International Standards Convergence I. INTERNATIONAL FINANCIAL REPORTING STANDARDS The International Accounting Standards Board (IASB) develops and issues International Financial Reporting Standards (). The are designed to be a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. Many countries around the world have adopted or are adopting these standards. The most notable exception to the adoption of the is the United States. The U.S.-based Financial Accounting Standards Board (FASB) has stated that it will not adopt the. Instead, the FASB is working with the IASB on a convergence project that will reduce the differences between the and standards. This convergence project is an ongoing process. Many differences remain between and that will be resolved over time. Updated information regarding the progress of the convergence project can be found on the websites of the IASB (www.iasb.org) and the FASB (www.fasb.org). To analyze and compare U.S. companies with their global counterparts, it is important to understand the existing International Financial Reporting Standards and how these standards differ from. A. The Balance Sheet LOS 10.43.a Identify and explain the major international accounting standards for each asset and liability category on the balance sheet and the key differences from U.S. generally accepted accounting principles (GAAP). The following summarizes for key components of the balance sheet and compares and for each component. 2009 DeVry/Becker Educational Development Corp. All rights reserved. 10-79
Financial Reporting & Analysis 4 Study Session 10 Stalla Review for the CFA Exams 2009 Level I Balance Sheet Comparison of and Marketable Securities Inventories Property, Plant and Equipment Marketable securities should initially be recorded at fair value (generally the cost to acquire the security). Subsequent accounting for a marketable security depends on its classification: Held-to-maturity securities are reported at amortized cost. Held-for-trading securities, including derivatives, are reported at fair value, with unrealized gains and losses reported on the income statement. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported in equity as a component of other comprehensive income. Realized gains/losses and income (interest, dividends) are reported on the income statement for all marketable securities. For all financial instruments, including marketable securities, there must be disclosures of credit risk, liquidity risk, market risk, and risk management policies and procedures. Inventory must be reported at the lower of cost or market. Inventory write-downs can be reversed. The method selected should reflect the order in which the products are sold, which calls for using specific identification whenever possible. Weighted average cost or FIFO (first in, first out) are both acceptable alternatives. The LIFO costing method is prohibited. Fixed assets must be reported at cost less accumulated depreciation or at a revalued amount that reflects fair value of the asset at the time of revaluation less subsequent accumulated depreciation. Revaluation gains are recorded as an increase to equity, unless reversing a prior revaluation decrease. Revaluation decreases are reported on the income statement unless reversing a prior revaluation increase. No significant differences from. Although not discussed in the source reading, under the unrealized gains and losses on derivative instruments are reported on the income statement or as a "direct-to-equity" adjustment in other comprehensive income. Inventory is reported at the lower of cost or market. The reversal of inventory writedowns is prohibited. The costing method is not required to reflect the actual flow of the inventory. The cost of inventory can be determined using specific identification, weighted average cost, FIFO or LIFO. Fixed assets are reported at cost less accumulated depreciation. Revaluation is not permitted, unless the asset is determined to be impaired. 10-80 2009 DeVry/Becker Educational Development Corp. All rights reserved.
Balance Sheet Long-Term Investments Business Combinations Goodwill Less than 20% ownership (no significant influence) Account for the investment as a trading or available-for-sale security. Between 20-50% ownership (significant influence) Account for the investment using the equity method. Greater than 50% ownership (control) Consolidation. Joint control Proportionate consolidation is the preferred method; the equity method is allowed. Accounted for using the purchase method. The assets and liabilities of the acquired company are consolidated with the parent company at their fair values on the date of acquisition. The income statements and statements of cash flows of the parent and the acquired company are consolidated from the date of acquisition forward. Goodwill is the difference between the amount paid to acquire another company and the fair value of the net assets of the company acquired. Positive goodwill is considered to be an unidentifiable intangible asset because it cannot be bought and sold individually. Negative goodwill is reported as a gain in the period of the business acquisition after reassessing the acquisition cost and the fair values of the acquired entity's assets and liabilities. Goodwill must be tested annually for impairment. Impairment losses are reported on the income statement. Similar accounting rules, with the addition that the method used to account for the investment can also be based on the economic substance of the relationship between the investor and the investee (not just the extent of voting control). Also, the equity method is generally required when joint control exists, while proportionate consolidation is prohibited. No significant differences from. The accounting for purchase method business combinations is currently being reviewed jointly by the FASB and IASB. No significant differences from, although different terminology is used to describe the process of determining whether goodwill is impaired. 2009 DeVry/Becker Educational Development Corp. All rights reserved. 10-81
Financial Reporting & Analysis 4 Study Session 10 Stalla Review for the CFA Exams 2009 Level I Balance Sheet Intangible Assets Other Than Goodwill Provisions (Nonfinancial liabilities) Identifiable intangible assets are defined as arising from contractual or legal rights, or capable of being separated from the company and sold. Identifiable intangible assets are recorded at cost when the cost can be measured and it is probable that future economic benefits from the asset will flow to the company. Purchased or manufactured intangibles are recognized as assets while internally developed intangibles are not. Finite life intangibles are amortized over their useful lives. Indefinite life intangibles are not amortized, but are evaluated at least annually for impairment. Intangibles can be reported on the balance sheet at cost less amortization and impairment, or at a revalued amount equal to the fair value of the asset on the revaluation date less subsequent amortization. Revaluation increases are recorded as a component of equity, unless reversing a revaluation decrease. Revaluation decreases are reported on the income statement unless reversing a revaluation increase. Liabilities of uncertain timing or amount, including warranty obligations and contingent liabilities, are recognized when there is a present obligation resulting from a past event and the cost to settle the obligation can be reasonably estimated. The amount recognized is the best estimate (as of the balance sheet date) of the amount to settle the obligation. Finite life intangible assets are reported at cost less amortization and impairment. Indefinite life intangibles are reported at cost less impairment. Upward revaluation to fair value is not permitted. Although not described in the source reading, contingent liabilities are recognized on the balance sheet when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated. 10-82 2009 DeVry/Becker Educational Development Corp. All rights reserved.
