Ch 11 Worldwide Accounting Flashcards
IFRS refers to fixed assets as…
Tangible assets
IFRS VS GAAP: presentation of assets
Listed in reverse order if liquidity, starting from intangible assets
IFRS calls receivables…
Debtors
IFRS term for: inventories
Stocks and work in progress
IFRS term for: cash and cash equivalents
Bank balances and other liquid funds
IFRS term for: accounts payable
Creditors
Provisions, where are they found?
Define?
Found in both Noncurrent and current liabilities
Estimated obligations related to warranties and restructuring plans
What order does an IFRS balance sheet report current liabilities, Longterm liabilities and shareholders equity?
1 shareholders equity
2 long term liabilities
3 current liabilities
Share capital
Reflects the par value of common stock
Share premium
Shows the paid in capital in excess of par value
Retained earnings are not…
Reported separately but are included in revenue and other
Reserves
Other reserves
Related to revaluation of assets
IFRS term for: treasury stock
Own shares held
Typical reporting format of operating expenses on the income statement for US companies 6
Sales Less: COGS equals: gross profit Less: selling costs Less: administrative costs Equals: operating profit
Under IFRS material costs on the income statement are reported as? 2
Raw material
Consumables and services
Under IFRS labor costs on the income statement are reported as?
Personnel expenses
How is overhead reported on the income statement under IFRS?
Included in:
Amortization, depreciation and impairments
Personnel expenses includes…2
Wages, salaries and benefits paid to employees involved in
Manufacturing
Selling and administration expenses
On an IFRS income statement, cost of goods sold is…
2) what can therefore not be calculated?
Not reported as s separated amount
2) gross profit can’t be calculated
Foreign companies whose stock is listed on the U.S. stock exchange are required to…
Be registered and file statements with the SEC
For a columbian oil company, some of the largest adjustment entries
To reconcile between IFRS and GAAP included…5
1 nonmonetary assets 2 deferred charges 3 deferred income taxes 4 revenue recognition 5 depreciation, depletion and amortization
5 factors that influence a country’s financial reporting practices
1 legal system 2 taxation 3 financing system 4 inflation 5 political and economic ties
2 major types of legal systems used around the world
1 common law
2 codified roman law
Non English speaking countries typically use what kind of legal system?
Codified roman law (code law)
Code law tends to have…
More statute or codified law governing a wider range of human
Activity
What does a countries code law legal System have to do with accounting?
Code law countries have corporation law (AKA commercial code
Or companies act) establishes legal parameters governing Business enterprise
Accounting rules are established primarily by the government
Instead of the accounting profession
What does a country’s common law legal system have to do with accounting?
In countries with common law (US, UK), the profession or
Independent nongovernmental body establishes accounting rules
In code law countries, the accounting law is rather…
General, not providing specific detail about accounting practices
How is The FASB an extreme case for the United States in a common law country?
Provides an overload of specific details about accounting rules
In some countries what do published financial statements form the basis for?
2) In other countries, financial statements are adjusted for…
Taxation
2) tax purposes and submitted to the government separately
From reports sent to stock holders
Taxation: Germany’s conformity principle (Massgeblichkeitsprinzip), requires in most cases an expense also must be used in…
Calculating financial statement income to be deductible for tax
Purposes
In the US, conformity between the tax statement and financial statements is required…
Only for use of LIFO cost flow assumption
US companies are allowed to use accelerated depreciation for…
2) And strait line depreciation for…
tax purposes
2) financial statement purposes
Well managed German companies attempt to minimize income for tax purposes by…
Using accelerated depreciation to reduce their tax liability
US vs. Germany company income reporting
US company is likely to report higher income than German
counterpart
Major providers of financing for business enterprises 4
1 family members
2 banks
3 governments
4 shareholders
Countries in which families, banks or state dominate company financing have…
Less pressure for public accountability and information disclosure
Banks and the state often are represented on the board of
Directors and therefore are able to…
Obtain information necessary for decision making from inside
The company
Stockholder’s are more interested in a company’s…
2)banks are more interested in a company’s…
Profit
2) solvency and liquidity (emphasis on balance sheet)
Banker prefer companies to practice…
Rather conservative accounting with regard to assets and
Liabilities
Countries with chronically high rates of inflation have been forced to adopt accounting rules that require…
Inflation adjustment over historical cost amounts
Ex. Latin America
Double and triple digit inflation rates render historical cost…
Meaningless
Countries with economic ties (NAFTA)…
Influence each other’s accounting practices
Gray: 2 ways a country’s societal values influence its accounting system
1 help shape a country’s institutions: legal system, capital markets,
Financing system
2 influence accounting values shared by members of accounting
Subculture, influencing the nature of the accounting system
Gray argues, In a society with low tolerance for uncertainty exists accountants prefer…
2) high power and high secrecy society, that prefer to maintain
Inequality in society prefer…
More conservative measures of profits and assets
2) provided minimal disclosure on financial statements
Nobes 1998 model gave 2 explanatory factors for international accounting diversity
1 national culture including institutional structures
2 nature of country’s financing system
Nobes: Class A accounting system
Used by countries with strong equity outsider financing system
System is less conservative, provides more disclosure and
