IFRS & SOX Overview Presentation Lance LaCross, CPA September 23-25, 2009

1. IFRS & SOX Overview PresentationLance LaCross, CPA September 23-25, 2009

2. Today’s Agenda • SOX (Sarbanes-Oxley Act) • Background • Was It Worth It? • Latest Update • IFRS (International Financial Reporting Standards) • What Is It? • Will It Effect Me? • Latest Update

3. The Scandals of … • Enron • WorldCom • Tyco • Arthur Anderson • KPMG • HealthSouth Corporation Drove investors to loss confidence in our regulators and the reliability of publically reported financial information so our government sent a strong message to the marketplace with this act.

4. Sarbanes-Oxley Act - Summary The Sarbanes-Oxley Act of 2002 (often shortened to SOX and named for its sponsors Senator Paul Sarbanes and Representative Michael G. Oxley) is a law that was passed in response to the financial scandals such as Enron and WorldCom. The law establishes new, stricter standards for all US publicly traded companies. It does not apply to privately companies. The Act is administered by the Securities and Exchange Commission (SEC), which deals with compliance, rules and requirements. The Act also created a new agency, the Public Company Accounting Oversight Board, or PCAOB, which is in charge of overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.

5. Key Sections Summary • Key Sections • Section 201 Outlines Prohibited Auditor Activities. • Section 302 Describes The CEO's And CFO's New Responsibilities Regarding Corporate Reports. • Section 404 Addresses The Management Assessment Of Internal Controls. • Section 409 Outlines Real Time Disclosure. • Section 802 Describes Criminal Penalties For Altering Documents. • Section 806 Describes Whistleblower Protection. • Section 807 Describes Criminal Penalties For Fraud.

6. Internal Controls – Safety Procedure

7. Section 404 of the Sarbanes-Oxley Act SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS.(a) RULES REQUIRED- The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall-- • (1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and • (2) contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. (b) INTERNAL CONTROL EVALUATION AND REPORTING- With respect to the internal control assessment required by subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer. An attestation made under this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such attestation shall not be the subject of a separate engagement.

8. Sarbanes-Oxley Section 404 IT Controls Top Deficiencies Common deficiencies found in first year of audits: • Unidentified or unresolved segregation of duties issues • Programmer/developer access to production business transactions • Large number of users with access to “Super” or “Power” User transactions in production

9. Was It Worth It? • Per the SEC, the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000. • Actual implementation costs in 2004 were 35 times higher than SEC estimate ($3.185 M) • In 2002, only 3 Congressmen opposed SOX now a lot of businessmen & politicians oppose the financial burden it puts on smaller companies • SOX led to the creation of the Public Company Accounting Oversight Board (PCAOB), which was established to oversee public companies' auditors and protect the public's interest by ensuring informative, fair, and independent audit reports. • The PCAOB is actively investigating small business issues (70+% of public companies are considered small). • The SEC and PCAOB are constantly revising their guidance to address some of the concerns Small company i.e. compliance dead lines have been extended.

10. SOX & The Future • Section 404 certification is an annual event. Compliance is an ongoing requirement which will require resources (people / $$$) • Auditors are now more objective because they cannot provide nonaudit services • Auditors are rotated every five years (learning curve?) • External Reporting is expanded for investors • The SEC and PCAOB are constantly revising their guidance to address some of the ongoing concerns which drives continuous change • CEO & CFO are likely to be more proactive in their financial disclosure due to potential liability • SEC has more power – i.e. blackball officers & directors

11. SOX & The Future cont… • The Sarbanes-Oxley Act has many critics. They state the Act is an over-burdensome piece of regulation, one that has imposed costly and unneeded obligations on issuers. It has driven U.S. companies to exit the public markets and “go private,” and it has deterred non-U.S. companies from raising capital and listing in the United States. • Supporters of Sarbanes-Oxley counter that these arguments are extreme. Yes the benefits of Sarbanes-Oxley are hard to quantify. Little discussion about the costs of not implementing such compliance measures, such as the losses due to fraud, and the loss of investor confidence. The costs of an entity's dysfunction, such as what happened with Enron and a number of other companies, were enormous. Trillions of dollars were lost in market capitalization, and this was a real crisis with respect to investor confidence. The feelings are that is has increased public confidence in the markets and arguably lessened accounting fraud and numbers “manipulation.” • However, there is agreement among all parties that the act needs some adjustment particularly with respect to the burdens it imposes on smaller companies.

