advanced accounting 6e by jeter chaney chapter 11

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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.

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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.

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LO 1 Increased focus on International Accounting Standards.

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• 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.

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LO 1 Increased focus on international accounting standards.

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• 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.

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LO 1 Increased focus on international accounting standards.

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• 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.

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

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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)

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LO 4 SEC work plan for incorporating IFRS

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Ability to Use Interactive Data For IFRS Reporting

• In 2009, the SEC issued rule “Interactive Data to Improve

• This format provides an exhibit to the current reports

and registration statements and provides “detailed

tagging” of the footnotes and schedules.

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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.

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Possible Adoption Approaches

1 Full Adoption of IFRS – countries recognize IFRS as issued by

the IASB as GAAP.

2 Adopt IFRS after Some Incorporation Process – allows each

country to address country-specific issues This results in the following:

– Convergence approach: jurisdictions maintain their local

standards but work to converge with IFRS over time.

– Endorsement approach: jurisdictions incorporate individual

IFRS into local standards.

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Possible Adoption Approaches

3) “Condorsement” of IFRS – focus of the SEC’s work plan, predicated

on several principles:

– U.S GAAP would be retained, but the FASB would incorporate IFRS into U.S GAAP over a defined period, with a focus on minimizing transition costs.

– The FASB would incorporate newly issued IFRS into U.S GAAP pursuant to some established endorsement protocol.

• There may be a need for U.S interpretations of IFRS on issues that are significant in the U.S but not in the remainder of the world.

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The Role of the SEC and the FASB

• The SEC would retain the ultimate authority to establish financial reporting requirements in instances in which interpretative guidance is required or appropriate for U.S constituents.

– The SEC could issue guidance following similar processes to those employed currently such as issuing Staff Accounting Bulletins.

– The SEC would monitor international standard-setting developments.

• Currently IFRS do not have any requirements for oil and gas companies and the SEC could decide to retain reporting requirements upon incorporation of IFRS.

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LO 4 SEC’ work plan for incorporating IFRS

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Similarities and Differences

Similarities and Differences Between U.S GAAP and IFRS

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GAAP Hierarchy-U.S Versus IFRS

• U.S GAAP Hierarchy—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.

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LO 2 Differences between IFRS and U.S GAAP.

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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.

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Similarities and Differences between FASB and IASB

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IFRS Financial Statements Illustrated

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Convergence Projects - FASB and IASB

As of the beginning of 2014, four major convergence projects remained:

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Lease Accounting Convergence

• The guidance for leases, in the U.S is provided in FASB ASC Topic 840 – Leases and in IAS 17 for 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

• Therefore, in this chapter we will use the terms

capital lease and financing lease as equivalent.

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LO 5 Four remaining convergence topics between IFRS and FASB.

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The differences between FASB and IFRS in the table above are noted in italics These differences are

often used to illustrate the difference between a rules-based approach and a principles-based approach.

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Lessee Convergence Project Plan

• The Boards have not agreed on accounting for leases.

• It appears that all leases will be recorded as liabilities.

• Preliminary indications suggest that most leases would result in asset and liability recognition for lessees A lessee would recognize:

1 An asset representing its right to use the leased asset for the lease term

2 A liability to make lease payments.

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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.

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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.

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• Because the IASB currently has no current standards for insurance contracts,

– it favors developing a model from scratch.

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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.

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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.

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