Doesn’t follow tax rules
Nobes: Class B accounting system
Accounting is more conservative, disclosure is not extensive,
More closely follows tax rules
In countries with weak equity outsider financing system
Nobes argued, Many countries in the developing world are culturally…
Dominated by another country (could be one they were colonized
By)
Nobles argued, Culturally dominated countries use the accounting system of…
The dominating country regardless of the nature of their equity
Financing system
Ex. African countries use British system
Nobes argued that as a financing system in a country evolves from weak equity to strong equity, the accounting system evolves to…
class A accounting system
Ex. China
Financial reporting problem for multi nationals
Diverse accounting practices make consolidation of financial
Statements difficult for these companies
Involves currency adjustments and Reconciliations to US GAAP
Ex. Coca cola operates in 40 countries, each sub must prepare
Financials in compliance with local regulations
Problems with diverse accounting systems internationally 3
1 currency difference
2 costs of converting to public ally trade in foreign markets
3 comparability
most important organization for convergence of international financial reporting standards
2) What organization did it sucked in 2001?
International Accounting Standards Board
2) International Accounting Standards Committee
organization that is composed of over 100 stock exchange regulators including the SEC
1 International Organization of Securities Commissions IOSCO
Primary objective of IOSCO
Facilitate cross-border securities offerings and listings by
Multinational issuers
Primary responsibility of IASB
International Accounting standard-setting responsibilities
How many members does the IASB consist of?
2) how many are full Time?
16
2) 13
3 authoritative pronouncements that make up IFRS
1 IFRS standards issued by the IASB
2 International Accounting standards (IASs) issued by IASC
And adopted by IASB
3 interpretations originated by the Standing Interpretations Committee (SIC until 2001) and the Intl. Finl. Reporting Interpretations Committee (IFRIC)
Under the new structure the IASB has sole responsibility for establishing…
IFRS
IASB Framework states that the objective of financial statements is to provide information about…
1 Financial position
2 performance and changes in financial position that is useful to
A wide range of decision makers
4 uses of IFRS
A country can…
1 adopt IFRS as its nation GAAP
2 require domestic listed companies to use IFRS in preparing their
Consolidated financial statements
3 allow domestic listed countries to use IFRS
4 require or allow foreign companies listed on domestic stock
Exchange to use IFRS
As of June 2012, what number of countries out of 153 countries required companies listed on the domestic stock exchange to use IFRS?
Significant region of the group?
92
All 27 EU countries use IFRS
Companies using US GAAP, when did they begin using IFRS?
2007
In most cases, EU companies continue to use…
Domestic GAAP to prepare parent company financial statements
Which often serves as basis for taxation
China, accounting standards
In 2006, China adopted completely new set of Chinese Accounting
Standards that’s based on IFRS
2 primary methods countries use to incorporate IFRS into their financial reporting requirements
1 full adoption of IFRS, without review or approval by local body
2 adoption of IFRS, with some national or multinational review
Process
EU financial reporting is in full compliance with IFRS, with only one exception?
IAS 39 “Financial Instruments Recognition and Measurement”
2 objectives of FASB-IASB convergence
1 make existing financial reporting standards fully compatible
As soon as practicable
2 after compatibility is achieved make sure it stays maintained
Significance of the Memorandum of Understanding (MoU) between FASB and IASB in 2006
Any accounting standards that need improvement should be
Replaced with new jointly developed standards
4 Significant convergence projects in 2013
1 Leases
2 Insurance contracts
3 Financial instruments
4 Revenue recognition
SEC acceptance of IFRS
In 2007, SEC allows foreign companies listed in the US stock
Exchange to report in compliance with IFRS instead of US GAAP
First time adoption of IFRS:
Step 1- determine Applicable IFRS Accounting Policies Based on Standards in Force on Reporting Date
Companies must knew 2 years in advance what the applicable
Standards will be on the reporting date
First time adoption of IFRS:
Step 2: Recognize assets and liabilities required to be recognized under IFRS that were not recognized under previous GAAP and derecognize assets and liabilities previously recognized that are not allowed to be recognized under IFRS
Give example 2
Deferred development costs can be recognized under IFRS but
Not GAAP
US GAAP company would need to check if intangible meets
The definition of IFRS intangible
First time adoption of IFRS:
Step 3: Measure assets and liabilities Recognized on the opening balance sheet in accordance with IFRS
Entity must retroactively apply applicable IASB standards to
Each asset and liability
Ex. Change from LIFO to FIFO
First time adoption of IFRS:
Step 4: Reclassify Items Previously Classified in a different manner than what is acceptable under IFRS
Examples 2
Deferred tax assets are current and Noncurrent under GAAP
but only classified as Noncurrent under IFRS
Convertible debt is classified as liability under GAAP, but classified
As equity under IFRS
First time adoption of IFRS:
Step 5: comply with all disclosure and presentation requirements,
IFRS 1 must be followed
IFRS 1 requires 2 reconciliations for the first set of IFRS financial statements…
1 reconciliation of total equity measured under previous GAAP
to total equity under IFRS
2 reconciliation of net income measured under previous GAAP
to net income measured under IFRS for the comparative period
IFRS 1 also requires disclosures explaining the company’s…
Adoption of IFRS, including notes to accompany IFRS
reconciliations
Reconciliation of total equity measured under previous GAAP to total equity measured under IFRS at…2
1 date of transition to IFRS
2 the end of the comparative period
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”
Establishes what?
