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Moss-Adams: IFRS webinar on SME’s(Part2)

September 4th, 2009 Comments off

            Yesterday I covered the opening segment on my coverage of the Moss-Adams webinar on IFRS for SME’s. As a quick review, the overall definition of an SME, or Small Medium Enterprise is one that publishes financial statements for external customers, has no “Public Accountability” or fiduciary responsibility, and is a private entity. As the classification currently stands, there is no threshold on the level of revenues for the company; only that it is private in organizational structure. While some of the basic elements of general IFRS were covered, I’ll itemize some of the points that were covered on the call yesterday.

§  GAAP is a Rules-based set of guidelines whereas IFRS is a Principles-based structure.

§  LIFO is allowed under GAAP whereas it IS NOT allowed under IFRS.

§  GAAP calls for inventory valuations that are the lower of cost/market versus a lower of cost or Net Realizable Value under IFRS.

§  Unlike GAAP which DOES NOT allow for the amortization of goodwill, IFRS DOES ALLOW for this, along with the inclusion of a 1-step impairment test.

§  Unlike GAAP which does not allow for the reversal of impairments, IFRS DOES ALLOW for a reversal, except for in the case of goodwill.

§  Under GAAP, R&D expenses are capitalized if obtained through an acquisition and expensed if they are internally developed.

            With respect to the first rollout of IFRS for SME’s in the U.S., there would be a complete review after the first 2-year window to address any errors, omissions, or provide further clarity for specific topics. After the first 2-year review, this process would then happen every 3-years.  Also during the webinar there were a number of questions that were posed to the participants. As I mentioned in my posting yesterday, there were 245 participants on the webinar. Below are the questions & responses.

Do you believe your organization would benefit from IFRS for SME’s?
Yes 14%      
No 14%      
Not Sure 34%      
N/A MA employee 36%      
           
Do you believe your company will adopt within the following timeframes?
Immediately 0%      
1-3 years 19%      
3-5 years 34%      
Never 8%      
N/A MA employee 37%      
           
How much do you know about IFRS for SME’s?
Nothing 18%      
Very Little 50%      
Significant 6%      
N/A MA employee   24%      

            As I’ve mentioned in previous posts, I still have my doubts as to how aggressively this will really be rolled out in the U.S. and if the U.S. will allow GAAP to be so easily discarded in favor of such a new set of standards, regardless if they are being applied globally. We shall see….

Thanks for reading . . . . 

Jeffrey Ishmael

Moss-Adams: IFRS webinar on SME’s(Part I)

September 3rd, 2009 Comments off

             Although I do tend to be a critical of the IFRS outlook, I do continue staying up to date on all that is happening. Yesterday I sat in on a Moss-Adams webinar on “IFRS for SME’s & Private Companies”, which focuses on Small & Medium Enterprises. I do tend to pay a bit more attention to what Moss-Adams is doing since they have had extended involvement on the IFRS front, and it was this same firm, along with Mazars, that we used in our IFRS conversion in 2005.  They’re a professional outfit and their guidance was great. While a good majority of the webinar was more on the educational side of IFRS versus GAAP, it was probably appropriate to the audience, where in one of the survey questions, 68% knew “Nothing” or  “Very Little” about IFRS. I was also surprised by the number of participants in the session, which was 245. Although I later learned in some of the survey questions that there were also a large number of Moss-Adams employees on the call.

            Starting off the webinar was the opening survey question, which asked “How much do you know about IFRS for SME’s?”  Of the participants, 18% knew “Nothing”, 50% knew “Very Little”, 6% were “Significant”, while 24% were N/A due to their status as a MA employee. The call progressed into discussing the merits of implementing IFRS for the SME. One of the more significant stats was the fact that the guidelines of IFRS for SME’s is only a scant 230 pages, while the full-IFRS version is 2,700 pages, which pales in comparison to U.S. GAAP, which is a ghastly 17,000+ pages.  What the folks at MA have been finding, which is no surprise, is that many SME’s are finding a full implementation of IFRS too complex and costly to adopt. But what exactly is the definition of an SME? As IFRS policymakers define an SME;

§  Publishing of financial statements for external use.

§  No “public accountability”, whether in the public markets or a fiduciary responsibility.

