advance accounting ch11

1

International Accounting and the International Accounting and the Global EconomyGlobal Economy

Advanced Accounting, Fifth Edition

1111

2

1. Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS).

2. Explain some of the major differences between IFRS and U.S. GAAP.

3. List some of the milestones that must be achieved before the SEC will require adoption of IFRS.

4. Describe the SEC’s work plan for incorporating IFRS into the financial reporting system for U.S. issuers.

5. Describe three major joint convergence topics between the IFRS and FASB.

Learning ObjectivesLearning Objectives

3

6. List the steps that a non-U.S. company must follow to list its shares on a U.S. stock market.

7. Explain the role of form 20-F filed with the Securities and Exchange Commission.

8. Indicate the role of American Depository Receipts in the issuing of securities of non-U.S. companies in the United States.

Learning ObjectivesLearning Objectives

4

The Increasing Importance of International The Increasing Importance of International Accounting StandardsAccounting Standards

Securities and Exchange Commission (SEC)

June 2007, eliminated the need for foreign private investors to reconcile their financial statements to U.S. generally accepted principles (GAAP) if the issuers use International Financial Reporting Standards (IFRS).

July 2007, voted unanimously to publish a concept release for comment on allowing U.S. issuers to prepare their financial statements using IFRS as issued by the IASB.

LO 1 Increased focus on International Accounting Standards.LO 1 Increased focus on International Accounting Standards.

5

The Road To Convergence-U.S. GAAP and IFRSThe Road To Convergence-U.S. GAAP and IFRS


September 2002, FASB and the IASB issued their Norwalk Agreement including a “memorandum of understanding.”

April and October 2005; November 2009, FASB and the IASB reaffirmed their commitment to the convergence of U.S. GAAP and IFRS.

September 2008, IASB and FASB issued a progress report and timetable for completion, recognizing the relevance of a roadmap for the removal of the reconciliation requirement for non-U.S. companies using IFRS.

6



November 14, 2008, SEC released a roadmap for the adoption of IFRS by U.S. issuers.

February 24, 2010, SEC issued a release, Commission Statement in Support of Convergence and Global Accounting Standards. The SEC stated its continued belief that a single set of high-quality globally accepted accounting standards would benefit U.S. investors.

May 26, 2011, SEC released a staff paper discussing possible work plans for incorporating IFRS into the financial reporting system.

7


LO 3 SEC milestones to be achieved for adoption of IFRS.LO 3 SEC milestones to be achieved for adoption of IFRS.

The basis for considering the use of IFRS by U.S. issuers include the following milestones.

1. Improvements in accounting standards;

2. Accountability and funding of the IASC Foundation;

3. Improvement in the ability to use interactive data for IFRS reporting;

4. Education and training relating to IFRS.

These four milestones relate to issues that need to be addressed before adoption of IFRS by U.S. entities can occur.

8


The work plan for incorporating IFRS into the financial reporting system includes:

1.Full adoption of IFRS on a specified date, without any endorsement mechanism.

2.Full adoption of IFRS following staged transition over several years.

3.An option for U.S. issuers to apply IFRS.

4.Retaining U.S. GAAP with continued convergence efforts, with or without a specific mechanism in place to promote alignment with IFRS.

5.Retaining a U.S. standard-setter (condorsement).

Work Plan for Incorporating IFRS

LO 4 SEC’s work plan for incorporating IFRSLO 4 SEC’s work plan for incorporating IFRS

9



It is important that the accounting standards

be established under a robust, independent process that includes careful consideration of possible alternative approaches.

be established with due process, which allows for input from and consideration of views expressed by affected parties, including investors.

are timely to keep standards current and reflect emerging accounting issues.

produced are capable of improving the accuracy and effectiveness of financial reporting and the protection of investors.

Improvement in Accounting Standards

10


The IASB is established to develop global standards for financial reporting.

Oversight is by the IASC Foundation, a stand-alone, not-for profit organization, which is responsible for the activities of the IASB and is governed by 22 trustees whose backgrounds are geographically diverse.

Initially IASB operations were financed through voluntary contributions by approximately 200 organizations.

A majority of the IASB’s finances are now based on national financing regimes, proportionate to a country’s relative GNP.

Further progress on financing is essential to safeguard the IFRS Foundation’s position as the world’s independent accounting standard

setter.

Accountability and Funding of the IASC Foundation


11



In May 2008, the SEC proposed rules to require companies to provide their financial statements to the Commission as well as on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (“XBRL”).

In April 2011, the SEC acknowledged that it would be impossible for foreign private issuers using IFRS and filing with the SEC to file in XBRL because the SEC had not approved the IFRS XBRL taxonomy.

During March 2011, the IFRS Foundation finalized a 2011 IFRS taxonomy but the SEC had not yet granted approval.

Ability to Use Interactive Data For IFRS Reporting

12



A requirement for U.S. issuers to report in accordance with IFRS would increase the need for effective training and education about IFRS for a number of groups, including investors, accountants, auditors and others involved in the preparation and use of financial statements, due to differences between U.S. GAAP and IFRS.

