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Costco Whole sale MNC

PLEASE MAKE SURE THAT YOU ADD ALL THE INFORMATION THAT IS ATTACHED . THERE IS ALSO QUESTIONS THAT NEEDS TO BE ANSWERED THAT HAS NOT BEEN COMPLETED. BY ANSWERING THE QUESTION IT WILL ALSO HELP YOU COMPLETE THE PROJECT.

PLEASE USE ALL OUT SIDE RESOURCE TO HELP COMPLETE THIS PROJECT.

THE FIRST ATTACHMENT HAS INFORMATION THAT MUST BE ADDED IN THE PROJECT IN THE CORRCT AREAS.

1. MNC PROJECT REPORT

At the end of the semester you are required to write a five to six page report summarizing all the concepts of IFRS and international accounting issues as they relate to your selected MNC. IT IS NOT A 10K SEC PROJECT REPORT. This report is to be written in your own words and double spaced. What you are being asked to do is to capture the experience of the research that you did on your selected MNC. DO NOT quote from sources; just write what you learned about your MNC. I do not expect APA style re format or references. It’s just an essay; look at your report as if you were telling the reader a story. Also, make sure that you include in your summary if you enjoyed the research and anything extra you may have learned about your MNC because of the research. This report is to be posted in your assignment folder.

HOMEWORK ASSIGNMENTS: week 2

Question

s PLEASE ANSWER THESE QUESTION TO HELP WITH THE PROJECT

· How does harmonization differ from convergence?

· Are you for or against convergence and why? Write a short, one-paragraph statement supporting your position.

I will provide a summary of your positions at the end of the week.

· MNC Assignment

· On what exchange(s) is(are) your MNC listed? What are its call letters?

· Look at your MNC’s most recent published annual report. Are the consolidate financial statements in conformity with U.S. GAAP? IFRS?

HOMEWORK: week3

There are two assignments this week…

Question

Select any two of the IAS or IFRS standards presented this week, identify which two you have selected and then discuss how your MNC handles the standards. Post your response in this week’s forum so that everyone can benefit from your posting and also provide their comments

ANSWER:

Discussion on IAS 1

IAS 1 describes the presentation of financial statements, which is usually closely accompanied by IAS 34, which is interim financial reporting, and IAS 7 that guides the Statement of cash flows. Financial statements comprise assets, liabilities, equity, income and expenses, cash flows, and notes to the financial statements. IAS 1 outlines what a financial statement should look like in terms of structure and utilization of concepts such as going concerned of an institution and differentiating short- and long-term assets or liabilities. IAS 1 ensures that financial statements are prepared and presented concerning International Financial Reporting Standards (IFRSs), which is essential for the users of financial information such as investors in making decisions about their investment.

How Costco handles IAS 1

Multinational corporations which include Costo utilize this standard because it is vital most in the preparation of their financial statements. Costco must obey the double entry concept in preparing the financial statements (Hoyle, J. B 2018).

Discussion on IAS 24.

1. IAS 24 Related Party Disclosures tries to outline when a person or entity is related to an entity preparing its financial statements. Disclosures are done concerning related party relationships and transactions, commitments done between entities and related parties, identifying circumstances when disclosure of related party is required, and determining related party transactions. Additionally, IAS 24 is attached to IAS 8 is an essential part of disclosures. It provides transparency on financial statement issues whereby it guides on selecting accounting policies, accounting for changes, dealing with changes in accounting estimates, and correcting errors. IAS 24 is also attached to IAS 10, which outlines when an entity should conduct changes to the financial statement after the balance sheet date with the necessary disclosures that are required to be made.

1. How Costco handles IAS 24

1. A multinational corporation like Costco needs to make all the reacted party transactions according to IAS 24 to ensure transparency to the various stakeholders this is done by disclosing the facts of the value of assets in a company. (Ignat, I 2019).

1. Accounting diversity refers to the differences in bookkeeping and financial statements whereby different countries hold different principles; hence it varies from one country to another. Due to accounting diversity, it isn’t easy to interpret different financial statements due to the different legislation by parliaments of those countries. Legal systems are one of the factors that result in accounting diversity due to complicated legal systems encountered.

1. Part two of Homework week 3

Answer

this questions pick two.

1. There are six major reasons for accounting diversity throughout the world:

1. Legal systems

1. Taxation

1. Sources of financing

1. Inflation

1. Political and economic ties

1. Culture

Two additional factors to consider

1. Level of economic development

1. Education

Select which one factor has exerted the greatest influence on the development of accounting (in general you are not focusing on a specific country) in your opinion and why. Again, post your homework in this week’s forum. Once everyone has submitted their response, I will post a summary of your opinions and also include my own along with previous author’s opinions.

Homework Assignment week 4 part 1

Question

Research your MNC and report on any accounting issues covered in this chapter related to foreign currency transactions and hedging activities. Post your report in this week’s discussion area by nlt Saturday evening. By the end of Week 4, you are required to also respond to at least one other post. If someone asks a question of you, please take the time to also respond to those questions

Answer

.Costco wholesale is an international business enterprise that operates internationally. Being a global organization, the organization has issues when it comes to financial statement disclosures. It is brought about by different use of currencies in other continents. Presentation of financial statements becomes an issue since all financial statements must be computed in one economic value. In this case, if the organization is to use the dollar as the means of disclosing financial statements, all other branches have to publish their financial comments in dollar form. It means that they have to exchange their values for the dollar to ensure the financial statements’ consistency. The result is that currency value keeps changing with time and is not essential for organizations operating in different economic zones. An increase in the value of a foreign currency will result in a foreign exchange gain on a foreign currency receivable and a loss on a payable. The vice versa is also true (Kim 2017).

Homework Assignment week 4 part two

question

Read up and research this new standard and write a paragraph or two (in your words) on any issue that you find interesting or intriguing. Please cite your source(s). You should also include reflection on your MNC and the impact, if any, it will have. Post your report in this week’s discussion area by nlt Saturday evening under the Foreign Currency Exposure & Revenue Recognition topic.

The new rule will provide direction applicable to accounting for revenue for an entity that arises from an agreement with a client to transference goods and agreements to handover non-financial assets, except those contracts are within the scope of other guidance. In the case study, this will help acknowledge the transfer of goods from the organization to the customer. It is based on the principle that a reporting entity should distinguish revenue to portray the handover of goods promised to customers in an amount that replicates the deliberation to which the wholesale expects to be entitled in exchange for goods. For this new rule, it is essential to note that all organizations that contract with clients to allocate goods will be impacted in some way by the new administration, except the agreement is expected explicitly from application to the revenue standard. It means that Costco Wholesale will be affected in a way, and they should look at ways to advance on their reporting issues (Dixon, Odoner & Alterbaum 2017).

Running Head: INTERNATIONAL ACCOUNTING
1

Accounting Exercise
2

Antonia Davis

Week 1 Homework & Lecture Notes

Question: Why might a company be interested in investing in an operation in a foreign country (foreign direct investment)?

There are several reasons why a company might want to invest in foreign markets. Investing in rapidly growing markets could lead to increased sales and revenues. The costs of doing business could be less in these foreign markets. Companies could see an investment in a foreign market as protecting their domestic market or protecting a foreign market. Finally, investing in a foreign market could lead to new technological developments or new ways of conducting business.

The New York Stock Exchange (NYSE) provides a list of non-U.S. companies listed on the exchange on its Web site (www.nyse.com). (Hint: Search the internet for “NYSE List of Non-U.S. Listed Issuers.”)

Required:

a) Determine the number of foreign companies listed on the NYSE and the number of countries they represent.

There are about 508 New York Stock Exchange as well as NYSE MKT non United States companies which are listed in the NYSE; these foreign companies represent Issuers from 46 Countries.

b) Determine the five countries with the largest number of foreign companies listed on the NYSE.

Five countries with the largest number of foreign companies which are listed on the NYSE include, CANADA 132 non-ADR issuers, CHINA 63ADR &16 NON-ADR ISSUERS, UNITED KINGDOM 24 common ADR, 16 non-ADR & 1 preferred ADR issuers, BRAZIL 31 & 4 non-DR issuers and BEMUDA 19 non-ADR & 2 preferred issuers.

c) Speculate as to why non-U.S. companies have gone to the effort to have their shares listed on the NYSE.

Non-United States companies have actually made an effort of going a notch higher to have their shares listed on the NYSE mostly due to the fact that the NYSE is bullish and as such it tends to trade the highest number of shares, it also has an immense access to the wider European markets.

Assignment Question:

Some have advocated that a single widely spoken language be designated as the formal international accounting language. What language would you select and write a one-paragraph statement supporting your choice.

English is already the leading language of global business. It’s the fastest spreading language in human history and is spoken by 1.75 billion people worldwide. There are about 385 million native speakers, a billion fluent speakers in formerly colonized nations, and millions that have learned English as a second language. In addition it is used by 565 million people on the internet. If foreign companies want to do business in the U.S. or many other countries around the world, English is going to be their best bet.

Exercise: Take a look at your adopted MNC …in what countries does it do business. Then identify if those countries are common law, code law or bi-juridical (civil and common). Finally select one of the environmental factors listed below and in a short paragraph relate it to your MNC.

Environmental Factors


Cultural


Economic


Legal


Political

United States
Common

Canada

Common

Mexico
Civil

United Kingdom
Common

Japan

Civil

South Korea
Civil

Taiwan

Civil

Australia
Common

Spain

Civil

France

Civil

Economic factors can adversely affect Costco’s business, financial condition, and results of operations. Higher energy and gasoline costs, inflation, levels of unemployment, healthcare costs, consumer debt levels, foreign currency exchange rates, unsettled financial markets, weaknesses in housing and real estate markets, reduced consumer confidence, changes related to government fiscal and tax policies, sovereign debt crises, and other economic factors could adversely affect demand for their products and services or require a change in the mix of products they sell. Prices of certain commodity products, including gasoline and other food products, are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, market speculation, government regulations, taxes and periodic delays in delivery. Rapid and significant changes in commodity prices may affect Costco’s sales and profit margins. These factors could also increase their merchandise costs and selling, general and administrative expenses, and otherwise adversely affect their operations and financial results.

INVESTOR RELATIONS OVERVIEW. (n.d.). Retrieved January 7th, 2021, from Costco Wholesale Corporation website: https://investor.costco.com

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WEEK 2

International Harmonization and International Financial Reporting Standards (IFRS)

IFRS Standards: Why do they matter?*

Financial Reports for the World Economy

· It is the life blood of capital markets

· Investors need information they can trust in cross-border investments.

IFRS – the global language of financial reports.

