311 Lecture 11 Foreign GAAP Differences

Summary

This lecture provides a detailed overview of the differences between foreign Generally Accepted Accounting Principles (GAAP) and how these standards relate to International Financial Reporting Standards (IFRS). It delves into the complexities of consolidation, discussing various accounting methods such as the equity method and the implications of stock acquisitions. The lecture further explores the challenges companies face when operating in diverse accounting environments globally, the history and evolution of IFRS, and the steps required for companies to conform local accounting practices to international standards. Additionally, it covers the role of regulatory bodies, the adoption of IFRS globally, and specific accounting practices in major economies like the U.S., Germany, and the U.K.

Highlights

• Delve into the importance of consolidation in global accounting 🌎.
• Explore the differences between the equity method and fair market value method 📊.
• Learn the IFRS's role in harmonizing global accounting standards 🌐.
• Understand the intricacies of foreign accounting principles 🇩🇪🇺🇸.
• Discover the impact of IFRS on international business operations and reporting 🌍.

Key Takeaways

• Understanding the equity method and consolidation is crucial for accounting professionals 🌍.
• Stock acquisitions over 50% necessitate different consolidation adjustments 📈.
• The IFRS has bridged many accounting differences globally, but challenges remain 🌐.
• Accountants must navigate various international accounting systems to comply with local regulations 🌎.
• The IFRS promotes uniformity, but cultural and legal differences still present hurdles 🤔.

Overview

Embark on a detailed exploration of international accounting standards in this comprehensive lecture. We unravel the intricacies of consolidation, critical for any accountant dealing with multinational corporations. With IFRS as the cornerstone, see how these standards help to unify diverse accounting practices globally, and the challenges posed by varied local GAAPs.

Understand the pivotal role of methodologies such as the equity method and the fair market value method in handling international stock acquisitions. This lecture offers a clear comparison and highlights the necessary consolidation adjustments needed when dealing with stock acquisitions exceeding 50%.

Travel through the history and evolution of IFRS, revealing its pivotal role in molding global accounting norms. Despite its strides toward harmonization, the lecture poignantly illustrates the remaining hurdles due to cultural, legal, and financial nuances worldwide.

Chapters

• 00:00 - 00:30: Introduction and Course Overview The chapter serves as an introduction and overview of the course. It begins with music, setting a welcoming and engaging tone for the learners. Though the transcript does not provide specific details, typically, such chapters include a brief introduction to the course instructor, a summary of the topics to be covered, and the learning objectives to give students a clear idea of what to expect in the course.
• 00:30 - 12:30: Consolidation Overview The chapter titled 'Consolidation Overview' begins with a greeting to professionals and sets the stage for the journey towards becoming an accountant or CPA.
• 12:30 - 25:00: Foreign GAAP Differences Introduction The chapter introduces the concept of Foreign GAAP (Generally Accepted Accounting Principles) Differences. The instructor apologizes for the unedited nature of the video and underscores that it should not be shared outside of the course without written permission. The chapter emphasizes the importance of reporting any errors directly to the instructor via email. It sets the stage for an exploration of how to improve understanding and use of software related to GAAP differences.
• 25:00 - 37:30: International Accounting Standards The chapter emphasizes the importance of knowledge, especially in understanding International Accounting Standards. It begins with a recap of previously discussed terminologies related to consolidation, suggesting a focus on maintaining a comprehensive view of the subject.
• 37:30 - 52:30: Adoption and Implementation of IFRS The chapter titled 'Adoption and Implementation of IFRS' focuses on the equity method, elaborating on its importance and distinguishing it from the fair market value method. It explains how the equity method, in conjunction with the cost or initial investment, is utilized alongside consolidation processes. Furthermore, it covers the manner in which these are reported in financial books, highlighting the differences and applications within the framework of IFRS.
• 52:30 - 65:00: Adjusting Financial Principles and Statements The chapter discusses the equity method used for stock acquisitions, emphasizing the importance of percentage ownership. Consolidation is required only if ownership exceeds 50%. Intricacies or adjustments are necessary when a stock acquisition results in a parent-subsidiary relationship, especially when dealing with intra-entity transactions.