§  Private entity

§  No threshold on company size.

            I was somewhat surprised by the last point in which there is no threshold for how big the company can be in the adoption of this set of standards.  As it was also discussed, IFRS for SME’s has already been approved and is allowed for current adoption by companies in the U.S.  This has me wondering what the response would be from my banker if I handed him a set of financials and advised him that I was reporting in this new format? While Moss, Deloitte, and the remaining large firms are starting to bolster their ranks with IFRS-centric staff, they are the exception. This is an area that will need to be increased in the coming years.  There was same great detail on the call and I’ll further expand on the call tomorrow.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Categories: CorpFin Cafe, IFRS Tags:

IAS 36 Asset Impairment – & Subsequent Recovery? The eBay/Skype Deal…

September 2nd, 2009 Comments off

            After my coordination of an IFRS conversion in 2005, I’ve keenly been watching the move towards a convergence here in the U.S. as policymakers believe IFRS is the next great move for U.S. accounting policy. With the meltdown of the financial markets, many believe that this could be an answer to the avoidance of future issues. As I’ve mentioned in previous posts, IFRS will not be a solution or provide avoidance of future issues, but is only another reporting mechanism. In fact, it will likely create more confusion for the greater investing public as they try and wade through the a company’s financials trying to make an informed decision.  One area I have been planning to profile is IAS 36, which covers the Impairment of Assets, and the procedures that should be followed to ensure that assets are carried at no more than their recoverable amount.

            Basically, IAS 36 calls for a company, at the end of each reporting period, to test and determine whether an asset may be impaired. Without going into all the details, if the company determines that an asset is impaired in its value then the company will recognize that decrease in value as an impairment loss and include it within the profit/loss reporting for the company. However, one of the more significant elements of IAS 36 is the ability to reverse the impairment of that same asset, which is an option not allowed under GAAP accounting. I have been looking at determining an appropriate example of applying this to a realistic situation and was given a perfect opportunity with the eBay / Skype acquisition and subsequent divestiture.

Purchase Analysis of Skype:
  (millions)
Initial cash consideration  $   1,300.00
Initial stock consideration  $   1,300.00
Potential earnouts  $   1,500.00
Total Projected Purchase Price  $   4,100.00
   
Earnout not paid  $     (975.00)
Net Purchase Price  $   3,125.00
Skype cash generation  $       (324.0)
   
Write-down  $       (1,400)
   
Total Carrying Value  $         1,725
   
Sale of 65% of Skype  $         1,900
   
Projected Skype Value  $         2,923
   
Excess over Book Value  $         1,023

             If you start looking at the total considerations and estimated purchase price for Skype, eBay was potentially on the hook for $4.1 billion. However, Skype failed to meet the aggressive goals that were set and missed the payout on the majority of the potential earnout. This reduced the final purchase price to $3.1 billion. Then, in October 2007, the company recorded a $1.4 billion writedown in the value of Skype, which was reflected in the earnings for eBay that year. Fair enough, admitting that you overpaid and now you pay for the sins. This basically gave Skype a carrying value of $1.7 billion.   This is completely separate from the estimated $324 million in cash that was generated by Skype during the 2007-2009 period, under the eBay watch. With the recent divestiture deal that eBay struck, at $1.9 billion, for a 65% share, this puts an effective valuation of $2.9 billion. Almost $1.2 billion higher than what was reflected on the books, and without consideration to the cash generated by Skype, which is also part of the IAS 36 impairment test. This, also in consideration to the fact that eBay still owns 35% of Skype.

            So if I’m interpreting IAS 36 as it reads, eBay has essentially recovered the entire carrying value of Skype, while also retaining a 35% stake in the company, which has an estimated value of just over $1.0 billion. Would this mean, under IFRS, that eBay is obligated to revalue this asset and include in their P&L. With approximately 1.3 billion shares outstanding this would equate to almost $0.79 per share. With a trailing 12-month PE of 18x, we’re not talking about chump change. So with this example in mind, how is Joe Q Public investor supposed to interpret the earnings of a highly recognized company like eBay and feel comfortable in his decision when this would clearly not be normal operating results and risks overpaying for a stock that has such a significant non-recurring element?  This is a very material consideration.  I would enjoy hearing back from my IFRS friends if this is an inappropriate application / judgment of IAS 36. Since we’re talking about a Principles-based application versus Rules-based, it seems a great example to examine.