Why do they matter…three key benefits:

1. Transparency

a. High quality, comparable information

2. Accountability

a. Reduces the information gap between insiders and those outside the company

3. Efficiency

a. Single trusted global standard: lowers the cost of capital & reduces reporting costs

IFRS contributes the following to the global economy:

· Trust

· Growth

· Long-term financial stability

*Source: IFRS.com

Our focus this week is on major harmonization efforts worldwide and the major differences between IFRS and US GAAP

Harmonization

· Process of increasing the compatibility of accounting practices

· Sets limits on how much practices can vary

· More flexible and open

· Accommodates differences

includes….

· Accounting standards

· Disclosures

· Auditing standards

Standardization

· Set of rules

· Does not accommodate national differences

· More difficult to implement internationally

Comparability

· Financial information is comparable if it is similar in enough ways.

Convergence

· Convergence of international and national accounting standards involves gradual elimination of differences.

Other approaches to cross-border financials….

Reconciliation

· Preparing financials using home country accounting standards but providing reconciliation between critical accounting measures (net income and stockholder’s equity)

Mutual Recognition (Reciprocity)

· Regulators outside the home country accept foreign firm’s financial statements based on home country principles.

PROS AND CONS FOR HARMONIZATION OF ACCOUNTING STANDARDS

Arguments for Harmonization

· Financial statement from different countries would be more comparable, which in turn would make it easier for investors to evaluate multi-national companies (MNC).

· Raise the quality level of international accounting practices.

· Reduce costs for MNCs to consolidate foreign listed companies.

· Easier access to foreign capital markets.

· Simplify for MNC the evaluation of possible foreign takeover targets.

· Make it easier for MNCs and international accounting firms to transfer accounting personnel to other countries.

Arguments against Harmonization

· Considering the differences among countries in terms of socio-politico-economic systems, it would be almost impossible to arrive at a set of accounting standards that would satisfy all the parties involved.

·
Nationalism…international standards could be perceived as a set of standards developed to suit the requirements of other countries and hence would not be received favorably.

·
It is unnecessary to force all companies worldwide to follow a common set of rules.

·
Today’s global capital market has evolved without harmonized accounting standards.

Efforts for harmonization…

began even before the creation of….

1973 International Accounting Standards Committee (IASC) – formed

Ten countries were involved: Australia, Canada, France, Germany, Ireland, Japan, Mexico, the Netherlands, the United Kingdom, and the United States.

Their objective was to create “international accounting standards”

The final work of the IASC began with the International Organization of Securities Commissions (IOSCO) agreement in 1993 and ended with the creation of the IASB.

For more information on IOSCO,

http://www.iosco.org/

2001 International Accounting Standards Board (IASB) – replaced IASC

This group is an independent, private-sector, standards-setting body founded by professional accounting organizations in nine countries. The IFRS Foundation is the legal entity under which the IASB operates.

IASB Objectives:

1. To develop a single set of high-quality, understandable and enforceable global accounting standards….

2. To promote the use and rigorous application of those standards

3. To take in account the needs of all sizes and types of entities in diverse economic settings.

4. To bring about convergence of national accounting standards and IFRS.

The IASB represents accounting organizations from approximately 140 countries.

IASB Structure:

The IASB is organized under an independent foundation named the IFRS Foundation.

Number of trustees: Currently (2020) there are 22 Trustees. Initially the Foundation Board had 19 Trustees.

https://www.iasplus.com/en/resources/ifrsf/governance/ifrsf-trustees

Geographic balance:

1. Trustees

a. Six from North America

b. Six from Europe

c. Six from Asia/Oceania region

d. One from Africa

e. Three from any area, subject to establishing overall geographical balance

2. IASB Board (14 members)

a. Establishes and improves standards of financials accounting and reporting for business. https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb-board

3. IFRS Advisory Council

a. 51 organizations across the globe are represented on the council with 50 individual members

b. Responsible to give board advice on its agenda and priorities

https://www.iasplus.com/en/resources/ifrsf/advisory/ifrs-advisory-council

4. International Financial Reporting Standards Interpretations Committee (IFRIC)

a. 14 voting members

b. Interprets standards in the context of IASB’s framework.

For more information:

on the IASB structure…

http://www.iasplus.com/restruct/restruct.htm#diagram

on the IFRS Foundation and the International Accounting Standards Board

https://www.ifrs.org/

Understand that the IASB’s primary responsibility is to develop a set of high-quality standards to be used worldwide. The IASB follows a due process procedure and uses a principles-based approach in developing these international standards.

NOTE: IFRS are primarily principle-based standards whereas US GAAP is rules-based but both have rules and principles within their respective structures.

Ways in which a country might adopt IFRS:

· Replace their national GAAP with IFRS.

· Require parent companies to use IFRS in preparing consolidated financial statements.

· Require stock exchange listed companies to use IFRS in preparing consolidated financial statements.

· Require foreign companies listed on a domestic stock exchange to use IFRS.

· Require domestic companies listing on a foreign stock exchange to use IFRS.

Concerns about adopting IFRS

· Too complicated

· Some IFRS are controversial

· Guidance for adopters is inadequate

· Language translation issues

· If a country does not have a well-developed capital market and their users are satisfied with local standards, IFRS are of little benefit.

Despite the above, there is a worldwide trend towards convergence with or adoption of IFRS.

· The European Union (EU) requiring the use of IFRS by publicly-traded companies in preparing consolidated financial statements.

· The FASB/IASB convergence project (the so-called Norwalk agreement).

The Norwalk Agreement refers to a Memorandum of Understanding between FASB and the IASB. It was the first step for the US to commit to converge US GAAP and IFRS. Unfortunately, this convergence is still a long way from being realized.

For more information on the agreement…

http://www.fasb.org/intl/convergence_iasb.shtml

HOMEWORK ASSIGNMENTS:

· How does harmonization differ from convergence?

· Are you for or against convergence and why? Write a short, one-paragraph statement supporting your position.

I will provide a summary of your positions at the end of the week.

· MNC Assignment

· On what exchange(s) is(are) your MNC listed? What are its call letters?

· Look at your MNC’s most recent published annual report. Are the consolidate financial statements in conformity with U.S. GAAP? IFRS?

Post your homework in this week’s discussion area.

Reconciliation is no longer required…please read update below….

Although the speech on the next page occurred in June 2008, I think it’s still important for you to read where we have been…

Speech by SEC Staff:
IFRS and U.S. Companies: A Look Ahead

John W. White

Director, Division of Corporation Finance
U.S. Securities and Exchange Commission

Financial Executives International
Global Financial Reporting Convergence Conference
New York, New York
June 5, 2008

Thank you very much Michael [Cangemi]. Good morning. What a great title for the program — “The World Is Moving to IFRS: Are You?” This is exactly the topic I want to focus on this morning: the acceptance of International Financial Reporting Standards, or IFRS, in the United States. Among all the Commission’s current initiatives, and there are many, I believe that this one has the potential to be the most far-reaching, affecting all U.S. capital markets participants:

· issuers, which report financial results;

· accountants, who audit those results;

· intermediaries, who play many roles; and

· especially, investors, who analyze and most importantly make investment decisions based on those results.

Before getting into the substance of my remarks, however, I need to remind you that as a matter of policy, the U.S. Securities and Exchange Commission disclaims responsibility for any private statements of any SEC employee. Accordingly, the views I express today are solely my own and do not necessarily reflect the views of the SEC or of any members of the staff other than myself.

Where We Are Today

So with that, let me start by setting the stage for what the Commission has done recently relating to IFRS. On the foreign issuer front, during 2007, the staff held a roundtable on the use of IFRS by foreign companies

and published a report that provided observations on the staff’s reviews of IFRS financial statements in the filings of over 100 foreign issuers.

More significantly, this past November, after issuing a proposing release in July,

the Commission voted to eliminate the U.S. GAAP reconciliation requirement for foreign private issuers that file their financial statements with the SEC using IFRS as issued by the International Accounting Standards Board, or the IASB.

As a result, since early this year, the U.S. GAAP reconciliation is no longer required in foreign issuer filings with the SEC when the issuer asserts, and the auditors agree, that the financial statements are in accordance with IFRS as issued by the IASB. Even though there was little fanfare, I cannot emphasize enough the significance and the historic nature of this action. Actually, we recognized the event in Corp Fin on January 28 when Novartis AG filed its Form 20-F without a U.S. GAAP reconciliation, becoming the first foreign issuer to do so. For as long as any of us can remember, foreign issuers and their advisers have argued against the necessity of the U.S. GAAP reconciliation. Well, with the development of the high quality and globally accepted accounting principles embodied in IFRS, as issued by the IASB, as well as other important progress in this area, the Commission was able to come to the conclusion that the reconciliation was no longer necessary when the financial statements are prepared in accordance with these standards.

FOR THE ENTIRE SPEECH, GO TO

www.sec.gov/news/speech/2008/spch060508jww.htm

WEEK 2 CONTINUED

International Harmonization and International Financial Rep

ting Standards (IFRS)

To recap….

The IASC was formed in 1973 and over the next 28 years, the committee established standards

1973 – 2001 41 International Accounting Standards (IAS) were written

12 are either no long in effect or were replaced

· 27 standards are still in effect (see below)

In March 2001, the International Accounting Standards Committee (IASC) Foundation was formed as a not-for-profit corporation incorporated in the State of Delaware, US. The IASC Foundation is the parent entity of the International Accounting Standards Board, an independent accounting standard-setter based in London, UK.

INTERNATIONAL ACCOUNTING STANDARDS

I originally found the list below but it is a little dated. I wanted to include it though as a reference since most of the links still work. Please see the website posted below this list in order to see an up-to-date list of not only IAS and IFRS standards but also IFRIC and SIC interpretations

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 16 Property Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for 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 and Joint Ventures

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 32 Financial Instruments: Presentation

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

Source: Annual Reporting Information, IFRS Standards

http://www.iasplus.com/en/standards/ias

Since 2001 the current International Accounting Standards Board (IASB) has issued 17 IFRS

1. First-time Adoption of International Financial Reporting Standards

2. Share-based Payment

3. Business Combinations

4. Insurance Contracts (to be superseded by IFRST 17 as of January 2021)

5. Non-current Assets Held for Sale and Discontinued Operations

6. Exploration for and Evaluation of Mineral Assets

7. Financial Instruments: Disclosures

8. Operating Segments

9. Financial Instruments

10. Consolidated Financial Statements

11. Joint Arrangements

12. Disclosure of Interests in Other Entities

13. Fair Value Measurement

14. Regulatory Deferral Accounts

15. Revenue from Contracts with Customers

16. Leases

17. Insurance Contracts

Source and for more information:

http://www.ifrs.org/IFRSs/Pages/IFRS.aspx

In 2002 the IASB and U.S. Financial Accounting Standards Board (FASB) agreed to work together to reduce differences between IFRS and U.S. GAAP.

Types of differences between IFRS and U.S. GAAP.

A. Definition differences: Differences in definitions can occur even though concepts are similar. Definition differences can lead to differences in recognition and/or measurement.

