Convergence with IFRS in Latin America             

June 2007

Use of IFRS in Latin America

(Proposed)

(2010)

(May 19 04)

(2009)

Acceptability of IFRS in the US

FASB recognizes that American standards contain weaknesses that can be eliminated by developing new global standardsAmerican standards based on detailed rules, which differ from IFRS that are based on broad principles, provide legal protectionThe success of convergence in the European Union beginning in 2005 was critical to help with the acceptance of IFRS by the SEC in the US … now approved for 2008

Global Difference

IFRS: Standards are based on

broad principles (“principles-based accounting”)

GAAP: U.S. standards are based on

detailed rules (“rules-based accounting”)

Basic Principle

Options

Degree of Detail

Rules

Less

More

Concepts

Less

More

Why the Differences?

IFRS

GAAP

Articulate the basic objective Provide necessary guidance for

operational and consistent application

Broad applicability (limited scope exceptions)

“Bright lines” are limited (percentage testing)

Alternative accounting treatments are limited for similar transactions

Principle-Based Standards

Advances Towards Convergence in MexicoMexican standards are being reviewed to assess the convenience of making changes to converge with IFRS Some of the projects or studies include the following:

Financial services industry (completed project)Insurance and bonding industryGovernment agencies

Convergence Projects

To be Examined by FASB

To be Examined by IASB

Subsequent events Borrowing costs

Impairment Impairment

Income taxes Income taxes

Investment properties Government grants

Research and development

Joint ventures

Accounting Standards for SMEsIASB is working on a project to develop financial information standards that are appropriate for small and medium entreprises (SMEs)SMEs have been defined by IASB as entities that

Are not required to report to the “public”

Are not economically significant in their locations of origin

Are required to publish general-purpose financial statements for external use

IASB’s basic proposal is the issuance of a simplified version of IFRS that establishes

Summary information requirementsValuation, presentation and disclosure standards that exclude technical accounting treatments that are difficult to implement

In April 2005, IASB issued a document for discussion to identify relevant topics, with two main issues

What are the accounting problems when SMEs apply IFRS?What IFRS topics should be left out of the standards applicable to SMEs?

Accounting Standards for SMEs

In connection with the Interamerican Accounting Seminar (Seminario Interamericano de Contabilidad) held in Mexico City in October 2004, workshops were carried out among representatives of IASB, CINIF and other South American standard setters The conclusion was that it is also necessary to amend IAS 29, “Financial Reporting in Hyperinflationary Economies”The amendments are intended to better adapt IAS 29 to the needs of Latin American countries where there is broad experience in dealing with inflation

Inflationary Accounting

During the workshops, it was concluded that Mexico and Argentina should work together to draft proposed amendments to IAS 29Work assignments

Argentina: Investigate establishing levels of inflation at which to “disconnect” and “reconnect” the restatement methodology and provide the accounting for the effects derived from either of these two circumstances Mexico: Outline the standard that will serve as the starting point

CINIF has completed a project to amend Bulletin B-10To adapt it to Mexico’s current needsWith a view to elevating B-10 to an international standardIn May 2007 CINIF decided to retain the requirement to recognize the comprehensive effects of inflation

Inflationary Accounting

IAS 29 does not establish an absolute rate of inflation that, when surpassed, results in a state of hyperinflationOn the other hand, it is a matter of judgment to decide when restatement of financial statements is necessary, pursuant to IAS 29

Inflationary Accounting

Pursuant to IAS 29, certain characteristics of a country’s economic environment indicate a state of hyperinflation, such as:

The general population prefers to keep its wealth in nonmonetary assets or in a relatively stable foreign currency; amounts of local currency held are immediately invested to maintain purchasing powerThe general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency; prices may be quoted in that currencySales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if the period is shortInterest rates, wages and prices are linked to a price indexThe cumulative inflation rate over three years is approaching, or exceeds, 100%

Inflationary Accounting

Summary

Local? GAAP?

IFRS!