• 65:00 - 70:00: Conclusion The chapter discusses the financial transaction known as Upstream Downstream, focusing on the adjustments made to net income from a subsidiary to a parent company. It emphasizes the importance of recognizing that the accounting treatment varies depending on the percentage of ownership. Specifically, when ownership is more than 20% and less than 50%, or more than 50%, there are different methods for handling intra-entity transactions.

311 Lecture 11 Foreign GAAP Differences Transcription

• 00:00 - 00:30 [Music] [Music] [Music]
• 00:30 - 01:00 dear professionals greetings and welcome back to your journey towards becoming an accountant or CPA the perfect place the
• 01:00 - 01:30 springboard to so many other fields since I teach for all it is only natural that some would like and others will dislike my apologies this video is unedited and should not be made available to anyone outside this course without direct written authorization please report any errors throughout this course to me immediately via email so let's continue that journey of Improv proving that beautiful powerful software
• 01:30 - 02:00 of yours yes knowledge is power so we're going to continue down that road allow me to quickly recap in a slightly different way to keep you glued on the big picture again we've gone over several terminologies as it relates to consolidation by now you're very
• 02:00 - 02:30 acquainted with those we have examined the equity method thoroughly and you now know the importance you also know how it differs from the fair market value method the equity method as it relates to cost or the initial and how it is used in collaboration with consolidation you understand how it's reported on the books of P
• 02:30 - 03:00 you understand the equity method is used for stock Acquisitions and percentage matters consolidation does not come into play unless it's over 50% you understand that there are intricacies or adjustments that must be made if there is a stock acquisition that creates a parent sub relationship and there are intra entity
• 03:00 - 03:30 transaction known as Upstream Downstream what is critical about these adjustments to net income from the subsidiary to the parent in the way of investe or income in investe is that you must recognize that the treatment is different when it's more than 20 and less than 50 more than 50 there are slightly different ways of dealing with that intra entity
• 03:30 - 04:00 elimination you now see how crucial it is at least from our Apple review how crucial consolidation is to Wall Street it started out with ARB 51 and you can appreciate all the changes from that time you now know why we consolidate or at least key reasons and why we
• 04:00 - 04:30 don't you understand that they are or were two methods in the past one completely eliminated known as fooling of Interest method the purchase Method which is somewhat still around and the acquisition method we all used to record the m&a deals you you now know that depending on
• 04:30 - 05:00 the kind of deals the treatment are different when there's a stock deal over 50% and the sub remains such as a stock acquisition work papers are involved now you understand the implication of p+ s+ adjustments plus noncontrolling interest as opposed to a statutory merger or statutory consolidation you understand the
• 05:00 - 05:30 intricacies when it's a stock acquisition there is a process of addressing the income statement then sliding the income down to retained earnings and once retain earnings is completed you could then use that in the balance sheet it's important to understand that the investment account analysis is important when addressing
• 05:30 - 06:00 the elimination entries or adjustment entries you understand that the cash flows the cash flows with an S is the result of the combined balance sheet and income statement you understand that Branch accounting is a very useful bookkeeping that is necessary and
• 06:00 - 06:30 must be combined with the Consolidated results while it mimics consolidation it isn't exactly consolidation of a parent plus app it's part of a division or a department and it is Consolidated with the Consolidated results you now know that the SE segment reporting on the fast 14 and 131
• 06:30 - 07:00 is critical for internal reporting but external reporting as well because according to F 14 and 131 this information must be reported in the footnotes of the combined financial statements you understand that the process of getting to the segment information starts out with the legal consolidation proc process and from that
• 07:00 - 07:30 process you then create the information by segment so the process is complicated if you recall this chart that we have discussed at the beginning of class now you can appreciate why consolidation is somewhat complicated so we're at the point where we have examined all these
• 07:30 - 08:00 various fast PES we've compared it to the IFRS we understand that there are a number of adjustments when there's a stock acquisition of p plus S as opposed to satutory merger or statutory consolidation or viie so let's turn our attention now to foreign Gap as as you know companies are not all
