FEI International Express - Vol.1

Vol.1                      August 2008

Table of Contents

·         Canada

·         Mexico

·         United States

CANADA

IFRS Readiness in Canada: An Executive Research Report

In 2011, all publicly accountable Canadian companies will be required to report their financial results using the International Financial Reporting Standards ( IFRS) as opposed to Canadian GAAP. The Accounting Standards Board (AcSB) is also currently considering options for changes in GAAP for private companies.

The conversion to IFRS will have significant impacts not only on financial reporting, but on broader business issues that extend across the entire organization. According to a report published April 25th by the Canadian Financial Executive Research Foundation (CFERF) and its sponsor, Ernst & Young, financial executives are concerned about what those impacts will be and how best to manage them. This research begins to fill the gap in the literature surrounding the state of IFRS Readiness in Canada by identifying current issues and challenges, and potentially emerging best practices from the leaders in the IFRS conversion process.   

Anecdotal information has suggested that not many Canadian companies are far down the path to IFRS conversion; this research report provides statistical and qualitative evidence that suggests that this is generally true.  The survey results show that relatively few senior finance executives are aware of the differences between IFRS and Canadian GAAP, and consequently, most have yet to brief their audit committees. The majority are nowhere near prepared for conversion at this point in time, haven’t calculated the conversion costs, and don’t know if their systems can handle the job.  (This holds true for both private and public companies.) In spite of that, financial executives do not want the 2010 conversion deadline to be extended.  

For more on this research, click here.

20 Questions Directors and Audit Committees Should Ask About IFRS Conversions

Canada’s Accounting Standards Board has confirmed that public companies will be required to adopt IFRS as of Jan. 1, 2011, and the Canadian Securities Administrators recently indicated that it would support early adoption of the new standards.

A firm confirmation date means companies can proceed with their conversion plans. And the time to start planning is now. The changeover will be more than a technical accounting exercise. It will be a major change management project, involving nearly every area of an organization.


Strong leadership drives change. Ernst & Young has prepared a very timely piece of IFRS thought leadership for the Chartered Accountants of Canada, entitled: 20 Questions Directors and Audit Committees Should Ask About IFRS Conversions. 20 Questions covers tough questions that directors and audit committees need to ask management about their IFRS conversion plans.

To learn more about IFRS, and to view a copy of 20 Questions Directors and Audit Committees Should Ask About IFRS Conversions, please visit http://www.ey.com/global/content.nsf/Canada/AABS_-_Assurance_-_IFRS_-_Overview.

Canadian CEOs Concerned about Business Growth

The current uncertainty being played out in global financial markets echoes the findings of the latest global CEO survey released by PricewaterhouseCoopers (PwC). According to PwC’s 11th Annual Global CEO Survey, half of CEOs are concerned about a global recession and prospects for short-term business growth, a drop from last year’s results. Other areas of concerns identified by Canadian CEOs in the report include over-regulation, a cooling market for mergers and acquisitions and the ongoing war for talent.

Released earlier this year at the World Economic Forum in Davos , Switzerland , the survey was based on interviews with 1,150 CEOs in 50 countries, including 30 from Canada . According to this year’s report, only 33 percent of Canadian respondents are very confident about revenue growth over the next 12 months—a pronounced drop of 27 points from 60 percent last year, and compares to 50 percent of CEOs globally.

Respondents are focusing on the building blocks of growth to grow their business. One-third of Canadian CEOs put expanding in their existing markets as a top priority, followed by geographic expansion of their business at 27 percent. This compares to 30 percent globally who indicate better penetration of existing markets as their main growth factor, followed by new product development at 20 percent and geographic expansion at 19 percent. 70 percent of respondents in Canada are looking to finance growth through internally generated cash flow compared to 82 percent globally.

For more information on the PwC’s 11th Annual Global CEO Survey please click here.

Increased Environmental Awareness: Turning It into Business Opportunities

While Canadian banks have shown progress in managing environmental risk, they now need to become more actively involved in environmental product and service opportunities in order to harness public awareness of environmental issues and to position themselves for pending climate change regulation.

While Canadian banks have shown progress in addressing stakeholder concerns with respect to the environment -- such as in-house emissions tracking, risk management or green procurement -- related product and service offers remain an area of growth in Canada . Moving forward, products and services that address heightened public awareness of environmental issues will need to continue to be an integral component of each bank’s sustainability strategy.

PricewaterhouseCoopers’ publication, Canadian Banks 2008, provides an analysis of the 2007 financial results for the Canadian banking industry. It examines the challenges that lie ahead: how can banks be part of a sustainable future, how can they attract and retain the best talent and how can they streamline the regulatory burden? It also addresses the demographic and regulatory changes that will affect the bottom line in 2008 and in the years to come. 

To read the complete article and access an electronic copy of the Canadian Banks 2008 publication, please click here.

Canadian Professionals: Fewer Work Hours, More Home Work

A new global report shows that many financial professionals are putting in more hours on the job than just two years ago, but exactly how much time varies widely by country.  The Robert Half International research also suggests a trend toward increased accessibility of financial managers outside of the office.