B. Recognition differences: Differences in recognition criteria and/or guidance related to whether an item is recognized, how it is recognized, and/or when it is recognized (timing difference).

C. Measurement differences: Differences in approach for determining the amount recognized resulting from either a difference in the method required or a difference in the detailed guidance for applying a similar method.

D. Alternatives: One set of standards allows a choice between two or more alternative methods; the other set of standards requires one specific method to be used.

E. Lack of requirements or guidance: IFRS do not cover an issue addressed by U.S. GAAP and vice versa.

F. Presentation differences: Differences in the presentation of items in the financial statements.

G. Disclosure differences: Differences in information presented in the notes to financial statements related to whether a disclosure is required and/or the manner in which a disclosure is required to be made.

A variety of similarities and differences exist between IFRS and U.S. GAAP.

The following links are from Price Waterhouse Coopers and take you to the same page. It serves as an excellent resource regarding IFRS and U.S. GAAP. It is a lengthy document but very informative.

http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml

https://www.pwc.com/us/en/cfodirect/issues/ifrs-adoption-convergence.html

For this week, please take the time to at least read:

· The importance of being financially bi-lingual and to learn more about IFRS and how it affects US businesses

Also keep the link handy, it does reference many of the topics that we will be covering as the term progresses.

WEEK 3

International Financial Reporting Standards (IFRS)

Since all of you have already taken Intermediate Accounting and are aware of US GAAP, the focus this week will be on the International Accounting Standards (IAS) with some comparison comments to US GAAP. Also included this week is a Grant Thornton report, Comparison between U.S. GAAP and IFRS.

IAS1 PRESENTATION OF FINANCIAL STATEMENTS

This Standard prescribes the basis f

presentation of general purpose financial

statements to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. It sets out overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content.*

When reviewing this IAS, keep in mind two other standards that are closely tied to IAS 1; namely,

IAS 34 Interim Financial Reporting, and

IAS 7 Statement of Cash Flows

*Source: http://annualreporting.info/ifrs_standard_title/ias-1-presentation-of-financial-statements/

IAS2 INVENTORIES

Guidance is more extensive than US GAAP and includes

· Cost of inventories

· Purchase, conversion and other costs

· Excluding abnormal costs of wasted materials, labor or other production costs; storage costs, administrative overhead and selling costs.

· Cost formulas to be used when expenses

· LIFO is not allowed; only FIFO or weighted-average

· Measurement of inventories on financials

· Inventory on balance sheet is either at lower of cost or net realizable value (NRV)

· NRV is estimated selling price less estimates costs of completion and costs necessary to make the sale.

IAS7 STATEMENT OF CASH FLOWS

The statement contains details on the requirements. Reference link below for details.

http://www.iasplus.com/en/standards/ias/ias7

IAS8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS

Provide guidance for

· The selection of accounting policies,

· Accounting for changes,

· Dealing with changes in accounting estimates and

· Correction of errors

When reviewing this IAS, keep in mind two other standards that closely tie to

IAS 8

; namely,

IAS 10 Events After the Reporting Date, and

IAS 24 Related Party Disclosures

IAS10 EVENTS AFTER THE REPORTING PERIOD

Explains when an entity should adjust its financials for event occurring after the balance sheet date and the disclosures needed.

IAS11 CONSTRUCTION CONTRACTS

Identifies two types of construction contracts: fixed-price and cost-plus. Revenues and expenses should be recognized using the percentage-of-completion method when the outcome of the contract can be estimated reliability.

This standard ties closely to IAS 18 Revenue. Both IAS 11 and 18 have been superseded by IFRS 15 Revenue from Contracts with Customers, effective January 2018.

IAS12 INCOME TAXES

Standard uses an asset-and-liability approach that requires recognition of deferred tax assets and liabilities for temporary differences and for operating losses and tax credit carry-forwards. A deferred tax asset is recognized only if it is probably that a tax benefit will be realized.

IAS14 SEGMENT REPORTING

Replaced by IFRS 8, Operating Segments – see below for details.

IAS16 PROPERTY, PLANT & EQUIPMENT (PPE)

The following guidance is provided for:

1. Initial costs of PPE

2. Subsequent costs

3. Measurement at initial recognition and afterward

4. Depreciation

a. Allows for component depreciation (US GAAP does not)

5. Retirement and disposal

IAS16 allows PPE to be carried at cost less accumulated depreciation and impairment losses

at a revalued amount less any subsequent accumulated depreciation and impairment losses.

NOTE: US GAAP does not permit use of the revaluation model.

IAS17 LEASES

There is a distinction between finance (capitalized) leases and operating leases. IAS17 also provides guidance for sale-leaseback transactions.

Finance lease – transfers substantially all the risks and rewards incidental to ownership to the lessee. Examples are provided by IAS17.

Any lease not classified as above is considered an operating lease and payments are expensed by lessee and recognized as income by the lessor

Sales-leaseback – sale of an asset by initial owner of asset who then leases it back.

If the event is a finance lease, the initial owner must defer any gain on the sale and amortize it to income over the lease term. If an operating lease, difference between fair value and carrying value is recognized immediately as income.

IAS 17 Leases Update

February 25, 2016 FASB released ASU 2016-02 Leases

This brings the project to overhaul lease accounting.

New guidance – effective for public business entities in fiscal years beginning after 12/15/2018

– effective date for most other entities (private) deferred for one year to 2020; in October, 2019

the effective date was moved to January 2021. In May, 2020, because of the coronavirus fallout, the date was moved again to 2022.

– early adoption permitted for all entities

Important points:

· Lessees will be required to recognize most leases “on balance sheet.”

· The new guidance retains a dual lease accounting model for purposes of income statement recognition, continuing the distinction between what are currently known as “capital” and “operating” leases for lessees.

· Lessors will focus on whether control of the underlying asset has transferred to the lessee to assess lease classification.

· A new definition of a “lease” could cause some contracts formerly accounted for under ASC 840 to fall outside the scope of ASC 842, and vice versa.

· A modified retrospective transition will be required, although there are significant elective transition reliefs available for both lessors and lessees.

Source:

http://www.grantthornton.com

Bottom line: Nearly all of the lessees’ leases will be on the balance sheet, unless the lease terms are 12 months or less. Lessors will also see changes that will align with this revised lessee model and also to comply with FASB’s new revenue recognition guidance.

NOTE: IAS 17 will be superseded by IFRS16 Leases as of 1 January 2019. January 1 effective date with the annual report date of 12/31/2019. Early adoption only if IFRS 15 (Revenue Recognition) is also adopted.

SPECIAL NOTES:

Leases, for the most part, will now be on the Balance Sheet, which changes the reported assets and liabilities….in some cases, significantly. Although the Standard implementation isn’t until 2019, it’s never to earlier to start familiarizing yourself with its components.

IAS18 REVENUE

Requires that revenue be measured at the fair value of the consideration received or receivable. This standard will be superseded by IFRS 15 Revenue from Contracts with Customers effective January 2018.

IAS19 EMPLOYEE BENEFITS

Standard that covers all forms of employee compensation and benefits other than share-based compensation; i.e., stock options, which are covered in IFRS 2 (see below).

Four type of employee benefits:

1. Short-term benefits (i.e., compensated absences and profit-sharing and bonus plans)

a. Recognize an expense and a liability at the time that the employee provides services; amount recognized is undiscounted.

2. Post-employment benefits (i.e., pensions, medical benefits and other post-employment benefits)

a. Distinguishes between a defined contribution plan and defined benefit plan

i. Defined contribution plan is simple…the employees accrues an expense and a liability at the time the employees renders services for the amount employers is obligated to contribute. The liability is reduced when the contributions are made.

ii. Defined benefit plans are considerably more complicated.

3. Other long-term employee benefits (i.e., deferred compensation and disability benefits)

a. A liability should be recognized for the benefit equal to the difference between the present value of the defined benefit obligation and the fair value of plan assets (if any).

4. Termination benefits (i.e., severance pay and early retirement benefits)

a. Benefits recognized as an expense and a liability when an employer is demonstrably committed to either terminating the employment of an employee or a group of employees or providing termination benefits as a result of an offer made to encourage voluntary termination.

IAS20 ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURES OF GOVERNMENT ASSISTANCE

This standard outlines how to account for government grants and other assistance. For details please reference the following link:

https://www.iasplus.com/en/standards/

ias/ias20

IAS21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Accounting for foreign currency transactions and foreign operations in the financial statements of an entity as well as the translation of financial statement into a presentation currency.

Scope of IAS 21

· Accounting for transactions and balances in a foreign currency, that is a currency other than the functional currency of an entity

· Translating the results and financial position of an entity for

· consolidation or equity accounting purposes and

· where financial statements are presented in a different currency from that in which they are prepared, in other words where the presentation currency is different from the functional currency of an entity.

The following situations are those in which IAS 21 does not apply: Foreign currency derivatives, hedge accounting, and cash flows arising from transactions in a foreign currency.

IAS23 BORROWING COSTS

Capital costs to the extent that they are attributable to the acquisition, construction or production of a qualifying assets; other costs are expensed in the period incurred.

IAS 24 RELATED PARTY DISCLOSURES

A related party is a person or entity that is related to the entity that is preparing its financial statements (referred to as the “reporting entity”).

The scope of IAS 24 is applied as follows:

· Identifying related party relationships and transactions;

· Identifying outstanding balances, including commitments, between an entity and its related parties;

· Identifying the circumstances in which disclosure of related party items is required;

· Determining the related party disclosures

This IAS also ties to IAS 8 and 10

IAS26 ACCOUNTING AND REPORTING BY RETIREMENT BENEFIT PLANS

This standard outlines the requirements for the preparation of financial statements of retirement benefit plans.

Please see the following reference for details:

https://www.iasplus.com/en/standards/ias/ias26

IAS27 SEPARATE FINANCIAL STATEMENTS

This standard has a history, which started in April 2001 when the IASB adopted IAS27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries.

In 2008 it was amended and entitled Consolidated and Separate Financial Statements as part of the joint project on business combinations with FASB.

In May 2001 the IASB issued IAS27, concurrently with IFRS10, with a modified title of Separate Financial Statements.

IAS 27 addresses only the accounting and disclosure requirements for investments in subsidiaries, joint ventures, and associates when an entity prepares separate financial statements. Some jurisdictions require entities to present both consolidated and separate (parent-only) financial statements. The standard requires an entity preparing separate financial statements to account for those investments either at cost, in accordance with IFRS 9, Financial Instruments, or using the equity method.

Note that financial statements of an entity that does not have a subsidiary, associate, or joint venturer’s interest in a joint venture are not separate financial statements.

IFRS 10 replaces the guidance formerly included in IAS 27 and establishes the principle of control and the requirements for the preparation of consolidated financial statements.

