Using SEC Resources to Incorporate IFRS Content in Intermediate Accounting Linda Matuszewski Northern Illinois University

Linda J. Matuszewski is an Associate Professor of Accountancy at Northern Illinois University. She teaches courses in managerial and financial accounting at the undergraduate level. Dr. Matuszewski is a CPA (inactive) and a member of the AICPA, the American Accounting Association, the Illinois CPA Society and the Institute of Management Accountants. Her primary research interest involves the study of the effect of preferences for honesty and fairness on the decisions of accounting managers. Her work has been published in Journal of Management Accounting Research, Advances in Accounting Education: Teaching and Curriculum Innovations, Cost Management, and Strategic Finance. Abstract Frequent changes in the movement toward achieving a single set of high-quality, global accounting standards make it challenging to keep the content of intermediate accounting textbooks up-to-date with respect to this issue. This project utilizes a variety of publicly available U.S. Securities and Exchange Commission (SEC) documents to supplement textbook materials and help students better understand the SEC’s evolving efforts in deciding whether and how to incorporate International Financial Reporting Standards (IFRS) for U.S. issuers. It was assigned during spring 2012 in an intermediate financial accounting course (ACCY 331 – Financial Reporting I), which is an undergraduate course, typically taken in the second semester of a student’s junior year. Students read and answer questions about the SEC statement in support of global accounting standards, the “Work Plan,” progress reports, staff papers, and comment letters. In completing the project, students gain an appreciation for the complexity of this issue as well as an understanding of the wide range of opinions among various stakeholder groups, including public corporations, public accounting firms, standard setters, accounting professional organizations, investors, creditors, accounting educators, and others. The project reinforces textbook coverage of the major differences between U.S. GAAP and IFRS, and helps prepare students for their future practice in a world with global accounting standards. Project instructions have been shared to help other instructors implement this project in a cost-effective manner. Solutions and grading rubrics are available upon request. Contact Linda at [email protected] or 815-753-6379.

Learning Objectives The main objectives of the project are to increase students’ knowledge of the Security and Exchange Commission’s (SEC’s) evolving efforts in deciding whether to incorporate IFRS for U.S. issuers, and to increase their understanding of how this might be accomplished. A third objective is to increase students’ understanding of similarities and differences in the opinions of various stakeholder groups (the FASB, financial statement preparers, auditors, investors, educators and others) regarding this potential change. Throughout the semester, students learn the differences between U.S. GAAP and IFRS as various topics are covered through traditional means such as lectures, homework assignments and exams. A fourth objective of this project is to reiterate some of these differences to increase retention of this knowledge. ACCY 331 – Spring 2012 IFRS Project – Part I Instructions

1 Purpose: In recent years, many accounting standard setters, regulators, company leaders and market participants have set a goal of achieving a single set of high-quality, common accounting standards used around the world. The purpose of Part I of this project is to increase your knowledge of the Security and Exchange Commission’s (SEC’s) evolving efforts in deciding whether and how to incorporate IFRS for U.S. issuers. You will work in the teams of three formed earlier in the semester on this part of the project. The source documents needed to complete this project are all located on the SEC website under “Spotlight on Work Plan for Global Accounting Standards” at http://www.sec.gov/spotlight/globalaccountingstandards.shtml After completing all parts of the project, each member of your team must complete a Peer Evaluation Form to rate the performance of each team member. I reserve the right to lower the grade of any team member if the peer evaluations suggest that his or her attitude, attendance and/or contribution were substantially less than those of the other team members. Format for written report:  Your report should include a heading that identifies the name of each of your group members.  Your answers should be reported in the same order that the requirements are listed below. Provide your answers using full sentences. Either repeat the question, or write your answer in such a way that the question being answered is clear. Whenever possible, you should use your own words in your answers. However, if you choose to quote from the source documents, be sure to use quotation marks, clearly identify the document you are citing, and indicate the page number within the source document.

