chapter 11-1. chapter 11-2 international accounting and the global economy advanced accounting,...

Chapter 11-1

Chapter 11-2

International Accounting and the International Accounting and the Global EconomyGlobal Economy

Advanced Accounting, Third Edition

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Chapter 11-3

1. Describe how the changing world environment is leading to an increased focus on international accounting standards.

2. Explain some differences in accounting methods as they are applied internationally.

3. List five major classifications of accounting models used in different geographical regions.

4. Describe the role of the International Accounting Standards Committee and the International Accounting Standards Board in establishing international accounting standards.

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 11-4

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

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

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

Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives

Chapter 11-5

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

Beginning in 2005, the European Union (EU) mandated that accounting standards for companies listed in its securities markets conform to International Financial Reporting Standards.

In 2006, the total value of cross-border transactions in bonds and equities was $90 trillion U.S. dollars annually.

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

Chapter 11-6

Importance of International Accounting Importance of International Accounting StandardsStandardsImportance of International Accounting Importance of International Accounting StandardsStandards


FIGURE 11-1Composition of the Global Equity and Debt Marketsby Each Country’s Domestic Securities

Chapter 11-7



FIGURE 11-1Composition of the Global Equity and Debt Marketsby Each Country’s Domestic Securities

Chapter 11-8



U.S. holdings of foreign

securities

(870 billion to 3.5 trillion increase)

Foreign holdings of U.S.

securities

(1.2 to 6 trillion increase)

FIGURE 11-2Holdings of U.S. and Foreign Securities, 1994–2004

Market Value of Holdings of U.S. and Foreign Securities, 1994-2004

Chapter 11-9

The demand for uniform international accounting standards has increased because:

Investors seek comparable standards to evaluate investment opportunities,

Managers seek to evaluate the performance of foreign subsidiaries and competitors, and

Creditors and debt capital markets seek comparable standards to determine credit quality and bankruptcy risk.



Chapter 11-10

Financial accounting practices, required disclosures, and auditing requirements are not uniform across countries. Variations exist in the accounting for:

Goodwill.

Business combination methods.

Tax allocation.

LIFO inventory costing.

Development costs.

Use of reserves

Harmonization of Worldwide Accounting Harmonization of Worldwide Accounting StandardsStandardsHarmonization of Worldwide Accounting Harmonization of Worldwide Accounting StandardsStandards


Chapter 11-11

The International Accounting Standards Committee (IASC) was founded in 1973.

41 standards were issued by January 2001.

In 2001, the IASC announced formation of the International Accounting Standards Board (IASB).

Goal is to develop high-quality internationally accepted accounting standards.

Issues standards known as International Financial Reporting Standards (IFRS).

To date six IFRSs have been issued.



Chapter 11-12

Harmonization of accounting standards. The International Accounting Standards Committee (IASC) was founded in 1973.

In 2002, the FASB and IASB agreed to begin converging U.S. GAAP and the IFRSs.

By 2005, over 90 countries had announced they would be following IFRSs.

In 2005, European Union requires publicly traded EU companies to follow IFRSs.



Chapter 11-13

Differing accounting practices could result in the same economic event being reported differently.

LO 2 Differences in accounting methods.LO 2 Differences in accounting methods.

Comparative Accounting ModelsComparative Accounting ModelsComparative Accounting ModelsComparative Accounting Models

FIGURE 11-3Differences in Net Income and Equity due to Differing GAAP

= ROE

Chapter 11-14

Format and Terminology Differences



Some non-U.S. companies prepare statements in:

English still using their national GAAP.

Their local currency with a column that is translated into U.S. dollars.

English conforming to U.S. GAAP or the IFRS.

The first step is to determine which GAAP is being used.

Chapter 11-15




Examples of terminology differences:

Chapter 11-16




Various formats are allowed in presenting financial statements in different countries.

In the UK:

Noncurrent assets are listed first in the balance sheets.

Current assets listed second and in order of increasing liquidity (i.e., the most liquid assets are listed last).

Assets and liabilities are combined to compute total net assets.

Chapter 11-17

A company located in Japan prepares an annual report denominated in U.S. dollars. Any report denominated in U.S. dollars is always prepared in accordance with U.S. GAAP.

