International Financial Reporting Standards: Specific Challenges for Readers. Stephen G. Kerr * John W. Gillett Nathan Sandoz

Transcription

1 International Financial Reporting Standards: Specific Challenges for Readers Stephen G. Kerr * John W. Gillett Nathan Sandoz ABSTRACT The United States will soon start transitioning to the International Financial Accounting Standards (IFRS). Professional accountants have been preparing for the profound differences in disclose for several years. This paper highlights three areas of practical concern for other financial professionals that may be overlooked while effort is devoted to the transition. First, the more flexible IFRS presentation of financial statements will make it harder to pull information into analytical data-bases. Second, the uneven adoption dates will result in ratios that cannot be immediately used to make intercompany comparisons. Third, the IFRS is leading to a radical transformation of the basic balance sheet equation. JEL Classification: N20, G11 Key Words: IFRS, Ratio Analysis, GAAP Convergence, Financial Statement Comparison. INTRODUCTION The adoption of the International Financial Accounting Standards (IFRS) will make life more difficult for readers of Financial Statements. This is especially true for commercial lenders. A recent article in the Journal of Accountancy 1 pointed out that serious phasing in of the IFRS will begin in According to the transition rules they are proposing it may be several years before everyone reports under IFRS. This adds an additional challenge to a lenders use of financial statements. Our article in the September 2010 edition of the Commercial Lending Review explained ways in which IFRS will change the numbers reported in financial statements. The purpose of this paper is to extend that analysis. Specifically, to explore the challenges associated with the way in which those new numbers will be presented. International companies (based outside the U.S.A.) like Siemens, an engineering firm headquartered in Germany, have already converted to IFRS. Companies are going to convert over a number of years. Currently, only limited information is provided to readers wanting to reconcile the IFRS reports results to the old U.S. GAAP standards. This information will disappear once the standards are in place. Analysts will have to work much harder to avoid arriving at incorrect assessments. A lack of information increases the chance that ratios which arose due to changes in accounting policy will be labeled as genuine operating improvements. We have used the Siemens financial statements to illustrate some foreseeable challenges. With proper consideration they provide an opportunity to demonstrate the practical challenges ahead. The conversion process is going to make comparison more time consuming than it is today. Professionals that start preparing now will reduce the risk and stress we anticipate will arise when the IFRS implement is fully underway. There are 3 broad areas of concern that will make the financial statement readers life more difficult. First, the more flexible presentation standard will make it harder to pull information into analytical data-bases. Second, the uneven adoption dates will result in ratios that cannot be immediately used to make intercompany comparisons. Third, the IFRS is leading to a radical transformation of the basic balance sheet equation. Freshman entering business schools this fall are going to learn both standards. It will be hard and risky for the rest of us to ignore the challenges ahead. * Kerr is an Associate Professor of Accounting at Bradley University. John W. Gillett is a Professor of Accounting and Chair of the Bradley University Accounting Department. Nate Sandoz is an Assurance Associate at PriceWaterhouseCoopers. Corresponding author is Kerr. Their s are skerr@bradley.edu, jwg@bradley.edu, and Nathan.sandoz@us.pwc.com respectively. 1 SEC Road Map for Transition to IFRS Available. Journal of Accountancy. November 16 th, Journal of Financial and Economic Practice Page 52

