Appendix A Homework GAAP Allows Assets Written Down They Have

A-1

Appendix A

International Financial

Reporting Standards

After studying this chapter, students should be able to:

◼ Explain why accounting standards currently differ among countries around the world (LO1).

INSTRUCTOR’S MANUAL

A-2

Chapter Outline

LO 1

Why Do Accounting Standards Differ?

Accounting standards currently differ among countries around the world for several reasons:

◼ Legal system

• Common law system – fewer statutes written into the laws and thus more reliance on

interpretation by the courts.

◼ Taxation – some countries have significant differences between book income and taxable income

(U.S.) while others have fewer differences (most of Europe).

◼ Financing

• Corporations in some countries get financing from outside sources (creditors and

stockholders) and accountability is important.

◼ Relationships Between Countries – countries that have strong political and economic ties often

share similar accounting practices (Canada and Australia).

◼ State of Economic Development– more developed countries have detailed accounting rules to

deal with complex business arrangements, while developing countries are developing their

accounting standards.

APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS

LO 2

Benefits from a Single Set of Standards

Many U.S. publicly traded companies are global companies. Advantages to these companies of a single set

of accounting standards include:

◼ Save on Accounting Costs – A single set of accounting standards would save companies

considerable money in accounting fees.

◼ Make It Easier to Acquire Foreign Companies – a single set of standards would make it much

easier to make a decision on whether to acquire a foreign company.

LO 3

Who Is Responsible for Developing Global Accounting Standards?

The International Accounting Standards Board (IASB) establishes worldwide standards.

◼ Headquartered in London.

◼ IFRS Foundation includes among its principal objectives “to develop a single set of high quality,

understandable, enforceable and globally accepted international financial reporting standards

(IFRSs) through its standard–setting body, the IASB.”

INSTRUCTOR’S MANUAL

A-4

 In 2007, SEC dropped rule that required foreign companies who filed financial

statements with it had to adjust the statements to GAAP. Only stipulation is that the

LO 4

Major Differences Between U.S. GAAP and IFRS

◼ Chapter 1: Accounting as a Form of Communication

• Since IFRS is more principle based and its standards are less detailed than the FASB, the level

of disclosure required in the footnotes to the financial statements will be more detailed.

◼ Chapter 2: Financial Statements and the Annual Report

• FASB and IASB issued a joint statement “Conceptual Framework for Financial Reporting.”

 Objective of financial reporting and the qualitative characteristics that make accounting

◼ Chapter 3: Processing Accounting Information

• Processing of accounting information is a function of technology available rather than the

result of any standards.

◼ Chapter 4: Income Measurement and Accrual Accounting

◼ Chapter 5: Inventories and Cost of Goods Sold

• IASB strictly prohibits the use of LIFO.

 U.S. has LIFO conformity rule.

 Talk in the U.S. of repealing LIFO for tax purposes.

APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS

7-5

 If this were to happen, it is likely that its use for financial reporting purposes would

be eliminated as well.

• Both use lower–of-cost-or-market rule to value inventory, but standards differ:

◼ Chapter 6: Cash and Internal Control

• SOX requirements for internal control do not exist under IFRS.

◼ Chapter 7: Receivables and Investments

◼ Chapter 8: Operating Assets: Property, Plant, and Equipment, and

Intangibles

• Estimates of residual values and the depreciable lives of assets may be assessed differently.

 IFRS requires these estimates to be reviewed at least annually and any changes treated as

a change in estimate.

• Methods of evaluating impairment of goodwill differ.

• Research and development costs:

 Must be expensed under GAAP.

◼ Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money

• Although not required under GAAP, most companies prepare a balance sheet presenting

current and noncurrent classifications for assets and liabilities. IFRS requires the classified

balance sheet.

INSTRUCTOR’S MANUAL

A-6

 Standards differ on what is considered probable.

◼ Chapter 10: Long-Term Liabilities

• Criteria concerning whether a lease is a capital lease are similar for IFRS and GAAP.

 Criteria are considered more like “guidelines” for IFRS reporting and companies may

◼ Chapter 11: Stockholders’ Equity

• Financial instruments that have both debt and equity characteristics (convertible bonds).

 IFRS requires the portion of the instrument that represents debt to be reported as a

liability and the portion that represents equity to be reported in stockholders’ equity.

◼ Chapter 12: The Statement of Cash Flows

• Under GAAP, interest (paid or received) is always considered an operating activity.

 Under IFRS, can be either operating or financing (payments) or investing (receipts).

◼ Chapter 13: Financial Statement Analysis

• IFRS does not recognize extraordinary items. U.S. GAAP now prohibits any items to be

classified as extraordinary.

LO 5

Format and Terminology Differences

◼ Significant differences exist in how financial statements are presented and the names given to

various accounts. (Refer to the Daimler AG partial financial statements in Exhibit A-1).

APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS

7-7

◼ Under IFRS, the differences in ordering include:

• Many statement items are referenced to notes to the financial statements since IFRS is less

rule based.

◼ Under IFRS, the differences in terminology include:

• Share Capital is used instead of Capital Stock.

INSTRUCTOR’S MANUAL

A-8

Lecture Suggestions

LO 2

As the globalization of business continues, and people invest in companies from all over the

world, the need for a single set of standards becomes more critical. Discuss with students the need

for unified standards. How can there be comparability between companies if the financial

statements aren’t prepared using the same set of rules. Compare to playing a sport with one team

playing under one set of rules and the other team playing under a different set of rules. How could

you even keep score?

LO 4

All of the Big 4 accounting firms have excellent resources available on their websites to help you

keep current with IFRS. You may want to review these websites before presenting the material in

the chapter.

they think moving to IFRS will make statements more comparable.

APPENDIX A INTERNATIONAL FINANCIAL REPORTING STANDARDS

Projects and Activities

LO 2

LO 4

In-class discussion: Is Conversion to IFRS really going to happen?

The discussion about the U.S. adopting IFRS has been ongoing for well over 10 years. During this

period, the move towards IFRS has gained and lost momentum. Do you think the U.S. will

abandon GAAP and adopt IFRS?

Solution

The answer to this will depend in a large part on when this topic is addressed. A recent article

states:1

to identify and quantify the material differences they reported under IFRS in terms of U.S.

GAAP.)

However, he added, “there does seem to be continued support for the objective of a single set of

high-quality globally accepted accounting standards.” The chief accountant stressed that the U.S.

Financial Accounting Standards Board and the International Accounting Standards Board continue

to communicate and keep each other’s views very much in mind when each considers its own

actions.

Outside assignment: Where does the U.S. stand with IFRS now?

FASB and IFRS have worked together over the last several years to develop a plan of convergence

INSTRUCTOR’S MANUAL

A-10

Solution