1、,International Accounting and the Global Economy,Advanced Accounting, Third Edition,11,Describe how the changing world environment is leading to an increased focus on international accounting standards. Explain some differences in accounting methods as they are applied internationally. List five maj
2、or classifications of accounting models used in different geographical regions. Describe the role of the International Accounting Standards Committee and the International Accounting Standards Board in establishing international accounting standards.,Learning Objectives,List the steps that a non-U.S
3、. 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.,Learning Objectives,The Increas
4、ing Importance of International Accounting Standards,Beginning in 2005, the European Union (EU) mandated that accounting standards for companies listed in its securities markets conform to International Financial Reporting Standards. In 2006, the total value of cross-border transactions in bonds and
5、 equities was $90 trillion U.S. dollars annually.,LO 1 Increased focus on International Accounting Standards.,Importance of International Accounting Standards,LO 1 Increased focus on International Accounting Standards.,FIGURE 11-1 Composition of the Global Equity and Debt Markets by Each Countrys Do
6、mestic Securities,Importance of International Accounting Standards,LO 1 Increased focus on International Accounting Standards.,FIGURE 11-1 Composition of the Global Equity and Debt Markets by Each Countrys Domestic Securities,Importance of International Accounting Standards,LO 1 Increased focus on I
7、nternational Accounting Standards.,U.S. holdings of foreign securities (870 billion to 3.5 trillion increase),Foreign holdings of U.S. securities (1.2 to 6 trillion increase),FIGURE 11-2 Holdings of U.S. and Foreign Securities, 19942004,Market Value of Holdings of U.S. and Foreign Securities, 1994-2
8、004,The demand for uniform international accounting standards has increased because: Investors seek comparable standards to evaluate investment opportunities, Managers seek to evaluate the performance of foreign subsidiaries and competitors, and Creditors and debt capital markets seek comparable sta
9、ndards to determine credit quality and bankruptcy risk.,Importance of International Accounting Standards,LO 1 Increased focus on International Accounting Standards.,Financial accounting practices, required disclosures, and auditing requirements are not uniform across countries. Variations exist in t
10、he accounting for: Goodwill. Business combination methods. Tax allocation. LIFO inventory costing. Development costs. Use of reserves,Harmonization of Worldwide Accounting Standards,LO 1 Increased focus on International Accounting Standards.,The International Accounting Standards Committee (IASC) wa
11、s founded in 1973. 41 standards were issued by January 2001. In 2001, the IASC announced formation of the International Accounting Standards Board (IASB). Goal is to develop high-quality internationally accepted accounting standards. Issues standards known as International Financial Reporting Standa
12、rds (IFRS). To date six IFRSs have been issued.,Harmonization of Worldwide Accounting Standards,LO 1 Increased focus on International Accounting Standards.,Harmonization of accounting standards. The International Accounting Standards Committee (IASC) was founded in 1973. In 2002, the FASB and IASB a
13、greed to begin converging U.S. GAAP and the IFRSs. By 2005, over 90 countries had announced they would be following IFRSs. In 2005, European Union requires publicly traded EU companies to follow IFRSs.,Harmonization of Worldwide Accounting Standards,LO 1 Increased focus on International Accounting S
14、tandards.,Differing accounting practices could result in the same economic event being reported differently.,LO 2 Differences in accounting methods.,Comparative Accounting Models,FIGURE 11-3 Differences in Net Income and Equity due to Differing GAAP,= ROE,Format and Terminology Differences,LO 2 Diff
15、erences in accounting methods.,Comparative Accounting Models,Some non-U.S. companies prepare statements in: English still using their national GAAP. Their local currency with a column that is translated into U.S. dollars. English conforming to U.S. GAAP or the IFRS. The first step is to determine wh
16、ich GAAP is being used.,Format and Terminology Differences,LO 2 Differences in accounting methods.,Comparative Accounting Models,Examples of terminology differences:,Format and Terminology Differences,LO 2 Differences in accounting methods.,Comparative Accounting Models,Various formats are allowed i
17、n presenting financial statements in different countries. In the UK: Noncurrent assets are listed first in the balance sheets. Current assets listed second and in order of increasing liquidity (i.e., the most liquid assets are listed last). Assets and liabilities are combined to compute total net as
18、sets.,A company located in Japan prepares an annual report denominated in U.S. dollars. Any report denominated in U.S. dollars is always prepared in accordance with U.S. GAAP.,Review:,False,LO 2 Differences in accounting methods.,Comparative Accounting Models,In the United Kingdom, stock refers to c
19、ommon stock.,Review:,False, stock refers to inventory,LO 2 Differences in accounting methods.,Comparative Accounting Models,Since 2005, all European Union companies listed on a regulated market are required to prepare consolidated accounts in accordance IASB accounting standards.,Review:,True,LO 2 D
20、ifferences in accounting methods.,Comparative Accounting Models,LO 5 Five major classifications of accounting methods.,Classification of International Accounting Models,Five Major Geographical Classifications:,Type of Accounting Practice Region Anglo-Saxon United States Anglo-Saxon United Kingdom Ge