Note: The information in this section reflects an amendment issued by the IASB in August 2014, titled Equity Method in Separate Financial Statements. The purpose of this amendment is to restore the option to use the equity method to facilitate convergence of local GAAP in those jurisdictions with IFRS.

Entities should apply this amendment for annual periods beginning on or after January 1, 2016, retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is permitted with proper disclosure.

IAS28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

IAS 28 defines an associate and provides criteria to determine whether an investment meets that definition. It ties directly with IFRS 11, which defines a joint arrangement and provides criteria to determine whether a joint arrangement is a joint operation or a joint venture.

In terms of accounting for these investments, IAS 28 discusses the accounting treatment for associates and joint ventures; IFRS 11 discusses how to account for joint operations.

Here’s a chart to help visualize how each standard works.

The objective of IAS 28 is to prescribe the accounting for investments in associates and requirements for the application of the equity method when accounting for investments in associates and joint ventures. It does not define financial or operating policy.

The objective of IFRS 11 is to establish the principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements).

IAS29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

This standard applies when an entity’s functional currency is that of a hyperinflationary economy. See the following link for details:

https://www.iasplus.com/en/standards/ias/ias29

IAS32 FINANCIAL INSTRUMENTS: PRESENTATION

Defines a financial instrument as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. This standard ties closely with IFRS 9 and 7 and IAS 39.

The objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. IAS 32 applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities, and equity instruments; the classification of related interest, dividends, losses, and gains; and the circumstances under which financial assets and financial liabilities should be offset.

IAS33 EARNINGS PER SHARE

The objective of IAS 33, Earnings per Share, is to prescribe the principles for the determination and presentation of earnings per share, so as to improve performance comparisons between different entities in the same reporting period and between different reporting periods for the same entity.

Even though earnings per share data have limitations because of the different accounting policies that may be used to determine “earnings,” a consistently determined denominator enhances financial reporting. Therefore, the focus of IAS 33 is on the denominator for the earnings per share calculation. The scope applies to separate or individual financials statements of an entity and then consolidated financials of a group with a parent.

IAS34 INTERIM FINANCIAL REPORTING

An interim financial report is a financial report that contains either a complete or condensed set of financial statements for a period shorter than an entity’s full financial year.

This standard does not mandate which entities should publish interim financial reports, how frequently, or how soon after the end of an interim period. These matters should be decided by national governments, securities regulators, stock exchanges, and accountancy bodies. This standard applies when a company is required or elects to publish an interim financial report.

IAS 34 defines the minimum content of an interim financial report, including disclosures, and identifies the accounting recognition and measurement principles that should be applied in an interim financial report.

For the most part requires interim period to be treat as discrete reporting periods; i.e. unlike US GAAP, an annual bonus would be recognized in the interim period that it was given and not spread over four quarters.

This standard ties to IAS 1 and 7.

IAS36 IMPAIRMENT OF ASSETS

Requires testing of PPE; intangibles, including goodwill; and long-term investments.

An entity must assess annually whether there are any indicators that an asset is impaired; that is, when an asset’s carrying value exceeds its recoverable amount.

· Recoverable amount is the great of net selling price and value in use

· Net selling price is the price of an asset in an active market less disposal costs

· Value is use is determined as the present value of future net cash flows expected to arise from continued use of the assets over its remaining useful life and upon disposal.

Measurement of impairment loss is the amount by which carrying value exceeds recoverable amount and it is recognized in income.

At each balance sheet date a review should be undertaken to determine if an impairment loss should be reversed. Reversals are recognized in income immediately.

Here’s a link that provides more detail if you are interested:

https://www.iasplus.com/en/standards/ias/ias36

NOTE: US GAAP does not allow reversals.

IAS37 PROVISIONS, CONTINGENT LIABILITIES & CONTINGENT ASSETS

Guidance for reporting liabilities and assets of uncertain timing, amount or existence. Also contains specific rules related to arduous* contracts and restructuring costs.

*contract in which the unavoidable costs of meeting the obligation of the contract exceed the economic benefits expected to be received.

Provisions are defined as liabilities of uncertain timing or amounts.

Restructuring is a program that is planned and controlled by management and that materially changes either the scope of a business undertaken by an entity or the manner in which the business is conducted; i.e., sale of a line of business, closure of a location, changes in management structure.

Contingent asset is a probable asset that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of a future event. These assets should not be recognized but disclosed when the inflow of economic benefits is probable.

IAS38 INTANGIBLE ASSETS

Definition: nonmonetary asset without physical substance held for use in the production of goods or services, rental to others or administrative purposes.

IAS38 provides guidance as follows:

· Purchased intangible assets

· Initially measured at cost

· Useful life is assessed as finite or indefinite

· Intangibles acquired in a business combination

· Patents, trademarks and customer lists acquired are recognized at their fair value

· Development costs are capitalized

· Goodwill is included with IFRS 3, Business Combinations and not included here. See below under IFRS3 for information on goodwill.

· Internally generated intangibles

· The expenditure(s) giving rise to the potential intangible needs to be classified as either research or development expenditures. If the distinction cannot be established, then all are classified as research expenditures and expensed as incurred…no intangible asset would be recognized.

· Judgment becomes key since you are determining where research ends, and development begins. IAS38 provides extensive lists as a reference.

IAS39 FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT

Establishes categories into which all financial assets (four) and liabilities (two) must be classified. The classification determines how it will be measured. This standard is closely tied to IAS 32 and IFRS 9 and 7.

Replaced by IFRS 9 Financial Instruments

· See IFRS 9 for more details. There is also a file attached to this week’s lecture that further explains the standard.

IAS40 INVESTMENT PROPERTY

Land and/or buildings held to earn rentals, capital appreciation or both.

Options: Use of fair value model or cost model

NOTES: US GAAP requires use of cost model.

IAS41 AGRICULTURE

This standard sets out the accounting for agricultural activity. It was issued in December 2000 and applied to annual periods beginning on or after January 2003.

See the following link for more details:

https://www.iasplus.com/en/standards/ias/ias41

For additional information on any of the above IAS, use the following link…

https://www.iasplus.com/en/standards/

IAS vs IFRS…is there a difference? From my research, the International Accounting Standards Committee (IASC) was established in 1973 and issued a number of standards. The above list includes all of the standards issued by IASC.

In 2001 it was restructured and became the International Accounting Standards Board (IASB). It was agreed that all of the above standards would be adopted by the IASB but moving forward all standards would become IFRS…International Financial Reporting Standards.

One major implication IFRS principles take precedence over IAS. So when contradictory IFRS standards are issued by the IASB, older ones (IAS) are usually disregarded.

IFRS 1 FIRST-TIME ADOPTION OF IFRS

The objective of IFRS 1 is to ensure that the entity’s first IFRS financial statements and its interim financial reports for the portion of the period recorded in those financial statement, contain high-quality information that:

· Is transparent for users and comparable over all periods presented,

· Provides a suitable starting point for accounting in accordance with International Financial Reporting Standards (IFRSs), and

· Can be generated at a cost that does not exceed the benefits.

Please note: It is continually being updated….

IFRS 2 SHARE-BASED PAYMENT

Sets out measurement principles and specific requirements for three types of payments:

1. Equity-settled share-based payment transactions

2. Cash-settled share-based payment transactions

3. Choice-of-settlement share-based transactions

Requires entity to recognize all share-based payment transactions in its financial statements; no exceptions. Standard applies a fair-value approach.

Note: Reference IAS 19 Employee Benefits for additional details on this topic.

IFRS 3 BUSINESS COMBINATIONS

The core principle of IFRS 3 is that an acquirer of a business recognizes the assets acquired and liabilities assumed at their acquisition-date fair values and discloses information that enables users to evaluate the nature and financial effects of the acquisition.

The objective of IFRS 3 is to improve the relevance, reliability, and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. To accomplish this, IFRS 3 establishes principles and requirements for how the acquirer:

· recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;

· recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and

· determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Includes initial measurement of goodwill as follows:

· The difference between

· Consideration transferred by the acquiring firm plus any amount recognized as non-controlling interest

· The fair value of net assets acquired.

If the first one exceeds the second, goodwill is recognized as an asset. If reversed, then it is a “bargain purchase” and the difference becomes negative goodwill and is recognized as a gain in net income by the acquiring firm.

IFRS 4 INSURANCE CONTRACTS

IFRS 4 Insurance Contracts applies, with limited exceptions, to all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. In light of the IASB’s comprehensive project on insurance contracts, the standard provides a temporary exemption from the requirements of some other IFRSs, including the requirement to consider IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors when selecting accounting policies for insurance contracts.

Note: IFRS 4 was issued in March 2004 and applies to annual periods beginning on or after 1 January 2005. IFRS 4 will be replaced by IFRS 17 as of 1 January 2021.

For additional details

https://www.iasplus.com/en/standards/ifrs/ifrs4

IFRS 5 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

In theory, IFRS classifies an asset based upon how management intends to realize its future economic benefits. A non-current asset is basically an asset which management cannot or does not expect to realize, sell, or use up within its normal operating cycle or at least twelve months after the reporting period’s end.

The main principle of IFRS 5 is that management intent determines measurement and presentation of non-current assets. Management intent regarding asset use can change over time.

This chart shows how management’s intended use affects the classification of several major types of non-current assets

The second part of IFRS 5 sets standards for discontinued operations, which is a component of an entity that has been disposed of or is classified as held for sale, and that

· represents a separate major line of business or major geographical area of operations, or

· is part of a single coordinated plan to dispose of a separate major line of business or major geographical area of operations, or

· is a subsidiary acquired exclusively with a view to resale.

For more details reference

https://www.iasplus.com/en/standards/ifrs/ifrs5

IFRS 6 EXPLORATION FOR AND EVALUATION OF MINERAL RESOURCES

IFRS 6 Exploration for and Evaluation of Mineral Resources has the effect of allowing entities adopting the standard for the first time to use accounting policies for exploration and evaluation assets that were applied before adopting IFRSs. It also modifies impairment testing of exploration and evaluation assets by introducing different impairment indicators and allowing the carrying amount to be tested at an aggregate level (not greater than a segment).

For more details reference

https://www.iasplus.com/en/standards/ifrs/ifrs6

IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES

Requires disclosure of information about the significance of financial instruments to an entity, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms. Specific disclosures are required in relation to transferred financial assets and a number of other matters.

When learning this topic you also have to reference IFRS 9 Financial Instruments, which establishing principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing, and uncertainty of an entity’s future cash flows.

Also, for this topic reference IAS 32 and 39.

IFRS 8 OPERATING SEGMENTS

Extensive disclosures are required for each separately reportable operating segment.

