Chapter 11

In 2019, the number of countries around the world that required all or most domestic listed companies to use IFRS was

105

The International Accounting Standards Committee (IASC) operated from

1973 until 2001.

The International Accounting Standards Board (IASB) has been setting international standards since

2001

The U.S. Securities and Exchange Commission (SEC) has allowed foreign companies to use IFRS in preparing financial statements filed with the SEC since

2007

The U.S. Securities and Exchange Commission (SEC) issued the so-called "IFRS Roadmap" in the year .

2008

A 2015 IFRS Foundation study found that the number of countries that either required or permitted private companies to use IFRS for SMEs was

73

In 2019, the two most economically important countries that did not permit the use of IFRS by domestic listed companies were

China and the United States.

Two countries that historically influenced accounting rules in other countries through colonialism are

England and France.

Foreign companies listed on a U.S. stock exchange must use U.S. GAAP in preparing the annual report submitted to the U.S. Securities and Exchange Commission

False

True or false: Because U.S. public companies are not allowed to use IFRS in preparing their financial statements there is no need for U.S. accountants to have a working knowledge of IFRS.

False

True or false: Converting IFRS-based amounts to a U.S. GAAP basis involves the use of a single rule of thumb for converting each line item in the financial statements.

False

The authoritative pronouncements that make up IFRS includes IFRSs issued by the .

IASB

Arguably, the greatest difference between IFRS and U.S. GAAP with respect to the presentation of financial statements stems from the fact that

IFRS has a single standard designed to govern the presentation of financial statements, and U.S. GAAP does not.

is the acronym for the international organization that supported the IASC's efforts at developing accounting standards that foreign issuers could use in entering capital markets outside their home country.

IOSCO

The International Accounting Standards Committee (IASC) developed

International Accounting Standards (IASs).

A company is required to prepare financial statements under IFRS for the first time for the year ended December 31, 2020, and must provide one year of comparative information. This company's transition date to IFRS is

January 1, 2019.

Historically, high rates of inflation significantly influenced the development of accounting principles in

Latin America.

A version of IFRS created in 2009 and intended to be used by nonpublic (private) companies is called IFRS for .

SME

According to the IASB Conceptual Framework, general purpose financial statements are primarily intended to provide useful information to investors and creditors.

True

Based upon IOSCO's recommendation, many stock exchanges around the world permitted foreign companies to use IASC standards rather than local standards in preparing their financial statements.

True

True or false: Differences in financial statements across countries exist with regard to format, terminology, and recognition and measurement principles.

True

True or false: Some countries fully adopt IFRS as issued by the IASB without any review being conducted by a local organization.

True

Bank overdrafts that are part of a company's cash management plan are classified as a liability under U.S. GAAP. Under IFRS, such bank overdrafts are classified as

a reduction in cash and cash equivalents.

In contrast to code law countries, common law countries tend to have

a strong accounting profession or other independent body that establishes accounting standards.

The use of IFRS worldwide might not lead to complete comparability of financial statements across countries because

accountants across countries might interpret IFRS differently due to differences in culturally based biases across countries. some English-language terms used in IFRS are difficult to translate into other languages.

Of the two extreme approaches to adopting IFRS accounting policies, a so-called "fresh start" approach would allow a company to

adopt accounting policies that best reflect economic reality.

Of the two extreme approaches to adopting IFRS accounting policies, a so-called "minimize change" approach would allow a company to

adopt accounting policies under IFRS most consistent with the company's current policies.

The European Union

adopts individual IFRSs only after an extensive review and endorsement process has been completed.

As compared to full IFRS, IFRS for SMEs simplifies financial reporting by requiring

all borrowing costs to be expensed (rather than some being capitalized). goodwill to be amortized over useful life (rather than tested for impairment).

With respect to the use of IFRS, a country might

allow foreign companies listed on a domestic stock exchange to use IFRS. adopt IFRS as its national GAAP. allow domestic listed companies to use IFRS in preparing consolidated financial statements.

Ways in which IFRS for SMEs is a less complex set of standards than full IFRS include

allowing only the cost model for property, plant, and equipment. not requiring segment reporting.

The International Accounting Standards Committee (IASC), which developed International Accounting Standards (IASs) from 1973 until 2001, was heavily criticized for

allowing two or more methods to be used in accounting for some accounting issues.

In some countries, taxation exerted a significant influence on financial reporting because of a requirement that

an expense must be recognized in the financial statements to be tax deductible.

