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List the steps that a non-U.S. company must follow to list its shares on a U.S. stock market

A registration with the SEC under the 1934 Securities Exchange Act is mandatory for non-U.S. companies that intend to list on a U.S. stock market. Such a registration can be achieved for firms that intend to do only a listing by filing a form 20-F with the SEC. However, if non-U.S. companies issue securities in the United States along with the U.S. listing, then the sale of these securities must be registered under the 1933 Securities Act, typically through the filing of an F-1 statement. This registration must be declared effective subsequent to the actual listing or the offering of securities for sale in the event of an equity capital acquisition program.

Current cash debt coverage

Are company's cash flows sufficient to pay loans due now?

IFRS History

Be sure to read Chapter 11.1 - 11.2 Will not discuss much in class, but fair game for exam. Standard setter for IFRS is the International Accounting Standards Board (IASB) Newer standards are called: International Financial Reporting Standards (IFRS) (i.e., IFRS1, IFRS2, etc.) Older standards called: International Accounting Standards (IAS) (i.e., IAS1, IAS2, etc.) US concerns about the IASB No government agency oversees IASB 25% of financing came from major accounting firms

Quick ratio

Can company pay loans due now with REALLY liquid assets?

Current ratio

Can company pay loans due now with liquid assets?

IFRS Adoption in the US

2005-2009: FASB and IASB committed to convergence of U.S. GAAP and IFRS and identified key convergence projects Several convergence projects appear to have reached an impasse

International Accounting Standards (IAS)

A committee whose missions are to formulate international accounting standards used in the presentation of financial statements and to promote their worldwide acceptance and observation.

Indicate the role of American Depository Receipts in the issuing of securities of non-U.S. companies in the United States.

A depository receipt (DR) is a derivative instrument usually representing a certain fixed number of publicly traded shares of a non-U.S. corporation. A DR that is traded in the United States is called an American Depository Receipt (ADR). ADRs may trade freely, subject to some conditions, like any U.S. security on one of the major exchanges like the New York Stock Exchange (NYSE), NASDAQ, or the American Stock Exchange (AMEX), or trade over the- counter (OTC) in the "pink sheet" market. The ADR is treated similarly to a domestic security for the purposes of clearance, settlement, transfer, and ownership.

1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS).

A dramatic rise in cross-border financial activity and the resulting internationalization of equity markets since the late 1980s have transformed the investor profiles of many companies. The movement has been away from a primarily debt-financed business world, in which a relatively informal flow of information between companies and creditors sufficed, to a primarily equity-financed environment in which more financial communication is demanded.

How to Merge IFRS and US GAAP?

Full Adoption of IFRS Ditch any local standards (e.g., US GAAP) and start using IFRS Nice and simple, but not gonna happen Adopt IFRS after Some Incorporation Process Convergence Approach: Maintain local standards and work with IASB to converge standards over time Endorsement Approach: Pick and choose which parts of IFRS to incorporate into local standards Condorsement of IFRS (CONvergence + endorsement) Converge what exists as much as possible (while minimizing costs) For new standards, add necessary provisions for use locally

Full Disclosure Principle

Full disclosure principle - Financial reports should include all financial facts that would influence the judgment of an informed reader Pros-Allows users to make more informed decisions (i.e., decreases information asymmetry) Useful for uncovering fraud in a more timely manner (e.g., imagine Enron trying to describe their Special Purpose Entities) Cons-Cost of assembling expanded disclosures can be large (e.g., requires additional personnel) Volume of disclosure can obscure important parts - information overload

Liquidity Ratios

Ratios that measure the company's short-term ability to pay its maturing obligations.

Explain some of the major differences between IFRS and U.S. GAAP.

Some of the areas in which important differences arise include the fact the LIFO inventory is not permitted under IFRS, expenses on the income statement can be listed either by nature or function under IFRS, balance sheet items are generally listed in order of increasing liquidity, extraordinary items are not allowed under IFRS, property, plant and equipment can be revalued on a regular basis under IFRS, reversal of previously written down assets are allowed under IFRS, and development costs are capitalized under IFRS.

International Financial Reporting Standards (IFRS)

Standards issued by the International Accounting Standards Board (IASB) as part of a drive toward the global harmonization of accounting practices.

Explain the role of form 20-F filed with the Securities and Exchange Commission.

The 20-F allows the non-U.S. company to retain its local GAAP reporting and still be able to list on a U.S. stock exchange, so long as it meets one of two alternative conditions for explaining any differences between the reported numbers and numbers derived under U.S. GAAP. The firm may either (1) reconcile net income and the shareholders' equity, thus showing earnings based on U.S. GAAP; or (2) fully disclose all financial information required of U.S. firms, including such detailed information as segmental disclosures.

Describe the SEC's work plan for incorporating IFRS into the financial reporting system for U.S. issuers

The work plan focuses on the condorsement approach. Under this approach, a U.S. standard-setter would be retained. The standard-setter would facilitate the transition process by incorporating IFRS into U.S. GAAP over some defined period. At the end of this period, the objective would be that a U.S. issuer would be compliant with both U.S. GAAP and IFRS. This alternative has been labeled "condorsement."

Describe four remaining joint convergence topics between the IFRS and FASB.