Among the findings:

For more on the survey, click here.

MEXICO

Mexican Tax Reform 2008 - Executive Summary

(Article provided by Carlos Cardenas Guzman, IMEF’s VP of Institutional Communication & E&Y Senior Partner & Director)

On Sept. 13, 2007 the Senate of Mexico approved the release of several new tax laws and modifications to existing ones. The approved tax reform has been in place since Jan. 1, 2008.

This reform is both a novelty and important to the Mexican Republic. It is a novelty since it publishes two new tax laws without precedent in Mexico: The law for a unique corporate tax rate (Ley del Impuesto Empresarial a Tasa Única) and the law for withholding on cash deposits (Ley del Impuesto a los Depósitos en Efectivo). It is important since these new commandments will diminish the tax collections deficit who has been affecting our country for several decades.

Click on this link or paste in your browser to learn more (article in Spanish)… http://www.imef.org.mx/fei/descargas/article(1).doc

Foreign Manufacturing Investment in Mexico

(Article provided by Luis Ortiz Hidalgo, IMEF’s VP of International Relations & BRC Partner and Managing Director)

During the 1980s, Mexico began an ambitious plan to diversify its petroleum-based economy by creating programs that promoted exports. It also joined the General Agreement on Tariff and Trade (predecessor to the World Trade Organization or “WTO”) in 1986.

Additionally, during the 1990s the federal government negotiated and successfully signed a number of free trade agreements with countries around the globe. As a result, companies exporting from Mexico can benefit from a series of federal programs designed to reduce tax exposure, and as well, Mexican-made products may enjoy preferential access to the world largest and most profitable markets by properly taking advantage of all its free trade agreements.

Click on this link or paste in your browser for more information (article in English)… http://www.imef.org.mx/fei/descargas/article(2).doc

Tax Regime of the Maquiladoras in Mexico:

What Should a Foreign Investor Know About It?
(Article provided by Luis Ortiz Hidalgo, IMEF’s VP of International Relations & BRC Partner and Managing Director)

According to the rules issued by the Mexican Ministry of Economy, a pure maquiladora activity will exist when a Mexican corporation transforms, elaborates or repairs the inventory provided by a foreign resident using for said process assets provided directly or indirectly by the foreign resident or any of its related parties. Such maquiladoras could benefit from Mexican legislation and reduce operational costs with proper counseling.

Click on this link or paste in your browser to know more about what a foreign investor should know about the maquiladora’s tax regime in Mexico (article in English)… http://www.imef.org.mx/fei/descargas/article(3).doc

How Are We Doing with Regard to Financial Information Norms?
(Article provided by Enrique Calleja Pinedo, Member of the National Committee of Financial Information and José Coballasi Hernandez, President of IMEF’s Technical Board)

The standards issued last year by CINIF (the Mexican institute responsible for approval and issuance of financial reporting standards) have been applicable from Jan. 1, 2008. It is very important to know how these norms have been applied and to evaluate the impact that they have or will create in corporations during the current year, allowing better understanding for all the stakeholders, including auditors and decision-makers.

Click on this link or paste in your browser to learn more (article in Spanish)… http://www.imef.org.mx/fei/descargas/article(4).doc

 

The Use of Financial Information Standards

(Article provided by Daniel Ledesma Gonzalez, President of the National Committee of Financial Information and José Coballasi Hernandez, President of IMEF’s Technical Board)

The Mexican Financial Reporting Standards, (technically called Normas de Informacion Financiera or NIFs) are mandatory for public accountants in the production of financial information. Nevertheless, the knowledge and utilization of these norms is small.

Click on this link to learn more (article in Spanish)… http://www.imef.org.mx/fei/descargas/article(5).doc

UNITED STATES

Corporate Roundtable on International Financial Reporting (CRIFR)

On June 5, FEI announced the formation of a new national coalition, the Corporate Roundtable on International Financial Reporting (CRIFR) at its 2008 Global Financial Reporting Convergence Conference in New York.  

As a true national coalition, CRIFR is open to both FEI members and nonmembers. The coalition will provide a forum for companies of all sizes and funding models to discuss all business issues related to the promulgation, implementation and convergence of International Financial Reporting Standards (IFRS) by U.S. companies. Furthermore, CRIFR will work with standard setters and other government policymakers on these business issues and the challenges that arise from the transition.

CRIFR initially consists of an alliance of corporate senior executives with a major responsibility for IFRS implementation, as well as thought leaders from business associations. CRIFR’s charter members include FEI, Eli Lilly and Co., Honeywell International Inc, The McGraw-Hill Cos., Source Technologies Inc., SMSC and Tyco International Ltd.  FEI is looking to grow the size and breadth of CRIFR in the coming months and welcomes additional interested members. 

Additionally, see the FEI press release.

FASB Codification of All U.S. GAAP Released for One-Year Verification Period

In January, the Financial Accounting Standards Board (FASB) announced the release of its Codification, launching the start of the one-year "verification" period in which FASB is "encourag[ing]... use [of] the online Codification Research System free of charge to research accounting issues and provide feedback on whether the codification content accurately reflects existing U.S. generally accepted accounting principles."