Thanks for reading . . . .

Jeffrey Ishmael

IFRS – White Knight or Dark Horse?

August 13th, 2009 Comments off

            With our recent travails in the financial markets, there’s a large number of folks who are starting to point their fingers in the direction of IFRS with claims that this new reporting structure could very well be a solution to all that has happened. Really? Let’s be clear in that IFRS is merely another measurement platform and a basis of financial reporting for a group of nations that are within direct proximity to each that never had a common financial reporting platform.  First, let me qualify my background in addressing this topic in a bit more detail and tabling my opinion on the topic. I spent 4-years working with a France-based manufacturing company and coordinated the North American effort for the company’s IFRS implementation in 2005.  I worked closely with our global finance group in Grenoble, attended numerous coordination meetings in Grenoble, worked with Moss-Adams and Mazars in those efforts, and produced all parallel GAAP/IFRS reporting.  We were working under a very definitive timeline for our company, which was operating under the time mandate of the European Union for implementation.

            Let’s throw a little more history in the mix. The evolution of U.S. accounting standards has been a gradual, almost 7-decade process since the first auditing standards were implemented in 1939. Without going into exhaustive detail, U.S. standards evolved over the next 7-decades to bring us to the point we’re at now. Many of the new standards implemented over the last decade have been a reaction to crises that have been encountered in the open markets. These standards have included the massive Sarbanes-Oxley regulation, Revenue Recognition standards, Reg FD on the disclosure of corporate information, and the list goes on. Let’s keep in mind that full European implementation of IFRS only happened in the last handful of years. While the planning window was longer, it has been in effect for less than 5-years. It was a necessary set of reporting standards that was previously absent for a large number of nations, each with their own stock exchange, and no common set of standards for the average investor to refer to.

            Back to an IFRS versus GAAP consideration. The evolution of the U.S. system has been in reaction to continual developments and introductions of new financial tools introduced into the market, an increasing complexity in the types of companies conducting business over the decades, and the increasing need to maintain integrity within the U.S. financial markets, as well as protect private investors. The U.S. is an absolute rule-based system whereas IFRS is more principals based.  IFRS allows a much higher degree of discretion in applying the IFRS standards.  While I haven’t directly addressed why this is not our white knight for solving the financial reporting issues in the U.S., it’s an intro for the next post I will write.

            In my next posting I’m going to address IAS 36 and the latitude that is given to a company for the reversal of a previously recognized impairment of a tangible asset. Think about the potential dilemma this creates for an investor when they’re trying to compare companies, determine the quality of earnings, yet companies have the ability to write down…and then subsequently, increase the value of an asset. We’ll look at an example where a company can alter their income levels through the revaluation of assets.  I’m certainly not implying that our own U.S.-based system is problem free and doesn’t allow for some level of indiscretion in reporting, but it still appears laughable that we’re going to abandon a system that has been developed over a handful of decades in favor of one that is newly introduced for a group of nations where no standards previously existed.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

Moss-Adams conference recap; “Back in Black”

June 3rd, 2009 Comments off

     Today I was given an invite to attend the Moss-Adams conference, “Back in Black – Paving a Path to Profitability”. It was their first in what they hope is an annual event. The conference opened with a number of comments by key Moss-Adams personnel, was followed by three breakout sessions, and ended with a lunch and closing remarks by Pat Haden of Riordan, Lewis, and Haden. RLH was a prime participant in the conference, taking part in a number of the panel discussions.

     Interestingly enough, the previous CEO of Moss-Adams, Bob Bunting, delivered the opening remarks through a pre-taped video. What was worthy of note is that Bunting is currently in Dublin attending an IFAC summit regarding IFRS. Bunting spent quite a bit of time discussing the pending adoption of IFRS and the various considerations. As a bit of validation to some of my recent posts, he directly discussed the lack of training that is currently happening and the absence of an IFRS presence at the University level. As he discussed the specific rollout dates for each country it became apparent to thos in attendance that this is a legitimate issue. In an electroninc poll conducted w/ attendees through the room at the close of the video opening, 84% of attendees believe that IFRS will be mandated in the U.S.. However, Bunting was also quick to comment in his video that the adoption of IFRS was not going to be the result of actions taken by the SEC, but through overall Market pressures that would force the U.S. to adopt the new standards.