Hierarchy for determining accounting policies
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”
What are the 4 steps in IFRS Accounting Policy hierarchy?
1 apply specific relevant standards (IASs, IFRSs) dealing with accounting issue
2 refer to IASB standards on similar issues
3 refer to definitions, recognition criteria, measurement concepts
In IASB
4 consider most recent standard setting pronouncements
aspects of the IFRS accounting Policy hierarchy that are noteworthy:
Framework is specifically listed as part of hierarchy and must be consulted before considering…
Sources of guidance in recent pronouncements
aspects of the IFRS accounting Policy hierarchy that are noteworthy:
Because FASB and IASB conceptual frameworks are similar, step 4 (new pronouncements) provides an opportunity for entities to…
Adopt FASB standards in dealing with accounting issues
Where step 1 and 3 aren’t helpful
In establishing accounting policies to be followed under IFRS, the 2 extreme approaches companies can follow are?
1 minimize change
2 fresh start
Minimize change
Company adopts accounting policies consistent with IFRS that
Are most consistent with current accounting policies
Less costly to implement than fresh start approach
Fresh start
Company ignores current accounting policies and adopts
accounting policies consistent with IFRS
That best reflect economic reality
3 classifications of differences between IFRS vs GAAP
1 recognition differences
2 measurement differences
3 presentation and disclosure differences
Several differences between IFRS and GAAP relate to 3 things
1 whether an item is recognized or not
2 how it is recognized
3 when it is recognized
According to IAS 38, development costs must be recognized as…
An internally generated intangible asset when certain criteria are
Met
According to IAS 38, deferred development costs are are amortized…
Over their useful life but not to exceed 20 years
Development costs include (all costs that can be allocated to development activities) 5
1 personnel costs 2 materials and services costs 3 depreciation on fixed assets 4 amortization on patents and licenses 5 overhead/general administrative costs
The types of development costs that might qualify as internally generated intangible assets under IAS 38 include…6
1 Computer software costs 2 patents and copyrights 3 customer or supplier relationships 4 market share 5 fishing licenses 6 franchises
What does IAS 38 exclude from intangible assets? 4
1 brands
2 advertising costs
3 training costs
4 customer lists
4 major recognition differences between IFRS and GAAP
1 intangibles
2 gains on sale and leaseback transactions
3 past service costs related to vested pension benefits
4 deferred tax assets
IFRS VS GAAP:
Inventory: cost flow assumption
IFRS: LIFO not allowed
GAAP: LIFO allowed
IFRS VS GAAP:
Inventory: Market in Lower of cost or market rule
IFRS: net realizable Value
GAAP: replacement cost (with ceiling and floor)
IFRS VS GAAP:
Reversal of inventory write down
IFRS: Required if certain criteria are met
GAAP: not allowed
IFRS VS GAAP:
Property, plant and equipment: measurement subsequent to acquisition
IFRS: based on historical cost or revalued amount
GAAP: based on historical cost
IFRS VS GAAP:
Property, plant equipment: major inspection or overhaul costs
IFRS: generally capitalized
GAAP: either capitalized or expensed
IFRS VS GAAP:
Indication of asset impairment
IFRS: asset’s carrying value exceeds higher of its 1) value in
Use (discounted expected future cashflows)
or 2) fair value less costs to sell
GAAP: Asset’s carrying value exceeds the undiscounted expected
Future cashflows from the asset
IFRS VS GAAP:
Subsequent reversal of an impairment loss
IFRS: required if certain criteria are met
GAAP: not allowed
IFRS VS GAAP:
Construction contracts: method used when percentage of completion not appropriate
IFRS: cost recovery method
GAAP: completed contract method
IFRS VS GAAP:
Research and Development costs: Development costs
IFRS: capitalized if certain criteria are met
GAAP: expensed immediately, except computer software
Development
IFRS VS GAAP:
Leases: Recognition of gain on sale and leaseback on an operating lease
IFRS: recognized immediately
GAAP: amortized over the lease term
IFRS VS GAAP:
Pensions: recognition of past (prior) service costs related to benefits that have vested
IFRS: recognized immediately
GAAP: amortized over the remaining service period or life
expectancy
IFRS VS GAAP:
Income taxes: recognition of deferred tax assets
IFRS: recognized only if realization of tax benefit is probable
GAAP: always recognized but a valuation allowance is provided