2 CHANGES TO STATEMENT PRESENTATION The presentation of financial information under IFRS is fundamentally different. Most financial executives are, by now, well aware that the values attached to a number of important accounts will be different under IFRS. Another aspect of presenting financial information is the rules governing where the item is placed on the balance sheet. Many bankers and analysts rely on technology to pull data about a client for analysis. It would be a mistake to assume that such processes can be converted with simple rules such as X under U.S. GAAP is now Y under IFRS rules. Let us explain why this is going to make analysis and ratio computation more complex. International Accounting Standard 1 2 (IAS 1) gives the guidelines for the presentation of the primary financial statement: the Balance Sheet. It will be renamed as a Statement of Financial Position. The guidelines for presentation in IAS 1 do not require a specific balance sheet format. IAS 1 states that while assets and liabilities should be separated into current and noncurrent portions, assets can be presented current then noncurrent, or vice versa. Liabilities and equity can also be presented as current then noncurrent or vice versa. The standard also lists minimum items that must be on the statement of financial position, including intangible assets, inventories, trade receivables, cash and cash equivalents, deferred tax liabilities/assets, minority interest, and issued capital. In addition, the standard states that additional items might be needed to fairly present the firm s financial position. The requirement that companies apply judgment to ensure the presentation is fair will diminish the orderly standardization of format that is taken for granted. The Income Statement will also become less standardized. IAS 1 states that the minimum items that must be presented are revenue, finance costs, share of profit/loss of investments using the equity method, gains or losses on discontinued operations, tax expense, and profit/loss. Profit/loss attributable to a minority interest and attributable to equity holders of the parent must also be presented. Again, the standard states that additional line items may be needed to fairly present the enterprise s results of operations. The multi-step Income Statement that highlights Net Revenue, Gross Margin, Operating Income, and the net income will become less standardized as companies adjust to the expected level of professional judgment. Again a challenge to those employing methodologies that start with just picking up expected totals from the statements to do their analysis. The confounding combination of computational and presentation changes may best be illustrated by examining minority interest. Minority interest arises when a corporation does not own all the stock of a company but does have a controlling interest. The minority interest then reflects the equity due to the other stockholders when presenting a consolidated financial statement. Under U.S. GAAP the minority interest is not deducted from consolidated Stockholder s Equity but it was included in the computation or net income. However, U.S. GAAP is currently converging to IFRS with the issuance of Financial Accounting Standard (FAS) Under IFRS, minority interest is presented as a separate component of equity on the balance sheet; while the interest is presented on the income statement, it is not deducted from income/loss to determine consolidated earnings 4. This will reduce equity balances and increase net income in many cases. These confounding changes could substantially increase the attractiveness of intercompany investments that do not include 100% of the target company s stock. An example adds further clarity about the pertinence of this to users of financial statements. 2 IAS 1 Presentation of Financial Statements. 2 Apr International Accounting Standards Board, London. ( 3 Statement of Financial Accounting Standards No. 160: Non-controlling Interests in Consolidated Financial Statements. Federal Accounting Standards Board. December Norwark CT. 4 IFRS and US GAAP: Similarities and Differences. Sept Edition. PriceWaterhouseCoopers: New York ( p08.pdf594) Journal of Financial and Economic Practice Page 53

3 Table 1 shows the 2007 financial statements for Siemens 5 under the IFRS and U.S. GAAP. This is before the issuance of FAS 160. The U.S. GAAP statement shows a minority interest of 631 million Euros is presented outside of the equity section. Under the IFRS this same 631 million are now a reduction from total equity. We see that all computations involving equity will now be based on a smaller number. Table 2 shows that minority interest is not deducted from income under IFRS resulting in a 232 million increase in operating income. This treatment of minority interest reflect a different understanding of the economic reality that is one that states the minority stockholder s do not have a claim on the day to day resources of the corporation but the controlling shareholder does. The Siemens example illustrated the magnitude of the shift in something basic like Return on Equity (ROE) Income up $231 million and investment down $631 million. On the surface this looks simple enough but the positions where this information will be presented may change considerably. A further concern is the phasing in period that could extend over 5 or more years. During this phase in period the comparability of financial ratios between companies will be impaired. Will financial statement users especially analysts restate historic information and adjust results so they are all comparable? They will have to decide between the costs of confusion versus the labor cost needed to create comparable numbers during the transition. We think evaluating the change in the valuation of minority income along with the change in how the minority interest is presented will take considerable time and this is just one item. A second example will help to illustrate the magnitude of all the changes in their totality. Deferred taxes form a substantial asset and or liability on many balance sheets. The classification of deferred taxes is another example of presentation differences in the transition to the IFRS. Under U.S. GAAP, the classification of deferred tax assets and deferred tax liabilities follows the classification of the related asset or liability as either current or noncurrent. In contrast, deferred tax assets and liabilities are generally classified as noncurrent on the balance sheet under IFRS (PwC 98). This is reflective of a different economic position regarding what a deferred tax asset and liability represent. It will take a great deal of time to go through the notes to determine that the impact on other current assets and other current liabilities at Siemens are due to a change in deferred tax presentation. However, this will have to be done if a user is to know if improvements in liquidity (current) ratios are merely due to accounting procedure. The shift will also affect the balance sheet sizing ratios. These points illustrate that it will be more difficult to compare companies given the more flexible presentation standards of the IFRS. This will be the cost of giving companies more latitude to fairly present their economic position in their financial reports. On the one hand it is easy to understand why business might want the SEC to increase the length of the phase in period beyond the 5 or so years in the current implementation rules. However, on the other hand we have the needs of financial statement users who are analyzing corporate report. The phase-in rules make it much harder to provide comparable financial analysis. With the help of Siemens public disclosures the following sub-section illustrates the magnitude of the changes. Financial Statement Example Much of the existing literature concerning the conversion from U.S. GAAP to IFRS gives a list of areas where there are differences between the standards. At this stage in our national preparation it is time to start considering the next step. What will financial reports look like when they are based on the new standards? The author looked for a large corporation with operations in the U.S.A. that had already gone through the conversion. Siemens is a German engineering company that has been reporting under both standards for some time. 5 Annual Report 2007 including Consolidated Financial Statement of Siemens AG. Siemens AG, Munich, Germany. ( Journal of Financial and Economic Practice Page 54

