INF 311 Midterm Summary PDF

INF 311 – midterm 4 reasons for studying International Accounting: Historical Reason Multinational Reason Comparative Reason Harmonization Reason Contribution to development of accounting: Romans: Forms of bookkeeping (not double entry) Calculation of profit Italy:...

INF 311 – midterm 4 reasons for studying International Accounting: Historical Reason Multinational Reason Comparative Reason Harmonization Reason Contribution to development of accounting: Romans: Forms of bookkeeping (not double entry) Calculation of profit Italy: Double entry (between 13th and 15th century) Luca Pacioli – Summa de Arithmetica (double entry bookkeeping system) Bank, Capital, Cash, Debit, Credit, Journal are from Italian origin Britain and United States: Britain (19th century) true and fair view (accounts reflecting true substance of business); Establishment of Professional Accounting Bodies (ICAEW= Institute of Chartered Accountants in England and Wales); ACCA (Association of Chartered Certified Accountants) US: English became the world’s language of accounting; Management accounting ABC (=Activity Based Costing) Japan: In 20th century, Management Accounting, Standard Costing and JIT (Just-in-Time) – reduce or eliminate storage costs Multinational Enterprises (MNEs): = enterprises producing goods/services in 2 or more countries Why? Lower transportation costs (competitive advantage in prices) Trade barriers and quotas Resource seeking & market seeking Establishing distribution systems Reputation Financial capital (raise capital in one country and invest in other one) Consolidation of financial statements and translation of foreign currencies. Transfers accounting technology in many countries. Investors/Lenders become experts in financial reporting systems in more than one country. Harmonization: increasing compatibility of accounting processes. Provides increased comparability of accounting practices – Solutions by US mostly. Vital countries: Unites States United Kingdom Germany Japan France Netherlands Canada Why focus on Vital Countries? Economic significance (having world’s largest enterprises, largest stock exchange) Accounting significance (size of accountancy profession; Founding membership of the International Accounting Standards Committee (IASC) Factors of Differences in Accounting Systems 1) External Environment and Culture Individualism vs. Collectivism Individualism Collectivism Loosely-knit social framework, Tightly-knit framework; individuals take care of themselves, “I” exoect relatives/group members to look e.g., USA after them, “We” ; e.g., Europe Large vs. Small Power Distance = how a society handles power inequalities among people / organizations distributed unequally. Large power distance Small power distance People accept hierarchical order; Strive to equalize the distribution of everybody has a place e.g., power and demand justification for Mexico, China, UAE inequalities e.g., Austria, New Zealand, Norway, USA Strong vs. Weak Uncertainty Avoidance = society’s reaction to unknown future; to which degree a society feels uncomfortable with uncertainty? Strong Uncertainty Avoidance Weak Uncertainty Avoidance Demands uniformity; rely on set Relaxed atmosphere; no principles; rules; intolerant towards deviant deviance is more easily tolerated persons/ideas e.g., Greece, Japan, Turkey Masculinity vs. Femininity = distribution of emotional roles Masculinity Femininity Achievement, Heroism, Relationships, modesty, caring for Assertiveness (Rechthaberei), the weak, quality of life; works to material success, ambition and live power; live to work e.g., Turkey, Sweden, Netherlands e.g., Japan, Austria, Germany, UK, USA Gray’s Study = applied all Hofstede’s studies to explain differences in accountants (internationally). Authority & Enforcement A) Professionalism vs. Statutory Control = the higher the professionalism, the more self-regulation and lower need for gov intervention Professionalism Statutory Control accountants have independent Implement detailed legal attitudes, rely on judgement of requirements accountant - Small power distance Large power distance & Strong & Weak Uncertainty Avoidance (e.g., Uncertainty Avoidance (e.g., France) UK) B) Uniformity vs. Flexibility Uniformity Flexibility Uniform accounting plan and Weak Uncertainty Avoidance & imposition of tax rules (Strong Femininity Uncertainty Avoidance & Large e.g., UK Power Distance & Masculinity) e.g., France and Spain, Turkey Measurement & Disclosure C) Conservatism vs. Optimism = preference for cautious approach / less risky approach to measurement Conservatism Optimism Strong ties with traditional Open for new/risky approaches measurement practices (Strong e.g., UK, USA, Netherlands Uncertainty Avoidance) e.g., France, Germany, Japan D) Secrecy vs. Transparency Secrecy Transparency Strong Uncertainty Avoidance Weak Uncertainty Avoidance e.g, France, Germany, Japan) e.g., USA, UK 2) Legal Systems Anglo-Saxon countries = UK, USA, Canada, Ireland Continental Europe = France, Italy, Germany Common Law (Case Law) Provides answer to a specific case rather than a general rule for the future Was formed in England Relies on limited amount of statue law, which is interpreted by courts Commercial law doesn’t prescribe rules for behavior and how financial statements should be prepared E.g., England/Wales; Ireland, USA, Canada, Australia, New Zealand Roman Law Rules are linked to justice and morality Legal system relies upon statue law Company law or commercial codes need to establish rules for accounting/financial reporting E.g., France, Italy, Germany, Spain, Netherlands, Portugal, Japan (Commercial) 3) Providers of Finance Capital provided by Banks & Families (family-owned business) = Germany, France, Italy Capital provided by Shareholders = UK, USA, Netherlands Zysman’s Study – Grouping of countries by financial system types Capital Market