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Intermediate Accounting

James D. Stice Earl K. Stice

© 2012 Cengage Learning

PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University

Accounting in a Global Market

Chapter 22Chapter 22

18th Edition

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Dangers of Differing National Accounting Standards

• A key function of accounting standards is to create a common set of rules to be used by all companies so that outsiders can receive financial reports that are comparable among all the different companies they might want to analyze.

• Without this comparability, financial reports are virtually worthless.

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Brief History of the IASB and Its Standards (IFRS)

• Both the FASB and the IASC (predecessor of IASB) were established in 1973.

• The FASB had the advantage of being an independent board with broad representation from the U.S. business community.

• The IASC was a consortium of national CPA organizations, and committee members served part time while maintaining their connections with their firms and their clients.

(continued)

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• The early IASC standards were just a compilation of the diverse accounting practices from around the world with some expression of a preferred alternative but no coherent conceptual foundation.

• The original standards of the IASC were, and are, called International Accounting Standards (IAS). The body of standards issued by the IASC/IASB is now referred to as IFRS whether the label is IAS or IFRS.

Brief History of the IASB and Its Standards (IFRS)

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Brief History of the IASB and Its Standards (IFRS)

• All during the 1990s, the IASC worked to eliminate the large number of alternative accounting treatments allowable under IAS and also to improve the overall quality of the standards.

• The immediate goal of the IASC was to have its set of standards endorsed by the International Organization of Securities Commission (IOSCO), which includes the U.S. Securities and Exchange Commission.

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• In 2001, the IASB was aggressive in promoting its standards as THE international accounting standard setter through a substantial organizational restructuring.

• In 2002, the IASB and the FASB entered into a joint agreement, called the Norwalk Agreement, in which they pledged to work together to develop a set of “fully compatible” accounting standards, and to continue to work together to make those standards stay compatible.

(continued)

Brief History of the IASB and Its Standards (IFRS)

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• In 2007, the SEC announced that it approved the use of IASB standards for the financial reports of non-U.S. companies with shares traded on U.S. stock exchanges (effective on March 4, 2008).

• In 2008, the SEC revealed a “time line” for the rapid shift from U.S. GAAP to IFRS, with all U.S. publicly traded companies being required to use IASB standards by 2014.

Brief History of the IASB and Its Standards (IFRS)

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• In October 2008, this rosy “time line” exploded in a blaze of controversy when the IASB caved into European banks urging for a favorable accounting standard change.

• This blatant politicization of the accounting standard-setting process caused many in the U.S. business community to rethink the transfer of sovereignty over U.S. accounting standards to the IASB.

• Now the “time line” is 2015 at the earliest.

Brief History of the IASB and Its Standards (IFRS)

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Foreign Currency Financial Statements

• Translation is used when the foreign subsidiary is a relatively self-contained unit that is independent from the parent company’s operations.

• Remeasurement is appropriate when the subsidiary does not operate independently of the parent company.

There are two methods for converting foreign currency financial statements.

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• To determine the correct method of conversion, the functional currency of the foreign subsidiary must first be determined.

• In most instances, the functional currency is the currency in which most of the subsidiary’s transactions are denominated.

Foreign Currency Financial Statements

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• Assets and liabilities are translated using the current exchange rate prevailing as of the balance sheet date.

• Income statement items are translated at the average exchange rate for the year.

• Dividends are translated using the exchange rate prevailing on the date the dividends were declared.

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Translation

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• Capital stock is translated at the historical rate, that is, the rate prevailing on the date the subsidiary was acquired or the stock was issued.

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Translation

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• Retained earnings is translated in the first year using historical rates, but in subsequent years, it is computed by taking the U.S. dollar balance in retained earnings from the prior period’s translated financial statements, adding translated net income and subtracting translated dividends.

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Translation

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• As a result of the translation process, debits in the translated U.S. dollar trial balance typically will not equal credits.

• The balancing figure is called a translation adjustment and is recognized as part of the U.S. parent company’s stockholders’ equity.

Translation

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USA Company purchased Swiss Inc. on January 1, 2013, for 50,000 francs. On that date, the exchange rate for 1 Swiss franc was $0.25, so the acquisition price was equivalent to $12,500. Swiss Inc.’s trial balance dated December 31, 2013, is on Slide 22-16. The current exchange rate is $0.28, and the average exchange rate for the year was $0.27. Dividends were declared and paid when the exchange rate was $0.275.

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Translation Example

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Swiss, Inc. determines its functional currency is the Swiss franc. The translation process is shown on Slide 22-17.

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Translation Example

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Translation Example

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Chapter 22Chapter 22

The EndThe EndThe EndThe End

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