• 08:00 - 08:30 in the same country and every country has their own generally accepted accounting principle so how do we deal with the different accounting principle when you have a parent company let's say for instance in the United States and that parent owns subsidiary across the globe how do we within seven
• 08:30 - 09:00 days collect all of that information convert the accounting principles as part of the consolidation process so let's focus how do we convert these principles by now you've got the points and you know where we're heading so we're going to examine the foreign accounting principal
• 09:00 - 09:30 differences which brings us to a discussion having to do with IFRS the International Accounting Standards before the International Accounting Standards there were all these different pointers pushing towards the need for
• 09:30 - 10:00 International Accounting Standards accounting standards as I noted previously are different in different countries so you can imagine if you are a parent in the United States and you have subsidiaries across the globe you can understand the multitude of issues you will have and the cost of reporting to get all of those standards to confirm to the United States so
• 10:00 - 10:30 clearly if you had a parent in the United States or have a parent in the United States you have the need for uniform International Accounting Standards but so are Corporation across the globe they all have the same need it's like the best thing to do is for all of us to speak the same language can you imagine if we all spoke English across the globe how much cheaper and cleaner and clearer communication will
• 10:30 - 11:00 be what were some other reasons that brought on the uniform International Accounting standard need crossb equity in issuances you want to issue Securities in the United States but you are in Mexico well you're going to have to confirm to the United States accounting
• 11:00 - 11:30 principles internationalization helped to move this process forward such as companies that want to diverse their portfolio shifting towards Equity financing where you want to issue shares in the United States for financial reasons or someplace else such as Hong Kong stock market for instance
• 11:30 - 12:00 what is important to note is that even though the IFRS has made great strides forward in addressing the accounting principle differences across the globe you can count on accounting principles differences to be around for a long time again it is hard for us to speak
• 12:00 - 12:30 the same language even though it makes sense when we do have accounting differences the way the I IFRS handled it is not different than the way we used to handle it before the IFRS was around first we identify the countries that are strong globally then we use that as the home base Gap as a reference point to the
• 12:30 - 13:00 rest of the world it is important to understand accounting from a conservative perspective to a liberal perspective why is that important if you were to go to some other country and if you want to have an immediate appreciation of their accounting principles you don't have to read all their books if you can start out by
• 13:00 - 13:30 knowing things such as certain countries are highly conservatives while other countries are quite liberal what is important to note if you are following a conservative set of accounting principles in your country you are not going to like cruel too much however if you are not so Conservative then you are going to
• 13:30 - 14:00 entertain acels so those are very important things to understand globally about accounting principles differences so when you become that boss you can quickly get a sense as to how reporting is done in certain countries Middle Ground versus con extreme conservative versus liberal now why would the United States in the UK K be on the side any country that seeks to
• 14:00 - 14:30 dominate the business environment will seek will be forced to have a liberal system to accommodate the rest of the world it helps also to understand accounting principles globally where does accounting receive its influence from these countries are great
• 14:30 - 15:00 influencers in the process of accounting in many different ways so it helps to know if you are in certain country and they're the ones that like to set standards that their accounting might merror their way of thinking if not they may be taking that country might be taking or or leaning towards one of the
• 15:00 - 15:30 [Applause] influencers all of these helps because look at this every country you go into treat things from an accounting perspective treat transaction very very differently European companies present intangible Assets in cash at the end intangibles at the beginning of assets cashes at the end
• 15:30 - 16:00 that's strange to us in the United States Canada and France allow capitalization of R&D we don't Dutch companies reports assets as current replacement cost we use historical German companies armatize Goodwill as a reduction of ownership Equity now that's pretty interesting but these are all facts when you look at these countries and their Gap systems this is what they
• 16:00 - 16:30 would want you to do in their local books so what creates these countries to or what drove these countries to create principles that end up being so different when comparing one country to the next their legal system their culture if they're very conservative their accounting principles will be conservative their tax laws