systems (investors), Pressure for disclosure, audit and fair information = UK, USA Credit based governmental systems (state) = France, Japan Credit based financial institution systems (banks) = Germany 4) Taxation Tax rules are the accounting rules = France, Germany, Turkey → financial statements are utilized as a ground for taxation. Commercial rules operate separately from tax rules = UK, USA, Netherlands → financial statements are designed as performance indicators for investment decisions; tax and financial reporting rules are independent. Anglo-Saxon Countries Continental Europe Strong equity market Weaker equity market Many outside shareholders Core, insider shareholders Large auditing profession Small auditing profession Separate accounting and tax Tax dominates accounting rules rules e.g., France, Germany, Italy e.g., Australia, UK, USA  5) The Profession = Size, Strength and competence of the Accounting Profession Lack of private shareholders & public companies means there is less need for auditors. 6) Other Factors Inflation = when inflation is high, methods of general price-level adjustment need to be used (inflation accounting) – affects asset valuation method. External influences: Types of ownership of companies, economic crisis, EU requirements … Major international differences in financial reporting 1) Fairness Correctness Legality True and fair view (presenting true substance of economic transactions (UK – not containing any material misstatements) Substance over form = trying to account for the economic substance of events rather than for the legal form (US) 2) Conservatism and Accruals: Conservatism = not over-reporting revenue and assets (Allowances for Uncollectible Accounts, Reserves, Valuation) Concept of Prudence → UK Continental Europe = greater conservatism (more pessimistic) lower profit figures in France, Germany, Netherlands Accruals = timely recognition of unrealized gains and losses 3) Provisions and Reserves Provisions = liabilities recognized by charges against profit Allowance = matter of valuation relating to an asset which has already been recognized Reserves = Aim is protection of creditors Undistributed profits kept in the business; France, Germany & Belgium = legal reserves is 5% of annual profit until it reaches 10% of issued share capital → Turkey 5% of annual profit 4) Valuation Bases Germany = Historical cost (original cost at the time of transaction) Netherlands = replacement cost (amount to be paid for replacing an asset at the present time) France, Spain, Italy = historical cost accounting and revaluations for effects of inflation UK = Revaluation etc. IFRS = Cost model or revaluation model  5) Consolidation = process of combining financial results of subsidiary companies into the financial statements of the parent company 6) Financial Statements & their formats Balance Sheet Decreasing liquidity (starting with cash) OR increasing liquidity (starting with intangible assets) Shape of Balance Sheet o Two-sided (vertical): assets on left, liabilities & equity on the right o Report form: single page, assets at the top Income Statement By-nature format: combines costs as total purchases, total depreciation, total wages (France, Italy, Spain) By-function format: combines costs by stages of production (cost of sales, administrative costs; Allows calculation of gross profit; UK, USA, Japan, …) 7) Uniformity & Accounting Plans Spain, Germany, France & Belgium → adopted accounting plans for different industries Detailed legal rules – higher degree of uniformity Hedging = protect themselves against a loss from an exchange rate fluctuation by: Foreign currency option = right to sell (not obligation!) foreign currency at a specific exchange rate for a specified period of time Forward contract = obligation to exchange foreign currency at a date in the future, typically 30,60 or 90 days Foreign Direct Investment (FDI) = a company investing in a business operation in a foreign country  Greenfield investment = establishment of a new operation in foreign country Acquisition = investment in already existing operation in foreign country Transfer pricing = setting prices on goods exchanged between separate divisions within the same firm or between related companies that are part of the same group – direct impact on profits. Affects: Taxation (as it affects profit) Performance evaluation issues = division managers are evaluated on profits, which increase in this case International Auditing = Language & Cultural Differences → Different Accounting Standards (GAAP) and Auditing Standards (GAAS) Harmonization vs. Convergence Harmonization = process of reduction of alternatives while maintaining high degree of flexibility in accounting practices; allows different standards in different countries as long as there are not logical conflicts Convergence (Standardization) = adoption of one set of standards internationally – main objective of the International Accounting Standards Board (IASB). Advantages = integration of global capital markets and cross listing of securities international mergers and acquisitions reduce financial reporting costs Disadvantages = significant differences in standards currently exist overcoming nationalism and traditions will cause standards overload for some firms IASB now IASC; works towards convergence; established in 1973. Develops IFRS and Exposure Drafts From 1983 to 2001: IASC published. IASC was replaced by IASB in 2001. They adopted the previous published IAS standards and named the future standard IFRS BUT Principles of IFRS are newer so in case of a conflict with IASs, IFRS are preferred. Turkey joined in 2005.  