4 As a German company the Siemens Annual Report shows their financial results using the IFRS. Since it is listed in the U.S.A. Siemens had to file a 20-F 6 with the Securities and Exchange Commission. That filing provides us with a required and condensed version of their Financial Statements using U.S. GAAP. On the basis of this information we were able to prepare a comparative Balance Sheet for 2007 which is shown in Table 1. A comparative Income Statement is shown in Table 2. The process of using the F to produce Table 1 and 2 highlighted an important problem. Each company will phase in the use of IFRS during the transition period. Once a company converts we will lose the ability to back-into what the numbers would have been under the old GAAP rules. Financial analysts will not be able to compare the current results and ratios against what they would have been unless companies elect to incur the costs needed to provide such disclosures. Once the process is underway there will be no longer be a 20-F filing. This introduces the risk of attributing negative or positive changes to a cause that is not economic the change in accounting rules. Some concrete examples highlight this point. The disclosure of research and development costs illustrates the point about information that will change when IFRS goes live. U.S. GAAP requires that all research and development costs be expensed in the period they occur. This reflects a fear that companies will inflate income by classifying dubious expenditures as research. It is easier to be objective about research and development under the existing U.S. GAAP rule 7. The IFRS classifies treats costs associated with the research phase and development phase differently. While pure research phase costs are always expensed the cost of the development phase costs can be capitalized if certain criteria are met. The IFRS position on research and development also causes a big difference to Siemens. As a result, 2007 net income under IFRS for Siemens was 74 million Euros, or 3.1%, higher than U.S. GAAP income because of the capitalization of development costs. Stockholders equity at year-end 2007 was 282 million Euros, or 0.93%, higher as a result of this change. There is a lot of latitude for the exercise of professional judgment in the application of the IFRS. Capitalization of development expenditures increases the profile of Siemens investment in future technology. It also increases our reliance on the assessment of the financial professional about what is a fair economic presentation. Another item worthy of explicit illustration is the presentation of Convertible Instruments. The IRFS treatment of convertible instruments led to an additional, and dramatic, change in net income. Under U.S. GAAP, a debt instrument with an equity conversion feature is typically not separated into debt and equity components. Under the IFRS, the conversion right component of the compound instrument is measured at fair value through the income statement, and the liability component for the debt obligation is measured at amortized cost using the effective interest method. For 2007 Siemens repurchased parts of the convertible bonds that were outstanding. Because of the switch to the IFRS, the amount that was allocated to the liability component was charged against the carrying amount of that liability and the difference recognized through income; the amount that was allocated to the conversion right component was charged against paid-in capital. Siemens benefited from much higher income under the IFRS for Convertible Instrument. Under U.S. GAAP the purchase price of the Convertible Instrument would have been the debt component and would be charged against the carrying amount with the difference being recognized in the income statement. As a result Net Income under the IFRS for 2007 was higher by 1,436 million Euros, or 59.4%, compared to income under U.S. GAAP because part of the conversion right component was charged to additional paid-in capital rather than income. The net effect on equity for 2007 was that equity under 6 United States Securities and Exchanges Commission Form 20-F: Siemens Aktiengesellschaft for the year ending September Siemens AG, Munich, Germany. ( 7 IFRS and US GAAP : Similarities and Differences. Sept Edition. PriceWaterhouseCoopers: New York ( p08.pdf594) Journal of Financial and Economic Practice Page 55