• 16:30 - 17:00 their financial providers inflation also has a lot to do with accounting reporting politics and economics these are things that drives the interaction of these things will determine what accounting principles looks like Gary created a framework that helped accountants as we try to bring
• 17:00 - 17:30 these accounting principles on the One Roof by focusing four in four areas as to how you should assess a country's accounting system and its accounting principles what he did he said focus in these four areas cultural institutional accounting values and accounting system accounting system is the authority enforcement measurement and disclosure accounting values more
• 17:30 - 18:00 professionalism uniformity conservatism secrecy yeah secrecy has a lot to do do you want a system that you are able to create some secrecy if needs be communist countries would love that in institutional consequences is a legal system coroporate ownership Capital Market rules and regulations Professional Association educational and
• 18:00 - 18:30 religious demands cultural has to do with individuals and the power uh distance in masculinity these things also Drive how people will come up with accounting principles and what those principles would look like so obviously we know that accounting principles create quite a bit of problems but who has the most of these differences in accounting
• 18:30 - 19:00 principle it is the preparer financial statements that face the most problems the preparation of Consolidated financial statement by companies with foreign operations usually require companies to keep their books in local currency and in their local accounting principles so if we are a parent company in the United States and we have a subsidiary in in France or the
• 19:00 - 19:30 UK the accounting principles are going to be France or the UK for that set of books even though we own that company so clearly there's a need to convert those accounting principles of that local company to American gap before we can consolidate all the entities together we must do it for each country country and you are thinking now that is
• 19:30 - 20:00 crazy but there is a process so State glued and we're going to get there companies that want to gain access to foreign markets as I said earlier or obtain Capital by selling stocks they must report their financial statement in the country in which they seek to make those sales there are not too many of those across
• 20:00 - 20:30 the globe as a matter of fact the United stat is it these days the UK and Hong Kong in the past had some weight but that's long gone so any company that comes to the United States that seek to issue shares or sell shares will have to report their financials according to the United States Gap lack of comparability also
• 20:30 - 21:00 drove accounting principles to be one set of Standards so all of these including what I've mentioned earlier is create problems associated with Worldwide accounting diversity where so we work to reduce these accounting differences across country and establish one set of global accounting standards and that has been in the works
• 21:00 - 21:30 for over 40 years 40 4 decade in 1973 after 40 years some sort of agreement came into being several countries came together and say we need to speak one language when it comes to accounting standard the United States you would think is the driver but at at the beginning the United States wanted
• 21:30 - 22:00 everyone to follow the US Gap so the iasb was created in fact the iasc was created and then later on the iasb superseded the iasc which is today the group responsible for the for the International Accounting Standards there are 14 members
• 22:00 - 22:30 it's important to understand the difference between International financial reporting standards and IAS IAS stands for International Accounting Standards while the IFRS stands for international financial reporting standards and I know folks are not clear on this so I want to make a point the IAS standards were issued by as I said iasc while the IFRS are issued by the
• 22:30 - 23:00 iasb so IAS came from iasc IFRS today comes from iasb the iasb superseded the IIA so they're not around anymore so we would not have any more IAS standards we're going to have IFRS standards going forward as of 2019 there are about 16 IFRS and about
• 23:00 - 23:30 29 AIS as of today as many as 140 plus countries comply or have agreed to comply with the IFRS globally let me make a point there take the United States for instance although we have come confirm in 2015 that we're going to follow the IFRS and
• 23:30 - 24:00 therefore all our accountants are going to be International accounts and they must understand all the IFRS we still follow our local Gap but what we've been doing is to more and more make our local Gap reflective of the IFRS not completely I'll show you how that approach works but as of today about 140 countries comply with the IFRS
• 24:00 - 24:30 which is pretty amazing there are still several countries that does not require IFRS reporting Argentina Al Sola there Israel Mexico Peru Uruguay China what's interesting about China if Chinese companies are listed which are mostly listed on the Hong Kong exchange they will use the Hong Kong Gap or IFRS so it's interesting that China
