Accounting Systems 2
Vysoká škola finanční a správní
Jaromír R. Stemberg
jaromir@mail.vsfs.cz
Literature
McEwen, Ruth Ann:
Transparency in Financial Reporting: A concise
comparison of IFRS and US GAAP
Harriman House ltd., Hampshire UK 2009
ISBN-13: 978-1-906659-13-4
Layout of the Course
• Basic principles of IFRS/IAS
• Conceptual Framework and reporting requirements
• Financial statements: items, recording by IFRS,
US GAAP differences
– Assets
– Liabilities
– Equity
– Profit and Loss
– Cash Flow
Grading
• Attendance: 30% (6% for each lesson)
Short Test:
20% (3rd lesson)
Final test:
50%
• Minimum to pass: 60%
• 90-100%
85-89%
75-84%
70-74%
60-69%
<60%
A
B
C
D
E
F
(excellent)
(excellent minus)
(very good)
(very good minus)
(good)
(failed)
IFRS and US GAAP
Why do differences exist?
• US Financial Accounting Standards Board (FASB)
developed the first set of standards
• International Accounting Standards Board (IASB) had
the advantage of being inspired by some of the
perceived problems in the FASB standard
• Differences:
- in standards themselves
- in interpretation
Will the differences ever be eliminated?
• “Norwalk Agreement” in 2002:
Both Boards (FASB and IASB) publicly declared their
commitment to the convergence of IFRS and US GAAP
• US Securities and Exchange Commission (SEC)
eliminated the requirement for foreign issuers to
reconcile their IFRS results to US GAAP
• Unless the wording of the standards is totally unified,
interpretational differences will almost certainly stay
• Depends on willingness of national regulators and
industry groups to cooperate
IAS/IFRS
Standards
• International Accounting Standards (IASs) were issued by the
IASC from 1973 to 2000. In 2001, the IASC was replaced by
the IASB.
• Since then, the IASB has:
– amended some IASs
– replaced some IASs with new International
Financial Reporting Standards (IFRSs)
– adopted new IFRSs on topics for which there was
no previous IAS
– issued Interpretations of Standards
Compliance with Standards
Financial statements may not be described as
complying with IFRSs unless they comply with
all of the requirements of each applicable
standard and each applicable interpretation
IASB Conceptual Framework
• “IASB Framework for the Preparation and
Presentation of Financial Statements” was Adopted
by the IASB in April 2001
• Not a standard, serves as a guide
• Resolves accounting issues that are not addressed
directly in a standard
• If no standard or interpretation applies to a
transaction, an entity must use its judgment in
developing and applying an accounting policy that
results in information that is relevant and reliable
IAS
IAS 1 Presentation of Financial Statements
IAS 2 Inventories
IAS 7 Statement of Cash Flows
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events After the Reporting Period
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 14 Segment Reporting
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefit Plans
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS
IAS 31 Interests In Joint Ventures
IAS 33 Earnings Per Share
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture
IFRS
Preface to International Financial Reporting Standards
Framework for the Preparation and Presentation of Fin. Statements
IFRS 1 First-time Adoption of International Fin. Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 6 Exploration for and Evaluation of Mineral Assets
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
Conceptual Framework
• Preparation and Presentation of Financial Statements
is to be based on
– Accrual principles
– Continuity and consistency
• Quality requirements
–
–
–
–
Understandable
Relevant
Reliable
Comparable
Conceptual Framework
• Basic elements of financial statements
–
–
–
–
–
Assets
Liabilities
Owners’ Equity
Revenue
Expenses
• Presentation of Financial Statements
–
–
–
–
–
Balance sheet
Income statement
Cash flow statement
Statement of changes in equity
Notes
Reporting Requirements
Financial Statements
No given template nor detail contents of financial
statements except of:
•
•
•
•
Basics classification of assets, liabilities and equity
Distinction of revenue/expenses and gains/losses
Required items
Notes
Principle of relevance - items must be listed separately
if they account for:
• 2% of total assets (B/S)
• 5% of total revenue or expenses (P&L)
Classification of Balance Sheet Items
• Assets:
–
–
–
–
Criteria for long and short-term assets distinction
Assets can be sorted also by liquidity
Both systems are equally acceptable
So is a combination of both
• Liabilities