Operating segments are components of a business:

1. That generate revenues and expenses

2. Whose operating results are regularly reviewed by the COO, and

3. For which separate financial information is available.

For additional guidelines reference

https://www.iasplus.com/en/standards/ifrs/ifrs8

IFRS 9 FINANCIAL INSTRUMENTS (Replacement of IAS39)

The International Accounting Standards Board (IASB) completed the final element of its comprehensive response to the financial crisis with the publication of IFRS 9 Financial Instruments in July 2014. The package of improvements introduced by IFRS 9 includes a logical model for classification and measurement, a single, forward-looking ‘expected loss’ impairment model and a substantially-reformed approach to hedge accounting.

The IASB has previously published versions of IFRS 9 that introduced new classification and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). The July 2014 publication represents the final version of the Standard, replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement.

The objective of IFRS 9, Financial Instruments, is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing, and uncertainty of an entity’s future cash flows.

IFRS 9, Financial Instruments, is effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.

IFRS 10 CONSOLIDATED FINANCIAL STATEMENTS

The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. An entity that is a parent should present consolidated financial statements with some exceptions. The basis for consolidation is control and the standard provides detailed guidance for applying the control principle.

IFRS 10 replaces the pats of IAS 27 Separate Financial Statements that deal with consolidations. For more details reference

https://www.iasplus.com/en/standards/ifrs/ifrs10

IFRS 11 JOINT ARRANGEMENTS

Outlines the accounting by entities that jointly control an arrangement. Return to page 5 and take note of the information provide on IFRS 11 and review the charts that were provided.

IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES

When discussing IFRS 12 you also have to consider IAS 28 and IFRS 11. IFRS 12 provides the disclosure requirements for interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities.

IFRS 13 FAIR VALUE MEASUREMENT

The objective of IFRS 13 is to provide a definition of fair value, include all related guidance in one standard, and outline the required disclosures for fair value.

Additional information

https://www.iasplus.com/en/standards/ifrs/ifrs13

IFRS 14 REGULATORY DEFERRAL ACCOUNTS

Permits an entity which is a first-time adopter of International Financial Reporting Standards to continue to account, with some limited changes, for ‘regulatory deferral account balances’ in accordance with its previous GAAP, both on initial adoption of IFRS and in subsequent financial statements.

Details can be found at

https://www.iasplus.com/en/standards/ifrs/ifrs14

IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

Focus is entirely on identifying the contract with a customer and the performance obligations that result from that contract rather than on a particular transaction or event. It does not apply to leases, insurance contracts, or financial instruments and other contractual rights within the scope of IFRS9. It does tie to IAS 11 and 18.

We will be covering this topic in more detail in Week 4. This standard is full converged with US GAAP; reference ASU 2014-09.

IFRS 16 LEASES

The objective is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures to apply in relation to finance and operating leases.

In January 2016, the IASB issued IFRS 16, Leases, which will replace the current standard on leases (IAS 17) and related interpretations. The effective date of this standard is January 1, 2019. Entities can choose to apply IFRS 16 before that date but only in conjunction with the application of IFRS 15, Revenue from Contracts with Customers. Reference IAS 17 on pages 2 and 3 for more details.

This standard is a high-priority for both the FASB and the IASB…working toward convergence.

IFRS 17 INSURANCE CONTRACTS (Replacement of IFRS4)

The International Accounting Standards Board (IASB) issued a standard for insurance contracts to help investor’s and others better understand insurers’ risks exposure, profitability and financial position. Goal is for transparency in reporting and consistency in accounting for insurance contracts. It goes into effect on January 1, 2021 and early application is permitted.

As reported in AccountingToday.com on October 2019: The insurance contracts standard would be delayed for both public and private companies, as well as for nonprofits. The deferral moves the effective date for SEC filers from January 2021 to January 2022. Other public business entities, including smaller reporting companies, would see the effective date move from January 2021 to January 2024. For private companies and nonprofits, the effective date would move from January 2022 to January 2024.

QUALIFYING NOTE: Many of these standards are still being developed and improved upon; you may find in your research differences from these lecture notes. If you do, please bring it to my attention.

REFERENCE SOURCES:

The International Financial Reporting Standards Database and Textbook (online) and

International Accounting, 3rd edition, Doupnik & Perera

AICPA Certificate Program for International Financial Reporting Standards

Online resources for IAS and IFRS

PLEASE SEE THE NEXT PAGE FOR THE HOMEWORK ASSIGNMENTS

HOMEWORK:

There are two assignments this week…

· Select any two of the IAS or IFRS standards presented this week, identify which two you have selected and then discuss how your MNC handles the standards. Post your response in this week’s forum so that everyone can benefit from your posting and also provide their comments

· There are six major reasons for accounting diversity throughout the world:

1. Legal systems

2. Taxation

3. Sources of financing

4. Inflation

5. Political and economic ties

6. Culture

Two additional factors to consider

7. Level of economic development

8. Education

WEEK4 LECTURE NOTES PART I

FOREIGN CURRENCY EXPOSURE

FOREIGN EXCHANGE

Country → currency → unit of value for purchases and sales of goods and services

For example, United States dollar

United Kingdom pound

Japan yen

Switzerland franc

There are several currency arrangements

1. Pegged to another country’s currency, often the US dollar

2. Independent float – value fluctuates based on market forces

3. European Monetary System (euro) – currency established by the European Central Bank

Foreign exchange rates

Rates are available daily not only in newspapers but on the web

· These rates are the ones banks and foreign exchange brokers charge each other to exchange currencies

· Typically…

· Rates to buy are lower than selling rates, which are higher

· Resulting in profits on foreign exchange trades

Trades can occur on a spot or a forward basis

SPOT

RATE is the price at which a foreign currency can be purchased or sold today

FORWARD

RATE is the price that can be locked-in today at which foreign currency can be purchased or sold at a predetermined date in the future.

0.0902

FORWARD	SPOT	CURRENCY SELLING @
0.0916		0.0902	Premium in forward market
0.0811	Discount

Companies enter into forward contracts with their banks to fix the price at which they can buy or sell foreign currency at a specified future date.

Note: There is no upfront cost to enter into a forward contract.

When the contract matures, the forward contract must be honored, with the company buying or selling foreign currency at the predetermined forward rate.

Companies can also purchase a foreign currency option that gives them the right, but not the obligation, to buy or sell foreign currency at a specified future date at a predetermined price; known as the strike price.

Note: The company purchases the option by paying an option premium

Upon maturity, the company can choose to exercise the option and buy or sell currency at the strike price or allow the option to expire unexercised.

FOREIGN EXCHANGE RISK

Export sales and import purchases are international transactions that are denominated in a foreign currency create exposure to risk

· An increase in the value of a foreign currency will result in a foreign exchange gain on a foreign currency receivable and a loss on a payable

· A decrease in the value of a foreign currency will result in a foreign exchange loss on a foreign currency receivable and a gain on the payable.

FINANCIAL STATEMENT PREPARATION

· Foreign currency balances must be revalued to their current domestic currency equivalent using current exchange rates when the financials are prepared.

· Gains and losses on foreign currency balances are recognized in income in the period in which the exchange rate change occurs; referred to as the two-transaction perspective, accrual approach.

HEDGING

Exposure to foreign exchange risk can be eliminated through hedging…

Establishing a price today at which a foreign currency to be received in the future can be sold in the future or at which a foreign currency to be paid in the future can be purchased in the future.

The two most used instruments for hedging foreign exchange risk are

1. Foreign currency forward contracts*

2. Foreign currency options*

*See above notes under the spot and forward rate for definitions.

Guidance for Hedging

There are two International Accounting Standards (IAS) that apply – IAS32 and IAS39; also, IFRS 9 and 7 are applicable.

According to the Deloitte website….

Overview:

IAS 32 Financial Instruments: Presentation outlines the accounting requirements for the presentation of financial instruments, particularly as to the classification of such instruments into financial assets, financial liabilities and equity instruments. The standard also provides guidance on the classification of related interest, dividends and gains/losses, and when financial assets and financial liabilities can be offset.

IAS 32 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

Objective of IAS 32

The stated objective of IAS 32 is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and liabilities. [IAS 32.1]

IAS 32 addresses this in a number of ways:

· clarifying the classification of a financial instrument issued by an entity as a liability or as equity

· prescribing the accounting for treasury shares (an entity’s own repurchased shares)

· prescribing strict conditions under which assets and liabilities may be offset in the balance sheet

IAS 32 is a companion to

IAS 39

Financial Instruments: Recognition and Measurement and

IFRS 9

Financial Instruments. IAS 39 deals with, among other things, initial recognition of financial assets and liabilities, measurement subsequent to initial recognition, impairment, derecognition, and hedge accounting. IAS 39 is progressively being replaced by IFRS 9 as the IASB completes the various phases of its

financial instruments project

For more details use the following link below or reference the lecture notes from Week 3.

http://www.iasplus.com/en/standards/ias/ias32

In January 2014 IASB finalized a new hedge accounting model. According to KPMG The IASB’s recently issued general hedge accounting standard, which aligns hedge accounting more closely with risk management, will result in additional risk management strategies qualifying for hedge accounting under International Financial Reporting Standards.

The new standard does not fundamentally change the three types of hedging relationships or the requirement to measure and recognize ineffectiveness.

Assessing the effectiveness of a hedging relationship will require more judgment and applying the new guidance in some areas remains complex.

Key Facts

The new IASB standard:

· Allows fair value elections for certain credit exposures and own-use contracts;

· Allows cash instruments to be used as hedging instruments in additional circumstances;

· Allows the time value of purchased options, the forward element of forward contracts, and foreign currency basis spreads to be deferred or amortized as a cost of hedging;

· Extends the availability of hedge accounting to additional risk exposures;

· Removes bright lines from hedge effectiveness testing; and

· Requires rebalancing hedging relationships without terminating hedge accounting in certain situations and prohibits voluntary termination of otherwise qualifying hedging relationships.

Key Impacts

For entities following IFRS:

· The new IASB standard will enable them to better reflect in their financial statements how they manage risks with financial instruments.

· If they have significant commodity price exposures, they could benefit because hedge accounting will be allowed for risk components of nonfinancial items.

DERIVATIVES

According to Investopedia.com…

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.
Futures contracts, forward contracts, options, swaps and warrants are common derivatives.

Derivatives are used for speculating and hedging purposes. Speculators seek to profit from changing prices in the underlying asset, index or security.

A derivative is a financial instrument or other contract within the scope of IAS 32 and IFRS 9

For our purpose, derivative contracts are used to hedge foreign exchange prices.

Most common derivatives are

· Foreign currency forward contracts

· Foreign currency options

Hedge accounting is appropriate if the derivative is

(a) used to hedge an exposure to foreign exchange risk,

(b) highly effective in offsetting changes in the fair value or cash flows related to the hedged item, and

Under hedge accounting gains and losses on the hedging instruments are reported in net income in the same period as gains and losses on the item being hedged.