• 24:30 - 25:00 does not require but because of their activities they may end up reporting using the IFRS so a macro Point needs to be made here if I'm still using my local gap which is getting closer and closer to the IFRS it's still different and the IFRS clearly is not followed by by all countries in the world but a
• 25:00 - 25:30 majority you can see we still have accounting differences to be addressed but the irf IFRS has certainly made things a whole lot easier because for all those subsidiaries that we have across the globe now the local countries knows what the IFRS rules are and so what they will do is convert those subsidiaries to the IFRS reporting
• 25:30 - 26:00 requirements and then send it to the United States what makes it easier to convert from IFRS to us Gap so it's a great step up as opposed to the past where there was no IFRS so there were no confirmity and any country you you selected was vastly different today all countries are moving closer to the IFRS that's one GIF and then the IFRS is
• 26:00 - 26:30 even closer to the US gap which is a second gift hopefully this point is clear to you as you go into the real world you will need to understand these things apple and oranges so we started out generally speaking with apple and oranges when we compare our local US Gap to the IFRS what I want to make clear to you what
• 26:30 - 27:00 I've seen from my experience is that the differences when you can compare one country to another country in terms of Gap apart from their discipline apart from their uh makeup of cultures and laws and all of these things it always come back to certain areas where the financial statements are going to have the greatest difference so what I've done is list some of them for you you're going to find differences in the way countries report inventory property
• 27:00 - 27:30 planted equipment how do they impair things some countries impair things other countries armatize things and don't impair them constructions how do we recognize Revenue R&D some capitalize others expense operating leases some do not recognize the operating lease current differences pensions income tax some countries have no
• 27:30 - 28:00 deferred tax Consolidated financial statements the way the report parent and subsidiaries are different interim reporting are they using discrete or integral some of them use discrete and does not allow the integral as we discussed when we discuss segment reporting statement of cash flow certain items in statement of cash flow is handled differently so these are some
• 28:00 - 28:30 very good areas of where things are different so you can imagine when we started to move or uh when we started to set up these congregants projects to get your local Gap closer to the IFRS those were the areas that you started working with first because you can expect areas of
• 28:30 - 29:00 reserving expensing are where countries will have the most differences so here's how the approach went first take a country like the United States United States look at their us Gap and says what changes do we need to make to our fast bees to become closer to the IFRS inventory assets accounting changes EPS these are areas that the United States actually worked on Fast 151 153
• 29:00 - 29:30 154 they're all new why because they took this old way of reporting onto the APB and converted so that it can be closer to IFRS on the flip side the IFRS looks at uh their principles as well and said hey what are some of the changes that we can work on to get closer to other countries
• 29:30 - 30:00 such as the United States and so they went ahead and make some changes as well and then there were the issues that both sides had to work on joint projects in order to get closer to each other so that was the process basically where the the IFRS worked with the country to make changes on their part and then they asked the country to make changes on their local Gap in order to get closer to the IFRS and then they worked together on issues that they both had to
• 30:00 - 30:30 change and had a discussion to get to some point of agreement so that was the approach so it's interesting to note so as you go forward you will understand how that uh can be of help to you so in 1997 988 the IAS 39 um there were about 39 uh as we made note earlier so in the December of 1998 was the last standard
• 30:30 - 31:00 developed to complete the core set of Standards under the IAS or the iasc in addition in 2000 the snow group also made some security regulation uh uh recommendation so that foreign issuers had to in order to gain access to certain Marketplace they had to comply with certain uh regulatory needs many
• 31:00 - 31:30 Stock Exchange across the globe adopted to the I IO ice ISO and so the world adopted that so we are pretty much orange and orange in terms of this particular technical committee recommendation ias1 number one of the International Accounting Standards had talked about presentation of financial statement that
• 31:30 - 32:00 was amended later on um and defined better and under the IFRS the still continuing here so that you have a full understanding where the IFRS came from how we gradually moved to it what was the process and how did we adopt it well the irrs had an implementation process and countries can use the IFRS and adopt the IFRS as its
