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11
International Accounting and the
Global Economy
Advanced Accounting, Fifth Edition
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Learning Objectives
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1.
Describe how the changing world environment is leading to an increased
focus on international financial reporting standards (IFRS).
2.
Explain some of the major differences between IFRS and U.S. GAAP.
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.
The Increasing Importance of International
Accounting 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.
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LO 1 Increased focus on International Accounting Standards.
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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LO 1 Increased focus on International Accounting Standards.
The Road To Convergence-U.S. GAAP and 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.
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LO 1 Increased focus on International Accounting Standards.
The Road To Convergence-U.S. GAAP and 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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LO 3 SEC milestones to be achieved for adoption of IFRS.
The Road To Convergence-U.S. GAAP and IFRS
Work Plan for Incorporating IFRS
The work plan for incorporating IFRS into the financial reporting system
includes:
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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).
LO 4 SEC’s work plan for incorporating IFRS
The Road To Convergence-U.S. GAAP and IFRS
Improvement in Accounting Standards
It is important that the accounting standards
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
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 1 Increased focus on International Accounting Standards.
The Road To Convergence-U.S. GAAP and IFRS
Accountability and Funding of the IASC Foundation
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.
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LO 1 Increased focus on International Accounting Standards.
The Road To Convergence-U.S. GAAP and IFRS
Ability to Use Interactive Data For IFRS Reporting
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.
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LO 3 SEC milestones to be achieved for adoption of IFRS.
The Road To Convergence-U.S. GAAP and IFRS
Education and Training
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.
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LO 3 SEC milestones to be achieved for adoption of IFRS.
The Road To Convergence-U.S. GAAP and IFRS
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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LO 4 SEC’s work plan for incorporating IFRS
The Road To Convergence-U.S. GAAP and IFRS
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
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remainder of the world.
LO 4 SEC’s work plan for incorporating IFRS
The Road To Convergence-U.S. GAAP and IFRS
Timing of Future Rulemaking by the Commission
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.
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LO 4 SEC’s work plan for incorporating IFRS
Significant Similarities and Differences
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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LO 2 Differences between IFRS and U.S. GAAP.
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.
GAAP Hierarchy-U.S. Versus IFRS
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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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
Similarities and Differences between FASB and IASB
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
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LO 2 Differences between IFRS and U.S. GAAP.
GAAP Hierarchy-U.S. Versus IFRS
IFRS Financial Statements Illustrated
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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
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LO 5 Three major convergence topics for IFRS and FASB.
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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LO 5 Three major convergence topics for IFRS and FASB.
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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LO 5 Three major convergence topics for IFRS and FASB.
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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LO 5 Three major convergence topics for IFRS and FASB.
Revenue Recognition Convergence
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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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.
LO 5 Three major convergence topics for IFRS and FASB.
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 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
performance obligation is satisfied by transferring goods or services.
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LO 5 Three major convergence topics for IFRS and FASB.
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
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this project at a later date.
LO 5 Three major convergence topics for IFRS and FASB.
Current and Potential Changes to Financial 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 do 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.
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LO 5 Three major convergence topics for IFRS and FASB.
Current and Potential Changes to Financial 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).
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LO 5 Three major convergence topics for IFRS and FASB.
Proposed
Statement of
Financial
Position
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How the Financial Statement Might 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.
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LO 5 Three major convergence topics for IFRS and FASB.
How the Financial Statement Might 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.
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LO 5 Three major convergence topics for IFRS and FASB.
International Convergence 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.
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International Convergence 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.
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LO 7 The role of form 20-F.
International Convergence 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
1. reconcile net income and the shareholders’ equity, thus
showing earnings based on U.S. GAAP; or
2. fully disclose all financial information required of U.S.
firms.
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LO 7 The role of form 20-F.
International Convergence 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.
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American Depository Receipts (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.
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LO 8 The role of American Depository Receipts.
American Depository Receipts (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.
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LO 8 The role of American Depository Receipts.
American Depository Receipts (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.
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LO 8 The role of American Depository Receipts.
American Depository Receipts (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.
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LO 8 The role of American Depository Receipts.
American Depository Receipts (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.
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LO 8 The role of American Depository Receipts.
Copyright
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