Advanced accounting, 5th edition international student version ch11

Describe how the changing world environment is leading to an increased focus on international financial reporting standards IFRS.. generally accepted principles GAAP if the issuers use

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1 Describe how the changing world environment is leading to an increased

focus on international financial reporting standards (IFRS).

3 List some of the milestones that must be achieved before the SEC will

require adoption of IFRS.

4 Describe the SEC’s work plan for incorporating IFRS into the financial

reporting system for U.S issuers.

5 Describe three major joint convergence topics between the IFRS and

FASB.

Learning Objectives

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

U.S stock market.

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

Commission.

8 Indicate the role of American Depository Receipts in the issuing of

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

Learning Objectives

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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.

LO 1 Increased focus on International Accounting Standards.

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

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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 3 SEC milestones to be achieved for adoption of IFRS.

The basis for considering the use of IFRS by U.S issuers

include 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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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)

Work Plan for Incorporating IFRS

LO 4 SEC’s work plan for incorporating IFRS

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It is important that the accounting standards

 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.

Improvement in Accounting Standards

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The Road To Convergence-U.S GAAP and IFRS

The IASB is established to develop global standards for financial reporting

 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

Accountability and Funding of the IASC Foundation

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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”)

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

During March 2011, the IFRS Foundation finalized a 2011 IFRS

taxonomy but the SEC had not yet granted approval

Ability to Use Interactive Data For IFRS Reporting

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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

Education and Training

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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

Adoption Approaches

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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

Adoption Approaches

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By the end of 2011, the SEC plans to decide whether to proceed with

rules requiring some U.S public companies to file IFRS-based financial statements

The AICPA Board of Examiners announced that IFRS would be eligible for testing on the Uniform CPA Exam starting in 2011

Timing of Future Rulemaking by the Commission

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Significant Similarities and Differences

LO 2 Differences between IFRS and U.S GAAP.

In general,

 U.S GAAP are 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

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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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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

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Similarities and Differences between FASB and IASB

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Long-Term Convergence Issues - FASB & IASB

Three long-term convergence issues between the FASB and

IASB

1 Accounting for leases by the lessee

2 Revenue recognition

3 Financial statement presentation

LO 5 Three major convergence topics for IFRS and FASB.

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Lease Accounting Convergence

Currently, the guidance for leases is provided in FASB ASC

Topic 840 – Leases 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.

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Lease Accounting 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.

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Revenue Recognition 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

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The Boards have reached some preliminary views in developing

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.

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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 an asset, such as 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 only recognized when a

Customer Consideration (Allocation) Model

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Financial Statement 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 entity’s activities

 Disaggregates information so that it is useful in predicting an

entity’s future cash flows

 Helps users assess an entity’s liquidity and financial flexibility

 In October 2010, the Boards decided not to issue an

Exposure Draft in the first quarter of 2011, and to return to this project at a later date

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Current and Potential Changes to Financial Statements

Items will be classified into the operating, investing and financing

function, income and expense items are disaggregated by nature

(economic characteristics or attributes that distinguish assets, liabilities, and income and expense items that do not respond equally to similar

economic events)

All entities would present a single statement of comprehensive

separate section

Statement of Comprehensive Income

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Current and Potential Changes to Financial Statements

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)

Statement of Comprehensive Income

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