Point value: 50 points Due Date: March 22, 2012, no later than 4:30 pm. Your team must submit one electronic copy of your document via Blackboard. Requirements: 1. On February 24, 2010, the Securities and Exchange Commission issued RELEASE NOS. 33-9109; 34-61578 “Commission Statement in Support of Convergence and Global Accounting Standards”. Read this statement (available at http://www.sec.gov/rules/other/2010/33-9109.pdf), and answer the following questions. a. Briefly describe the SEC’s goals in promoting a single set of high-quality globally accepted accounting standards. b. What benefits does the SEC believe would result from global accounting standardization through convergence? c. Briefly describe the actions the SEC took in response to the Sarbanes-Oxley Act of 2002. d. Briefly describe the two actions the SEC took in 2007. e. In 2008, the SEC released a Proposed Roadmap leading to an eventual decision about whether to require the use of IFRS by U.S. issuers, and received over 200 comment letters from market participants. What was the potential benefit from the use of a single set of global accounting standards cited most frequently by commenters? Briefly describe a few of the concerns raised by commenters in response to the Proposed Roadmap.

2 f. In an appendix to the document, the SEC includes a Work Plan that will be executed before they will decide whether to require the use of IFRS by U.S. issuers. Briefly describe each of the six areas of concern that will be addressed in the work plan. g. What is the SEC’s estimate of the number of years U.S. issuers would need to successfully incorporate IFRS into their financial reporting systems? h. Briefly describe the SEC’s belief about the role the FASB would play in standard setting if U.S. issuers were required to use IFRS. 2. On October 29, 2010, the SEC released a Progress Report on the work plan. Read this Progress Report (available at http://www.sec.gov/spotlight/globalaccountingstandards/workplanprogress102910.pdf) and answer the following questions. a. The Progress Report describes two categories of approaches that have been used when jurisdictions incorporate IFRS into their financial reporting system. Briefly compare and contrast these two categories. b. Do most jurisdictions retain their national standard-setting body after incorporating IFRS into their financial reporting system? Explain. c. The SEC is closely following the work of the Monitoring Board, which oversees the IFRS Foundation, and is currently reviewing its governance framework. As part of this review, the Monitoring Board made a statement regarding the primary objective of financial reporting. In this statement, the Board identified four qualities that make information decision-useful for present and potential investors. What are these four qualities? d. Compare and contrast the current funding models for the IFRS Foundation and the FASB. e. In the section on the Regulatory Environment, the Progress Report notes that various industry regulators generally support the movement toward a single set of high-quality global accounting standards, but also notes that they have several concerns. Briefly describe a concern raised in the Progress Report. f. Members of the SEC staff have been meeting with the Internal Revenue Service (IRS) and the U.S. Department of the Treasury. In these meetings, four areas with significant ramifications have been identified. Briefly describe one of these four areas.

3 3. On May 26, 2011, the SEC released “Staff Paper: Exploring a Possible Method of Incorporating IFRS”. Read this Staff Paper (available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper- 052611.pdf) and answer the following questions. a. While the SEC did not intend for the framework discussed in this paper to be interpreted as the preferred approach, they presented it to illustrate three main points. Briefly describe these three points. b. Compare and contrast the approaches taken by the People’s Republic of China and the European Union (EU). c. How do the operating framework and the transition element described in this paper compare to the approaches taken by China and the EU? d. Briefly describe the role of the FASB in the framework presented in this paper. In what ways is this description similar or different from the description of the role of the FASB in the 2/24/2010 statement you read in item 1? e. Under the framework presented in this paper, what is described as the most likely example of a modification to IFRS? f. Compare and contrast the role of the SEC in relation to the FASB and the IASB. g. Does the SEC currently participate in the international standard setting process? Explain. h. The paper indicates “The FASB would be a facilitator of effective communication between the IASB and U.S. Constituents…” Does the SEC envision the FASB serving as the single U.S. voice in global standard setting efforts? Explain. i. Identify the three categories of IFRS identified in the strategy for transition. In each category describe one of the examples the SEC uses as an illustration. j. The final section of the document describes benefits and risks of the approach described in this document, and the SEC asked constituents to share their views by writing comment letters. Imagine that your team was writing a comment letter. Briefly describe your opinions on the pros and cons of the approach described in this document.