• 32:00 - 32:30 National Gap so they put all of these principles out there and tell all the countries here these are some beautiful accounting principles well thought out completely culmination of all countries across the globe if you use it you're going to make your life much better so many countries adopted it requiring domestic listed company to use the if FRS in preparing a Consolidated
• 32:30 - 33:00 financial statement so consolidation was based on these new principles as well allowing domestic listed company to use the IFRS meaning it's fine we wrote it you can have it requiring and allowing foreign companies that are listed on the domestic Stock Exchange to use the IFRS so you can see clearly they went after local domestic and markets even though we have come a long way in
• 33:00 - 33:30 terms of the IFRS and especially in terms of the differences between the United States and the IFRS we still have recognition issues disclosure issues measurement issues think of historical costs we're still using historical cost although we're moving slowly towards fair market value so what are smes the IFRS address register registered
• 33:30 - 34:00 companies and if we look in Europe there are about 28 million private entities in the United States there are about 25 million these are companies that are non-public companies and often referred to as smes what the iasb when it was created did was to create a less complex because obviously public compan iies are more complex for these nonpublic companies
• 34:00 - 34:30 that are referred to as smes small and medium-size entities the iasb created a less complex set of standards in 2009 which is a self-contained book of Standards less than 250 page long that differs that is different from the full IFRS outlines so once you've decided to adopt what did that mean well publicly traded
• 34:30 - 35:00 companies required to stop using their all accounting standards and adopt the IFRS so they prepared a Consolidated financial statement using the IFRS the process of converting from one set of accounting principle to another is obviously complex iasb first standard which is IFRS one address adoption as well and in IFRS one
• 35:00 - 35:30 they had two steps if you want to see it that way one companies who are doing the adoption of the IFRS principles they will establish a procedure to convert from their previous standards to the new IFRS standards for the first time and then second it must in introduces the concept of what we call an open balance sheet opening balance sheet so let's
• 35:30 - 36:00 examine so if frs1 require the company transitioning to IFRS to prepare an opening balance sheet at the date of transition what is the date of transition if you were going to report in 2019 and this is the first time you're adopting IFRS well you're going to report your transition date as January 1 2018 you need two years because you want
• 36:00 - 36:30 to be able to compare so the transition date will be from January 118 and the report date will be 1231 2019 hopefully this timeline clears that up nicely for you but an important thing to note here is that companies had two extreme approach in establishing their accounting policies under the
• 36:30 - 37:00 IFRS it's what we call the minimized change or the Fresh Start the minimize change basically adopt the accounting policy consistent with the IFRS that were most consistent with the company current accounting so what they did is keep all the things they use that were in agreement with the IFRS the approach that the IFRS likes best and it's less costly because you're
• 37:00 - 37:30 not comparing things is to do a fresh start so the company that is going to adopt will do a fresh start and ignore its current accounting policies and just go right off of IFRS suggestions this gives them a clean slate and they adopt a fresh start approach so there were two minimized change in Fresh Start approach in the adoption of policies Fresh Start is encouraged by
• 37:30 - 38:00 the IFRS now in terms of financial statement presentation the IFRS had this specifically defined first and foremost the IFR defined what must be disclosed on the face of each financial statement and the structure and the other disclosures that is necessary for example the income statement must take one of two formats one is called the functional expense and the other is called the
• 38:00 - 38:30 nature of expenses what does it look like you are the international accountant you should be familiar with this function expense is somewhat you are familiar with with some minor changes revenues cost of good Soul gross profit other income distribution cost administrative expense Auto expense operating income financing cost Equity method income so it's not up here profit and loss before tax income tax
• 38:30 - 39:00 expense and then attribute to parent company which is minority interest this is what they call the function of expense format as compared to the nature of expense format this is fresh the IFRS has suggested revenues utter income changes inventory raw materials but this has more a manufacturing type taste
• 39:00 - 39:30 so let's take a glimpse let me give you a glimpse into the world of how countries can be different and what will you be presented with and how do you handle it take consolidation method for instance we know in the United States we focus on acquisition if we were to look at the IAS they said hey purchase is okay we look at it as a un unifying interest similar to pooling so it's