5 IFRS was only 2 million Euros higher than under U.S. GAAP. This again highlights the difficulty analysts will have tracking and comparing the impact of financing decisions during the conversion period. There are of course many other specifics that can be given. Other areas that may cause big differences in income and be hard to trace include pension obligations and inventory valuation. We have to keep in mind that each item is not independent of the other. A change is pension reporting may in turn result in a new deferred tax provision. The bottom line is that the IFRS produces significant different Revenue, Income, and Equity balances for the Siemens Corporation. Even with the temporary help of the 20-F filing 8 that exact reasoning behind the total differences is hard to assess. It is not going to be possible to handle analysis with simple algorithm which will convert X to Y the information will not be available to do this. The analyst will have to start fresh and acclimatize to the new standards and the new assessment risk associated with them. These observations build into our concern that professional financial statement users need to consider the impact of the IFRS on their regular, and often automatic ratio analysis. RATIO ANALYSIS To more specifically illustrate our comments regarding ratios we have prepared a few basic ratios for Siemens. The presentation of the ratios can be found in Table 3. Set aside for a moment the problems caused by a staggered implementation and changes in presentation. With the help of Table 3 we can illustrate how the IFRS impacts the ratio analysis of one company. The most significant observation for financial users is that we cannot make a simple statement that covers the direction of the change for all three common categories of ratios. In our current environment the first analytical concern is probably the absolute level of corporate liquidity and the direction it is tending towards. The IFRS transition for Siemens results in lower current ratio and quick ratios. If 2007 U.S. GAAP financial statements weren t provided, trying to replicate the true change (not considering the change in standards) would be difficult. There are two reasons for the difficultly. First, items might be classified differently as current or noncurrent depending on the standards used; deferred taxes, as explained previously, is a good example. Items being classified as noncurrent instead of current, or vice-versa, could have significant effects on liquidity ratios. In Siemens case, the change was not major, but it could be significant for companies with, for example, large deferred tax balances. Another liquidity difference not displayed by the Siemens numbers occurs where numerical values of balance sheet items change. Remember when the IFRS come into effect the equivalent U.S. GAAP amount will disclosed or known even by the company. For example, LIFO inventory valuation is prohibited under IFRS. While this did not affect Siemens, it could have significant effects on a company that used LIFO under U.S. GAAP. A company originally using LIFO under U.S. GAAP and changing to FIFO for IFRS would see a significant increase in its inventory valuation. If the option of a long phase in period for the LIFO transition is accepted financial statement users will have to worry about the uneven comparisons throughout that period. Throughout the current lending crisis the importance of solvency ratios has increased. Attitudes towards acceptable levels of financial leverage are becoming more conservative. For Siemens, their debt ratio and debt-to-equity ratios were slightly more under the IFRS than under U.S. GAAP. The main reasoning for the decrease was a decline in equity that exceeded the decline in debt when converting from U.S. GAAP to IFRS numbers. The differences in equity were the result of differences in items such as accounting for development costs, pensions, minority interest, and deferred taxes. Siemens 2007 financial disclosures provide an excellent reconciliation of equity under U.S. GAAP to equity under IFRS. Once implementation begins that link to the accounting change will be lost. For some companies a strong trend could emerge that might be attributed to changes in management but 8 United States Securities and Exchanges Commission Form 20-F: Siemens Aktiengesellschaft for the year ending September Siemens AG, Munich, Germany. ( Journal of Financial and Economic Practice Page 56