4 4. The SEC staff requested comments on the possible method described in the Staff Paper. Over 150 letters were received. Various stakeholder groups are represented in the letters. In the table on the next page, I have identified several writers of comment letters in each of six categories of stakeholders. Comment letters are posted on the SEC website at http://www.sec.gov/comments/4-600/4-600.shtml. Download and read at least one letter from each category in the table on the next page (at least six letters in total) and compare and contrast the writers’ comments.

Stakeholder Date of Written by Category Comment Letter Aug. 8, 2011 Deloitte & Touche LLP Public Aug. 1, 2011 PricewaterhouseCoopers LLP Accounting Jul. 29, 2011 Crowe Horwath LLP Firm Jul. 29, 2011 KPMG LLP Aug. 19, 2011 Arnold C. Hanish, Vice President, Finance and Chief Accounting Officer, Eli Lilly and Company Jul. 27, 2011 Kevin M. Ozan, Corporate Senior Vice President – Public Controller, McDonald’s Corporation Company Jul. 31, 2011 Bob Laux, Senior Director, Financial Accounting and Reporting, Microsoft Corporation Jul. 29, 2011 Richard Tarapchak, VP & Controller, Navistar, Inc. Nov. 15, 2011 John J. Brennan, Chairman, Financial Accounting FAF / FASB Foundation Jul. 1, 2011 Stephen A. Zeff, Professor of Accounting, Rice University Accounting Jul. 3, 2011 Joseph D. Ament, JD/CPA, Professor of Accounting & Educator / Taxation, Chicago, Illinois Other Jul. 26, 2011 Dr. Nigel Sleigh-Johnson, Head of Financial Reporting Faculty, ICAEW, London, United Kingdom Aug. 17, 2011 Paul V. Stahlin, CPA, Chairman of the Board, and Barry Melancon, CPA, President and CEO, American Institute of Certified Public Accountants Aug. 2, 2011 Allan Cohen, Chair Financial Reporting Committee, Accounting Institute of Management Accountants Professional Jul. 31, 2011 Jeffrey P. Watson, CPA Chair, and Scott G. Lehman, CPA Organization Vice-Chair, Accounting Principles Committee of the Illinois CPA Society Jul. 28, 2011 Cynthia M. Fornelli, Executive Director, Center for Audit Quality Aug. 3, 2011 Anne Simpson, Senior Portfolio Manager, California Public Employees Retirement System (CalPERS) Jul. 31, 2011 Jeff Mahoney, General Counsel, Council of Institutional Investors and Investors Creditors Aug. 1, 2011 Donna J. Fisher, Senior Vice President, Tax, Accounting and Financial Management, American Bankers Association Jul. 28, 2011 Tom Quaadman, Vice President, Center for Capital Markets Competitiveness, US Chamber of Commerce

5 ACCY 331 – Spring 2012 IFRS Project – Part II Instructions

Purpose: In recent years, many accounting standard setters, regulators, company leaders and market participants have set a goal of achieving a single set of high-quality, common accounting standards used around the world. The purpose of Part II of this project is to increase your knowledge of the Security and Exchange Commission’s (SEC’s) evolving efforts in deciding whether and how to incorporate IFRS for U.S. issuers.

You will work as an individual on this part of the project. (An open-book test administered online via Blackboard course management software, with one attempt per student.) Two source documents will be needed to answer the questions in this test: "An Analysis of IFRS in Practice" and "A Comparison of U.S. GAAP and IFRS." Both were issued on November 16, 2011, and both are located on the SEC website under “Spotlight on Work Plan for Global Accounting Standards” at http://www.sec.gov/spotlight/globalaccountingstandards.shtml

Point value: 40 points 1. (2 points) This is an individual assignment. By checking the "agree" box below, you are certifying that you have/will not discuss the assignment with anyone other than Professor Matuszewski. a. Agree b. Disagree

An Analysis of IFRS in Practice

2. (2 points) The analysis of IFRS in practice is based on a sample of 183 companies on the 2009 Fortune Global 500 list that make their financial statements available in English. What form of IFRS did a company have to follow to be included in the sample? a. IFRS (without qualifiers) b. IFRS as issued by the IASB c. IFRS as adopted by the European Union d. IFRS as adopted in Australia e. The sample included financial statements under all of these forms of IFRS.