     I would like to say that the breakout discussions were incredibly informative, but there seemed to be little new information that was discussed or presented that isn’t already being actively covered daily by the media. Unfortunate for what could have been some very interesting topics. However there were a number of other polls taken in the morning that were interesting.

–  Attendees believed that Domestic opportunities would provide the highest area for growth, with a 54% weighting versus International at 46%.

-Attendees were still somewhat pessimistic when it came to growth in the second half of 2009. Approximately 63% of attendees believed business would be flat to negative 3-8%. Of this number, 29% believed they would encounter declines of greater than 8%.  Only 37% believe that business might improve. Of the optimists, 19% believed business would increase 3-8% and 18% believed business would increase greater than 8%.

-When asked what the biggest key to success would be in 2010, 48% responded it would be “Improved General Economic Conditions”. Of the remainder, 18% mentioned Access to Capital, 16% mentioned Production Improvements, 3% mentioned Competitive Pricing, and the remaining 15% mentioned Internal Efficiencies. What’s worthy to note is the 3% that mentioned competitive pricing. I find tremendous value in the statistic that companies are not looking to improve their situation by engaging in price wars. They are looking to improve operating and production efficiencies.

Thanks for reading . . . .

Jeffrey Ishmael

IFRS: Is the disconnect as significant as I believe?

May 29th, 2009 Comments off

            I wanted to follow-up on my posting from last week in which I commented on a recent AICPA press release regarding IFRS preparation. In that commentary I had commented on what appeared to be a disconnect between the preparation of the accounting sector and the timeline being pushed by the SEC for IFRS adoption.  One of my observations involved a review of the USC Leventhal School of Accounting curriculum and the fact that there are only 2 classes of 84 that are international in nature, neither of which even mention IFRS in the course description. I decided to expand the level of research and review accounting programs from a more geographically diverse population and look to top schools churning out new graduates.

 

            I took a look at 8 additional schools, while still keeping the data from USC. These schools included both Top-5 universities, as well as a local Cal State school (Fullerton), which is known for it’s Accounting emphasis.  

 

School

Profile

# Acctg Courses

# Intl / IFRS Courses

University of Chicago

No dedicated school

3

0

Wharton; U of Penn

No dedicated school

19

0

Northwestern

No dedicated school

19 seminars

0

Harvard

Acctg/Mgmt Unit

4

4

University of Michigan

No dedicated school

22

0

University of Southern California

Leventhal School of Accounting

84

2

Loyola-Univ. of Chicago

No dedicated school

15

0

UCLA

No dedicated school

10

0

Cal State Fullerton

Dedicated Program

40

1

 

            What continues to be so surprising to me is that there is hardly a mention of IFRS-related classes offered or that there is even a mention within the course descriptions. Perhaps something more surprising is that these schools are attracting an international student population and these students are not receiving any exposure to IFRS.  Only speculation, but will a lack of emphasis or development in this area affect the decision-making of whether foreign students continue looking to the U.S. for advanced business education?

 

            When I reviewed the course offerings at top schools such as Wharton and Chicago there was not a single mention.  Further, in reviewing the course offerings for the Accounting & Management Unit at Harvard, the courses were somewhat rudimentary in nature when it came to covering accounting topics in a more mechanical manner. Courses included:

         Business Analysis and Valuation using Financial Statements

         Customer Intelligence Advantage

         Designing Organizations for Performance

         Financial Reporting & Analysis for Managers (1/2 course in Spring)

 

My aim here is not to bash any one school or discredit the Accounting programs out there, but to bring light to what appears to be a significant shortfall in the U.S.’s preparation for the adoption, or convergence, of IFRS. Consider the timeline of designing course offerings, implementing that at the University level, bringing those graduates into the working force, and having an “experienced” accounting population ready to address IFRS. I don’t see that happening.   After coordinating an IFRS implementation in North America for a France-based company I have a sincere appreciation for the effort that this takes. I do not see the necessary preparation happening.

