Harmonisation Of ing Standards 1md6p

Financial Reporting International Harmonisation of ing Standards

Learning Outcomes  Describe how the changing world environment is leading to an increased focus on international ing standards.  Explain some differences in ing methods as they are applied internationally.  List five major classifications of ing models used in different geographical regions.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Learning Outcomes  Describe the role of the International ing Standards Committee (IASC) and the International ing Standards Board (IASB) in establishing international ing standards.  Describe the advantages of International Harmonisation of ing Standards

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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The Increasing Importance of International ing Standards  Beginning in 2005, the European Union (EU) mandated that ing standards for companies listed in its securities markets conform to International Financial Reporting Standards (IFRS). In 2006, the total value of cross-border transactions in bonds and equities was $90 trillion U.S. dollars annually. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Importance of International ing Standards Composition of the Global Equity and Debt Markets by Each Country’s Domestic Securities

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Importance of International ing Standards Composition of the Global Equity and Debt Markets by Each Country’s Domestic Securities

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Importance of International ing Standards Holdings of U.S. and Foreign Securities, 1994–2004 Market Value of Holdings of U.S. and Foreign Securities, 1994-2004

Foreign holdings of U.S. securities (1.2 to 6 trillion increase) U.S. holdings of foreign securities (870 billion to 3.5 trillion increase)

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Importance of International ing Standards The demand for uniform international ing 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 standards to determine credit quality and bankruptcy risk.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Harmonisation of Worldwide ing Standards Financial ing practices, required disclosures, and auditing requirements which are not uniform across countries. Variations exist in the ing for: 

Goodwill.



Business combination methods.



Tax allocation.



LIFO inventory costing.



Development costs.



Use of reserves

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Harmonisation of Worldwide ing Standards The International ing Standards Committee (IASC) was founded in 1973. 

41 standards were issued by January 2001.



In 2001, the IASC announced formation of the International ing Standards Board (IASB).  Goal is to develop high-quality internationally accepted ing standards.  Issues standards known as International Financial Reporting Standards (IFRS).

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Harmonisation of Worldwide ing Standards Harmonization of ing standards were enhanced with the formation of this International ing Standards Committee (IASC). 

In 2002, the FASB and IASB agreed to begin converging U.S. GAAP to 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.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Advantages of International Harmonisation of ing Standards To International Investors - Ability to make useful and meaningful comparisons of investments portfolios in different countries. To multi national companies: Easy consolidation of financial statements. Better management control would be improved, because harmonisation would aid internal communication of financial information. Appraisal of foreign enterprise for takeovers and mergers would be more straightforward. It would be easier to comply with the reporting requirements of overseas stock exchanges. A reduction in audit costs might be achieved. Transfer of ing staff across national boarders would be easier. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Advantages of International Harmonisation of ing Standards Governments and National standard setting bodies Countries would save time and money as they can just adopt International ing Standards in full. Ability to counter transfer pricing by multinational companies as these companies could not ‘hide’ behind foreign ing practice which are difficult to understand. Easy to calculate the tax liability of investors, including multinationals who receive income from overseas sources. Ensures availability of high quality and well-researched standards to countries which otherwise could not have afforded to issue standards. Ensures ability and transparency of operations of enterprises in different countries. Assist governments in attracting international investors as adoption of IAS enables international investors easy monitoring of overseas investments. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Advantages of International Harmonisation of ing Standards Regional economic groups: Promotion of trade within the region through common ing practices. Ability to compile meaningful data on the performance of various enterprises within the region.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Advantages of International Harmonisation of ing Standards Standardisation Develop, in the public interest, a single set of high quality understandable and enforceable global ing standards that require high quality transparent and capable information in financial statements and other financial reporting to help the participants in the various capital markets of the world and other s of the information to make economic decisions. Promote the use and rigorous application of those standards. Work actively with national standards-setters to bring convergence of national ing standards and International Financial Reporting Standards (IFRS) to high quality solution. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Obstacles of International Harmonisation of ing Standards the size of the present differences between the ing practices of different countries. 