Fundamental Requirement

· All derivatives are carried on the balance sheet at fair value

· Positive value = asset

· Negative value = liability

As a result, another accounting issue is the treatment of unrealized gains and losses, which are recognized in net income.

Homework Assignment COSTCO WHOLESALE

WEEK 4 LECTURE NOTES PART II

REVENUE RECOGNITION

In May 2014, the IASB and FASB converged the Revenue Recognition Standard. Since I’ve received a dozen or more notices on this, I thought it would be relevant to discuss this topic at length so our Week 4 will include not only foreign currency exposure but all revenue recognition.

As reported by the IFRS,

“The convergence of the standard on the recognition of revenue from contracts with customers will improve financial reporting of revenue and improve comparability of the top line in financials globally.”

The comparability of financials is the key to the convergence of reporting worldwide.

It is important to understand that with the new standard

· all previous practices are no longer valid.

· Any industry exceptions or special rules are void.

· Every business will be following this new single standard.

My perspective is that it should simplify revenue recognition since there will no longer be any industry-specific guidance.

JOURNAL OF ACCOUNTANCY

On May 28 (see attached file specific to this topic) and again on June 2 (included in file labeled IASB and FASB converge standard), the Journal posted six things to consider as guidance with this new standard. I’ve listed the six items below…for details open either of the files I referenced above)

1. Disclosures are a big key.

2. Software, telecom, and real estate will be most affected.

3. IFRS will become more rigorous.

4. The transition resource group will provide some direction.

5. Sales of nonfinancial assets may be represented better

6. The transition date is firm.

ACCOUNTING POLICY & PRACTICE SPECIAL REPORT

The above-reference report was copyrighted in 2014 by Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc.

The report is 60 plus pages, but I wanted to highlight a few areas taken directly from the report:

· Scope

· Core Principle

· Ten Most Important things to Know about the New Guidance

SCOPE

“The new rules provide guidance relevant to an entity’s accounting for revenue that arises from a contract with a customer to transfer goods or services as well as contracts to transfer nonfinancial assets, unless those contracts are within the scope of other guidance. The rules do not apply to revenue that arises from other types of events (e.g., revenue that arises from a change in the value of an assets). The following types of contracts are outside the scope of the new rules:

· Leases (ASC840, Leases);

· Insurance contracts (ASC944, Financial Services-Insurance);

· Financial instruments and other contractual rights or obligations that are within the scope of other ASC Topics;

· Guarantees (other than product or service warranties) that are within the scope of ASC460, Guarantees; and

· Nonmonetary exchanges between entities in the same line of business to facilitate sales to customers, or potential customers.”

CORE PRINCIPLE

“The new revenue guidance is based on the core principle that
a reporting entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
”

TEN MOST IMPORTANT THINGS TO KNOW ABOUT THE NEW GUIDANCE

1. Most industry-specific guidance is out; thus, the new approach is more reliant on professional judgment and contract terms and conditions

2. All entities that enter into contracts with customers to transfer goods or services will be affected in some way by the new rules unless the contract is specifically excepted from application of the revenue standard.

3. The key to revenue recognition under the new approach is the “transfer of control” (not the transfer of risks and rewards or the culmination of an earning process).

4. A single contract may contain a different number of performance obligations than under current US GAAP.

5. Collectability is a criterion for determining whether a contract exists but does not affect the measurement of transaction price.

6. The new rules introduce a constraint on revenue that applies to variable consideration (i.e., rebates, refunds, credit and incentives).

7. The approach to accounting for long-term contracts has changed.

8. The approach to accounting for licenses has changed

9. All reporting entities will allocate the transaction price to the good or service underlying each performance obligation on a relative stand-along selling price basis.

10. For public entities applying US GAAP, the new rules are generally effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods therein. Early application is prohibited.

Obviously, this standard will take time to implement. The timeline was as follows:

· U.S. Public Companies — annual reporting periods beginning after 12.15.16

· Companies using IFRS — annual reporting periods beginning on or after 1.1.17

In July 2015 FASB delayed revenue recognition effective date by one year.

FY beginning after 12/15/17 for Public Companies

FY beginning after 12/15/18 for Private Companies

The IASB has also proposed a one-year delay.

Check the following link for details:

http://www.journalofaccountancy.com/news/2015/jul/revenue-recognition-effective-date-extended-201512608.html

Fast forward to May 2020 and you will learn that FASB voted to delay the effective date for private companies again in response to the COVID-19 impact. The board voted on Wednesday, May 20 to give private companies and not-for-profit organizations an extra year to comply with the revenue recognition and leases standards.

For private companies and private not-for-profits, the effective date will be for fiscal years beginning after Dec. 15, 2021 and interim periods within fiscal years beginning after Dec. 15, 2022.

Here’s the link for details…

https://www.journalofaccountancy.com/news/2020/may/fasb-delays-revenue-recognition-for-private-companies-amid-coronavirus.html?utm_source=mnl:alerts&utm_medium=email&utm_campaign=20May2020&utm_content=button

Others and policies impacted (reference file New Standard Could Affect Tax Practitioners for details)

· Tax practitioners

· Auditors

· Transfer pricing policies (Week 7 topic)

· SEC Staff Accounting Bulletin 74

· License revenue

Components of the new standard are open to interpretation, which ties to a principle-based approach vs a rules-based approach.

Remember: Both US GAAP and IFRS are both principles and rules based with GAAP being more rules based and IFRS principles based.

In the April 29, 2016 AICPA CPA Letter Daily, the news was to go to the definitive source for AICPA revenue recognition tools….

The revenue recognition standard eliminates the transaction- and industry-specific guidance under current US GAAP and replaces it with a principles-based approach for determining revenue recognition. Visit the link below to find comprehensive resources.

https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition/

FINAL NOTE: The revenue recognition standard (IFRS 15) is comprehensive and also ties to IAS 11 and 18. It has had a significant impact on public companies and effective this December 2018 private companies will be using the standard. Implementing the standard is no easy task.

Homework Assignment

Reminder: By the end of Week 4, you are required to also respond to at least one other post.

WEEK 5 LECTURE NOTES

Analysis of Financial Statements & Other Reporting Issues

This week we will conclude with the following specific financial reporting topics:

· Inflation – accounting for changing prices.

· Business combinations

and

consolidated financials.

· Segment reporting.

Historical cost accounting in a period of inflation understates asset values (and related expenses) and overstates income. It ignores the gains and losses in purchasing power caused by inflation that arise from holding monetary assets and liabilities.

Methods of accounting for inflation are

· general purchasing power (GPP) accounting, and

· current cost (CC) accounting.

General Purchasing Power Accounting

· Nonmonetary assets and stockholders’ equity accounts are restated for changes in the general price level.

· Cost of goods sold and depreciation/amortization are based on restated asset values and the net purchasing power gain/loss on the net monetary liability/asset position is included in income.

· Income is the amount that can be paid as a dividend while maintaining the purchasing power of capital.

Current Cost Accounting

· Nonmonetary assets are revalued to current cost.

· Cost of goods sold and depreciation/amortization are based on revalued amounts.

· Income is the amount that can be paid as a dividend while maintaining physical capital.

IAS 29

IAS 29 Financial Reporting in Hyperinflationary Economies applies where an entity’s functional currency is that of a hyperinflationary economy. The standard does not prescribe when hyperinflation arises but requires the financial statements (and corresponding figures for previous periods) of an entity with a functional currency that is hyperinflationary to be restated for the changes in the general pricing power of the functional currency.

IAS 29 was issued in July 1989 and is operative for periods beginning on or after 1 January 1990.

https://www.iasplus.com/en/standards/ias/ias29

IAS 21

IAS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements and how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

IAS 21 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

https://www.iasplus.com/en/standards/ias/ias21

IAS 29 requires the use of GPP accounting by firms that report in the currency of a hyperinflationary economy.

IAS 21 requires the financial statements of a foreign operation located in a hyperinflationary economy to first be adjusted for inflation in accordance with IAS 29 before translation into the parent company’s reporting currency.

IFRS 3

IFRS 3 Business Combinations outlines the accounting when an acquirer obtains control of a business (e.g. an acquisition or merger). Such business combinations are accounted for using the ‘acquisition method’, which generally requires assets acquired and liabilities assumed to be measured at their fair values at the acquisition date.

A revised version of IFRS 3 was issued in January 2008 and applies to business combinations occurring in an entity’s first annual period beginning on or after 1 July 2009.

https://www.iasplus.com/en/standards/ifrs/ifrs3

· recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree;

· recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and

· determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

Issues that must be resolved in accounting for a business combination:

A. Selection of an appropriate method

IFRS 3 and US GAAP both require the purchase method in accounting for business combinations; the pooling-of-interests method is not allowed.

B. Recognition and measurement of goodwill

Goodwill is recognized on the consolidated balance sheet as an asset and tested annually for impairment under both IFRS 3 and U.S. GAAP.

C. Measurement of minority interest.

When less than 100% of a company is acquired, IFRS 3 requires the acquired assets and liabilities to be recorded at full fair value and minority interest is initially measured at the minority shareholders’ percentage ownership in the fair value of the acquired company’s net assets. This is known as the economic unit or entity concept.

Note:
In addition to the economic unit or entity concept, U.S. GAAP also allows use of the parent company concept in which the acquired assets and liabilities are initially measured at book value plus the parent’s ownership percentage in the difference between fair value and book value. Under this approach, minority interest is initially measured at the minority shareholders’ percentage ownership in the book value of the subsidiary’s net assets.

IAS 28

IAS 28 Investments in Associates and Joint Ventures (as amended in 2011) outlines the accounting for investments in associates. An associate is an entity over which an investor has significant influence, being the power to participate in the financial and operating policy decisions of the investee (but not control or joint control), and investments in associates are, with limited exceptions, required to be accounted for using the equity method.

IAS 28 was reissued in December 2003, applies to annual periods beginning on or after 1 January 2005, and is superseded by
IAS 28
Investments in Associates and Joint Ventures and

IFRS 12

Disclosure of Interests in Other Entities with effect from annual periods

beginning on or after 1 January 2013.

https://www.iasplus.com/en/standards/ias/ias28

Also reference Week 3 lecture notes for details and a chart that should help you to visualize how IAS28 and

IFRS 11 relate.

IAS 28 and US. GAAP require use of the equity method when an investor has the ability to exert significant influence over an investee; significant influence is presumed when the investor owns 20% or more of the investee’s voting shares. It is also defined as the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies

IAS 31

IAS 31 Interests in Joint Ventures sets out the accounting for an entity’s interests in various forms of joint ventures: jointly controlled operations, jointly controlled assets, and jointly controlled entities. The standard permits jointly controlled entities to be accounted for using either the equity method or by proportionate consolidation.