 

Is our source of expertise and support going to come from only our EU-based accounting friends? Is the disconnect as significant as it appears, or what I believe?

 

Thanks for reading . . . .

 

Jeffrey Ishmael

 

 

 

 

IFRS: Misaligned SEC / AICPA Priorities . . . .

May 15th, 2009 Comments off

While I usually try and remain neutral and stay with the facts as it relates to accounting topics, I read a press release yesterday, which absolutely left me shaking me head with respect to the planned adoption of IFRS reporting in the U.S.  I have posted quite a few entries regarding this area and have my doubts that we are moving towards a successful implementation of these standards in the U.S. and this doubt was further reinforced after the AICPA press release from yesterday.

 

                Keep in mind that the schedule is still in flux as key business representatives are pushing for a delayed adoption of IFRS, but let’s assume that we are going forward with the SEC adoption date of mandated phased-in adoption starting in 2011. With this in mind, the accounting profession, who will be required to provide professional guidance, and my colleagues in the corporate sector, need to already be training on these standards and planning system reporting calendars for adoption.  It will not be as easy as “flipping the switch”. In fact, we ran IFRS reporting parallel to our GAAP reporting for two quarters before fully converting.  Back to the preparation though for IFRS – below is a sampling of statistics from yesterdays IFRS press release:

 

When asked to rate their level of familiarity with IFRS:

a.  36% responded they “want” Advanced or Expert knowledge

b.  24% responded there is a need for “some” knowledge.

c.  21% responded they require a “Basic” knowledge.

d.  There was no info reported on the missing 19%.

 

The AICPA further reported that “CPA’s are still evaluating their business & client needs”.   Really? What is there to evaluate on the “needs” front when the SEC is looking to have mandated phased-in reporting by 2011?

 

The AICPA further reported on the status of IFRS knowledge over the last 6-months:

                a.  22% responded they have no knowledge of IFRS (down from 30%).

                b.  43% have a “Basic” knowledge

                c.  24% have “Some” knowledge.

                d.  There was no info reported on the missing 11%.

 

I would also be interest to know what the difference is between “Basic” and “Some” knowledge.  I feel fortunate that I have been through a full IFRS implementation, but what if I were the CFO of a public company that wanted to start planning for an implementation and was looking to hire consultants, where 69% of the population has only “Basic” or “Some” knowledge?

 

                I took my review one step further and conducted a quick review of what the USC Leventhal School of Accounting is doing to prepare accounting students for what could be a massive shift in accounting standards and reporting.

 

                a.  For the MAcc degree, which has an offering of 21 classes to choose from, only one class was international in nature; Accounting in a Global Environment.

                b.  In further review of the entire Accounting course catalog, which consists of 84 classes, there are only two classes that are international in nature; the one listed above, as well as Taxation of Foreign Business Operations.

                c.  There is not one class that is titled as IFRS specific.

                d.  There is not one class that mentions IFRS in the course description.

 

                I would absolutely welcome feedback, but if we are truly moving towards an implementation of IFRS reporting in the U.S. does it really appear that we are preparing ourselves for this shift?  Does it appear from the stats above that we are being set-up for a massive talent squeeze of IFRS experts who can provide the appropriate guidance? I have had my doubts with the SEC calendar and the likelihood for an IFRS adoption for some time, but now that doubt seems to be further supported.

 

This is one area I’d love to hear back from peers on.

 

Thanks for reading….

 

Jeffrey Ishmael

As the IFRS World Turns – & continues turning. . . .

April 21st, 2009 Comments off

     It’s been quite a few months since I’ve touched on the topic of the pending IFRS conversion. I’ve just continued watching from the sidelines as to how it would develop as the entire global finance system worked its way through the existing meltdown.  Since I had the “luxury” of working through an full-length IFRS conversion during my time with a France-based company, I was provided with a great insight as to the merits, and difficulties, of such a conversion.  Through the majority of my posts during Q2/Q3 of last year I discussed the significant challenges U.S. companies would have going through such a conversion and whether the U.S. was truly prepared to cast aside a financial reporting structure that had been developed over decades, rigid in it’s application, for a system that was principles-based and open to the interpretations of those applying the “Standards”.