Converting IFRS-based amounts to a U.S. GAAP basis requires

an expertise in both IFRS and U.S. GAAP.

The accounting for a contingent liability is an area in which a significant measurement difference exists between IFRS and U.S. GAAP. Measurement differences deal with the accounting issue of

at what amount an item should be reported in the financial statements.

Classification, presentation, or disclosure differences exist between IFRS and U.S. GAAP with regard to

bank overdrafts. convertible debt.

The "date of transition" to IFRS is the

beginning of the earliest period for which comparative information under IFRS is presented.

The formal FASB-IASB convergence project has come to an end

but informal convergence between U.S. GAAP and IFRS has occurred.

Foreign companies listed on a U.S. stock exchange may use foreign GAAP in preparing the annual report filed with the U.S. Securities and Exchange Commission

but must also provide a reconciliation of net income and stockholders' equity to U.S. GAAP.

Accounting diversity makes it difficult for potential international investors to the financial statements of companies located in different countries that use different accounting standards.

compare

Differences in financial reporting across countries creates a problem for international investors in

comparing the financial position and performance of companies located in different countries.

The historical requirement in Germany that an expense had to be recognized in accounting net income to be tax deductible was referred to as the reverse principle.

conformity

Research has found that accountants in France and Germany are likely to estimate warranty expense at a higher amount than accountants in the United Kingdom. This difference is thought to be a result of differences across countries in the accounting value of

conservatism.

In many foreign countries, publicly traded companies must use IFRS in preparing their financial statements.

consolidated

The problems caused by worldwide accounting diversity

could be solved by all countries adopting a common set of accounting standards.

Some foreign companies refer to accounts receivable as .

debtors

An accounting item for which significant recognition differences exist between IFRS and U.S. GAAP is

development costs.

Some foreign companies report operating expenses on the basis of their nature and as a result

do not report cost of goods sold as a separate line item in the income statement. report wages and salaries paid to all employees as a separate line item in the income statement.

The driving force behind the desire to establish a single set of accounting standards worldwide is to

eliminate the problems resulting from differences in accounting across countries.

According to IAS 1, "Presentation of Financial Statements," the overriding principle that should be followed in preparing financial statements is

fair presentation.

IFRS for SMEs can be adopted for private companies by any country regardless of whether it has adopted full IFRS for public companies. To date,

fewer countries have adopted IFRS for SMEs than have adopted full IFRS.

In 2000, the International Organization of Securities Commissions (IOSCO) recommended that stock exchange regulators allow

foreign companies to use IASC standards in preparing their financial statements rather than local accounting standards.

Accounting diversity can create an additional cost for companies interested in

having stock listed on the stock exchange of a foreign country.

Historically, accounting in Latin America differed from accounting in other parts of the world because of

high inflation.

A U.S. CPA should have a working knowledge of IFRS because

in a U.S. company that owns foreign subsidiaries, a U.S. CPA might need to convert the IFRS financial statement of a foreign subsidiary to U.S. GAAP. U.S. companies might be owned by foreign entities for which a U.S. CPA might need to use IFRS to prepare a reporting package.

Unlike U.S. companies, which split the total amount of asset depreciation recognized in net income between cost of goods sold and selling and administrative expenses, some foreign companies report the total amount of depreciation recognized in net income

in a single line item in the income statement.

Differences in balance sheet presentation exist between foreign companies and U.S.-based companies

in both format and terminology.

Areas in which the IASB and FASB tried but were unable to agree on a common accounting standard include

income taxes. research and development. noncontrolling interest.

Major factors that historically influenced the development of financial reporting practices across countries include

inflation. financing system.

The International Organization of Securities Commissions (IOSCO) supported the IASC in its efforts at developing IASs that could be used by companies

instead of foreign (local) GAAP when entering a foreign capital market.

Authoritative pronouncements that make up IFRS includes issued by the International Financial Reporting Interpretations Committee (IFRIC).

interpretations

After the formal FASB-IASB convergence project had come to an end, the FASB nevertheless converged U.S. GAAP with IFRS with regard to

inventory measurement. extraordinary items.

According to the IASB Conceptual Framework, general purpose financial statements are primarily intended to be useful to

investors and creditors.

U.S. GAAP permits the use of LIFO in accounting for inventory, but IFRS does not. This is an example of a

measurement difference between IFRS and U.S. GAAP.

If no IASB standard is relevant for a particular accounting issue, according to the IFRS accounting policy hierarchy, an entity

might use the FASB (U.S. GAAP) standard related to this issue.