Three of the major convergence topics include accounting for leases, insurance contracts, financial instruments, and revenue recognition.

One important limitation of ratios is

that they generally are based on historical cost, which can lead to distortions in measuring performance.

Financial Statement Presentation

topic- US GAAP-IFRS Financial Periods presented- two years of balance sheet and three years for other statements- Two years all statements Balance sheet presentation- Classified or non-classified;items listed in order of decreasing liquidity- Current/non- current format (classified);items listed in order of increasing liquidity Income statement presentation- Expenditures usually listed by function- expenditures listed by function or nature Unusual items- Reported on face of IS;disclosed in notes- reporting on face of the IS is optional , disclosure in notes required statement of cash flows- direct or indirect; more guidance on operating, investing, and financing classifications- direct or indirect; less guidance on operating, investing, and financing classifications;can begin indirect with profit before tax rather than net income

Selected US GAAP vs. IFRS Differences

Topic- US GAAP- IFRS *1. Inventory-Lower of cost or market (current replacement cost); LIFO permitted-Lower of cost or realizable value (best estimate of amount expected to be realized); LIFO prohibited 2. Development costs-Research and development costs are expensed (unless specific standard states otherwise - software)-development costs capitalized when technical and economic feasibility demonstrated 3. Property, plant, and equipment-Historical cost-Historical cost or revalued amounts (must be regularly revalued once option selected) 4. Contingent liability-Recorded if probable and estimable; footnoted if not estimable (unless probability is remote)-Not recognized; footnote if not remote (include amount in footnote) 5. Leases-More specific classification guidance for operating vs. capital lease. Different income statement presentation for operating vs. capital lease.-Less specific classification guidance for operating vs. finance (capital) lease. Same income statement presentation for operating vs. finance lease. 6. Insurance Contracts (insurer's perspective)-Profit recognition based on type of contract.-Profit recognition based on timing of payments and risk of claim payment regardless of contract type. 7. Financial Instruments-Accounting dependent on type of instrument. Impairment: Examine full life of instrument.-Accounting dependent on cash flow characteristics of instrument. Impairment: Examine 12-month period.

Financial Accounting

U.S. Generally Accepted Accounting Principles (GAAP) Primarily rules-based standards of accounting determined by the Financial Accounting Standards Board (FASB) Other GAAP (e.g., Canadian GAAP) Different countries have different rules of accounting and different standard setting organizations International Financial Reporting Standards (IFRS) Attempt to create standard principles-based accounting determined by International Accounting Standards Board (IAS) Increased globalization requires improved comparability

PP&E Example: Component Depreciation

We also can't agree on how to calculate the numbers that go in the financial statements. Component depreciation as an example IFRS requires component depreciation Break property into smaller, depreciable parts Example: Roof (13 year life), Electrical system (15 year life), Remainder of Building (30 year life) US GAAP allows component depreciation, but companies rarely use it Example 11-1

No US GAAP + US Stock Exchange?

When a foreign company wants to sell shares on an United States based market the SEC has different rules for them F-1: Registration statement for foreign securities (first issuance) As opposed to form S-1 for US based companies Annual report can be filed using either IFRS or the company's local GAAP on form 20-F (equivalent to 10-K for US company) If local GAAP (e.g., Dutch GAAP, German GAAP, etc.), must reconcile to US GAAP or provide additional disclosure If IFRS, no reconciliation to US GAAP required Due to efforts to converge US GAAP and IFRS, the two are now "close enough" for financial statement users to understand

"Active" Convergence Projects

Your book lists four active convergence projects, but I have some updates for you! Revenue recognition - fully converged (except for that more-likely-than-not issue) & you already learned it! Leases - discontinued (agree to disagree) Insurance contracts - discontinued (agree to disagree) Financial instruments - partial convergence (agree to disagree on some things?)

11.1 The Increasing Importance of International Accounting Standards

The International Accounting Standards Committee (IASC) was founded in 1973. Prior to 2001, it has been the driving force toward global harmonization of accounting practices. Its objective was to formulate and to publish standards to be followed in the preparation of financial statements, to promote worldwide acceptance of these standards, and to work generally for improvements in international accounting. Initially, the IASC made decisions on accounting issues and reported them in the form of International Accounting Standards (IAS). The first international accounting standard was issued in January 1975; 41 standards were issued by January 2001. In January 2001, the IASC announced formation of the International Accounting Standards Board (IASB). This board is comprised of members from various countries (including the United States) with a goal of developing high-quality internationally accepted accounting standards for users of financial statements. The Board includes 12 full-time members and 2 part-time members. This board is responsible for issuing standards known as International Financial Reporting Standards (IFRS). In April 2001, the IASB approved a resolution stating that all IASC Standards and Standing Interpretation Committee (SIC) interpretations in effect as of April 1, 2001 (the date on which the IASB assumed its duties) would remain in effect until amended or withdrawn by the IASB. To date, thirteen IFRS have been issued.

List some of the milestones that must be achieved before the SEC will require adoption of IFRS.

The four milestones discussed in the chapter are: (1) improvements in accounting standards; (2) the accountability and funding of the IASC Foundation; (3) the improvement in the ability to use interactive data for IFRS reporting; and (4) education and training relating to IFRS.