• 39:30 - 40:00 allowed if firms seizes are you know sizes are similar so already we have a slight difference here go to other countries take some countries and you would see that pooling is not permitted at all well we know it's not permitted in United States it's not pered in other countries but the IAS may still look at some certain company as a pooling of their
• 40:00 - 40:30 interest property plant and Equipment here's another area historical cost you're familiar IAS fair market value hey in a country like France or the UK they are going to revalue their asset and they are going to revalue their equity for the change in the revaluation in asset depreciation we use straight line mostly of course we have other methods the IAS said simply give me anything once it's
• 40:30 - 41:00 systematic and rationally allocated other countries such as Japan would says sorry we don't need that we don't need that we want you to use what our taxing authorities have been using this is a great topic and I want you guys to focus a little here when companies come to the US non- US companies and they want to register their company in the United States the
• 41:00 - 41:30 process and the forms are different than what we use under the 1933 act and 1934 act so for registration for non us companies they are listed on what we call the 20f in other words it's not that's equivalent to our 10K so the form that they do their annual reporting is called 20f so this is a foreign company coming to the United States to list their security for
• 41:30 - 42:00 sale their quarterly is reported on the 6K F1 is the form that they will use for the issuance of the security or the form they will use for compliance in order to be authorized to issue Securities if you recall we use the S1 when company reports report including Consolidated financial
• 42:00 - 42:30 statement how do they report their differences in accounting principle here's what goes on so remember you will have a foreign country converting from their country to IFRS and then from IFRS to the US the United States depending on the subsidiary might just choose we're going to take what the country has forget IFRS we're going to have them convert to the United States and from the US we will then convert to
• 42:30 - 43:00 the IFRS if needs be so you can slice and dice this in many different ways for non us companies when they send so let's say we have subsidiaries across the globe they're not they're non us companies and we own them we're going to have them send us their local Gap reporting and get this very very clearly in their foreign currency they
• 43:00 - 43:30 cannot send you their financial statement converted they must send you their financial statement in their local currency in their local Gap principles and then what we do is we are going to do some reconciliation how we do that is a two-step approach we will reconcile net income first once that net income is completed we we will reconcile the shareholders let's make this clear if
• 43:30 - 44:00 you wanted to change a balance sheet what an effect are you trying to change isn't it the net assets isn't it the asset L liability equals to the equity so why don't we take the equity approach and that's exactly what these foreign entities do they don't worry about the assets they don't worry about the liabilities what they do is they focus the account in principal changes in terms of impact to the income
• 44:00 - 44:30 statement and impact to the equity of the balance sheet the equity section that is the result of asset less liability and therefore you would have captured everything if you follow this approach so the F1 is what foreign how foreign companies are able to get authorization to list their Securities or sell security in the United States so there are certain conditions you need to
• 44:30 - 45:00 know about the owner the location of the assets uh addresses of the executive Executives and phone numbers and so forth uh certain prospectus must be completed and submitted to the SEC those prospectus will have all the financial statements reconcile the income statement and the equity section description of the business regulatory structure management structure your capital structure shareholder you can see a wealth of information down to the
• 45:00 - 45:30 article legal contracts and so forth will be part of this F1 in order for a foreign entity to be listed and be able to Tain or comply to be able to sell and issue shares in the United States now if we have a foreign subsidiary that we own they follow the same procedure in reporting to us so what are adrs and you might have
• 45:30 - 46:00 heard of this before they look like and feel like Securities however they are stocks being traded for foreign companies they're called the American depository receipts it is a derivative what it is is a fixed number of publicly traded shares of non- us Corporation so adrs trade freely on the
• 46:00 - 46:30 stock market obviously they go through approval many approval uh compliance processes adrs is pretty interesting and very wealthy Banks such as JP Morgan Chase and Goldman Sach and so forth makes a wealth of money off of adrs now think of this this for a sec you go into a country you see a company
