1. Vysoká škola finanční a správní
Accounting Systems 2
Vysoká škola finanční a správní
Jaromír R. Stemberg

2. Literature
McEwen, Ruth Ann: Transparency in Financial Reporting: A concise comparison of IFRS and US GAAP Harriman House ltd., Hampshire UK 2009 ISBN-13:

3. Layout of the Course Basic principles of IFRS/IAS
Conceptual Framework and reporting requirements
Financial statements: items, recording by IFRS, US GAAP differences
Assets
Liabilities
Equity
Profit and Loss
Cash Flow

4. Grading
Attendance: 30% (6% for each lesson) Short Test: 20% (3rd lesson) Final test: 50%
Minimum to pass: 60%
90-100% A (excellent) % B (excellent minus) % C (very good) % D (very good minus) % E (good) <60% F (failed)

5. IFRS and US GAAP

6. Why do differences exist?
US Financial Accounting Standards Board (FASB) developed the first set of standards
International Accounting Standards Board (IASB) had the advantage of being inspired by some of the perceived problems in the FASB standard
Differences:
- in standards themselves - in interpretation

7. Will the differences ever be eliminated?
“Norwalk Agreement” in 2002: Both Boards (FASB and IASB) publicly declared their commitment to the convergence of IFRS and US GAAP
US Securities and Exchange Commission (SEC) eliminated the requirement for foreign issuers to reconcile their IFRS results to US GAAP
Unless the wording of the standards is totally unified, interpretational differences will almost certainly stay
Depends on willingness of national regulators and industry groups to cooperate

8. IAS/IFRS

9. Standards amended some IASs
International Accounting Standards (IASs) were issued by the IASC from 1973 to In 2001, the IASC was replaced by the IASB.
Since then, the IASB has:
amended some IASs
replaced some IASs with new International Financial Reporting Standards (IFRSs)
adopted new IFRSs on topics for which there was no previous IAS
issued Interpretations of Standards

10. Compliance with Standards
Financial statements may not be described as complying with IFRSs unless they comply with all of the requirements of each applicable standard and each applicable interpretation

11. IASB Conceptual Framework
“IASB Framework for the Preparation and Presentation of Financial Statements” was Adopted by the IASB in April 2001
Not a standard, serves as a guide
Resolves accounting issues that are not addressed directly in a standard
If no standard or interpretation applies to a transaction, an entity must use its judgment in developing and applying an accounting policy that results in information that is relevant and reliable

12. IAS
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 14 Segment Reporting IAS 16 Property, Plant and Equipment IAS 17 Leases

13. IAS
IAS 18 Revenue IAS 19 Employee Benefits IAS 20 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 IAS 29 Financial Reporting in Hyperinflationary Economies

14. IAS
IAS 31 Interests In Joint Ventures 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

15. IFRS
Preface to International Financial Reporting Standards Framework for the Preparation and Presentation of Fin. Statements IFRS 1 First-time Adoption of International Fin. Reporting Standards IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IFRS 6 Exploration for and Evaluation of Mineral Assets IFRS 7 Financial Instruments: Disclosures IFRS 8 Operating Segments IFRS 9 Financial Instruments

16. Conceptual Framework
Preparation and Presentation of Financial Statements is to be based on
Accrual principles
Continuity and consistency
Quality requirements
Understandable
Relevant
Reliable
Comparable

17. Conceptual Framework Basic elements of financial statements
Assets
Liabilities
Owners’ Equity
Revenue
Expenses
Presentation of Financial Statements
Balance sheet
Income statement
Cash flow statement
Statement of changes in equity
Notes

18. Reporting Requirements

19. Financial Statements
No given template nor detail contents of financial statements except of:
Basics classification of assets, liabilities and equity
Distinction of revenue/expenses and gains/losses
Required items
Notes
Principle of relevance - items must be listed separately if they account for:
2% of total assets (B/S)
5% of total revenue or expenses (P&L)