Education and Training

13



1. Full Adoption of IFRS – countries recognize IFRS as issued by the IASB as GAAP.

2. Adopt IFRS after Some Incorporation Process – allows each country to address country-specific issues. This results in the following:

Convergence approach: jurisdictions maintain their local standards but work to converge with IFRS over time.

Endorsement approach: jurisdictions incorporate individual IFRS into local standards.

Adoption Approaches

14



3. “Condorsement” of IFRS – focus of the SEC’s work plan, predicated on several principles:

U.S. GAAP would be retained, but the FASB would incorporate IFRS into U.S. GAAP over a defined period, with a focus on minimizing transition costs.

The FASB would incorporate newly issued IFRS into U.S. GAAP pursuant to some established endorsement protocol.

There may be a need for U.S. interpretations of IFRS on issues that are significant in the U.S. but not in the remainder of the world.

Adoption Approaches

15



By the end of 2011, the SEC plans to decide whether to proceed with rules requiring some U.S. public companies to file IFRS-based financial statements.

The AICPA Board of Examiners announced that IFRS would be eligible for testing on the Uniform CPA Exam starting in 2011.

Timing of Future Rulemaking by the Commission

16

Significant Similarities and DifferencesSignificant Similarities and Differences

LO 2 Differences between IFRS and U.S. GAAP.LO 2 Differences between IFRS and U.S. GAAP.

In general,

U.S. GAAP are considered to be more rules-based, while

IFRS is considered to be more principles-based,

although this dichotomy is an over-simplification as most U.S. rules are rooted in principles, and the IASB is embracing more interpretative details of its principles over time.

17

GAAP Hierarchy-U.S. Versus IFRSGAAP Hierarchy-U.S. Versus IFRS


U.S. GAAP Hierarchy—Effective September 2009

Authoritative: Included in the FASB Accounting Standards Codification

Non-Authoritative: Not-included in the FASB Accounting Standards Codification

Exceptions: SEC registrants must also follow SEC rules and regulations issued under the authority of federal securities laws.

18



IFRS Hierarchy (issued by the IASB)

1. IFRS/IAS statements (8 IFRS and 41 IAS standards) and IFRIC/SIC Interpretations (32 SIC and 14 IFRIC). SIC stands for the Standards Interpretations Committee.

2. Apply a method that is relevant, reliable, represents faithfully the financial position, the performance, and cash flows of the firm; reflect the economic substance of the firm.

3. Look to recent pronouncements of other standard setters which use a similar conceptual framework (i.e., U.S. GAAP).

4. The conceptual framework.

19



Similarities and Differences between FASB and IASB

20



21



22



23



24



25



26



27



28


IFRS Financial Statements Illustrated

32

Long-Term Convergence Issues - FASB & IASBLong-Term Convergence Issues - FASB & IASB

Three long-term convergence issues between the FASB and IASB

1. Accounting for leases by the lessee

2. Revenue recognition

3. Financial statement presentation

LO 5 Three major convergence topics for IFRS and FASB.LO 5 Three major convergence topics for IFRS and FASB.

33

Lease Accounting ConvergenceLease Accounting Convergence

Currently, the guidance for leases is provided in FASB ASC Topic 840 – Leases and in IAS 17 under IFRS.

For lessees in the United States, there are two types of leases: operating and capital.

Under IAS 17, capital leases are referred to as financing leases.


34

Lease Accounting ConvergenceLease Accounting Convergence

While the major change will be the requirement that all leases extending beyond a year are capitalized, the financial statement presentation and the potential changes in lease assumptions have yet to be determined.


35

Revenue Recognition ConvergenceRevenue Recognition Convergence

The IASB and the FASB are working on a project to develop a single statement on revenue recognition for both U.S. GAAP and IFRS. The project is intended to improve financial reporting by:

a. converging U.S. and international revenue recognition standards,

b. eliminating inconsistencies in existing revenue recognition standards and practices,

c. providing clearer principles for addressing future revenue recognition issues, and

d. filling voids in existing revenue recognition guidance.


36


The Boards have reached some preliminary views in developing a revenue recognition model. This model would apply to contracts with customers where a contract is an agreement between two or more parties that creates an obligation (does not need to be in writing).

There are five steps in this proposed model.

1. Identify the contract(s) with the customer.

2. Identify the separate performance obligation.

3. Determine the transaction price.

4. Allocate the transaction price to the separate performance obligation.

5. Recognize revenue.


37


Revenue is recognized from “increases” in the net contract position.

Revenue is recognized when there is an increase in the contract asset or a decrease in the contract liability from satisfying performance obligations (promises to transfer an asset, such as goods or services, to the customer).

At the inception of the contract, the contract rights and the performance obligations would be equal and the net contract asset/liability would be zero. Revenue is only recognized when a

performance obligation is satisfied by transferring goods or services.

Customer Consideration (Allocation) Model


38

Financial Statement PresentationFinancial Statement Presentation

In October 2008, the FASB and the IASB released a joint discussion paper outlining three objectives for financial statement presentation. Those proposed objectives state that information should be presented in the financial statements in a manner that:

Portrays a cohesive financial picture of an entity’s activities.