     Interestingly enough, the discussion boards are heating up to call for the SEC to discontinue its mandate of having U.S. companies adopt IFRS. In a recent article on CFO.com, finance executives have “cited concerns over whether the U.S. legal culture and auditors could handle a more principles-based accounting language, getting their staff up to speed on IFRS, the integrity of the IASB, and whether the international rules are truly bettern than U.S. GAAP”.  Some are arguing “that an outright adoption of IFRS, rather than convergence, may be a better route”. I will still take the position that while the current structure of IFRS is a quantum leap over what previously existed before, it is not strong enough to outright replace the U.S. GAAP system. 

     As in my posts from last year, there are still a number of questions that have yet to be answered, and are even more relevant now considerating the developments of the financial markets over the last year.

-Are we really prepared to enter into a 3-year moratorium on new accounting standards to work through the conversion? (consider that most significant changes in standard are born out of crisis…)

-Does the IASB have enough ful-time, technically capable, and independent staff members to support a broad-based U.S. conversion effort?

-What is the U.S. education / university system doing to bolster the number of qualified graduates with the proper IFRS knowledge base?

     There are countless questions which need to be addressed, which are over and above those centered around a comparison of the two reporting platforms and how they will be enforced. I have not read about these questions being addressed and would like to see articles quantifying the developing support in each of these areas.  With all this said, while I don’t believe that we are realistically looking at a conversion window in the near-term, I’m certainly going to continue keeping my IFRS knowledge up to date with any developments happening across the pond.

Thanks for reading . . . .

Jeffrey Ishmael

IFRS reporting & equality in reporting . . . .

October 6th, 2008 Comments off

I’m a bit off in the last week as I have not been reading all the info that has been getting published with respect to the pending IFRS standards. However, one of the primary drivers in the adoption of IFRS is to have standardized reporting for public entities, whether there in Italy, France, or here in the U.S.. So once these new standards have been rolled out then we’ll be able to view each company in the same light and make equal comparisons? Wrong. A reader of SEC reporting for a handful of companies in a similar industry can easily start to see the differences in the manner in which those companies report. Yes, there are standards that they all need to follow, but that doesn’t mean those standards extend to every section of a 10-Q or K.

Let’s jump into a very simple example, and with some brands that most consumers are pretty familiar with . . . K-Swiss, Skechers, and Heely’s. As I read through each one of their most recent 10-Q filings, I wanted to learn a little more about how each one of these companies was tracking their Cost of Goods. The observation that prompted my curiousity was the drastic differences in Gross Margins between these three entities.

The worst performer of the group appeared to be Heely’s, but they also took the approach of burdening their COGS with every cost element that touched the flow of product through the design & manufacturing process. These costs included all freight, warehousing, tooling, tooling depreciation, royalty expenses, shrinkage, quota fees, and agent fees/commissions. This same approach is also taken by Skechers. However, compare this to K-Swiss, who didn’t break out the different elements of COGS, but recorded their warehousing fees within their SG&A expenses. Ultimately, you have Gross Margin levels that range from the mid-30% to high-40% range. While some of the discrepancies can be attributed to performance levels and buying efficiencies, it’s clear from the K-Swiss example that not all margins are created equal.

While all of this ultimately flows to the bottom line and it’s only a mapping issue prior to the EPS calculation, there’s the management of perceptions when it comes to comparisons with your peers. “You’ve got a lower Gross Margin so you can nearly be performing as well as Company XYZ….”. Not necessarily the case so make sure you know how you’re presenting your financials in comparison to your competitors.

Thanks for reading . . . .

Jeffrey Ishmael

IFRS planning & IT collaborations

September 3rd, 2008 Comments off

In my post this morning about making the jump into an IFRS conversion, I wrote about the platform upgrade we had completed prior to our move into the adoption of IFRS. We had implemented Hyperion HFM, which would allow us to report under the new standards. I wrote that a word of caution was necessary knowing whether your current or planned system would be able to support IFRS since not all platforms are capable at this time. Just posted to CFO.com is a great article regarding the necessary collaboration that needs to happen with the Finance and IS departments. Definitely worth the few minutes to read.
CFO.com article:Can your CIO spell IFRS?