Countries with a weak equity-outsider financing system tend to have a system of financial reporting that is

more conservative and provides less disclosure.

In preparing their consolidated financial statements, stock exchange listed companies in the European Union

must use IFRS.

IFRS for SMEs was created to meet the needs of

non-publicly traded companies.

When a particular item to be accounted for is not covered by a specific IASB standard (IFRS, IAS, IFRIC, SIC), the IFRS accounting policy hierarchy requires an entity to first refer to

other IASB standards that related to similar or related items.

Ways in which countries use IFRS for SMEs include

permitting private companies a choice between IFRS for SMEs and full IFRS. requiring private companies to use IFRS for SMEs. permitting private companies a choice between IFRS for SMEs, full IFRS, or local GAAP.

The member nations of the European Union have adopted a common set of accounting standards as a result of

political and economic ties.

One problem caused by worldwide accounting diversity for multinational companies relates to

preparing consolidated financial statements in accordance with parent company GAAP.

In many foreign countries, traded companies must use IFRS in preparing their consolidated financial statements.

publicly

Differences exist across countries in the preparation and presentation of financial statements with regard to

recognition principles. format. measurement principles. terminology.

In preparing the opening IFRS balance sheet, an entity must

recognize assets required to be recognized under IFRS that were not recognized under previous GAAP. measure assets in accordance with IFRS that were measured differently under previous GAAP. reclassify assets in accordance with IFRS that were classified differently under previous GAAP.

With respect to the use of IFRS, a county might permit or domestic listed companies to use IFRS in preparing consolidated financial statements.

require

Generally speaking, IAS 1, "Presentation of Financial Statements,"

requires a statement of changes in equity to be included in a set of financial statements. requires an entity to classify assets and liabilities as current and noncurrent.

In preparing an opening IFRS balance sheet, if a liability has been measured under previous GAAP in a manner inconsistent with IFRS, an entity must

retrospectively apply the relevant IASB standard to measure that liability.

As a result of the convergence process, the IASB and FASB were successful in developing a joint standard on

revenue recognition.

The proposed rule issued by the U.S. Securities and Exchange Commission (SEC) in 2008 that could have led to the required use of IFRS by U.S. publicly traded companies was called the IFRS .

roadmap

The goal of the FASB-IASB convergence process is to have but not identical standards.

similar

In its first set of IFRS financial statements, an entity must provide a reconciliation from previous GAAP to IFRS for

stockholders' equity at the end of the comparative (prior) period.

In its first set of IFRS financial statements, an entity must provide a reconciliaton from previous GAAP to IFRS for

stockholders' equity at the end of the comparative (prior) period. net income of the comparative (prior) period.

The accounting system is more likely to require extensive disclosure and less likely to be influenced by taxation in a country that has a

strong equity-outsider financing system.

With regard to foreign companies that file financial statements with the U.S. Securities and Exchange Commission (SEC), the SEC requires those foreign companies

that use a foreign GAAP other than IFRS to provide a reconciliation to U.S. GAAP.

In recognition of the fact some expressions in the original English-language version of IFRS may be difficult to translate into other languages, the U.S. Securities and Exchange Commission (SEC) requires foreign SEC registrants to use

the English-language version of IFRS in preparing financial statements filed with the SEC.

Convergence between IFRS and U.S. GAAP can occur by

the IASB adopting an existing FASB standard. the FASB and IASB jointly developing a new standard. the FASB adopting an existing IASB standard.

The International Accounting Standards Committee (IASC) was criticized because

the IASC often allowed two methods for dealing with a specific accounting issue.

Accounting diversity can create a problem for companies that wish to have stock listed on a stock exchange in a foreign country because the foreign stock exchange might require the company to use

the accounting standards of the foreign country in preparing financial statements.

IAS 1, "Presentation of Financial Statements," provides guidance with respect to

the components that make up a complete set of financial statements. the purpose of financial statements.

Measurement differences between IFRS and U.S. GAAP exist with respect to

the use of LIFO for measuring inventory. the use of a revaluation model for measuring property, plant, and equipment.

A company transitioning to IFRS must prepare an opening balance sheet on the so-called date.

transition

Accounting for development costs is a prime example of a recognition difference between IFRS and U.S. GAAP. Recognition differences relate to the questions of

whether or not, how, and when an accounting item should be recognized.

A majority of the members of the International Accounting Standards Board (IASB) must

work for the IASB on a full time basis.