Slide

11-1

11
11
International Accounting and the
Global Economy

Advanced Accounting, Fourth Edition

Slide
11-2

Learning
Learning Objectives
Objectives
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 the seven milestones that must be achieved before the SEC will
require adoption of IFRS.

4.

Describe three major joint convergence topics of the IFRS and FASB.

5.

List the steps that a non-U.S. company must follow to list its shares on a
U.S. stock market.

6.

Explain the role of form 20-F filed with the Securities and Exchange
Commission.

7.

Indicate the role of American Depository Receipts in the issuing of

securities of non-U.S. companies in the United States.

Slide
11-3

The
The Increasing
Increasing Importance
Importance of
of International
International
Accounting
Accounting Standards
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.

Slide
11-4

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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.
Slide
11-5

LO 1 Increased focus on International Accounting Standards.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
IFRS
Proposed Roadmap sets forth seven milestones for
completion.

Slide
11-6

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;

5.

Limited early use of IFRS where this would enhance

comparability for U.S. investors;

6.

Anticipated timing of future rulemaking by the Commission;

7.

Implementation of the mandatory use of IFRS by U.S. issuers.

LO 1 Increased focus on International Accounting Standards.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
IFRS
Improvement in Accounting Standards
It is important that the accounting standards

Slide
11-7

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
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
IFRS
Accountability and Funding of the IASC Foundation
The IASB is established to develop global standards for financial reporting.

Slide
11-8

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
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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).

Slide
11-9

LO 3 SEC milestones to be achieved for adoption of IFRS.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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.
Slide
11-10

LO 3 SEC milestones to be achieved for adoption of IFRS.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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.

Slide
11-11

LO 3 SEC milestones to be achieved for adoption of IFRS.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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.

Slide
11-12

LO 3 SEC milestones to be achieved for adoption of IFRS.

The
The Road
Road To
To Convergence-U.S.
Convergence-U.S. GAAP
GAAPand
and IFRS
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.

Slide
11-13

LO 3 SEC milestones to be achieved for adoption of IFRS.

Significant
Significant Similarities
Similarities and
and Differences
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.

Slide
11-14

LO 3 SEC milestones to be achieved for adoption of IFRS.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
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.

Slide
11-15

LO 3 SEC milestones to be achieved for adoption of IFRS.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS
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.
Slide
11-16

LO 3 SEC milestones to be achieved for adoption of IFRS.

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

Slide
11-17

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-18

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-19

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-20

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-21

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-22

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-23

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-24

LO 2 Differences between IFRS and U.S. GAAP.

GAAP
GAAPHierarchy-U.S.
Hierarchy-U.S. Versus
Versus IFRS
IFRS

Slide
11-25

LO 2 Differences between IFRS and U.S. GAAP.

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

Slide
11-26

Slide
11-27

Slide
11-28

Slide
11-29

Lease
Lease Accounting
Accounting Convergence
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.

Slide
11-30

Lease
Lease Accounting
Accounting Convergence
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.
Slide
11-31

Revenue
Revenue Recognition
Recognition Convergence
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.
Slide
11-32

Revenue
Revenue Recognition
Recognition Convergence
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,
(1) The underlying rights are measured at inception based on the
customer consideration (the amount the customer is willing to pay);
and
(2) The rights are allocated to the separate performance obligations
based on the sales price of the goods or services.
Slide
11-33

LO 4 Three major convergence topics for IFRS and FASB.

Financial
Financial Statement
Statement Presentation
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 entitys activities.

Disaggregates information so that it is useful in predicting an

entitys future cash flows.

Slide
11-34

Helps users assess an entitys liquidity and financial flexibility.

LO 4 Three major convergence topics for IFRS and FASB.

How
How the
the Financial
Financial Statement
Statement Might
Might Change
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.

Slide
11-35

How
How the
the Financial
Financial Statement
Statement Might
Might Change
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.

Slide
11-36

Proposed
Statement of
Financial
Position

Slide
11-37

How
How the
the Financial
Financial Statement
Statement Might
Might Change
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.

Slide
11-38

International
International Convergence
Convergence Issues
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.

Slide
11-39

International
International Convergence
Convergence Issues
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.
Slide
11-40

International
International Convergence
Convergence Issues
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
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.
Slide
11-41

LO 6 The role of form 20-F.

International
International Convergence
Convergence Issues
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.

Slide
11-42

American
American Depository
Depository Receipts
Receipts (ADRs)
(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.

Slide
11-43

American
American Depository
Depository Receipts
Receipts (ADRs)
(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.
Slide
11-44

American
American Depository
Depository Receipts
Receipts (ADRs)
(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.
Slide
11-45

American
American Depository
Depository Receipts
Receipts (ADRs)
(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.
Slide
11-46

Copyright
Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
distribution or resale. The Publisher assumes no responsibility for
errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.

Slide
11-47