– Use the same distinction as in assets
• Equity
– Must be listed separately form liabilities
Assets Required in Reporting
–
–
–
–
–
–
–
–
–
–
–
Property, Plant & Equipment
Investment Property
Intangible Assets
Investment Accounted for Using Equity Method
(investment in companies with capital holding of 20-50%)
Financial Assets
Receivables for Current Tax
Biological Assets
Assets Held for Sale
Inventories
Trade and Other Receivables
Cash and Cash Equivalents
Liabilities Required in Reporting
–
–
–
–
–
–
Trade and Other Payables
Provisions (must be certain and measurable)
Financial Liabilities
Liabilities for Current Tax
Liabilities for Deferred Tax
Minority Interests
Equity Required in Reporting
Issued Capital and Reserves Attributable to Equity
Holders of the Parent
Except of relevancy, IFRS has no other requirements - structure
depends on local rules; typically consists of following items:
–
–
–
–
–
–
Common Stock
Share Premium Account
Additional Paid-in Capital
Funds
Retained Earnings
Net Earnings of current period
P&L Items Required in Reporting
–
–
–
–
–
–
Revenue
Financial Expenses
Participation on Profit or Loss of Affiliated Enterprise
Profit or Loss on Discontinued Business
Profit or Loss on Revaluation of Assets
Net Earnings for Current Period
P&L Statement has no given structure, can be
– vertical or horizontal
– by function or by kind
Cash Flow Statement Items Required in
Reporting
Cash Flow Statement
– is to give clear understanding of sources and usage of cash
– has no given structure
– can use direct or indirect method
It lists separately
–
–
–
–
–
Cash at the Beginning of Period
Cash Flow from Operations
Cash Flow from Investment Activities
Cash Flow from Financial Activities
Cash at the End of Period
Assets
Asset Classification
• Assets are result of completed transactions and
occurrences (purchase, production, exchange)
• Expected or unfinished transactions don’t classify
• Asset books who has disposability rights and
economical benefit
• Ownership is not important
• Current / long-term
Current Assets
Definition:
• Are expected to be disposed within 12 months
• Will be disposed within 1 operational cycle (form raw material
purchase to collection of A/R)
• Cash
Typical Current Assets:
•
•
•
•
•
•
•
Cash and equivalents
Accounts receivable
Current part of long-term receivables
Inventories
Current financial assets
Accruals and deferrals
Assets Held for Sale
Accounting Transactions
Cash purchase of merchandise:
Inventory
Cash
100.00
100.00
Non-cash purchase of merchandise:
Inventory
100.00
Accounts payable
100.00
Payment of debt:
Accounts payable
100.00
Cash
100.00
Each transaction must be recorded with additional information
(date, transaction number, description, person who entered it)
that are here for simplicity reasons omitted
Accounting Transactions
Production of a current asset
Inventory of finished goods
Inventory of raw materials (B/S)
Production expense (P&L)
100.00
Sale of finished goods
Accounts receivable (B/S)
150.00
Revenue (P&L)
Cost of goods sold (P&L)
100.00
Inventory of finished goods (B/S)
Bank account (B/S)
150.00
Accounts receivable (B/S)
40.00
60.00
150.00
100.00
150.00
Evaluation of Current Assets
Accounts receivable
• Provision for bad debts
Inventory
• Manufactured: cost of material, direct labor and allocated
production cost
• Purchased: cost method (purchase price + transport, customs,
etc.) or retail method (retail price – sales margin)
• Inventory: lower cost or market (LCM – the lower of original
price and net realizable value)
• FiFo, weighted average
Current Assets in US GAAP
ARB 43 Chapter 4 Inventory Pricing and IAS 2
Inventories are both based on similar principles:
• Inventory are assets held for sale in the ordinary course of
business
• Primary basis of accounting for inventory is cost
• Both standard cost method or retail method can be used
• Cost of inventory includes all direct expenditures to ready
inventory for sale, including allocable overhead
• Selling costs are excluded from the cost of inventories, as are
most storage costs and general administrative costs
Current Assets in US GAAP
Differences:
• LIFO:
- US GAAP: acceptable
- IFRS: prohibited
• Reversal of write-downs of inventory to the lower of
cost or market:
- US GAAP: creates a new cost basis that cannot be reversed
- IFRS: reversal can be done max. to the original value if
reasons for write-downs no longer exist
Financial Assets
Definition:
• Non-physical assets that derives value because of a
contractual claim that can be readily converted into cash.