The Codification combines all U.S. GAAP in one place, with interactive search capabilities. Access to the codification is available at: http://asc.fasb.org. Further details are in this FEI summary.

FAF Votes to Reduce Size of FASB Board

Last winter, the Financial Accounting Foundation (FAF), parent of the FASB, announced it voted to effect the changes to FAF, FASB and GASB (Government Accounting Standards Board) structure proposed in December, including reducing the size of the FASB board from seven to five board members. 

As detailed in FAF’s Recitals and Resolutions , the changes to FAF, FASB and GASB governance and structure agreed to by FAF are virtually identical to a December proposal, except in two areas. 

Regarding composition of the FASB board, rather than requiring one board member from each of four constituencies (preparer, auditor, financial statement user and academic) and one at-large member, as proposed in December, FAF voted to broaden its general requirement applicable to all board members. It will now require experience in various areas, not just knowledge of various areas, and expanding the areas from accounting, finance and reporting to also include investing and accounting education and research. 

Additionally, in keeping with the December proposal to place agenda-setting authority in the hands of the FASB and GASB chair, the FAF added a requirement in its final vote last week that the chairs’ agenda-setting process should be a consultative one.

As we previously reported, comment letters filed on the December proposal by FEI’s Committee on Corporate Reporting (CCR), Committee on Private Companies (CPC) and a number of former FASB board members expressed concern about the reduction in size of the FASB board.

SEC Signs Protocols to Share Information on Application of IFRS

In May, the SEC announced it has signed protocols to share information on the application of IFRS with financial regulators in four European countries. The arrangements with regulators in Belgium, Bulgaria, Norway and Portugal are in line with the Work Plan previously agreed to between the SEC and the Committee of European Securities Regulators (CESR).

Restatements Rose 18-Fold Between 1997-2006, Says Treasury Study

In April, the U.S. Treasury Department released its study of restatements: “The Changing Nature and Consequences of Public Company Financial Restatements.“ Authored by Prof. Susan Scholz of the University of Kansas , the study was commissioned as part of Treasury’s Capital Markets Competitiveness initiative.

The study showed an 18-fold increase in the number of restatements between 1997 and 2006, and showed a decline in the number of restatements associated with fraud and revenue recognition, as well as a decline in investor reaction to restatements. Further details are in this FEI summary.

The Textron Tax Case: FEI Committees File Amicus Brief

Last August, the United States District Court for the District of Rhode Island held that tax accrual workpapers were protected by the work product protection and thus denied enforcement of the summons sought by the Internal Revenue Service to produce the workpapers and supporting notes (United States v. Textron, No. 06-198T (D.R.I. Aug. 29, 2007).

The court found that the tax accrual workpapers were also protected by both the attorney-client privilege and tax practitioner privileges; however, the court considered and concluded that disclosure of the workpapers to the auditors waived these privileges. For purposes of certifying the financial statements, Textron’s in-house counsel provided the accountants a tax reserve summary spreadsheet that lists the uncertain issues identified by the tax advisors and, for each issue, the hazards of litigation percentage and assigned dollar values. 

The decision offers much promise to corporate taxpayers concerned about the protection of confidential materials, but the contours of the opinion should be carefully evaluated. The IRS appealed this case to the U.S. Court of Appeals for the First Circuit. On April 4, FEI’s Committee on Taxation and Committee on Corporate Reporting filed an amicus brief in the Textron case (on appeal), to support the lower court’s decision and to address additional consequences that could result from an adverse ruling.

SEC Proposes XBRL Rule to Take Effect After Dec. 15 for Largest Companies

On May 14, the SEC voted to release for public comment a proposed rule regarding requirements for public companies to file certain data with the SEC using data tags in eXtensible Business Reporting Language (XBRL). The proposal calls for a phased-in approach, with the largest 500 companies in the U.S. (specifically, those that file in U.S. GAAP and have a worldwide public float of over $5 billion) being required to provide financial statements in XBRL for fiscal periods ending on or after Dec. 15, 2008.

In that first year, the SEC would permit footnotes to be provided in blocked tags. Thereafter, the detail within each footnote would have to be individually tagged. Smaller U.S. companies and companies filing in IFRS would be phased in during the following two years. The SEC noted that it will monitor initial adoption by the largest companies to determine if any change to the remaining phase-in schedule is necessary for the smaller and foreign filers.

The filing deadline for XBRL data would be the same as that for the related SEC filings currently (annual reports, interim reports, registration statements, transition reports). However, an additional 30-day “grace period” would be provided for the initial XBRL filing of the financial statements, and a similar grace period would be provided for the initial filing of the detailed footnotes required in the second year.

The SEC did not specify during its webcast if the information would be “furnished” vs. “filed,” but SEC staff said the same limited liability would be applied as under the current XBRL voluntary filer program. Also, the SEC was silent on the question of auditor attestation. A number of FEI member companies, including some from FEI’s Committee on Finance and Information Technology (CFIT) and Committee on Corporate Reporting (CCR), were among the 76 voluntary filer companies.