6 is really only the cumulative effect of changes in accounting standards. In some circumstances it may take considerable investment by financial statement users to reset their solvency benchmarks to new rates that they feel are equivalent to those used with U.S. GAAP statements. The perennial headline ratios are those measuring profitability. The profitability ratios calculated for Siemens, including return on equity and return on assets, present the most striking differences in IFRS and U.S. GAAP policies. Both ROA and ROA under the IFRS were nearly double what they were under U.S. GAAP. This is due to positive changes in both the income statement and the balance sheet for Siemens. For some companies the LIFO transition will be an additional upward adjustment on earnings. It is a save assumption that income tax expenses will increase in the short term under the IFRS. In Siemens case we can see that the IFRS creates a profitability incentive for increased expenditures for research-development. Over time some of these differences will reverse, such as with deferred taxes and the amortization of development expenditures. Again the challenges will be to reset benchmarks that reflect the new accounting policy. This might be impossible to do if a substantial phase in policy is adopted by the SEC. So far we have been able to talk about the IFRS as if it were a known constant body of accounting policy. The final challenge that users of financial statements need to consider is that, like U.S. GAAP, the IFRS is a living collection of policies that are also been amended and altered in response to concerns brought the International Accounting Standards Board. IFRS PROPOSAL FOR NEW FINANCIAL STATEMENT FORMAT For several hundred years the primary focus of accounting has been the equation: Assets = Liabilities plus Owner s Equity. This is the origin of the idea of a balanced sheet and why it is the primary accounting statement. Our historic interest in ratios pertaining to solvency, liquidity, and profitability relate to the structure of the primary accounting statement. The income statement (not the income sheet) and the statement of changes in cash have evolved to give the reader a deeper understanding of the changes underlying the balance sheet accounts. It is therefore only social convention that causes accountants to focus on the operating, investing, and financing activities of a company. The IFRS proposal goes beyond rearrangement of accounts within the structure of A=L+OE. There is an active proposal before the U.S. Federal Accounting Standards Board and the International Accounting Standards Board to fundamentally change the underlying accounting equation. 9 There are three objectives that the boards wish to accomplish with a radically new financial statement presentation. The boards agree that the information in the financial statements should: portray a cohesive financial picture of an entity s activities, disaggregate information so that it is useful in predicting an entity s future cash flows, and three, help users assess an entity s liquidity and financial flexibility. What is proposed is a Balance Sheet that emphasizes a new accounting formula: Owners Equity = Net Business Assets + Financing + Income Taxes + Discontinued Operations. This configuration facilitates the new analytical goals expressed by users of financial reports. We have prepared an example of what the Siemens reports might have looked like under the proposed restructuring. You can find this in Table 4. Table 4 illustrates that the traditional idea of assets equaling liabilities plus shareholders equity will disappear. Assets and liabilities are not divided into separate sections. Instead, the balance sheet is divided into five sections: operating, investing, financing, income taxes, and discontinued operations; assets and liabilities are netted together in each one of these sections. While the example shows the shortterm and long-term totals for assets and liabilities within the statements of financial position, this can also be done within the notes rather than on the face of the statement. The total net assets for the five sections are shown to equal total equity. 9 IFRS Brings a Radical Change to Financial Statement Presentation. CMA Magazine. Karine Benzacar. February 2009 pp Journal of Financial and Economic Practice Page 57