3. (2 points) In your own words, briefly describe the two themes that emerged from the Staff's analysis.

4. (2 points) The analysis revealed that some companies used terms that were inconsistent with the terminology in the applicable IFRS. Because the analysis was conducted using English-language translated financial statements published by the companies, the SEC concluded that the differing terminology resulted from translation differences. a. True b. False

6 5. (2 points) In selecting the accounting policies to apply to transactions IFRS requires that management consider the following items. Indicate the order in which they must be considered, from first to last. a. The guidance in an IFRS standard that specifically applies to the issue. b. The recent pronouncements of other standard setting bodies that use a similar conceptual framework, if they do not conflict with IFRS. c. The guidance in an IFRS standard that relates to similar issues. d. The IFRS Framework.

6. (2 points) If a company considers the recent pronouncements of other standard-setting bodies in determining how to account for a transaction, IFRS requires that the company must monitor subsequent changes to those pronouncements, and incorporate those changes in their future accounting. a. True b. False

7. (2 points) The SEC identified considerable diversity in the level of detail in descriptions of accounting policies in the financial statements they reviewed. Identify five of the common examples of topical areas with unclear accounting policy disclosures that were listed.

8. (2 points) The SEC observed that several companies presented required disclosures outside the financial statements; however, it was always made clear that these required disclosures were audited. a. True b. False

9. (2 points) IFRS permits companies to elect either a cost model or a revaluation model to account for property, plant and equipment after initial recognition. The cost model was elected by the vast majority of companies in the sample. a. True b. False

10. (2 points) IFRS requires disclosure of revenue recognition policies. List the industries in which the SEC indicated that unclear revenue recognition policy disclosures were prevalent.

7 11. (2 points) The SEC summarized its observations regarding its reviews of the most recent SEC filings of approximately 140 foreign private issues that are registered with the SEC and that prepare their financial statements in accordance with IFRS, and prepared a chart showing the most frequent areas of comment. Rank the areas shown below in decreasing order from highest percentage of registrants issued comments to lowest. a. Income taxes b. Financial statement presentation c. Property, plant and equipment d. Revenue recognition e. Operating segments f. Consolidation, associates and joint ventures g. Provisions and contingent liabilities h. Financial instruments i. Employee benefits j. Impairment of assets

12. (2 points) Briefly describe how the findings in "An Analysis of IFRS in Practice" have influenced your personal opinion about whether the SEC should incorporate IFRS as the set of accounting standards to be used by U.S. public companies.

A Comparison of U.S. GAAP and IFRS

13. (2 points) Compared with U.S. GAAP, IFRS may help promote broader consistency across industries because of its limited industry- or transaction-specific guidance. a. True b. False

14. (2 points) U.S. GAAP has extensive guidance for evaluating materiality, while IFRS has only limited guidance. a. True b. False

15. (2 points) Briefly describe three specific differences between IFRS and U.S. GAAP with respect to accounting for inventory.

16. (2 points) IFRS requires the use of a revaluation model for capitalized acquired intangibles. Under this model, acquired intangibles are periodically adjusted to fair value, as determined in an active market. a. True b. False 17. (2 points) When an item of property, plant and equipment has multiple parts, IFRS requires that each significant part be assigned a separate useful life, and be depreciated as if it was a separate asset. a. True b. False

8 18. (2 points) The liability referred to as an asset retirement obligation under U.S. GAAP is referred to as a decommissioning liability under IFRS. Despite the different terms, both initial and subsequent measurement of this type of liability is the same under U.S. GAAP and IFRS. a. True b. False c. 19. (2 points) Both U.S. GAAP and IFRS require that a loss contingency be recorded when a future economic outflow is probable. When a continuous range of equally possible outcomes exists, IFRS requires that the loss be recorded as a. the low end of the range. b. the mid-point of the range. c. the high end of the range. d. any value within the range.

20. (2 points) Both U.S. GAAP and IFRS require that research and development costs are expensed as incurred. a. True b. False

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