 lack of strong professional ancy bodies in some countries, and the differences in political and economic systems.  Nationalism poses a threat to harmonisation as countries are wary of possibility of control of their ing regulation to outsiders, especially if it is perceived as replacing their own ing regulations with those of other countries.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Obstacles of International Harmonisation of ing Standards Difference in ing measurement rules provide insufficient information to enable reports to be universally understood and interpreted. Countries have substantial economic and cultural differences that preclude simple interpretations, even when the figures are generated using the same ing principles because ing standards in any society are an outgrowth of that society's needs and perspectives. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Obstacles of International Harmonisation of ing Standards Coordination of their ing policies with policies prevailing in other countries in order to minimize negative externalities and to maximize positive externalities.  s might have different needs in different nations (e.g., debtor vs. creditor nations; countries that have very active stock markets and those where banks primarily accumulate and invest capital; investor vs. investee countries; etc.). BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Obstacles of International Harmonisation of ing Standards divergence between the needs of large multinationals and smaller business entities in developing countries might spoil the harmonisation of ing standards. 

different levels of sophistication and influence among different national ing professions. high cost of requiring issuers to change ing principles, or to keep a "separate set of books" for multinational offerings. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Differing ing practices could result in the same economic event being reported differently. Differences in Net Income and Equity due to Differing GAAP

= ROE

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Format and Terminology Differences 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 which GAAP is being used.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Format and Terminology Differences Examples of terminology differences:

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Format and Terminology Differences Various formats are allowed in 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 assets. BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Review: 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.

False

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Review: In the United Kingdom, stock refers to common stock.

False, stock refers to inventory

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Comparative ing Models Review: Since 2005, all European Union companies listed on a regulated market are required to prepare consolidated s in accordance IFRS ing standards.

True

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Classification of International ing Models Five Major Geographical Classifications: Type of ing Practice

Region

Anglo-Saxon

United States

Anglo-Saxon

United Kingdom

German

, Switzerland

Latin

, Italy, Brazil

Asia-Pacific

Japan, China

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Classification of International ing Models ing Standards in the United Kingdom 

Standards referred Standards (FRS).



Issued by the ing Standards Board (ASB).



The ASB strongly s the IASB.



ASB is considering a full conversion to IFRS implementation that would require companies to comply completely by January 1, 2009.

BM0157-3.5-2 Financial Reporting

to

as

Financial

Provision, Contingent Liabilities and Assets (FRS 137)

Reporting

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Classification of International ing Models ing Standards in 

Historically, standard setting has been the responsibility of the Federal Ministry of Justice (FMJ).



In 1998, FMJ recognized a new independent body, the German ing Standards Board (GASB).



As of 2005, preparation of financial statements according to IFRS became mandatory for public companies.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Classification of International ing Models ing Standards in Japan 

In February 2001, the  Financial ing Standards Foundation (FASF) and ing Standards Board (ASB), were formed to develop ing standards.



ing Standards Board has been working with the IASB in a path toward standards convergence. It plans to reconcile these differences to IAS by 2008.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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International Reporting Issues Treatment of Goodwill 

Since June 30, 2001, goodwill is expensed if impaired under 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.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

only

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International Reporting Issues Treatment of Goodwill 

Since June 30, 2001, goodwill is expensed if impaired under 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.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

only

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International Reporting Issues Inventories 

LIFO is not acceptable under IAS.



IASB recommends specific cost. If specific cost is not determinable, the benchmark is FIFO or weighted average.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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International Reporting Issues Research and Development 

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 expensed as incurred.  Development costs are capitalized when a product is determined to be commercially feasible.  Purchased R&D costs are capitalized and amortized.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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International Reporting Issues Business Combinations 

Purchase method required under U.S. GAAP.



Purchase method required under International ing Standards (IAS).

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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International Reporting Issues Fixed Assets and Depreciation 

In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States).



Under IAS 16, fixed assets are initially valued at cost. Subsequently, they can be valued under either the:  Cost model, or the  Revaluation model.

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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International Reporting Issues 

In several countries, fixed assets are valued at depreciated historical cost (Japan and the United States).

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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Question and Answer Session

Q&A BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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THANK YOU

BM0157-3.5-2 Financial Reporting

Provision, Contingent Liabilities and Assets (FRS 137)

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