Advanced Accounting, Fourth Edition 11 International Accounting and the Global Economy Advanced Accounting, Fourth Edition

Learning Objectives Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Explain some of the major differences between IFRS and U.S. GAAP. List the seven milestones that must be achieved before the SEC will require adoption of IFRS. Describe three major joint convergence topics of the IFRS and FASB. List the steps that a non-U.S. company must follow to list its shares on a U.S. stock market. Explain the role of form 20-F filed with the Securities and Exchange Commission. Indicate the role of American Depository Receipts in the issuing of securities of non-U.S. companies in the United States.

The Increasing Importance of International Accounting 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.

The 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, FASB and the IASB reaffirmed their commitment to the convergence of U.S. GAAP and IFRSs. September 2008, IASB and FASB issued a progress report and timetable for completion. November 14, 2008, SEC released a roadmap for the adoption of IFRS by U.S. issuers. LO 1 Increased focus on International Accounting Standards.

The Road To Convergence-U.S. GAAP and IFRS Proposed Roadmap sets forth seven milestones for completion. Improvements in accounting standards; Accountability and funding of the IASC Foundation; Improvement in the ability to use interactive data for IFRS reporting; Education and training relating to IFRS; Limited early use of IFRS where this would enhance comparability for U.S. investors; Anticipated timing of future rulemaking by the Commission; Implementation of the mandatory use of IFRS by U.S. issuers. LO 1 Increased focus on International Accounting Standards.

The Road To Convergence-U.S. GAAP and IFRS Improvement in Accounting Standards 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. LO 1 Increased focus on International Accounting Standards.

The Road To Convergence-U.S. GAAP and IFRS Accountability and Funding of the IASC Foundation The IASB is established to develop global standards for financial reporting. Board is overseen by the IASC Foundation, a stand-alone, not-for profit organization. Foundation is responsible for the activities of the IASB. IASC Foundation is governed by 22 trustees whose backgrounds are geographically diverse. IASC Foundation has financed IASB operations principally through voluntary contributions from market participants, ranging from firms in the accounting profession to companies, international organizations, central banks and governments. LO 3 SEC milestones to be achieved for adoption of IFRS.

The Road To Convergence-U.S. GAAP and IFRS Ability to Use Interactive Data For IFRS Reporting 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”). LO 3 SEC milestones to be achieved for adoption of IFRS.

The Road To Convergence-U.S. GAAP and IFRS Education and Training 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. The SEC has estimated that the cost to adopt IFRS for the 110 firms that would qualify for early adoption of IFRS would be around $32 million over the first three years of adoption. LO 3 SEC milestones to be achieved for adoption of IFRS.

The Road To Convergence-U.S. GAAP and IFRS Limited Early Use of IFRS As part of the SEC Roadmap, proposed amendments allow a limited number of U.S. issuers to file IFRS financial statements prior to any mandated use of IFRS in Commission filings. It is probably unlikely that firms will make this election so long as there remains any concern that the SEC might not ultimately require mandatory adoption of IFRS. LO 3 SEC milestones to be achieved for adoption of IFRS.

The Road To Convergence-U.S. GAAP and IFRS Timing of Future Rulemaking by the Commission In 2011, the SEC should decide whether or not to proceed with rules requiring some U.S. public companies to file IFRS-based financial statements by 2014. Currently, U.S. issuers are required to include in their SEC filings three years of audited U.S. GAAP financial statements, and the SEC indicated that it expects that it would most likely require three years of audited financial statements in the first year of IFRS reporting. LO 3 SEC milestones to be achieved for adoption of IFRS.

The Road To Convergence-U.S. GAAP and IFRS Implementation of Mandatory Use of IFRS Provisionally, under the transition, IFRS filings would begin for Large accelerated filers for fiscal years ending on or after December 15, 2014. Other accelerated filers would begin IFRS filings for years ending on or after December 15, 2015. Nonaccelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after December 15, 2016. LO 3 SEC milestones to be achieved for adoption of IFRS.

Significant Similarities and Differences In general, U.S. GAAP is 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. LO 3 SEC milestones to be achieved for adoption of IFRS.

GAAP Hierarchy-U.S. Versus IFRS U.S. GAAP Hierarchy (SFAS No. 168)—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. LO 3 SEC milestones to be achieved for adoption of IFRS.

GAAP Hierarchy-U.S. Versus IFRS IFRS Hierarchy (issued by the IASB) 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. 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. Look to recent pronouncements of other standard setters which use a similar conceptual framework (i.e., U.S. GAAP). The conceptual framework. LO 3 SEC milestones to be achieved for adoption of IFRS.

GAAP Hierarchy-U.S. Versus IFRS Similarities and Differences between FASB and IASB LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS LO 2 Differences between IFRS and U.S. GAAP.

GAAP Hierarchy-U.S. Versus IFRS IFRS Financial Statements Illustrated

Lease Accounting Convergence Currently, the guidance for leases is provided in FASB Statement No. 13 [Topic 840] under U.S. GAPP 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.

Lease 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.

Revenue 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: converging U.S. and international revenue recognition standards, eliminating inconsistencies in existing revenue recognition standards and practices, providing clearer principles for addressing future revenue recognition issues, and filling voids in existing revenue recognition guidance.

Revenue Recognition Convergence Customer Consideration (Allocation) Model Revenue is recognized from “increases” in the net contract position. Revenue is only recognized when a performance obligation is satisfied by transferring goods or services. To measure the contract asset or liability, The underlying rights are measured at inception based on the customer consideration (the amount the customer is willing to pay); and The rights are allocated to the separate performance obligations based on the sales price of the goods or services. LO 4 Three major convergence topics for IFRS and FASB.

Financial 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. LO 4 Three major convergence topics for IFRS and FASB.

How the Financial Statement Might Change Statement of Comprehensive Income The proposed presentation model eliminates the existing choice of presenting components of income and expense in an income statement and a statement of comprehensive income. All entities would present a single statement of comprehensive income, with items of other comprehensive income presented in a separate section. This statement would include a subtotal of profit or loss or net income and a total for comprehensive income for the period.

How the Financial Statement Might Change Statement of Financial Position The statement of financial position would be grouped by major activities (operating, investing, and financing), not by assets, liabilities, and equity. See Illustration 11-8 for an example.

Proposed Statement of Financial Position

How the Financial Statement Might Change Statement of Cash Flows 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.

International Convergence Issues LIFO Inventories LIFO is not acceptable under IAS. IASB recommends specific cost. If specific cost is not determinable, the benchmark is FIFO or weighted average.

International Convergence Issues SEC Registration and U.S. Listing for Non-U.S. Companies 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.

International Convergence Issues 20-F Statement 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 reconcile net income and the shareholders’ equity, thus showing earnings based on U.S. GAAP; or fully disclose all financial information required of U.S. firms. LO 6 The role of form 20-F.

International Convergence Issues Statement F-1 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.

American Depository Receipts (ADRs) 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. ADRs may trade freely like any U.S. security on one of the major exchanges.

American Depository Receipts (ADRs) Types of ADR Programs 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.

American Depository Receipts (ADRs) Types of ADR Programs 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.

American Depository Receipts (ADRs) Types of ADR Programs 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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