• Typically, financial assets are traded on financial markets
• In general, the terms of financial assets may include nonfinancial assets like corn or wheat if they are traded on
financial markets.
Typical Financial Assets:
• Stocks, bonds, securities
• Investment accounts, loans
• Derivates (options, futures)
Financial Assets and the Standards
Both boards are working on standards (IFRS 9, ASC draft
version) in classification and measurement of all financial
instruments to replace existing guidance
• Held to maturity:
- zero coupon allocates the interest income
- mortgage allocates the interest income but also amortizes
for the payments
• Available for sale:
- US GAAP treats decline in fair value in consideration of the
company’s ability to hold the security
- IFRS discounts estimated cash flow for bad debts/credit losses
Zero-Coupon Fair Value Calculation
Interest (r)
Nominal value
(in 5 years)
1000
10%
15%
Present value =
FVn/(1 + r)n
909
870
Coupon Fair Value Calculation
Interest (r)
Year (n)
Net Receipt
(FV)
10%
15%
Present value =
FVn/(1 + r)n
91
87
1
100
2
100
83
76
3
100
75
66
4
100
68
57
683
547
1 000
832
5
1100
Total PV of Cash Inflow
Long-Term Assets
Definition:
•
•
•
•
Are expected to be held for 12 months or longer
Will not be disposed within 1 operational cycle (spare parts)
Tangible / Intangible
Extended use regardless of value
Typical Long-Term Assets:
•
•
•
•
Property, plant and equipment
Long-term receivables
Biological assets
Licenses, SW, copy rights
• Goodwill (must be purchased)
Depreciation
• To show true and honest value of the fixed asset
status
• Straight line or accelerated
• Residual value
• Early retirement, change in accounting estimate
• No major differences between IFRS and US GAAP
Depreciation
• Straight-line depreciation:
(original cost – salvage value) / periods of useful life
• Units-of-production method:
(original cost – salvage value) / estimated units to be
produced
• The sum-of-the-years’-digits (SYD) method
(original cost – salvage value) * (remaining years / SYD)
Example: 5 years = 1+2+3+4+5=15; hence
1st year (original cost – salvage value) * 5/15
2nd year (original cost – salvage value) * 4/15 etc.
• The double declining-balance method
twice the straight-line rate applied to the remaining book
value
Accounting Transactions
Fixed asset purchase:
Crain purchase
Transportation
Assembly costs
Accounts payable
148 000.00
1 000.00
2 000.00
Depreciation:
Depreciation Expense
30 000.00
Accumulated Depreciation
151 000.00
30 000.00
Leasing of Long-Lived Assets
• Leasing contract: temporarily transferred
disposability rights and economical benefits
• To be recorded as long-lived assets of the entity
(except of real estate)
• Capital/finance leases, operational leases
the criteria of a capital lease include
- the transfer of ownership to the lessee at the end of the
lease term
- a purchase option that is reasonably expected to be
exercised
- the lease term duration is for most of the asset’s economic
life
Leasing of Long-Lived Assets
Accounting transactions:
• Leasor:
the asset is taken of the long-lived asset and
becames a note payable from the lasee
• Leasee:
- the leased asset is recognized as an long-lived
asset and liability to the leasor
- use the lower of the present value of the outgoing
payments or the fair market value
- the asset is to be depreciated
Leasing of Long-Lived Assets
Differences in accounting standards:
• Only minor or less important differences between
IFRS and US GAAP
- terminology: capital lease vs. financial lease
- the lease term is a “major part” or “75%” of the asset’s
economic life
- recognition of gain/loss when only a minor part of the right
to use the asset is exercised (IFRS immediately, US GAAP over
the lease term)
• Major difference in Czech standards:
- leased asset is to be kept and depreciated in the owners
books
Intangible Assets
Nonmonetary assets without physical substance, there
are probable future economic benefits that can be
reliably measured
• SW, licenses, copy rights, trade marks
- amortization over its useful life
- development costs can be included only when
demonstrating technical feasibility and ability to complete
and sell the asset in the future
- if there is no foreseeable limit to the period over which it is
expected to generate net cash inflows, the useful life is
considered to be indefinite and the asset is not amortized
• Goodwill (in business combinations only)