22-1 Intermediate Accounting,17E Stice | Stice | Skousen PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2010 Cengage Learning Accounting in a Global Market

22-2 Dangers of Differing National Accounting Standards A key function of accounting standards is to create a common set of rules to be used by all companies so that outsiders, who do not have control over or access to the detailed financial records, can receive financial reports that are comparable among all the different companies they might want to analyze.

22-3 Brief History Both the FASB and the IASC (predecessor of IASB) were established in The FASB had the advantage of being an independent board with broad representation from the U.S. business community. The IASC was a consortium of national CPA organizations, and committee members served part time while maintaining their connections with their firms and their clients. (continues)

22-4 Brief History During the 1990s, the IASC worked to eliminate the large number of alternative accounting treatments allowable under IAS and also to improve the overall quality of the standards. In 2001, the IASC made a strong bid to become THE international accounting standard setter by becoming an operational clone of the FASB. (continues)

22-5 Brief History In 2002, the IASB and the FASB entered into a joint agreement, called the Norwalk Agreement, in which they pledged to work together to develop a set of “fully compatible” accounting standards. The IASB has been aggressive in promoting its standards as THE worldwide standards. (continues)

22-6 In 2007, the SEC announced that it approved the use of IASB standards for the financial reports of non-U.S. companies with shares traded on U.S. stock exchanges (effective on March 4, 2008). In 2008, the SEC announced that 110 large U.S. multinational companies would drop FASB standards and begin using IASB standards starting in Brief History

22-7 Summary of U.S. GAAP/IFRS Differences (continues)

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22-30 Foreign Currency Financial Statements Translation is used when the foreign subsidiary is a relatively self-contained unit that is independent from the parent company’s operations. Remeasurement is appropriate when the subsidiary does not operate independently of the parent company. There are two methods for converting foreign currency financial statements. (continues)

22-31 Foreign Currency Financial Statements To determine the correct method of conversion, the functional currency of the foreign subsidiary must first be determined. In most instances, the functional currency is the currency in which most of the subsidiary’s transactions are denominated. (continues)

22-32 Foreign Currency Financial Statements Assets and liabilities are translated using the current exchange rate prevailing as of the balance sheet date. Income statement items are translated at the average exchange rate for the year. Dividends are translated using the exchange rate prevailing on the date the dividends were declared. (continues)

22-33 Foreign Currency Financial Statements Capital stock is translated at the historical rate, that is, the rate prevailing on the date the subsidiary was acquired or the stock was issued. Retained earnings is translated in the first year using historical rates, but in subsequent years, it is computed by taking the U.S. dollar balance in Retained Earnings from the prior period’s translated financial statements, adding translated net income and subtracting translated dividends. (continues)

22-34 Foreign Currency Financial Statements As a result of the translation process, debits in the translated U.S. dollar trial balance typically will not equal credits. The balancing figure is called a translation adjustment and is recognized as part of the U.S. parent company’s stockholders’ equity.