IFRS Framework: main purpose of financial statements is to give useful information to improve financial decisions. IFRS Framework serves as a guide to the Board for developing future IFRSs. IFRSs (International Financial Reporting Standards) * If a company is open to public (shares issued to public or debt instruments issued, such as bonds) * If a company has "public accountability" - financial institutions * Companies that are subject to independent audit Asset = resource controlled by the entity as result of past events and from which future economic benefits are expected. Liability = present obligation arising from past events; expected outflow from entity Equity = residual interest in assets of entity after deducting all liabilities. Income = increases in economic ebnefits during period that result in increases in equity (revenue and gains) (not contributions from equity participants) Expenses = decreases in economic benefits during period that results decrease in equity (incl. expenses and losses; not distributions to equity participants) Complete set of financial statements: statement of financial position (Balance Sheet) statement of profit or loss and other income for the period statement of changes in equity statement of cash flows notes, comprising a summary IAS 1 – Presentation of financial statements fair presentation going concern (acting like company is continuing till forever) accrual basis of accounting, consistency of presentation materiality and aggregation offsetting (only showing difference in B/S, not allowed) comparative information (show at least last years numbers to compare) reporting period (financial statements need to be prepared at least annually) IAS 2 – Inventories Inventories include: finished, WIP, and raw materials  Costs include: cost of purchase (incl. taxes, transport, handling); cost of conversions (labour, fixed/variable manufacturing overhead); other costs to make inventory ready for use. Costs excluded: abnormal waste, storage unless necessary for production, purely administrative overhead, selling costs. Inventories need to be measured at lower cost of COST OR NRV (net realizable value). NRV = est. selling price – est. completion costs – est. selling costs. FIFO, Average-cost methods are allowed – LIFO is not allowed. IAS 7 – Statement of Cashflows Operating activities = main revenue-producing of entity (cash received from customers; cash paid to suppliers/employees) Investing activities = acquisition and disposal of long-term assets and other investments (stocks, bonds, fixed asset purchases, Property Plant and Equipment. Financing activities = altering equity capital and borrowing structure of entity (notes, loans, issuance of shares and bonds; buying back shares) Direct method = shows each major class of gross cash receipts/payments Indirect method = adjusts accrual basis net profit or loss for effects of non- cash transactions. IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. Policies = shall be applied consistently for similar transactions – Retrospective application Change in Accounting Change in Accounting Errors Policy Estimates If a change is required by Effect of change in Entity must correct all new IASB standard, then estimates will be material prior period change is applied recognized errors RETROSPECTIVELY RETROSPECTIVELY PROSPECTIVELY  in first set of financial statements IAS 16 – Property, Plant and Equipment (Tangible fixed assets) Should be recognized as assets when: future economic benefits are expected cost of asset can be measured reliably PPE should be recognized at cost incl. all costs necessary till ready for use: original purchase price costs of site preparation delivery and handling costs installation and testing costs related professional fees for architects and engineers Depreciation = depreciable amount (cost – residual value). 1) Straight-line method 2) Double-declining balance method 3) Units of production method 2 accounting models for measurement after initial recognition: Cost model = cost-accumulated depreciation impairment Revaluation model = Revalued amount (fair value at that date) – acc. Depreciation impairment. IAS 36 – Impairment of Assets (Fixed Assets) Carrying amount = amount at which asset is recognized in B/S after deducting acc. Depr. Value In use = discounted present value of future cash flows expected to arise Fair value = amount obtainable from sale of asset  IAS 23 – Borrowing costs Interest expense calculated by effective interest method under IAS 39 Finance charges in respect of finance leases recognized in accordance with IAS 17 Exchange differences arising from foreign currency borrowings Recognition = borrowing costs that are directly attributable to acquisition, construction/production of a qualifying asset (asset that takes substantial period of time to get ready aka buildings etc.) IAS 37 – Provisions, Contingent Liabilities & Contingent Assets Provision Contingent liabilities Contingent assets Present obligation as a possible obligation but Should not be result of past event. payment is not recognized → bc of Payment is probable – probable or amount Conservatism 80% can’t be measured Amount can be reliably Disclosed in Notes as a estimated reliably e.g., lawsuit filed probable inflow of e.g., provision for against company, but economic benefits uncollectible amounts no result estimation e.g., lawsuit filed by or employee benefits possible our company in B/S disclosed in Notes disclosed in Notes IAS 38 – Intangible assets = identifiable (seperable, arises from contractual or other legal rights) nonmonetary assets without physical substance Computer software Patents Copyrights Motion picture films Customer lists Mortgage servicing rights Licenses Import quotas Franchises Customer/supplier relationships Marketing rights All research costs will be recorded as expenses. Development costs only capitalized after technical and commercial feasibility of asset for sale or use (if completed and USED or SOLD) Cost model or revaluation model. Recoverable taxes Irrecoverable taxes Do not include in the Include in the cost cost Manufacturing costs Prime Costs DM DL MOH DM Conversion costs DL MOH