international accounting and financial reporting

International Accounting and Financial Reporting

Summer 2007

William F. O’Brien, MBA, CPA

Session III-A

International FSA

INTERNATIONAL ACCOUNTING & FINANCIAL REPORTING-2007

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Session III-A Objectives

Revisit MGM Revisit Reporting Levels General FSA considerations International FSA challenges Major GAAP differences Index of conservatism


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MGM’s Classifications

British-American-Dutch (B.A.D.) Continental South American Mixed Economy Socialist Islamic


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Six Levels of Foreign Reporting

Do-Nothing Convenience translation (Japan) Currency restatement GAAP disclosure Partial restatement Full restatement


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The 3 P’s

Preparation Processing Presentation


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Reasons for Analysis

Investment decisions* Credit decisions* Performance* Valuation (investment) Legal liability amount (credit & perf.) Going concern decisions (credit & perf.) Unreasonable returns (performance)


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Traditional FSA Methods

Index analysis Trend analysis Percentage analysis Comparative analysis Horizontal analysis Vertical analysis Use of critical ratios


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Typical Ratio Classifications

Liquidity and solvency ratios Efficiency or performance ratios Profitability ratios Coverage or leverage ratios Key Financial Statement Ratio handout


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FSA Cautions

General Numerator and denominator content

Comparative issues Timeliness GAAP alternatives Management aggressiveness/pro-forma stmts. “Just win, baby” attitude Size Geographic span of operations


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Other F/S Considerations

Quality of Earnings/Transparency Measurement Bias Management Bias


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Quality of Earnings Issues

Non-recurring items…sustainability Essentially we are trying to determine if what is

reported is going to recur in the future.


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Sustainability Issues

Discontinued operations Extraordinary gains and losses Changes in accounting principles Impairment of long-lived assets Restructuring charges Changes in estimates Peripheral gains and losses


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Sources of Information

Annual Report Form 10-K Form 10-Q Form 8-K Prospectus Form 20-F (foreign entity 10-K) SEC’s EDGAR service


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International FSA Challenges

Risk of applying home country perspective Risk of failure to understand the local reporting

context Risk associated with diverse GAAP and

economics


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Major GAAP Differences

PPE Depreciation R&D costs Borrowing costs Exchange rates Pensions Income Taxes Goodwill Intangibles

A detailed discussion of these differences is beyond the scope of this class. Research is required for each specific application of GAAP.


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Index of Conservatism

1 – Home GAAP – Local GAAP

Home GAAP

Less conservative = greater than 1 More conservative = less than 1

Partial index can be calculated for components


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Global Earnings Measurement

UK…higher, therefore, less conservative vs. US

Continent…lower, therefore, more conservative Japan…lower, therefore, more conservative

Often biased by formal debt…context issue


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Reasons for Measurement Differences

Driven by environmental and social values Revisit Hofstede and Bond and Gray


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Global Accounting Convergence

Single standard Harmonization Convergence IASC (1973); now IASB IOSCO role


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Key Points-Session III-A

Follow basic FSA considerations Note the contextual factors Be aware of conservatism biases Note the challenges that remain with respect to

convergence Remember the importance of enforcement and

the legal system

Session III-B

International Disclosure


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Session III-B Objectives

Revisit Reporting Levels Transparency Concepts Disclosure Concepts Disclosure Trends—Overview only Reporting Summary Frequency of Reporting


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Six Levels of Foreign Reporting

Do-Nothing Convenience translation (Japan) Currency restatement GAAP disclosure Partial restatement Full restatement


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Transparency

Looking through the numbers to see reality What you see is what you get--WYSIWYG What is. Is! Investor confidence


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Disclosure

Overload? Essential More disclosure leads to more disclosure Recall the financial accounting model

Useful and relevant information


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Disclosure Incentives and Disincentives

Incentives Lower cost of capital Compliance

Disincentives Competitive disadvantage See Exhibit 6.1

General issues 4th & 7th Directives Research inconsistencies


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Reporting Trends

Corporate Review Chairman’s statement Strategy review Unusual information M & A information H/R information Social responsibility information R & D information Investment information Future information

Operations Review MD&A Disaggregated analysis

Financial Review Results Liquidity and capital resources Asset valuations and inflation


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Frequency

EU directive: every six months IASB: IAS 34—content only discussed


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Key Points-Session III-B Transparency is important Enforcement is not universal Information goes far beyond the basic financial

data Frequency varies from the U.S.

Session III-C

Convergence


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Session III-C Objectives

Pressures and Participants for Convergence Key Directives International Standard Setting Challenges Remain


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Pressures & Participants

Governments Flow of capital Business growth Regional disadvantages

Trade unions & employees Consequences of transfer pricing Impact on future operations

Investors & analysts Information comparability

Bankers Transparency with respect to solvency

Accounting professionals Compliance Ease of implementation


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Key Directives

Grounded in laws of member nations 4th

Disclosure and presentation of financial information

7th

Elements of consolidated financial statements 8th

Qualification and work of auditors


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International Standard Setting

IAS Committee Foundation (Trustees) IASB (2000)

14 Members UK-3; US & Canada-3 Prof. Mary Barth from Stanford

Refer to www.iasb.org for current standards IFRS and US GAAP

Reconciliation to US GAAP required Current convergence project underway


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IFRS-FASB Convergence

Benefits Increased capital market efficiency Reduced administrative burdens Access to capital outside of home market


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Challenges Remain

Quality issues surrounding use, interpretation and enforcement

Rules-based versus principles based foundation What about legal bright lines?

Lack of broad IFRS compliance Some believe a global commitment is not in place

Differences based on local needs will continue Complexity of accounting and operations is growing Significant research is needed


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Key Points-Session III-C Increasing pressure for convergence Participants have varied interests in

convergence Development of converged standards is a

political process Significant issues remain

international accounting and financial reporting

Documents