IAS 31 was reissued in December 2003, applies to annual periods beginning on or after 1 January 2005, and is superseded by

IFRS 11

Joint Arrangements and

IFRS 12

Disclosure of Interests in Other Entities with effect from annual periods beginning on or after 1 January 2013.

https://www.iasplus.com/en/standards/ias/ias31

IAS 27

IAS 27 Consolidated and Separate Financial Statements outlines when an entity must consolidate another entity, how to

account for a change in ownership interest, how to prepare separate financial statements, and related disclosures.

Consolidation is based on the concept of ‘control’ and changes in ownership interests while control is maintained are

accounted for as transactions between owners as owners in equity.

IAS 27 was reissued in January 2008 and applies to annual periods beginning on or after 1 July 2009, and is superseded by

IAS 27
Separate Financial Statements and

IFRS 10

Consolidated Financial Statements with effect from annual periods

beginning on or after 1 January 2013.

https://www.iasplus.com/en/standards/ias/ias27

IAS 27 defines a subsidiary as an enterprise controlled by another enterprise known as the parent.

Control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control can exist without owning a majority of shares of stock, for example, when one company has power over more than half of the voting rights through agreements with other shareholders.

Historically, U.S. companies have relied on majority stock ownership as evidence of control.

IAS 27 requires a parent to consolidate all subsidiaries unless

(a) the subsidiary was acquired with the intent to dispose of it within 12 months, and

(b) management is actively seeking a buyer.

U.S. GAAP requires all subsidiaries to be consolidated unless the parent has lost control due to bankruptcy or severe restrictions imposed by a foreign government.

The aggregation of all a company’s activities into consolidated totals masks the differences in risk and potential existing across different lines of business and in different parts of the world. To provide information that can be used to evaluate these risks and potentials, companies disaggregate consolidated totals and provide disclosures on a segment basis.

IFRS 8

IFRS 8 Operating Segments requires particular classes of entities (essentially those with publicly traded securities) to disclose information about their operating segments, products and services, the geographical areas in which they operate, and their major customers. Information is based on internal management reports, both in the identification of operating segments and measurement of disclosed segment information.

IFRS 8 was issued in November 2006 and applies to annual periods beginning on or after 1 January 2009.

https://www.iasplus.com/en/standards/ifrs/ifrs8

IFRS 8 was issued in 2006 to converge with U.S. GAAP. Both IFRS and U.S. GAAP follow the so-called management approach in determining operating segments, which are components of a business that:

· Engage in activities from which they earn revenues and incurs expenses.

· Are regularly reviewed by the chief operating decision maker to assess performance and make resource allocation decisions.

· Have discrete financial information available.

IFRS and U.S. GAAP also require enterprise-wide disclosures related to:

I.
Major customers – any customer from which the enterprise generates 10% or more of revenues.

The existence of major customers must be disclosed along with the operating segment generating the revenues, but the identity of the customer need not be revealed.

II.
Products and services – if operating segments are not organized along these lines.

External revenues derived from each major product or service line must be disclosed when the company has only one operating segment or operating segments are based on something other than products/services.

III.
Geographic areas – if operating segments are not organized geographically.

If operating segments are not based on geography, revenues and long-lived assets must be disclosed for (a) the domestic country, (b) all foreign countries in total, and (c) for each foreign country in which a material amount of revenues or long-lived assets are located. A quantitative threshold for determining materiality is not specified.

Analysis of Foreign Financial Statements

Reasons to analyze financials whether the company is US based or foreign are for the most part the same:

· Portfolio investment decisions

· Merger and acquisition decisions

· Credit decisions about foreign customers

· Evaluation of suppliers

· Benchmarking against competitors

Potential problems or differences when analyzing US-based vs foreign companies’ financials:

· finding and obtaining financial information about a foreign company (data accessibility),

· understanding the language in which the financial statements are presented,

· the currency used in presenting monetary amounts,

· terminology differences that result in uncertainty as to the information provided,

· differences in format that lead to confusion and missing information,

· lack of adequate disclosures,

· financial statements are not made available on a timely basis (timeliness),

· accounting differences that hinder cross-country comparisons, and

· differences in business environments that might make ratio comparisons or analysis meaningless even if accounting differences are eliminated.

Solutions:

· Some of the potential problems can be removed by companies through their preparation of convenience translations in which language, currency, and perhaps even accounting principles have been restated for the convenience of foreign readers

· The analyst can restate foreign financials in terms of a preferred GAAP through the use of a reconciliation worksheet in which debit/credit entries summarizing the differences in GAAP are used to adjust the original reported amounts.

· All income differences also affect stockholders’ equity through retained earnings.

· In addition to adjustments resulting from differences in GAAP, an adjustment also will be needed for the deferred tax effect of the aggregate difference in pre-tax income.

Another Perspective on the Challenges and Opportunities in Cross-Border Analysis

Cross border analysis involves multiple jurisdictions.

Challenges

Nations vary dramatically in ….

· Accounting practices

· Disclosure quality

· Legal and regulatory systems

· Nature and extent of business risk

· Modes of conducting business

· Providing credible information

· Vast differences in financial reporting

· Government continuing to publish highly suspect information

Positives

· Accounting harmonization of standards allows for comparability

· Companies worldwide are disclosing more information

· Improving availability and quality of that information

· Impact of the worldwide web and accessibility to information

· Globalization of capital markets

· Increased competition

· Inter-dependencies are growing

Business Analysis Framework

Four stages of analysis….

1. business strategy analysis

2. accounting analysis

3. financial analysis (ratio and cash flow)

4. prospective analysis

1.
Business Strategy Analysis

Provides a qualitative understanding of a company and its competitors

in relation to its economic environment.

Ensures analysis is performed using a holistic perspective.

By identifying key profit drivers and business risks, forecasts are realistic.

2.
Accounting Analysis

The purpose is to assess the extent to which a firm’s report results reflect economic reality.

Need: evaluate the firm’s accounting policies and estimates, and

Assess the nature and extent of a firm’s accounting flexibility

Six Steps in Accounting Analysis

>
Identify key accounting policies

>
Assess accounting flexibility

>
Evaluate accounting strategy

>
Evaluate the quality of disclosure

>
Identify potential red flags

>
Adjust for accounting distortions

3.
International Financial Analysis

Goal:
evaluate a firm’s current and past performance, and

to judge whether its performance can be sustained.

Ratio and cash flow analysis are important tools.

Ratio analysis

1st – do cross-country differences in accounting principles cause significant variation in financial statement amounts of companies from different countries?

2nd – how do differences in local culture and economic and competitive conditions affect the interpretation of accounting measures in financial ratios, even if account measurements from different countries are restated to achieve “accounting comparability”?

Cash flow analysis

Cash-flow related measures are especially useful in international analysis because they are less affected by accounting principle differences than are earnings-based measures.

4.
International Prospective Analysis

Two steps:

1. Forecasting – analysts make explicit forecasts of a firm’s prospects based on its business strategy.

2. Valuation – analysts convert quantitative forecasts into an estimate of a firm’s value.

All four stages of business analysis (business strategy, accounting, financial and prospective analysis may be affected by the following:

· Information access

· More widely available due to the world wide web

· Timeliness of information

· Varies dramatically by country

· In the U.S. quarterly financial reporting is generally accepted; this is seldom the case elsewhere.

· Financial reporting lags can also be estimated by comparing a company’s fiscal year end with its audit report date, an indication of when financial information becomes public.

· Language and terminology barriers

· Language and accounting terminology differences can cause difficulty.

· Foreign currency issues

· Reader convenience: i.e., financials presented in dollars vs foreign currency

· Information content

· Differences in types and formats of financial statements

· Balance sheet and income statement format varies from country to country

· Classification differences abound internationally.

Homework Assignment:

The week’s discussion covered the following International Accounting Standards (IAS):

#21
The Effects of Changes in Foreign Exchange Rates

#27
Separate Financial Statements

#28
Investments in Associates and Joint Ventures

#29
Financial Reporting in Hyperinflationary Economies

#31
Interests in Joint Ventures (superseded by IFRS 11 Joint Arrangements and IFRS 12

Disclosures of Interests in Other Entities)

and

IFRS 3 Business Combinations

IFRS 8 Operating Segments

This part of the homework is twofold. First research your MNC and report which, if any, of these standards are applicable for your MNC. Second, select one of those standards and explain how your MNC handles it.

Part III of the homework….

Question: What companies might your MNC include in a benchmarking study and in which countries are those companies located. Your answer should include, at least, four other companies for the comparison. As an example of the response for this assignment, consider Ford Motor Company.

Ford might want to include the following companies in a benchmarking study:

U.S. – General Motors, Chrysler

Japan – Honda, Toyota, Subaru

Germany – BMW, Volkswagen, Audi

Korea – Hyundai, Kia

France – Renault, Peugeot

Your homework for Parts I and III must be posted by nlt Saturday evening. It will give everyone time to read and respond to the various posts.

I would also suggest, when reading and responding to the benchmarking studies component, if you have any other companies you would include, please mention them in your response….especially those of you who are located outside of the U.S.

Homework is to be posted in this week’s discussion.

Translationof Foreign Currency in Financial Statements

And

Preparation of Journal Entries

This week’s focus is on the translation of foreign currency financial statements for the purpose of preparing consolidated financials and posting journal entries.

IAS 21

The Effects of Changes in Foreign Exchange Rates is the standard that explains

· what exchange rate is applied,

· in what circumstances recorded amounts are translated again at current exchange rates, and

· how to account for any exchange differences that arise.

IAS 21 provides guidance on what exchange rates should be used to translate the financial statements and explains how to account for exchange differences.

Please note that IAS 21 does do apply to

· foreign currency derivatives.

· hedge accounting. or

· cash flows arising from transactions in a foreign currency.*

* Reference IFRS 9 Financial Instruments for the first two and IAS 7 Statement of Cash Flows for the last one for guidance.

When preparing consolidated financial statements on a worldwide basis, the foreign currency financial statements prepared by foreign operations must be translated into the parent company’s reporting currency.

Issues related to this translation:

1. Which method should be used, and

2. Where should the resulting translation adjustment be reported in the consolidated financial statements.

Translation methods differ based on which accounts are translated at the current exchange rate and which are translated at historical rates. Accounts translated at the current exchange rate are exposed to translation adjustment (balance sheet exposure).

Different translation methods give rise to different concepts of balance sheet exposure and translation adjustments of differing sign and magnitude.

There are four major methods of translating foreign currency financial statements:

1. current/noncurrent method

2. monetary/non-monetary method

3. temporal method

4. current rate

We will be focusing on the temporal and current rate methods.

CURRENT RATE METHOD

All assets and liabilities are translated at the current exchange rate giving rise to a balance sheet exposure equal to the foreign subsidiary’s net assets. Stockholders’ equity accounts are translated at historical exchange rates. Income statement items are translated at the average exchange rate for the current period.

