Advanced Accounting Jeter ● Chaney International Financial Reporting Standards Prepared by Sheila Ammons, Austin Community College Learning Objectives • Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS) • Explain some of the remaining differences between IFRS and U.S GAAP • List some of the milestones that must be achieved before the SEC will require adoption of IFRS • Describe the SEC’s work plan for incorporating IFRS into the financial reporting system for U.S issuers • Describe the four remaining joint convergence topics between the IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved Learning Objectives • 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 Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence Accountability and Funding of the IASC Foundation • The IASB is established to develop global standards for financial reporting – Oversight is by the IASC Foundation: • stand-alone, not-for profit organization • responsible for the activities of the IASB • 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 LO Increased focus on International Accounting Standards Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence • September 2002, FASB and the IASB issued the 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 – The Boards indicated nine major joint projects that over time should improve and converge their respective conceptual frameworks LO Increased focus on international accounting standards Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence • 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 LO Increased focus on international accounting standards Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence • The basis for considering the use of IFRS by U.S issuers includes 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 LO SEC milestones to be achieved for adoption of IFRS Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence Work Plan for Incorporating IFRS • 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) LO SEC work plan for incorporating IFRS Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence Ability to Use Interactive Data For IFRS Reporting • In 2009, the SEC issued rule “Interactive Data to Improve Financial Reporting” – Requires domestic and foreign companies using US GAAP (and eventually those using IFRS) to provide their financial statements in XBRL (eXtensible Business Reporting Language) • This format provides an exhibit to the current reports and registration statements and provides “detailed tagging” of the footnotes and schedules LO SEC milestones to be achieved for adoption of IFRS Copyright © 2015 John Wiley & Sons, Inc All rights reserved Historical Perspective: The Road To Convergence Ability to Use Interactive Data For IFRS Reporting • 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 – Since March 2011, the SEC has yet to approve the IFRS Foundation’s taxonomy that would allow IFRS users to file in XBRL LO SEC milestones to be achieved for adoption of IFRS Copyright © 2015 John Wiley & Sons, Inc All rights reserved Revenue Recognition Convergence • The Boards have agreed upon 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 LO Four remaining convergence topics between IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved Revenue Recognition Convergence Customer Consideration (Allocation) Model • 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 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 recognized only when a performance obligation is satisfied by transferring goods or services LO Four remaining convergence topics between IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved Insurance Contracts • U.S GAAP (ASC Topic 944) provides a comprehensive standard on insurance contracts • Constituents argued that – the cost of switching to a completely new model (as proposed by the IASB) would be costly and – perhaps by simply making incremental changes to the current model would be more beneficial • Because the IASB currently has no current standards for insurance contracts, – it favors developing a model from scratch LO Four remaining convergence topics between IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved Insurance Contracts Primary issue: Recognition of profits from insurance contracts • IASB’ approach: The profit element is divided into two components: a risk element and a contract margin – The risk element would have to be remeasured every financial statement date with adjustments included in income • In the U.S., property contracts are recognized as insurance is provided and life insurance revenue is recognized when due • While the FASB is limiting the guidance to the insurance industry, the IASB’s objectives are broader and the standard might include maintenance and service contracts provided by manufacturers and retailers – The Boards have decided to separately reexamine these issues – The FASB is expected to increase current disclosures and maintain the existing FASB model for insurance contracts LO Four remaining convergence topics between IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved Financial Instruments Financial Instrument Project: • Two components: (1) classification and measurement and (2) impairment • Neither project is likely to result in a converged standard since both Boards are pursuing different models –The IASB supports a model in which the financial assets would qualify for amortized cost classification if the assets were held within a business model whose objectives were to hold the asset in order to collect contractual cash flows –The FASB is now considering a bifurcation model which would require the entities to separately account for any embedded derivative (if any) and the financial instrument LO Four remaining convergence topics between IFRS and FASB Copyright © 2015 John Wiley & Sons, Inc All rights reserved International Convergence Issues LIFO Inventories – LIFO is not acceptable under international standards – IASB recommends specific cost If specific cost is not determinable, the benchmark is FIFO or weighted average – LIFO conformity rule, established in 1939, requires that taxpayers using LIFO for tax purposes must also use it for financial reporting purposes • Thus, one important issue that the SEC must face is the potential costs incurred by firms to switch from LIFO to another method Copyright © 2015 John Wiley & Sons, Inc All rights reserved International Convergence Issues Private-Small-and Medium-Sized Companies • July 2009: The IASB released IFRS for Small- and Medium-sized Entities (SME) – Comprehensive set of standards designed for entities that did not have public accountability • May 2012: The Financial Accounting Foundation (FAF) issued a final report, Establishment of the Private Company Council (PCC) – Created to improve the standard-setting process for private companies • December 2013: The Board and PCC issued: Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the Guide) – Purpose: To assist the FASB and the PCC in determining when to provide alternative recognition, measurement, disclosure, display, effective date, and transition guidance for private company reporting under U.S GAAP Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 (annual) and 6-K (interim) LO Listing by non-U.S firms on U.S exchanges Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 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 • 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 The role of form 20-F Copyright © 2015 John Wiley & Sons, Inc All rights reserved International Convergence Issues Statement F-1 – First-time offer of securities by any non-U.S company that comes under the definition of a “foreign private issuer” requires filing an F1 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 LO The role of form 20-F Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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, subject to some conditions, like any U.S security on one of the major exchanges – The ADR is treated similarly to a domestic security for purposes of clearance, settlement, transfer, and ownership LO The role of American Depository Receipts Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Issues are traded in the over-the-counter (OTC) market LO The role of American Depository Receipts Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 Have greater visibility because of their public listing LO The role of American Depository Receipts Copyright © 2015 John Wiley & Sons, Inc All rights reserved American Depository Receipts (ADRs) Types of ADR Programs 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 LO The role of American Depository Receipts Copyright © 2015 John Wiley & Sons, Inc All rights reserved 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 neither publicly traded nor listed on U.S stock exchanges and can be exchanged only among QIBs LO The role of American Depository Receipts Copyright © 2015 John Wiley & Sons, Inc All rights reserved ... financial reporting – Oversight is by the IASC Foundation: • stand-alone, not-for profit organization • responsible for the activities of the IASB • governed by 22 trustees whose backgrounds are... safeguard the IFRS Foundation’s position as the world’s independent accounting standard setter LO Increased focus on International Accounting Standards Copyright © 2015 John Wiley & Sons, Inc All... 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