11 11 International Accounting and the Global Economy Advanced Accounting, Fifth Edition Slide 11-1 Learning Learning Objectives 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 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 three major joint convergence topics between the IFRS and FASB Slide 11-2 Learning Learning Objectives 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 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 LO Increased focus on International Accounting Standards 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; November 2009, FASB and the IASB reaffirmed their commitment to the convergence of U.S GAAP and IFRS September 2008, IASB and FASB issued a progress report and timetable for completion, recognizing the relevance of a roadmap for the removal of the reconciliation requirement for non-U.S companies using IFRS Slide 11-5 LO Increased focus on International Accounting Standards The The Road Road To To Convergence-U.S Convergence-U.S GAAP GAAPand and IFRS IFRS 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 Slide 11-6 LO Increased focus on International Accounting Standards The The Road Road To To Convergence-U.S Convergence-U.S GAAP GAAPand and IFRS IFRS The basis for considering the use of IFRS by U.S issuers include the following milestones 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 Slide 11-7 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 The The Road Road To To Convergence-U.S Convergence-U.S GAAP GAAPand and IFRS IFRS 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) Slide 11-8 LO SEC’s work plan for incorporating IFRS 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 11-9 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 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 11-10 Oversight is by the IASC Foundation, a stand-alone, not-for profit organization, which is responsible for the activities of the IASB and is 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 Current Current and andPotential PotentialChanges Changesto toFinancial FinancialStatements Statements Statement of Comprehensive Income Items will be classified into the operating, investing and financing categories Those items are then disaggregated on the basis of their function (primary activities in which the entity is engaged) Within the function, income and expense items are disaggregated by nature (economic characteristics or attributes that distinguish assets, liabilities, and income and expense items that not respond equally to similar economic events) All entities would present a single statement of comprehensive income, with items of other comprehensive income presented in a separate section Slide 11-39 LO Three major convergence topics for IFRS and FASB Current Current and andPotential PotentialChanges Changesto toFinancial FinancialStatements Statements Statement of Comprehensive Income It is expected that the new presentation model would include more subtotals than are currently presented This will allow easier comparisons of effects across the financial statements Illustration 11-7 provides an examples of a one-year statement of comprehensive income prepared according to these guidelines (generally, two years of comparable data would be required) Slide 11-40 LO Three major convergence topics for IFRS and FASB Proposed Statement of Financial Position Slide 11-41 How How the the Financial Financial Statement Statement Might Might Change Change Statement of Financial Position Grouped by major activities (operating, investing, and financing), not by assets, liabilities, and equity This clearly separates which net assets management uses in its business and financing activities Assets and liabilities are disaggregated into short-term and longterm subcategories within each category Preparers could present assets and liabilities in order of liquidity if this presentation would provide more relevant information Slide 11-42 LO Three major convergence topics for IFRS and FASB 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 11-43 LO Three major convergence topics for IFRS and FASB International International Convergence Convergence Issues 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 Private Companies The IASB is currently developing IFRS for private entities It is too early to say which direction private-company GAAP will take Slide 11-44 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 11-45 LO The role of form 20-F 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 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 Slide 11-46 LO 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 (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 Slide 11-47 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 11-48 LO The role of American Depository Receipts 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 is confined to the pink sheet market Slide 11-49 LO The role of American Depository Receipts 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 11-50 LO The role of American Depository Receipts American American Depository Depository Receipts Receipts (ADRs) (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 Slide 11-51 LO The role of American Depository Receipts 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 11-52 LO The role of American Depository Receipts Copyright Copyright Copyright © 2012 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 11-53 ... 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... Objectives 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... 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