7 The new income statement, which will be known as the statement of comprehensive income, presents a subtotal for net income and a separate section for other comprehensive income. Everything above the net income subtotal is divided into the same five categories as the balance sheet, and the entity must also indicate whether an item in the other comprehensive income section is an operating, investing, or financing activity. Some line items also require more detail, such as dividing cost of goods sold into materials, labor, and overhead costs; however, this can be presented in the notes to the financial statements if disclosure would cause the statement to become too lengthy (CMA Management, 30). We could not obtain enough information from the Siemens F to make a reasonable estimation of what their statement of comprehensive income for 2007 might look like. The new statement format should not produce difficulty in figuring out the ratios once the location of the current inputs is discovered. For example, the total of current assets for use in calculating the current ratio can be found within the subtotals of each of the five sections; whether assets in each of the five sections are current or noncurrent must be disclosed either on the face of the statement or within the statement notes. Numbers for debt (current and noncurrent) for leverage ratios can also be located within the sections of the statement of financial position. Net income for profitability ratios is still clearly labeled on the statement of comprehensive income. It may be possible to continue producing the ratios now commonly used. Producing those calculations will be more time consuming as components may need to be drawn fr several sections of a balance sheet. These addition steps add to the risk of analytical error arising from transcription procedures. In addition, the fact remains that the numerical values produced from IFRS policy differ from those values under U.S. GAAP; backing into the GAAP numbers to produce comparable ratios upon the transition is extremely difficult unless a firm provides a reconciliation of IFRS to U.S. GAAP. A new definition of the balance sheet will support a new view of ratio analysis. There will be an opportunity for financial analyst to produce ratios that draw the attention of investors and creditors to a view of management s current performance and prospects for success that where unthinkable when A=L+OE was formulated. Will this additional transition be helpful? The answer will lie in the combined contributions of users that start thinking about the impact on their corporate situation and needs. CONCLUSION The purpose of this paper was to explore the impact of the IFRS on professional financial statement users. The IFRS transition will make it more important than ever to understand the policies behind the accounting disclosures. It is sometimes possible to use the financial statements without a sound understanding the policies used to prepare them. The IFRS transition will increase the risk of error and mistakes by those that are not paying attention to shifts in underlying policy. Siemens 20-F disclosures provided an excellent opportunity to illustrate what the effects of the IFRS might be. The amounts associated with accounts will change. Not only will the amounts change but the distribution of those amounts throughout the balance sheet will also change. A simple reconciliation of tradition ratios used for financial analysis will not be possible. This is true without the additional timing and phase in proposals facing U.S companies. It is not possible to translate on language to another on a word by word basis because there are cases where a language has no equivalent concept. It is risky to prepare for the IFRS transition assuming that a word for word translation is possible. The long phase in period for the IFRS is problematic. It may be a political strategy by some who are opposed the IFRS to gain time to restore support for U.S. GAAP. Stretching out the pain will add to the total cost of conversion to the IFRS. Every delay of course harms the competitiveness of our capital markets. Another more tangible cost of a long implementation is an extra reporting cost for U.S. companies. U.S. based companies will experience new costs of compliance during the transition because they will have to report U.S. GAAP and IFRS income. On the other hand, their dual listed European competitors are likely to experience a reduction in their reporting costs. There costs of converting their reports to comply with U.S. GAAP will immediately end under the regulations proposed for the transition Journal of Financial and Economic Practice Page 58

8 It is dangerous to play a game with a superfluous knowledge of the rules. The IFRS transition increases the risk of error by those professional financial statement users who do not have a substantial grasp on the rules of the game. Hopefully effort to go beyond a listing of policy changes will encourage more professionals to start thinking about what the IRFS will mean to them. Journal of Financial and Economic Practice Page 59

9 Table 1: U.S. GAAP and IFRS Reconciliation Siemens Simplified Balance Sheet (in millions) As of September 30, 2007 U.S. GAAP Adjustment IFRS ASSETS Current Assets Cash & Cash Equivalents 4,005-4,005 Trade & Other Receivables 14,620-14,620 Inventories 12,930-12,930 Other Current Assets 4,845-4,845 Assets Classified as Held for Disposal 11,555 (23) 11,532 Total Current Assets 47,955 (23) 47,932 Goodwill 12,517 (16) 12,501 Property, Plant & Equipment 10,557 (2) 10,555 Investments Accounted for Using the Equity Method 7,859 (843) 7,016 Other Assets 14,582 (1,031) 13,551 Total Assets 93,470 (1,915) 91,555 LIABILITIES & SHAREHOLDERS' EQUITY Current Liabilities Short-term Debt & Current Maturities of Long-term Debt 5,637-5,637 Trade Payables 8,382-8,382 Other Current Financial Liabilities 25, ,333 Liabilities Associated with Assets Classified as Held for Disposal 4, ,542 Total Current Liabilities 43, ,894 Long-term Debt 9, ,860 Other Liabilities 8,895 (721) 8,174 Total Liabilities 62,460 (532) 61,928 Equity Attributable to Shareholders of Siemens 30,379 (1,383) 28,996 Minority Interest Total Equity 31,010 29,627 Total Liabilities & Equity 93,470 (1,915) 91,555 Journal of Financial and Economic Practice Page 60

10 Table 2: U.S. GAAP and IFRS Reconciliation Siemens Simplified Income Statement (in millions) Year 2007 U.S. GAAP Adjustment IFRS Revenue 78,890 (6,442) 72,448 Cost of Goods Sold & Services Rendered, R&D Expenses, Marketing, Selling, and SG&A Expenses (74,855) 7,781 (67,074) Other Operating Income (Expense), Net 879 (1,252) (373) Income (loss) from Investments Accounted for Using the Equity Method, Net Financial Income (Expense), Net (1,665) 1,657 (8) Income (loss) from Continuing Operations before Income Taxes 3,250 1,851 5,101 Income Taxes (955) (237) (1,192) Minority Interest (231) 231 Income (loss) from Continuing Operations 2,064 1,845 3,909 Income (Loss) from Discontinued Operations, Net 353 (224) 129 Net Income (loss) 2,417 1,621 4,038 Attributable to: Minority Interest Shareholders of Siemens AG - 3,806 3,806 Basic Earnings (Losses) per Share Income from Continuing Operations Income (Loss) from Discontinued Operations 0.39 (0.28) 0.11 Net Income Diluted Earnings (Losses) per Share Income from Continuing Operations Income (Loss) from Discontinued Operations 0.39 (0.28) 0.11 Net Income Journal of Financial and Economic Practice Page 61