Disaggregates information so that it is useful in predicting an entity’s future cash flows.

Helps users assess an entity’s liquidity and financial flexibility.

In October 2010, the Boards decided not to issue an Exposure Draft in the first quarter of 2011, and to return to this project at a later date.


39

Current and Potential Changes to Financial StatementsCurrent and Potential Changes to Financial Statements

Items will be classified into the operating, investing and financing categories. Those items are then disaggregated on the basis of their function (primary activities in which the entity is engaged) . Within the function, income and expense items are disaggregated by nature (economic characteristics or attributes that distinguish assets, liabilities, and income and expense items that do not respond equally to similar economic events).

All entities would present a single statement of comprehensive income, with items of other comprehensive income presented in a separate section.

Statement of Comprehensive Income


40

Current and Potential Changes to Financial StatementsCurrent and Potential Changes to Financial Statements

It is expected that the new presentation model would include more subtotals than are currently presented. This will allow easier comparisons of effects across the financial statements.

Illustration 11-7 provides an examples of a one-year statement of comprehensive income prepared according to these guidelines (generally, two years of comparable data would be required).

Statement of Comprehensive Income


41

Proposed Statement of Financial Position

42

How the Financial Statement Might ChangeHow the Financial Statement Might Change

Grouped by major activities (operating, investing, and financing), not by assets, liabilities, and equity.

This clearly separates which net assets management uses in its business and financing activities.

Assets and liabilities are disaggregated into short-term and long-term subcategories within each category.

Preparers could present assets and liabilities in order of liquidity if this presentation would provide more relevant information.

Statement of Financial Position


43

How the Financial Statement Might ChangeHow the Financial Statement Might Change

There would be fewer changes to the statement of cash flows since the major categories already include operating, investing, and financing.

The boards are debating whether to require the

direct format only or the

choice of the direct versus indirect approach.

Statement of Cash Flows


44

The IASB is currently developing IFRS for private entities.

It is too early to say which direction private-company GAAP will take.

International Convergence IssuesInternational Convergence Issues

LIFO Inventories

Private Companies

LIFO is not acceptable under international standards.

IASB recommends specific cost. If specific cost is not determinable, the benchmark is FIFO or weighted average.

45

Registration with the SEC under the 1934 Securities Act is mandatory for non-U.S. companies that intend to list on a U.S. stock market.

Foreign companies are required to comply with the SEC continuous reporting requirements.

U.S. companies file forms 10-K and 10-Q.

Foreign companies file forms 20-F and 6-K.

SEC Registration and U.S. Listing for Non-U.S. Companies


LO 7 The role of form 20-F.LO 7 The role of form 20-F.

46

The 20-F filing is similar to the 10-K filing.

The 20-F allows the non-U.S. company to use IFRS (as promulgated by the IASB) or to retain its local GAAP reporting (so long as it meets one of two alternative conditions). The firm may either

1. reconcile net income and the shareholders’ equity, thus showing earnings based on U.S. GAAP; or

2. fully disclose all financial information required of U.S. firms.

20-F Statement

LO 7 The role of form 20-F.LO 7 The role of form 20-F.


47

First-time offer of securities by any non-U.S. company requires filing an F-1 statement as the principal registration statement.

Prospectus contains:

Financial statements (presented in accordance with U.S. GAAP, IFRS as promulgated by the IASB, or include an audited reconciliation of the home country GAAP numbers to U.S. GAAP).

Nonfinancial information about the company.

Statement F-1


48

A Depository Receipt (DR) is a derivative instrument that usually represents a certain fixed number of publicly traded shares of a non-U.S. corporation.

American Depository Receipt (ADR) – traded in the United States.

Global Depository Receipt (GDR) - traded outside the United States.

American Depository Receipts (ADRs)American Depository Receipts (ADRs)

ADRs may trade freely like any U.S. security on one of the major exchanges.

LO 8 The role of American Depository Receipts.LO 8 The role of American Depository Receipts.

49

Level I: Depository banks create an ADR program based on the

underlying shares that already trade on home markets. No capital raised. ADRs are not listed on U.S. markets. Trading is confined to the pink sheet market.

Types of ADR Programs



50

Level II: Do not involve raising new capital. Issues are registered with the U.S. SEC and listed on a

major U.S. stock exchange. Companies must file F-6 and 20-F.




51

Level III: Part of a capital program and are accompanied by a full

SEC registration. At the time of the equity offering, a non-U.S. company files

form F-1. Investors are informed of all material aspects. Companies file 20-F and other annual financial disclosures.




52

Rule 144A: Rule 144A ADRs are those ADRs placed privately among

large institutional buyers (known as QIB firms) with restrictions on subsequent trading of these securities.

Rule 144A ADRs are not publicly traded or listed on U.S. stock exchanges and can be exchanged only among QIBs.




53

Copyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

CopyrightCopyright

advance accounting ch11

Economy & Finance