20. Classification of Balance Sheet Items
Assets:
Criteria for long and short-term assets distinction
Assets can be sorted also by liquidity
Both systems are equally acceptable
So is a combination of both
Liabilities
Use the same distinction as in assets
Equity
Must be listed separately form liabilities

21. Assets Required in Reporting
Property, Plant & Equipment
Investment Property
Intangible Assets
Investment Accounted for Using Equity Method (investment in companies with capital holding of 20-50%)
Financial Assets
Receivables for Current Tax
Biological Assets
Assets Held for Sale
Inventories
Trade and Other Receivables
Cash and Cash Equivalents

22. Liabilities Required in Reporting
Trade and Other Payables
Provisions (must be certain and measurable)
Financial Liabilities
Liabilities for Current Tax
Liabilities for Deferred Tax
Minority Interests

23. Equity Required in Reporting
Issued Capital and Reserves Attributable to Equity Holders of the Parent
Except of relevancy, IFRS has no other requirements - structure depends on local rules; typically consists of following items:
Common Stock
Share Premium Account
Additional Paid-in Capital
Funds
Retained Earnings
Net Earnings of current period

24. P&L Items Required in Reporting
Revenue
Financial Expenses
Participation on Profit or Loss of Affiliated Enterprise
Profit or Loss on Discontinued Business
Profit or Loss on Revaluation of Assets
Net Earnings for Current Period
P&L Statement has no given structure, can be
vertical or horizontal
by function or by kind

25. Cash Flow Statement Items Required in Reporting
is to give clear understanding of sources and usage of cash
has no given structure
can use direct or indirect method
It lists separately
Cash at the Beginning of Period
Cash Flow from Operations
Cash Flow from Investment Activities
Cash Flow from Financial Activities
Cash at the End of Period

26. Assets

27. Asset Classification
Assets are result of completed transactions and occurrences (purchase, production, exchange)
Expected or unfinished transactions don’t classify
Asset books who has disposability rights and economical benefit
Ownership is not important
Current / long-term

28. Current Assets Definition: Typical Current Assets:
Are expected to be disposed within 12 months
Will be disposed within 1 operational cycle (form raw material purchase to collection of A/R)
Cash
Typical Current Assets:
Cash and equivalents
Accounts receivable
Current part of long-term receivables
Inventories
Current financial assets
Accruals and deferrals
Assets Held for Sale

29. Accounting Transactions
Cash purchase of merchandise: Inventory Cash Non-cash purchase of merchandise: Inventory Accounts payable Payment of debt: Accounts payable Cash Each transaction must be recorded with additional information (date, transaction number, description, person who entered it) that are here for simplicity reasons omitted

30. Accounting Transactions
Production of a current asset Inventory of finished goods Inventory of raw materials (B/S) Production expense (P&L) Sale of finished goods Accounts receivable (B/S) Revenue (P&L) Cost of goods sold (P&L) Inventory of finished goods (B/S) Bank account (B/S) Accounts receivable (B/S)

31. Evaluation of Current Assets
Accounts receivable
Provision for bad debts
Inventory
Manufactured: cost of material, direct labor and allocated production cost
Purchased: cost method (purchase price + transport, customs, etc.) or retail method (retail price – sales margin)
Inventory: lower cost or market (LCM – the lower of original price and net realizable value)
FiFo, weighted average

32. Current Assets in US GAAP
ARB 43 Chapter 4 Inventory Pricing and IAS 2 Inventories are both based on similar principles:
Inventory are assets held for sale in the ordinary course of business
Primary basis of accounting for inventory is cost
Both standard cost method or retail method can be used
Cost of inventory includes all direct expenditures to ready inventory for sale, including allocable overhead
Selling costs are excluded from the cost of inventories, as are most storage costs and general administrative costs

