0. Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 12: International Accounting and the Global Economy
Slides Authored by Hannah Wong, Ph.D.
Rutgers University

1. Increasing Interest in International Accounting Standards
Cross border equity issuances
Call for:
uniform international accounting standards
Internationalization of portfolio holdings
Shift toward equity financing

2. Divergence in Accounting Standards
In some countries:
Goodwill is not amortized until it is apparent it has diminished in value
The pooling of interests method is not allowed
LIFO inventory costing is not permitted
Reserves are recorded for self-insurance or contingencies for expected future losses

3. International Accounting Standards Committee (IASC)
An independent private-sector body
established in 1973 by the leading accountancy bodies of
Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and Ireland, and the United States
Issues International Accounting Standards (IAS)

4. Earnings Differences among Countries An Illustration
Most
conservative
Japan
Germany
France
United States
Least
conservative
United Kingdom

5. Accounting Models

6. International Accounting Issues Consolidation Methods
U.S GAAP
purchase and pooling allowed
IAS
purchase is required
uniting of interests (similar to pooling) is allowed if firm sizes are similar
Other Countries
pooling is not permitted in Japan and used infrequently in other countries

7. International Accounting Issues Property, Plant and Equipment
U.S GAAP
recorded at historical cost
carried on books at net book value
IAS
initial measurement is original cost
revaluation to fair value is allowed
Other Countries
In France and U.K., common to revalue assets to an equity reserve account

8. International Accounting Issues Depreciation
U.S GAAP
predominantly straight line method for financial purposes
alternative methods for tax purposes
IAS
method applied on a systematic basis
Other Countries
In Japan and Latin America, taxation authorities determine depreciation methods

9. International Accounting Issues Research and Development
U.S GAAP
all R&D costs are expensed
IAS
research costs are expensed
development costs may be recognized as an intangible asset
Other Countries
In Japan, some R&D costs can be capitalized and amortized for up to 5 years
In the UK, some development costs are capitalized

10. International Accounting Issues Goodwill
U.S GAAP
capitalized and amortized for up to 40 years
IAS
capitalized and amortized for up to 5 years, (up to 20 years if justified)
Other Countries
capitalized and amortized over a shorter time period in most countries
immediately written off in Germany

11. International Accounting Issues Inventories
U.S GAAP
LIFO and FIFO are primary methods
IAS
lower of cost or net realizable value is recommended
FIFO and weighted average are primary methods
LIFO allowed
Other Countries
LIFO is not acceptable for tax purposes in the U.K. and Canada, hence limited use

12. International Accounting Issues Deferred Taxes
U.S GAAP
liabilities and assets recorded on all taxable and deductible temporary differences
valuation allowances used if asset is not probable
IAS
liabilities and assets recorded if probable
no deferred taxes on nontaxable goodwill
Other Countries
In the U.K. and Germany, the liability method is used
In Japan, deferred taxes are not recognized

13. U.S. Listings for Non U.S. Companies
Required registration with the SEC
to be listed only: form 20-F
to issue securities in the U.S.: F-1 statement
subsequent periods:
form 20-F (annual reports) and
form 6-K (interim reports)

14. + 20-F Statement the non-U.S. company’s local GAAP reporting
reconciliation of net income and shareholders’ equity to comply with U.S. GAAP; or
full disclosure of financial information required of U.S. firms, including segmental disclosures

15. F-1 Statement
Required for first time offer of securities by a non-U.S. company (foreign private issuer)
The company must meet certain conditions of:
ownership,
location of assets, and
location of executive officers
Must contain the prospectus containing
financial statements (reconciled to U.S. GAAP)
detailed nonfinancial information

16. F-1 Statement - Content The prospectus containing
financial statements (reconciled to U.S. GAAP)
description of business
regulatory structure
management structure
capital structure
shareholding patterns
shareholder rights
Information about articles of association, bylaws, significant legal and contractual obligations of the company

17. American Depository Receipts (ADRs)
Definition
a derivative financial instrument usually representing a certain fixed number of publicly traded shares of a non-U.S. corporation
Trading
ADRs may trade freely, subject to some conditions, like any U.S. security on the major exchanges

18. American Depository Receipts (ADRs)
Depository Bank (DR Bank)
an intermediary creating ADRs, usually with the consent of the issuing company
provides an interface between the non-U.S. company and U.S. investors
major DR banks: Bank of New York, J.P.Morgan, Citibank

19. Process of Creating ADRs
DR bank purchases shares of non-U.S.
company from its home market
DR bank places shares with its
custodian in the home market
DR bank issues ADRs (denominated in U.S. $)

20. Types of ADR Programs Unsponsored ADRs
The DR bank creates a DR program without a formal agreement with the issuing non-U.S. company
usually arise due to great demand for the company’s securities in the U. S.
becoming obsolete

21. Types of ADR Programs Sponsored ADRs
The DR bank creates a DR program with an exclusive agreement with the issuing non-U.S. company
The DR bank provides information and disburse payouts (dividends, rights, etc) to U.S. investors
account for over 98% of ADRs

22. Types of Sponsored ADRs

23. Advanced Accounting by Debra Jeter and Paul Chaney
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