Advanced Accounting by Debra Jeter and Paul Chaney Chapter 11: International Accounting and the Global Economy Slides Authored by Hannah Wong, Ph.D. Rutgers University

Increasing Interest in International Accounting Standards Cross border equity issuances Call for: uniform international accounting standards Internationalization of portfolio holdings Shift toward equity financing obj 1

Divergence in Accounting Standards In some countries: Goodwill is not amortized until it is apparent it has diminished in value. The pooling of interests method is permitted in only a few countries. LIFO inventory costing is not permitted. Reserves are recorded for self-insurance or contingencies for expected future losses. obj 2

Earnings Differences among Countries An Illustration Most conservative Japan Germany France United States Least conservative United Kingdom obj 2

International Accounting Issues Goodwill U.S GAAP capitalized and expensed when impaired IAS capitalized and amortized for up to 5 years, (up to 20 years if justified) Other Countries capitalized and amortized over a shorter time period in most countries immediately written off in Germany obj 2

International Accounting Issues Inventories U.S GAAP LIFO and FIFO are primary methods IAS Specific cost is recommended FIFO and weighted average are primary methods LIFO allowed Other Countries LIFO is not acceptable for tax purposes in the U.K. and Canada, hence limited use obj 2

International Accounting Issues Research and Development U.S GAAP all R&D costs are expensed as incurred IAS R&D costs are expensed R&D asset purchased in an acquisition capitalized and expensed over life but <5 years Other Countries In Japan, some R&D costs can be capitalized and amortized for up to 5 years In the UK, some development costs are capitalized obj 2

International Accounting Issues Consolidation Methods U.S GAAP only purchase is allowed IAS purchase is required uniting of interests (similar to pooling) is allowed if firm sizes are similar Other Countries pooling is not permitted in Japan and used infrequently in other countries obj 2

International Accounting Issues Property, Plant and Equipment U.S GAAP recorded at historical cost carried on books at net book value IAS initial measurement is original cost revaluation to fair value is allowed Other Countries In France and U.K., common to revalue assets to an equity reserve account obj 2

International Accounting Issues Depreciation U.S GAAP predominantly straight line method for financial purposes alternative methods for tax purposes IAS requires only that method applied on a systematic basis Other Countries in Japan and Latin America, taxation authorities determine depreciation methods obj 2

International Accounting Issues Deferred Taxes U.S GAAP liabilities and assets recorded on all taxable and deductible temporary differences valuation allowances used if asset is not probable IAS liabilities and assets recorded if probable no deferred taxes on nontaxable goodwill Other Countries In the U.K. and Germany, the liability method is used In Japan, deferred taxes are not recognized obj 2

Accounting Models obj 3

International Accounting Standards Committee (IASC) An independent private-sector body established in 1973 by the leading accountancy bodies of Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States Issues International Accounting Standards (IAS) obj 4

U.S. Listings for Non U.S. Companies Required registration with the SEC to be listed only: form 20-F to issue securities in the U.S.: F-1 statement subsequent periods: form 20-F (annual reports) and form 6-K (interim reports) obj 5

+ 20-F Statement the non-U.S. company’s local GAAP reporting reconciliation of net income and shareholders’ equity to comply with U.S. GAAP; or full disclosure of financial information required of U.S. firms, including segmental disclosures obj 6

F-1 Statement Required for first time offer of securities by a non-U.S. company (foreign private issuer) The company must meet certain conditions of: ownership, location of assets, and location of executive officers Must contain the prospectus containing financial statements (reconciled to U.S. GAAP) detailed nonfinancial information obj 6

F-1 Statement - Content The prospectus containing financial statements (reconciled to U.S. GAAP) description of business regulatory structure management structure capital structure shareholding patterns shareholder rights Information about articles of association, bylaws, significant legal and contractual obligations of the company obj 6

American Depository Receipts (ADRs) Definition a derivative financial instrument usually representing a certain fixed number of publicly traded shares of a non-U.S. corporation Trading ADRs may trade freely, subject to some conditions, like any U.S. security on the major exchanges obj 7

American Depository Receipts (ADRs) Depository Bank (DR Bank) an intermediary creating ADRs, usually with the consent of the issuing company provides an interface between the non-U.S. company and U.S. investors major DR banks: Bank of New York, J.P.Morgan, Citibank obj 7

Process of Creating ADRs DR bank purchases shares of non-U.S. company from the company’s home market DR bank places shares with its custodian in the home market DR bank issues ADRs (denominated in U.S. $) obj 7

Types of ADR Programs Unsponsored ADRs The DR bank creates a DR program without a formal agreement with the issuing non-U.S. company usually arise due to great demand for the company’s securities in the U. S. becoming obsolete obj 7

Types of ADR Programs Sponsored ADRs The DR bank creates a DR program in an exclusive agreement with the issuing non-U.S. company The DR bank provides information and disburse payouts (dividends, rights, etc) to U.S. investors account for over 98% of ADRs obj 7

Types of Sponsored ADRs obj 7

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