12. Everyone is talking about it

13. Everyone is writing about it

14. IFRS vs. GAAP IFRS – International Financial Reporting Standardsby IASB (International Accounting Standards Board)GAAP – Generally Accepted Accounting Principalsby FASB (Financial Accounting Standards Board)

15. But Why Be Concerned about IFRS? How can global investors, regulatory agencies, etc compare financial information/statements on a global basis if it is based on different rules, etc. It is like comparing … TO

16. IFRS compared to GAAP = Apples vs. Oranges Both are in the fruit family but a different variety - having major differences: color, skin, taste, purpose & texture

17. But if everyone is using IFRS (a Worldwide Standard) for their Financial Reporting… Than it is like comparing Apples (Macintosh) vs. Apples (Granny Smith) Both in the fruit family and in the same variety - having minor differences: color, taste & texture – Easier comparison

18. IFRS vs. GAAP IFRS – International Financial Reporting Standardsby IASB (International Accounting Standards Board)IFRSs are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments.VsGAAP – Generally Accepted Accounting Principalsby FASB (Financial Accounting Standards Board)GAAP is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements

19. Why is everyone talking about IFRS? • The SEC Is Mandating It • Your Competitors Are Doing It • Your CPA Thinks It Is A Great Idea

20. The SEC Is Mandating It

21. The SEC Is Mandating It • International Corporations preparers no longer must reconcile to US GAAP • Will it replace US GAAP? • The SEC has announced a timeline (2014) for potential adoption • 2005 – EU Accepts it • 2009 - US listed companies have the option to use IFRS • 2009 – New SEC Chairman – “Now my agenda” • 2011 - SEC will access results • 2014: This would be the earliest year that the SEC would require U.S. large accelerated filers to convert their financials to IFRS. • 2015: Earliest year the SEC would require U.S. accelerated filers to convert to IFRS. • 2016: Earliest year the SEC would require U.S. non-accelerated filers, including smaller U.S. public companies to convert to IFRS.

22. Your Competitors are Doing It • Today more than 113 countries permit or require IFRS • By 2012 every major capital market will have adopted IFRS except the US (last to the dance) • We are a globally driven environment who will need to have a common standard in place

23. World Market Acceptance

24. Your Competitors are Doing It cont… 2011 2014? 2012 2011 2012 2010 2012 2009

25. Your CPA Thinks it is a Great Idea • AICPA – Appendix A Rule 2003 • In 1973 FASB was set as the sole standard setter • IASB (International Accounting Standards Board) is designated as an acceptable principles creation organization • Continuous Convergence between IASB & FASB for a common “standard” • There are more than 15,000 SEC registered companies in the USA

26. History – Timeline of IASB • 1973: Foundation of the International Accounting Standards Committee (IASC) in London as the result of an agreement between accountancy bodies in nine countries • 1998: Completion of 39 ‘core’ international accounting standards (IASs). The number of IASC members passes one hundred • 2001: The IASB assumes the standard-setting responsibilities from IASC and is overseen by the IASC Foundation (established in 2001) • 2002: The EU Parliament confirms the endorsement process by which IFRSs will become the sole set of standards for EU listed companies • 2005: Adoption of IFRSs for listed companies in the EU • 2006: The US FASB and the IASB publish a Memorandum of Understanding detailing a roadmap to convergence • 2007: US SEC publishes a proposal to eliminate reconciliation requirement for foreign private issuers using IFRSs

27. History – Timeline of IFRS in the US

28. IFRS Timeline

29. Why Not GAAP as the Global Standard • US GAAP is too detailed • The rest of the world would not accept detailed rules • IFRS is already widely accepted through out the world

30. Is Success In The Detail?

31. Convergence Process Between IASB & FASB IASB FASB Convergence On Going Effort Final IFRS Standard?

32. Convergence Process Between IASB & FASB • Agenda Alignment • Full Joint Projects • Modified Joint Projects • Short term: • Projects of Narrower areas of difference • Long term: • Projects of “Big Ticket” • Not just convergence for the sakes of convergence, but also improvement

33. Convergence Process Between IASB & FASB • Short Term • Fair Value Option (FASB) completed • Segment Reporting (IASB) completed • Joint Ventures (IASB) final standard in 2009 • … • Long Term • Financial Statement Presentation (Joint) DP (Discussion Paper) issued in Q42008 • Leases (Joint) Discussion Paper issued in Q12009 • Liabilities & Equity ED (Exposure Draft) in 2009 • …

34. IASB Project Example

35. Convergence Process Between IASB & FASB “ Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP. The goal is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved. Because of these ongoing convergence projects, the extent of the specific differences between IFRS and U.S. GAAP is shrinking.” However ….

36. Convergence Process Between IASB & FASB • Still Major Differences: • IFRS does not permit Last In First Out (LIFO) as an inventory costing method. • IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely. • IFRS has a different probability threshold and measurement objective for contingencies. • IFRS does not permit curing debt covenant violations after year-end. • IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction. Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail.

37. High Level Differences Areas: • Financial Statement Presentation • Consolidations, Joint Ventures, and Equity Method Investees • Business Combinations • Inventory • Intangible Assets • Long-Lived Assets • Impairment of Assets • Leases • Financial Instruments • Foreign Currency Matters • Income Taxes • Provisions & Contingencies • Revenue Recognition • Share Based Payments • Employee Benefits other than Share-based Payments • Segment Reporting • Earnings Per Share • Interim Financial Reporting

38. Key Challenges …

39. Key Challenges - Time

40. Key Challenges • Principles vs. Rules – Mindset Change • Hidden Differences – More Than Expected • Integration Into Education/Budget • Policy Issues i.e. LIFO Accounting • Education • Investors, Employees (current & future), etc. • And …?