11 Table 3: Selected Ratios Simplified Calculation U.S. GAAP IFRS Liquidity Ratios Current Ratio Current Assets/Current Liabilities Quick Ratio Cash + Receivables/Current Liabilities Solvency Ratios Debt Ratio Total Debt/Total Debt + Total Equity Debt-to-Equity Ratio Total Debt/Total Equity Profitability Ratios Return on Equity Net Income/Total Equity 7.79% 13.63% Return on Assets Net Income/Total Assets 2.59% 4.41% Journal of Financial and Economic Practice Page 62

12 Table 4: Proposed IFRS Format Siemens Statement of Financial Position As of September 30, 2007 BUSINESS Operating Trade and other receivables 14,620 Inventories 12,930 Other current financial assets 2,932 Other current assets 1,322 Total short-term assets 31,804 Property, plant and equipment 10,555 Goodwill 12,501 Other intangible assets 4,619 Other financial assets 5,561 Other assets 777 Total long-term assets 34,013 Trade payables (8,382) Other current financial liabilities (2,553) Current provisions (3,581) Other current liabilities (17,058) Total short-term liabilities (31,574) Pension plans and similar commitments (2,780) Provisions (2,103) Other financial liabilities (411) Other liabilities (2,300) Total long-term liabilities (7,594) Net operating assets 26,649 Investing Available-for-sale financial assets 193 Investments accounted for using the equity method 7,016 Total investing assets 7,209 NET BUSINESS ASSETS 33,858 Journal of Financial and Economic Practice Page 63

13 FINANCING Financing assets Cash 4,005 Total financial assets 4,005 Financing liabilities Short-term debt and current maturities of long-term debt (5,637) Short-term financing liabilities (5,637) Long-term debt (9,860) Total financing liabilities (15,497) NET FINANCING ASSETS (11,492) INCOME TAXES Short-term Income tax receivables 398 Income tax payables (2,141) Long-term Deferred tax asset 2,594 Deferred tax liabilities (580) NET INCOME TAX ASSET (LIABILITY) 271 DISCONTINUED OPERATIONS Assets held for sale 11,532 Liabilities related to assets held for sale (4,542) NET ASSETS HELD FOR SALE 6,990 NET ASSETS 29,627 EQUITY Common stock, no par value 2,743 Additional paid-in capital 6,080 Retained earnings 20,453 Other components of equity (280) Minority interest 631 TOTAL EQUITY 29,627 Journal of Financial and Economic Practice Page 64

14 REFERENCES Annual Report 2007 including Consolidated Financial Statement of Siemens AG. Siemens AG, Munich, Germany. IAS 1 Presentation of Financial Statements 2009 International Accounting Standards Board, London. IFRS and US GAAP : Similarities and Differences. Sept Edition. PriceWaterhouseCoopers: New York IFRS and US GAAP: Similarities and Differences. Sept Edition. PriceWaterhouseCoopers: New York IFRS Brings a Radical Change to Financial Statement Presentation. CMA Magazine. Karine Benzacar. February 2009 pp SEC Road Map for Transition to IFRS Available. (November 16, 2008). Journal ofaccountancy. Retrieved December 9, 2008 from Statement of Financial Accounting Standards No. 160: Non-controlling Interests in Consolidated Financial Statements. Federal Accounting Standards Board. December Norwark CT. United States Securities and Exchanges Commission Form 20-F: Siemens Aktiengesellschaft for the year ending September Siemens AG, Munich, Germany. United States Securities and Exchanges Commission Form 20-F: Siemens Aktiengesellschaft for the year ending September Siemens AG, Munich, Germany. Journal of Financial and Economic Practice Page 65