B. The Income Statement LOS 10.43.b Identify and explain the major international accounting standards for major revenue and expense categories on the income statement, and the key differences from. The following summarizes the for key components of the income statement and compares and for each component. Comparison of and Income Statement Revenue Recognition: General Revenue Recognition: Construction Contracts Cost of Sales Administrative Expenses Income is defined as both revenues and gains. Revenues are inflows of economic benefits during the period from the ordinary course of business or increases in equity other than contributions from owners. Revenues are measured at the fair value of the consideration received. Revenues are recognized when: It is possible to measure the amount of revenue and the costs of the transactions. It is probable that economic benefits of the transaction will flow to the seller. To recognize revenue from the sale of goods, the risks and rewards of ownership must pass to the buyer and the seller must not retain control of the goods. To recognize revenue from the sale of services, the stage of completion of the service must be reliably measured. Two methods are available to account for construction contracts: When the outcome of the project can be reasonably estimated, the percentage of completion method is used. When the outcome of the project cannot be reasonably estimated, revenue is recognized to the extent that it is probable to recover costs. The cost of inventory sold is calculated using specific identification (preferred method), weighted average cost or the FIFO method. The LIFO method is prohibited. Expenses include losses because expenses are defined as decreases in economic benefits that decrease equity. The key principles are the same, although the following differences exist: defines revenues in terms of actual or expected cash flows. Revenue recognition focuses on realization and whether the revenue has been earned. The percentage of completion method is used when the outcome of the project can be reasonably estimated. When the outcome cannot be reasonably estimated, the completed contract method is used with no revenue or expense recognition until the project is completed (assuming that a profit is expected). The cost of inventory sold is calculated using specific identification, weighted average cost, FIFO or LIFO. Expenses do not include losses because expenses are defined as outflows that relate to primary operations. 2009 DeVry/Becker Educational Development Corp. All rights reserved. 10-83
Financial Reporting & Analysis 4 Study Session 10 Stalla Review for the CFA Exams 2009 Level I Income Statement Depreciation Expense Finance Costs Income Tax Expense Nonrecurring Items Depreciation methods must be reviewed annually for appropriateness. A depreciation method is appropriate only if it reflects the pattern of consumption of the asset. A change in depreciation method is a change in accounting method that is accounted for prospectively (going forward). Financing costs (interest) for acquisition, construction or production of an asset that will take a long time to complete can be expensed in the period incurred or capitalized and added to the cost of the asset. Temporary differences between and applicable tax law result in the recognition of deferred tax assets and deferred tax liabilities. Discontinued Operations: Recorded when a business component is held for sale or has been disposed of and management has no continuing involvement. Accounting Changes: Changes in accounting methods are accounted for retrospectively. Changes in accounting estimates are accounted for prospectively. Extraordinary Items: Gains and losses cannot be classified as extraordinary. Depreciation methods are not required to match the expected pattern of asset consumption. Financing costs (interest) for acquisition, construction or production of an asset that will take a long time to complete must be capitalized and added to the cost of the asset. Companies cannot expense such costs in the period incurred. Temporary differences between U.S. GAAP and applicable tax law result in the recognition of deferred tax assets and deferred tax liabilities. Discontinued Operations: has aligned with as described. Accounting Changes: has aligned with. Extraordinary Items: Gains and losses that are (material in amount), unusual in nature, and infrequent in occurrence are reported separately from income from continuing operations. 10-84 2009 DeVry/Becker Educational Development Corp. All rights reserved.
C. The Statement of Cash Flows LOS 10.43.c Identify and explain the major differences between international and accounting standards concerning the treatment of interest and dividends on the cash flow statement. Both and require that a statement of cash flows be included in the financial statements and that cash flows be classified as operating, investing or financing. and differ in the classification of interest and dividends as indicated below. Comparison of and Cash Flow Interest Received Dividends Received Interest Paid Dividends Paid Operating activities or investing activities (CFO or CFI) Operating activities or investing activities (CFO or CFI) Operating activities or financing activities (CFO or CFF) Operating activities or financing activities (CFO or CFF) Operating activities only (CFO) Operating activities only (CFO) Operating activities only (CFO) Financing activities only (CFF) 2009 DeVry/Becker Educational Development Corp. All rights reserved. 10-85