21、rman Germany, Switzerland Latin France, Italy, Brazil Asia-Pacific Japan, China,LO 5 Five major classifications of accounting methods.,Classification of International Accounting Models,Standards referred to as Financial Reporting Standards (FRS). Issued by the Accounting Standards Board (ASB). The A
22、SB strongly supports the IASB. ASB is considering a full conversion to IFRS implementation that would require companies to comply completely by January 1, 2009.,Accounting Standards in the United Kingdom,LO 5 Five major classifications of accounting methods.,Classification of International Accountin
23、g Models,Historically, standard setting has been the responsibility of the Federal Ministry of Justice (FMJ). In 1998, FMJ recognized a new independent body, the German Accounting Standards Board (GASB). As of 2005, preparation of financial statements according to IAS became mandatory for public com
24、panies. GASB is now relevant primarily for unlisted companies.,Accounting Standards in Germany,LO 5 Five major classifications of accounting methods.,Classification of International Accounting Models,In February 2001, the Financial Accounting Standards Foundation (FASF) and Accounting Standards Boar
25、d (ASB), were formed to develop accounting standards. Accounting Standards Board has been working with the IASB in a path toward standards convergence. It plans to reconcile these differences to IAS by 2008.,Accounting Standards in Japan,Since June 30, 2001, goodwill is only expensed if impaired und
26、er U.S. GAAP. Amortization of goodwill is required under the Japanese model, with a life of five years. Under IAS standard 38, internally generated goodwill is not capitalized.,Treatment of Goodwill,International Reporting Issues,LIFO is not acceptable under IAS. IASB recommends specific cost. If sp
27、ecific cost is not determinable, the benchmark is FIFO or weighted average.,Inventories,International Reporting Issues,In the United States: Research and development (R&D) costs are expensed as incurred. In acquisitions, in-process R&D is recognized as an expense. IAS No. 38: Research costs are expe
28、nsed as incurred. Development costs are capitalized when a product is determined to be commercially feasible. Purchased R&D costs are capitalized and amortized.,Research and Development,International Reporting Issues,Purchase method required under U.S. GAAP. Purchase method required under Internatio
29、nal Accounting Standards (IAS). Pooling is not permitted in Japan and is used infrequently in other countries.,Business Combinations,International Reporting Issues,In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States). Under IAS 16, fixed assets a
30、re initially valued at cost. Subsequently, they can be valued under either the: Cost model, or the Revaluation model.,Fixed Assets and Depreciation,International Reporting Issues,Registration with the SEC under the 1934 Securities Act is mandatory for non-U.S. companies that intend to list on a U.S.
31、 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.,SEC Registration and U.S. Listing for Non-U.S. Companies,International Reporting Issues,LO 5 U.S. listing for no
32、n-U.S. companies.,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 reconcile net income and the shareholders equity, thus showing earnings based on U.S. G
33、AAP; or fully disclose all financial information required of U.S. firms.,20-F Statement,International Reporting Issues,LO 6 The role of form 20-F.,First-time offer of securities by any non-U.S. company requires filing an F-1 statement as the principal registration statement. Prospectus contains: Fin
34、ancial statements (reconciled to U.S. GAAP). Nonfinancial information about the company.,Statement F-1,International Reporting Issues,The footnote reconciling GAAP between the U.S. and another country can be very informative in terms of highlighting differences in accounting between countries.,Recon
35、ciliation to U.S. Accounting Principles,International Reporting Issues,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 Deposi
36、tory Receipt (GDR) - traded outside the United States.,American Depository Receipts (ADRs),ADRs may trade freely like any U.S. security on one of the major exchanges.,Level I: Depository banks create an ADR program based on the underlying shares that already trade on home markets. No capital raised.
37、 ADRs are not listed on U.S. markets. Trading confined to “pink sheet” market.,Types of ADR Programs,American Depository Receipts (ADRs),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.,
38、Types of ADR Programs,American Depository Receipts (ADRs),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 exchan
39、ges and can be exchanged only among QIBs.,Types of ADR Programs,American Depository Receipts (ADRs),In preparing a 20-F filing, a non-U.S. company can retain its local GAAP reporting as long as it meets certain conditions. Which of the following alternatives satisfies these conditions? The firm must
40、 reconcile net income and shareholders equity from the non-U.S. GAAP to U.S. GAAP. The firm must fully disclose all financial information required of U.S. firms, including segmental disclosures. The firm is allowed to retain local GAAP reporting if it meets either (a) or (b) above. The firm is allow
41、ed to retain local GAAP reporting only if it meets both (a) and (b) above.,Review Question,International Reporting Issues,Copyright 2008 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
42、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.,Copyright,
