1. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Spiceland | Thomas | Herrmann Financial Accounting International Financial Reporting Standards Appendix E

2. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Explain the reasons for differences in accounting practices across countries Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS) Recognize the major differences between U.S. GAAP and IFRS App E-2

3. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Explain the reasons for differences in accounting practices across countries App E-3

4. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. The Globalization of Accounting Standards SEC voted to accept IFRS financial statements from “foreign private issuers” without reconciliation US is moving toward converging U.S. GAAP with IFRS Convergence: process by which U.S. GAAP and IFRS will eventually merge to become a single set of accounting standards. App E-4

5. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Understand the role of the International Accounting Standards Board (IASB) in the development of International Financial Reporting Standards (IFRS) App E-5

6. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. International Financial Reporting Standards (IFRS) International Accounting Standards Committee Created a standard-setting body, (IASB) International Financial Reporting Standards More countries base their account standards on IFRS ISACISABIFRS App E-6

7. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Principles- vs. Rules-based Standards IFRS—principles-based accounting standards U.S. GAAP—rules-based accounting standards Future international accounting standards will need to be more principles-based App E-7

8. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Norwalk Agreement Signed by FASB & IASB—2002 Formalizing convergence of U.S. GAAP and IFRS Arguments against convergence to IFRS U.S. standards to remain customized to fit U.S. business environment Differences in implementation and enforcement could make accounting appear more uniform than it is Norwalk Agreement did not specify a timetable but active efforts are ongoing App E-8

9. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Recognize the major differences between U.S. GAAP and IFRS App E-9

10. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 1: Accounting Information and Decision Making United States—FASB’s conceptual framework Guide to standard setters Internationally—IASB’s conceptual framework Serves to indicate GAAP when more specific standards are not available FASB and the IASB are working together to develop a common conceptual framework Uniform set of standards internationally App E-10

11. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 2: The Accounting Information System Timing and measurement of revenue recognition U.S. GAAP and IFRS provide similar general guidance U.S. GAAP includes many additional rules and other guidance promulgated by FASB, SEC, and others App E-11

12. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 3: The Financial Reporting Process FASB and IASB are working on a project to establish a common standard for presenting information in financial statements App E-12

13. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 4: Cash and Internal Controls Accounting for cash is the same under both U.S.GAAP & IFRS Internal controls: U.S.GAAP: Section 404 of the Sarbanes-Oxley Act (SOX) requires management to document and assess the effectiveness of all internal control processes that could affect financial reporting IFRS: burden of documenting effective internal controls is much less, or even nonexistent App E-13

14. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 5: Receivables and Sales Accounting for receivables and uncollectible accounts same under both U.S. GAAP and IFRS App E-14

15. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 6: Inventory and Cost of Goods Sold LIFO method U.S.GAAP: allowed IFRS: not allowed Market value in lower-of-cost- or-market U.S GAAP: similar (market value – replacement cost) IFRS: similar (market value – net realizable value) Reversal of inventory write-downs U.S GAAP: not allowed IFRS: allowed App E-15

16. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 7: Long-Term Assets Valuation of property, plant, and equipment U.S.GAAP: Cost less accumulated depreciation IFRS: Cost less accumulated depreciation (or) Fair value(revaluation) Valuation of intangible assets U.S GAAP: Revaluation prohibited IFRS: Cost less accumulated amortization (or) Fair value(revaluation) Research and development expenditures U.S GAAP: Expensed in the period incurred IFRS: Research: expensed in the period incurred Development—that meet specified criteria: capitalized App E-16

17. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 8: Current Liabilities Contingencies U.S. GAAP: accrue if it is probable and can be reasonably estimated IFRS: threshold for “probable” is defined as “more likely than not” (greater than 50%) Valuation of long-term contingencies U.S.GAAP: present value—only when timing of cash flows is certain IFRS: present value—time value of money is material App E-17

18. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 9: Long-Term Liabilities Treatment of convertible debt U.S. GAAP: entire issue price is recorded as a liability IFRS: convertible debt is divided into its liability (bonds) and equity (conversion option) elements App E-18

19. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 10: Stockholders’ Equity Distinction between debt and equity for preferred stock U.S. GAAP: most preferred stock is included in stockholders’ equity, with the dividends reported as a reduction in retained earnings IFRS: most preferred stock is reported as debt, with the dividends reported in the income statement as interest expense Reacquired shares: IFRS does not permit retirement of shares All buybacks are treated as treasury stock App E-19

20. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 11: Statement of Cash Flows Classification of cash flows Cash outflows for interest payments U.S. GAAP—operating cash flows IFRS—either operating or financing cash flows Cash inflows from interest and dividends received U.S. GAAP—operating cash flows IFRS—either operating or investing cash flows Direct or indirect method FASB and IASB both require direct method rather than permitting either the direct or indirect method App E-20

21. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 11: Statement of Cash Flows (continued) Disclosure of noncash activities U.S. GAAP: Reported either on the face of the statement of cash flows or in a disclosure note IFRS: Disallows presentation on the face of the statement and requires reporting in a disclosure note App E-21

22. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 12: Financial Statement Analysis Discontinued operations U.S. definition is broader than its international counterpart IFRS considers a component to be primarily either a major line of business or geographical area of operations Extraordinary items U.S. GAAP: provides separate reporting IFRS: recording or disclosure not allowed App E-22

23. Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter Appendix E App E-23