41. Transition for US Corporations from GAAP to IFRS • Financial Statements: • Based on the current proposed roadmap published by the SEC, companies would need to be able to produce financials under both US GAAP and IFRS for a minimum of three (3) years • For some companies, the time period may be longer due to stand alone US GAAP reporting requirements for statutory reporting, debt covenant reporting to banks, etc.

42. Transition for US Corporations from GAAP to IFRS – Costs? • Expenses to determine the effects of adopting IFRS • Systems/ IT changes • Multi GAAP Capability / IFRS Complaint • Potentially higher cost of accounting staff – • Restatement of 2 prior years • Internal Experience • Outside consultants & auditors who understand IFRS • Possible cost of switching to an audit firm with proper experience in IFRS reporting

43. Transition for US Corporations from GAAP to IFRS • Information Technology Considerations: • IFRS is accounting driven but it will drive major changes to IT systems as well as business processes and personnel • Current experience indicates that IT costs are generally over 50 percent of the cost of IFRS conversion • Organizations benefit when they identify and integrate the efforts of the IT team early in the IFRS conversion process • Depending on the system complexities associated with the conversion to IFRS, experience from other global conversion efforts indicates that the IT system conversion component of an overall IFRS conversion can take 18 -24 months or longer. • IT efforts will comprise a mix of short and long term projects within the organization s overall IFRS project • The IFRS conversion effort provides opportunities for achieving synergies with other IT projects and strategic initiatives, such as an ERP implementation or major upgrade

44. SEC - Cost Estimate “ We estimated that the cost of IFRS transition under Proposal A would be 0.125% of revenue for the U.S. issuers that would be eligible to use IFRS accounting, and would be approximately 0.13% of revenue under Proposal B to reflect the additional U.S. GAAP reconciliation disclosure.182 . We used a higher percentage of revenue to take into account our different filing obligations in the U.S., which require, among other things, issuers to include three years of audited financial statements, and our requirement related to internal controls over financial reporting.” SEC Quote So a $1B organization estimate = $130,000. But you must remember that not too long ago the SEC made an estimate for a mandated enterprise-wide project that ended up costing companies millions of dollars in auditing fees. That project — the internal-control provision of the Sarbanes-Oxley Act — was initially estimated to cost companies $91,000.

45. Addressing IFRS Challenges with QAD Solutions • For Global Manufacturing Companies, the typical areas concerned will center on choices to be made in the areas of: • First-time adoption (IFRS 1) Reporting • Segment Reporting (IAS 14, recently superseded by IFRS 8) • Inventory Valuation (IAS 2) • Fixed Assets Valuation (IAS 16) • Revenue Recognition (IAS 18) • Foreign Exchange rates (IAS 21)

46. Addressing IFRS Challenges with QAD Solutions • Where some ERP vendors can only handle the multi-GAAP and reporting requirements by using separate consolidation or BI solutions, w e have embedded these capabilities in the core product suite. Some examples include: • Combination of Local GAAP and IFRS, also supporting the first time adoption • QAD Enterprise Applications allow combining reporting both on Local GAAP as well as on IFRS standards through the application ‘adjustment layers’ (EE). This approach allows for separately recording and tracking of the differences between the GAAPs.   • Segment reporting • IFRS 8 applies when a company has parts of the business operating in different business segments. QAD EE support multiple analytical segments (e.g. subaccount and SAF’s) that can be used to support segment reporting. In some cases there might be a need to reallocate general costs and revenues to the appropriate segments. QAD EE introduces an allocation module for this, streamlining the automation of this process • Inventory Valuation • IAS 2 concerns inventory valuation and recommends costing inventory by either specific identification, FIFO or weighted average. The standard cost inventory method may be used, provided that results after incorporation of variance reconcile back to one of the above. QAD Enterprise Applications supports both standard and average costing.

47. Addressing IFRS Challenges with QAD Solutions • Fixed Assets • QAD Enterprise Applications provide for the different ways to treat the lifecycle of a Fixed Asset from acquisition, revaluation through dismissal. QAD Enterprise Applications supports putting in place multiple depreciation books for an asset, allowing complying with both Local GAAP and IFRS valuation requirements. • Foreign Exchange Rates • QAD Enterprise Applications provide powerful tools for multi-currency activities, translating foreign currencies to functional currency at the moment of transaction and supporting the recognition of realized and unrealized exchange gains and losses at the moment of reporting. • Others • The above list is far from complete. QAD Enterprise Applications have many built-in provisions for internal controls that make reconciliation and reporting easier. QAD Enterprise Edition introduces an even more extensive set of these internal controls and extra functions.

48. QAD Solution – 2009 EE • QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance • Accounting Layers

49. QAD Solution – 2009 EE • QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance • Supplementary Analysis Fields (SAF)

50. QAD Solution – 2009 EE • QAD Enterprise Edition introduces new capabilities to further streamline IFRS compliance • Allocations