Review:Review:

FalseFalse



Chapter 11-18

In the United Kingdom, stock refers to common stock.

Review:Review:

False, False, stock refers to inventorystock refers to inventory



Chapter 11-19

Since 2005, all European Union companies listed on a regulated market are required to prepare consolidated accounts in accordance IASB accounting standards.

Review:Review:

TrueTrue



Chapter 11-20 LO 5 Five major classifications of accounting methods.LO 5 Five major classifications of accounting methods.

Classification of International Accounting Classification of International Accounting ModelsModelsClassification of International Accounting Classification of International Accounting ModelsModels

Five Major Geographical Classifications:

Type of Accounting Practice Region

Anglo-Saxon United States

Anglo-Saxon United Kingdom

German Germany, Switzerland

Latin France, Italy, Brazil

Asia-Pacific Japan, China



Standards referred to as Financial Reporting Standards (FRS).

Issued by the Accounting Standards Board (ASB).

The ASB strongly supports the IASB.

ASB is considering a full conversion to IFRS implementation that would require companies to comply completely by January 1, 2009.

Accounting Standards in the United Kingdom



Historically, standard setting has been the responsibility of the Federal Ministry of Justice (FMJ).

In 1998, FMJ recognized a new independent body, the German Accounting Standards Board (GASB).

As of 2005, preparation of financial statements according to IAS became mandatory for public companies.

GASB is now relevant primarily for unlisted companies.

Accounting Standards in Germany



In February 2001, the

Financial Accounting Standards Foundation (FASF) and

Accounting Standards Board (ASB),

were formed to develop accounting standards.

Accounting Standards Board has been working with the IASB in a path toward standards convergence. It plans to reconcile these differences to IAS by 2008.

Accounting Standards in Japan

Chapter 11-24

Since June 30, 2001, goodwill is only expensed if impaired under U.S. GAAP.

Amortization of goodwill is required under the Japanese model, with a life of five years.

Under IAS standard 38, internally generated goodwill is not capitalized.

Treatment of Goodwill

International Reporting IssuesInternational Reporting IssuesInternational Reporting IssuesInternational Reporting Issues

Chapter 11-25

LIFO is not acceptable under IAS.

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

Inventories


Chapter 11-26

In the United States: Research and development (R&D) costs are

expensed as incurred. In acquisitions, in-process R&D is recognized as

an expense.

IAS No. 38: Research costs are expensed as incurred. Development costs are capitalized when a

product is determined to be commercially feasible.

Purchased R&D costs are capitalized and amortized.

Research and Development


Chapter 11-27

Purchase method required under U.S. GAAP.

Purchase method required under International Accounting Standards (IAS).

Pooling is not permitted in Japan and is used infrequently in other countries.

Business Combinations


Chapter 11-28

In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States).

Under IAS 16, fixed assets are initially valued at cost. Subsequently, they can be valued under either the:

Cost model, or the

Revaluation model.

Fixed Assets and Depreciation


Chapter 11-29

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 5 U.S. listing for non-U.S. companies.LO 5 U.S. listing for non-U.S. companies.

Chapter 11-30

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

The 20-F allows the non-U.S. company 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 6 The role of form 20-F.LO 6 The role of form 20-F.

Chapter 11-31

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 (reconciled to U.S. GAAP).

Nonfinancial information about the company.

Statement F-1


Chapter 11-32

The footnote reconciling GAAP between the U.S. and another country can be very informative in terms of highlighting differences in accounting between countries.

Reconciliation to U.S. Accounting Principles


Chapter 11-33

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

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

Chapter 11-34

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 confined to “pink sheet” market.

Types of ADR Programs


Chapter 11-35

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.



Chapter 11-36

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.



Chapter 11-37

In preparing a 20-F filing, a non-U.S. company can retain its local GAAP reporting as long as it meets certain conditions. Which of the following alternatives satisfies these conditions?

a. The firm must reconcile net income and shareholders’ equity from the non-U.S. GAAP to U.S. GAAP.

b. The firm must fully disclose all financial information required of U.S. firms, including segmental disclosures.

c. The firm is allowed to retain local GAAP reporting if it meets either (a) or (b) above.

d. The firm is allowed to retain local GAAP reporting only if it meets both (a) and (b) above.

Review QuestionReview Question


Chapter 11-38

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