· Appreciation of the foreign currency results in a positive translation adjustment

· Depreciation of the foreign currency results in a negative translation adjustment

Translating all assets and liabilities at the current exchange rate maintains the relationships that exist in the foreign currency financial statements.

Translating assets carried at historical cost at the current exchange rate results in amounts being reported on the parent’s consolidated balance sheet that have no economic meaning.

TEMPORAL METHOD

A method of foreign currency translation that uses exchange rates based on the time assets and liabilities are acquired or incurred. The exchange rate used also depends on the method of valuation that is used. Assets and liabilities valued at current costs use the current exchange rate and those that use historical exchange rates are valued at historical costs. Source: INVESTOPEDIA

With the temporal method assets are carried at current or future value (cash, marketable securities, receivables) and liabilities are re-measured at the current exchange rate.

· Assets carried at historical cost and stockholders’ equity accounts are re-measured at historical exchange rates.

· Expenses related to assets re-measured at historical exchange rates are re-measured using the same rates.

· Other income statements items are re-measured using the average exchange rate for the period.

· When liabilities are greater than the sum of cash, marketable securities, and receivables, a net liability balance sheet exposure exists.

· Appreciation of the foreign currency results in a re-measurement loss.

· Depreciation of the foreign currency results in a re-measurement gain.

Re-measuring assets carried at historical cost at historical exchange rates maintains the underlying valuation method used by the foreign operation in preparing its financial statements.

Re-measuring some assets at historical exchange rates and other assets at the current exchange rate distorts the relationships that exist among account balances in the foreign currency financial statements.

All of the above is determined by identifying the functional currency of a foreign operation.

· The financial statements of a foreign operation whose functional currency is different from the parent’s reporting currency are translated using the current rate method, with the resulting translation adjustment deferred in stockholders’ equity until the foreign entity is disposed of. Upon disposal of the foreign operation, the accumulated translation adjustment is recognized as a gain or loss in net income.

· The financial statements of foreign operations whose functional currency is the same as the parent’s reporting currency are re-measured using the temporal method with the resulting re-measurement gain or loss reported immediately in net income.

FASB RULES

Statement #52 Summary

Foreign Currency Translation (Issued 12/81)

Summary
Application of this Statement will affect financial reporting of most companies operating in foreign countries. The differing operating and economic characteristics of varied types of foreign operations will be distinguished in accounting for them. Adjustments for currency exchange rate changes are excluded from net income for those fluctuations that do not impact cash flows and are included for those that do. The requirements reflect these general conclusions:

The economic effects of an exchange rate change on an operation that is relatively self-contained and integrated within a foreign country relate to the net investment in that operation. Translation adjustments that arise from consolidating that foreign operation do not impact cash flows and are not included in net income.

The economic effects of an exchange rate change on a foreign operation that is an extension of the parent’s domestic operations relate to individual assets and liabilities and impact the parent’s cash flows directly. Accordingly, the exchange gains and losses in such an operation are included in net income.

Contracts, transactions, or balances that are, in fact, effective hedges of foreign exchange risk will be accounted for as hedges without regard to their form.

More specifically, this Statement replaces FASB Statement No. 8, Accounting for the Translation of Foreign Currency Transactions and Foreign Currency Financial Statements and revises the existing accounting and reporting requirements for translation of foreign currency transactions and foreign currency financial statements. It presents standards for foreign currency translation that are designed to (1) provide information that is generally compatible with the expected economic effects of a rate change on an enterprise’s cash flows and equity and (2) reflect in consolidated statements the financial results and relationships as measured in the primary currency in which each entity conducts its business (referred to as its “functional currency”).

An entity’s functional currency is the currency of the primary economic environment in which that entity operates. The functional currency can be the dollar or a foreign currency depending on the facts. Normally, it will be the currency of the economic environment in which cash is generated and expended by the entity. An entity can be any form of operation, including a subsidiary, division, branch, or joint venture. The Statement provides guidance for this key determination in which management’s judgment is essential in assessing the facts.

A currency in a highly inflationary environment (3-year inflation rate of approximately 100 percent or more) is not considered stable enough to serve as a functional currency and the more stable currency of the reporting parent is to be used instead.

The functional currency translation approach adopted in this Statement encompasses:

a. Identifying the functional currency of the entity’s economic environment

b. Measuring all elements of the financial statements in the functional currency

c. Using the current exchange rate for translation from the functional currency to the reporting currency, if they are different

d. Distinguishing the economic impact of changes in exchange rates on a net investment from the impact of such changes on individual assets and liabilities that are receivable or payable in currencies other than the functional currency

Translation adjustments are an inherent result of the process of translating a foreign entity’s financial statements from the functional currency to U.S. dollars. Translation adjustments are not included in determining net income for the period but are disclosed and accumulated in a separate component of consolidated equity until sale or until complete or substantially complete liquidation of the net investment in the foreign entity takes place.

Transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency (for example, a U.S. company may borrow Swiss francs or a French subsidiary may have a receivable denominated in kroner from a Danish customer). Gains and losses on those foreign currency transactions are generally included in determining net income for the period in which exchange rates change unless the transaction hedges a foreign currency commitment or a net investment in a foreign entity. Intercompany transactions of a long-term investment nature are considered part of a parent’s net investment and hence do not give rise to gains or losses.

SOURCE: fasb.org

IFRS RULES

IAS 21

An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of this Standard is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements.

This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. IAS 39 applies to hedge accounting.

This Standard does not apply to the presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency, or to the translation of cash flows of a foreign operation (see IAS 7 Statement of Cash Flows).

Functional currency

Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency:

(a) the currency:

(i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and

(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.

(b) the currency that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).

Reporting foreign currency transactions in the functional currency

Foreign currency is a currency other than the functional currency of the entity.

Spot exchange rate is the exchange rate for immediate delivery.

Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation.

A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

At the end of each reporting period:

(a) foreign currency monetary items shall be translated using the closing rate;

(b) non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and

(c) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise.

However, exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognized in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (e.g. consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment.

Furthermore, when a gain or loss on a non-monetary item is recognized in other comprehensive income, any exchange component of that gain or loss shall be recognized in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss

Translation to the presentation currency/Translation of a foreign operation

The Standard permits an entity to present its financial statements in any currency (or currencies). For this purpose, an entity could be a stand-alone entity, a parent preparing consolidated financial statements or a parent, an investor or a venturer preparing separate financial statements in accordance with IAS 27 Consolidated and Separate Financial Statements. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency.

For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.

An entity is required to translate its results and financial position from its functional currency into a presentation currency (or currencies) using the method required for translating a foreign operation for inclusion in the reporting entity’s financial statements.

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

(a) assets and liabilities for each statement of financial position presented (i.e. including comparatives) shall be translated at the closing rate at the date of that statement of financial position;

(b) income and expenses for each statement of comprehensive income or separate income statement presented (i.e. including comparatives) shall be translated at

exchange rates at the dates of the transactions; and

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than

those of the reporting entity.

On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognized in other comprehensive income and accumulated in the separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognized (see IAS 1 Presentation of Financial Statements (as revised in 2007)).

On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognized in other comprehensive income.

SOURCE: ifrs.org

IFRS/GAAP MAJOR DIFFERENCES

FUNCTIONAL CURRENCY DETERMINATION

Primary Indicators

Secondary Indicators

IFRS

1. Currency that mainly influences sales prices
for goods and services; often the price sales
transaction is denominated
2. Currency of the country whose competitive forces and regulations that determines the sales prices of its goods and services.
3. Currency that mainly influences the labor, materials, and other costs of providing goods and services.

1. Currency in which financing activities are generated.
2. Currency in which receipts from operating activities are usually retained.
3. Extensions of reporting entity or autonomous.
4. Reporting entity transaction are high or low proportion.
5. Affect of cash flows on reporting entity.
6. Can fulfill debt service without funds from reporting entity.

U.S. GAAP

1. Currency in which the entity primarily generates and expends cash, if direct extension of parent, may not be local currency.
2. Operations are self contained and integrated in that country.

NO similar indicators

SOURCE: www.grantthornton.com April 2012 IFRS vs. US GAAP Reporting Webinar

PLEASE USE THE LINK BELOW FOR DETAILS REGARDING POSTING JOURNAL ENTRIES.

· Preparation of Journal Entries

AIS documentation:

http://docs.oracle.com/cd/E16582_01/doc.91/e15123/enterforeigncurrencyje.htm

This link will serve as your reference (textbook) for this topic. There are five sections included in this Chapter 11 Entering and Processing Foreign Currency Journal Entries.

IAS FUNCTIONAL CURRENCY INDICATORS

Factors Considered in Determining the Functional Currency. Keep in mind that the functional currency of an entity can be difficult to determine in some cases.

In accordance with IAS 21, The Effects of Changes in Foreign Exchange Rates, the following factors should be considered first in determining an entity’s functional currency:

1. The currency (a) that mainly influences sales prices for goods and services and (b) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.

2. The currency that mainly influences labor, material, and other costs of providing goods and services.

If the primary factors listed above are mixed and the functional currency is not obviously, the following secondary factors must be considered:

3. The currency is which funds from financing activities are generated.

4. The currency in which receipts from operating activities are usually retained.

5. Whether the activities of the foreign operation are an extension of the parent’s or are carried out with a significant amount of autonomy.

6. Whether transaction with the parent are a large or a small proportion of the foreign entity’s activities.

7. Whether cash flows generated by the foreign operation directly affect the cash flow of the parent and are available to be remitted to the parent.

8. Whether operating cash flows generated by the foreign operation are sufficient to service existing and normally expected debt or whether the foreign entity will need funds from the parent to service its debt.

*International Accounting, Doupnik and Perera, 3rd edition, page 419 Exhibit 8.3

Homework Assignment

This week we are discussing functional currency…what is the definition?

Functional currency is the currency of the subsidiary’s primary economic environment. It is usually identified as the currency in which the company generates and expends cash.

Your assignment is to report on the functional currency of your MNC. When researching your answer keep in mind the following and include details regarding your MNC:

Both U.S. GAAP and IFRS recommend the following factors:

· the location of primary sales markets,

· sources of materials and labor,

· the source of financing, and

· the amount of intercompany transactions should be evaluated in identifying an entity’s functional currency.

U.S. GAAP does not provide any guidance as to how these factors are to be weighted (equally or otherwise) when identifying an entity’s functional currency. Unlike U.S. GAAP, IAS 21 provides a hierarchy of factors to consider (reference the exhibit on the next page for details).

Your initial post reporting on your MNC’s functional currency must be posted up by nlt Saturday evening in order to give everyone in the class the opportunity to respond.

ALSO, you are required to read the postings and respond to at least two of them. If someone asks a question of you, please take the time to also respond to those questions.

Your homework is to be posted in the chapter conference.

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