33. Current Assets in US GAAP
Differences:
LIFO: US GAAP: acceptable - IFRS: prohibited
Reversal of write-downs of inventory to the lower of cost or market: - US GAAP: creates a new cost basis that cannot be reversed - IFRS: reversal can be done max. to the original value if reasons for write-downs no longer exist

34. Financial Assets Definition: Typical Financial Assets:
Non-physical assets that derives value because of a contractual claim that can be readily converted into cash.
Typically, financial assets are traded on financial markets
In general, the terms of financial assets may include non-financial assets like corn or wheat if they are traded on financial markets.
Typical Financial Assets:
Stocks, bonds, securities
Investment accounts, loans
Derivates (options, futures)

35. Financial Assets and the Standards
Both boards are working on standards (IFRS 9, ASC draft version) in classification and measurement of all financial instruments to replace existing guidance
Held to maturity: - zero coupon allocates the interest income - mortgage allocates the interest income but also amortizes for the payments
Available for sale: - US GAAP treats decline in fair value in consideration of the company’s ability to hold the security - IFRS discounts estimated cash flow for bad debts/credit losses

36. Zero-Coupon Fair Value Calculation

37. Coupon Fair Value Calculation

38. Long-Term Assets Definition: Typical Long-Term Assets:
Are expected to be held for 12 months or longer
Will not be disposed within 1 operational cycle (spare parts)
Tangible / Intangible
Extended use regardless of value
Typical Long-Term Assets:
Property, plant and equipment
Long-term receivables
Biological assets
Licenses, SW, copy rights
Goodwill (must be purchased)

39. Depreciation To show true and honest value of the fixed asset status
Straight line or accelerated
Residual value
Early retirement, change in accounting estimate
No major differences between IFRS and US GAAP

40. Depreciation
Straight-line depreciation: (original cost – salvage value) / periods of useful life
Units-of-production method: (original cost – salvage value) / estimated units to be produced
The sum-of-the-years’-digits (SYD) method (original cost – salvage value) * (remaining years / SYD) Example: 5 years = =15; hence 1st year (original cost – salvage value) * 5/ nd year (original cost – salvage value) * 4/15 etc.
The double declining-balance method twice the straight-line rate applied to the remaining book value

41. Accounting Transactions
Fixed asset purchase: Crain purchase Transportation Assembly costs Accounts payable
Depreciation: Depreciation Expense Accumulated Depreciation

42. Leasing of Long-Lived Assets
Leasing contract: temporarily transferred disposability rights and economical benefits
To be recorded as long-lived assets of the entity (except of real estate)
Capital/finance leases, operational leases the criteria of a capital lease include - the transfer of ownership to the lessee at the end of the lease term - a purchase option that is reasonably expected to be exercised - the lease term duration is for most of the asset’s economic life

43. Leasing of Long-Lived Assets
Accounting transactions:
Leasor: the asset is taken of the long-lived asset and becames a note payable from the lasee
Leasee: - the leased asset is recognized as an long-lived asset and liability to the leasor - use the lower of the present value of the outgoing payments or the fair market value - the asset is to be depreciated

44. Leasing of Long-Lived Assets
Differences in accounting standards:
Only minor or less important differences between IFRS and US GAAP - terminology: capital lease vs. financial lease - the lease term is a “major part” or “75%” of the asset’s economic life - recognition of gain/loss when only a minor part of the right to use the asset is exercised (IFRS immediately, US GAAP over the lease term)
Major difference in Czech standards: - leased asset is to be kept and depreciated in the owners books

45. Intangible Assets
Nonmonetary assets without physical substance, there are probable future economic benefits that can be reliably measured
SW, licenses, copy rights, trade marks - amortization over its useful life - development costs can be included only when demonstrating technical feasibility and ability to complete and sell the asset in the future - if there is no foreseeable limit to the period over which it is expected to generate net cash inflows, the useful life is considered to be indefinite and the asset is not amortized
Goodwill (in business combinations only)