authorities and other stakeholders around the
impact and acceptance of IFRS.

Become knowledgeable with the standard-setting process, as IFRS will continue to evolve during
implementation.

Make the most of opportunities for other project efficiencies (e.g. faster close process).

Consider opportunities for reporting rationalization/streamlining (e.g. multi-GAAP reporting, tax balances).

Implement at the business unit level using a top-down and bottom-up approach, with business units involved
earlier rather than later, as the impact can be profound.

PricewaterhouseCoopers

Slide 35

Key Messages

So What Now?

Strategically plan for the change

- Transition date no more than three years away
-

Three years of audited financial statements required

Consider IFRS impact on business processes

Focus on subsidiaries adopting IFRS earlier than parent

Consider tax consequences

PricewaterhouseCoopers

Slide 37

Time to act is now

The SEC outlined its roadmap to convergence in August 2008

Stakeholders will be asking questions

There are significant differences between US GAAP and IFRS

Benefit of a realistic timeline, without the pressure of mandatory adoption

deadlines

IFRS resources are scarce

PricewaterhouseCoopers

Slide 38

Remember the key messages

IFRS The worlds GAAP

There are significant differences between US GAAP and IFRS

A business transformation, not just debits/credits

There are significant differences between US GAAP and IFRS

Key challenges in an IFRS Implementation

The potential Roles for Internal Audit in an IFRS Implementation

PricewaterhouseCoopers

Slide 39

Final message: When you wake up tomorrow..

Keep abreast of the SECs actions concerning IFRS;
Engage in the debate on the IASBs (and FASBs) agenda;
Add IFRS talent to your organization;
Do your own analysis of the costs and benefits of
transition.

PricewaterhouseCoopers

Slide 40

Contact Information
Duaine Smith 1 646 471 4440
duaine.smith@us.pwc.com
Saad Bounjoua 1 646 471 1088
saad.bounjoua@us.pwc.com

PricewaterhouseCoopers

Slide 41

 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers

LLP (US) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the
network, each of which is a separate and independent legal entity.