IFRS VS GAAP:
Consolidated financial statements: different accounting policies of parent and subsidiaries
IFRS: must conform policies
GAAP: no requirement to conform policies
IFRS VS GAAP:
Classification of deferred taxes
IFRS: always Noncurrent
GAAP: split between current and Noncurrent
IFRS VS GAAP:
Presentation of extraordinary items
IFRS: not allowed
GAAP: required when certain criteria are met
IFRS VS GAAP:
Definition of a “discontinued operation”
IFRS: reportable business or geographic segment
GAAP: reportable segment, operating segment, reporting unit,
Subsidiary, or asset group
IFRS VS GAAP:
Interim reporting
IFRS: interim period treated as discrete accounting period
GAAP: Interim period treated as integral part of full year
IFRS VS GAAP:
Statement of cashflows classification of: interest paid
IFRS: operating or financing
GAAP: operating
IFRS VS GAAP:
Statement of cashflows classification of: interest received
IFRS: operating or financing
GAAP: operating
One of the greatest measurement differences between IFRS and GAAP is found in IAS 16…
“Property, Plant and Equipment”
IAS 16 Property, Plant and Equipment, allows companies to choose between what 2 approaches for assets subsequent to acquisition?
1 the cost model
2 the revaluation model
Measurement differences between GAAP and IFRS, 2 mentioned in text
1 inventory
2 property, plant, equipment
Firms using IFRS must capitalize development costs as an intangible asset when they can demonstrate what 6 things?
1 technical feasibility of completing the project
2 intention to complete project
3 ability to use or sell intangible
4 intangible will generate future benefits
5 availability of adequate resources to complete the asset
6 ability to measure development costs associated with intangible
Biggest difference between IFRS VS GAAP in the presentation of financial statements
IFRS has a single standard: IAS 1 “presentation of financial
Statements”
GAAP has no equivalent to this standard
IAS 1 “Presentation of Financial Statements” (guideline)
- Purpose of financial statements
Financial statements provide info about financial position,
Financial performance, cash flows
Useful to economic decision makers
IAS 1 “Presentation of Financial Statements” (guideline)
- Overriding principle of fair presentation
Financial statements should fairly present entity’s financial
position, financial performance and cashflows
Compliance with IFRS ensures fair presentation, although
In rare circumstances entity may need to depart from IFRS to
Show fair presentation
IAS 1 “Presentation of Financial Statements” (guideline)
- Basic principles and assumptions: IAS 1 emphasizes…5
1 going concern assumption 2 accrual basis 3 consistency principle 4 comparability 5 separate presentation of material items
IAS 1 “Presentation of Financial Statements” (guideline)
- Components of financial statements: IAS 1 requires a complete set of financial statements to include…5
1 statement of financial position (balance sheet)
2 statement of comprehensive income
3 statement of changes in equity
4 statement of cashflows
5 accompanying notes and summary of significant accounting
Policies
IAS 1 “Presentation of Financial Statements” (guideline)
- Structure and content of financial statements: IAS 1 provides guidance with respect to the structure of each financial statement and prescribes 2 items that must be presented…
1 on the face of financial statements
2 either on the face of financial statements or disclosed in the
Notes
What approach has the IASB taken to setting accounting standards?
2) what approach has FASB taken?
Principles based
2) FASB has taken a rules-based approach
Principles based vs. Rules based
Principles based provide more general guidance and require
A greater degree of professional judgment
Rules based are more specific
Bright lines
Body do detailed guidance (rule based)
What example demonstrates the difference between principle vs. Rule approach
Development costs
IFRS has guidance for whether they should be amortized, and
GAAP requires them to be expensed
The hall mark of principle based standards are that they do…
Not need to provide exceptions
In 2007, What percentage of global market capitalization companies used IFRS? Used GAAP?
55% used IFRS
35% used GAAP
Obstacles of world wide comparability of financial statements
1 language
2 cultural
Harmonization
Process of reducing differences in financial reporting across
Countries
Thereby increasing comparability of financial statements
IFRS 1 requires the preparation of an opening IFRS balance sheet…
2 years prior to when company publishes its first set of IFRS
financial statements
