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

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International Accounting and the International Accounting and the Global EconomyGlobal Economy

Advanced Accounting, Fifth Edition

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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 ObjectivesLearning ObjectivesLearning Objectives

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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 ObjectivesLearning ObjectivesLearning Objectives

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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

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.

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

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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.

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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.

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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

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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

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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


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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

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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

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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

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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

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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

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Significant Similarities and DifferencesSignificant Similarities and DifferencesSignificant 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.

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

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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.

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Similarities and Differences between FASB and IASB

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IFRS Financial Statements Illustrated

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

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Lease Accounting ConvergenceLease Accounting ConvergenceLease 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.


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Lease Accounting ConvergenceLease Accounting ConvergenceLease 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.


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Revenue Recognition ConvergenceRevenue Recognition ConvergenceRevenue 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.


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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.


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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


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Financial Statement PresentationFinancial Statement PresentationFinancial 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.LO 5 Three major convergence topics for IFRS and FASB.LO 5 Three major convergence topics for IFRS and FASB.

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


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


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Proposed Statement of Financial Position

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How the Financial Statement Might ChangeHow the Financial Statement Might ChangeHow 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


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How the Financial Statement Might ChangeHow the Financial Statement Might ChangeHow 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


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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 IssuesInternational 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.

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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.

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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.


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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


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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.

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

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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



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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.




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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.




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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.




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

Documents

adoption of ifrs

use of ifrs

accepted accounting

global accounting standards

convergence of

sec milestones

financial reporting

increased focus