• 46:30 - 47:00 that you really like and you know that American shareholders will invest in that company if they know more about that company you can go talk to the owners of that or the management of that company strike a deal bring the company back to the United States create the adrs list it on the stock exchange and make billions off of
• 47:00 - 47:30 it and what I will explain to you in a couple of minute will make you even wonder even more as to how these big Banks makes real D they rote a D in many different ways this is one of the ways ads now obviously over time things have changed so let's take a look and intermediary creating ADR usually with the content of the issuing company
• 47:30 - 48:00 usually provides an interface between the non- US company and the US investor so the US investor is a bank that goes to the company and says hey take this x amount for your share and I'm going to take it to the United States and see if I can sell it so the Dr Bank purchases shares of a non- US company from its Home Market the Dr Bank JP Morgan places the share with its custodian in the Home Market the Dr
• 48:00 - 48:30 Bank issues a drr denominated in the US and make whatever difference over whatever they paid and the sale price now these adrs can be unsponsored as well that means that the ADR was created without not even asking the company permission in reality JP margan or Goldman Sachs sees a company it is not in the United States
• 48:30 - 49:00 so they bring it and list it in the United States then you have the sponsors which is an exclusive agreement that was given to you by the company the United States encourages this because they don't want to have issues with uh Corporation suing because they found out their shares have been sold in the United States and they would have rather been part of it or they don't want want the person who is selling it to be part of it the bank and so forth so United States encourages
• 49:00 - 49:30 sponsors ADR and not unsponsor ADR so 98% of the adrs on the marketplace are sponsored typically this is the way they are reported they could be uh registration or no registration non issuing if they're not issuing no registration is level one if they are they have uh non issuing they could have a Liv to
• 49:30 - 50:00 as well depending on certain information and depending on the company and the arrangement issuing Capital they will have to have 144a and if they want to have sec registration they will have level three so level 1 2 3 now if you see these things you know they have to do with sponsors adrs so let's examine a few questions here to solidify the knowledge that we have just gone over let's illustrate which of the following
• 50:00 - 50:30 statement relating to differences in worldwide accounting standards and practice is not correct in the United States development costs are capitalized whereas in many countries they are expensed no we expense it in the United States in other countries they capitalize the body working to achieve uniformity and accounting principle that are used by business for financial reporting around the world is the
• 50:30 - 51:00 iasc we know this has been replaced with the iasb so either one of these answers would be correct common differences between the financial statement uh financial statements of companies in the United Kingdom and the United States include all of the following except well let's see fixed assets are listed first that's the difference current assets are listed in the order of increased liquidity by the U UK company that's different on the
• 51:00 - 51:30 income statement Dividends are subtracted from profits we put it in retained earnings that's different so all of these are different when you compare the United States to the UK in which of the following country do companies tend to report lower earnings because reported earnings and taxable income are the same you would let know but you know now it's
• 51:30 - 52:00 Germany company tends to report lower earnings because they're conservative accounting standards are strongly influenced by legal and tax laws with the little involvement by the private sector only a conservative country would have those needs or influences so Japan an immediate write off of Goodwill is allowed in
• 52:00 - 52:30 Germany because they're conservative we do impairments other countries capitalize and armatize but Germany write it off automatic revaluation of fixed assets are allowed in the UK as we said they will revalue the asset and they will credit equity in a reserve Equity account the Ias C which is no longer around because they've been replaced
• 52:30 - 53:00 with the iasb standards are accepted as sufficient for listing companies in most major Stock Exchange except we didn't accept them the United States the fast B identified all of the following as essential functions for an international standards Setter to attain except so the fast be identify all of the following as essential functions leadership and
• 53:00 - 53:30 Innovation objective responsiveness accountability understandability all of these are identified as essential functions for the fast B to identify when writing principles or setting principles if a non us company issues Security in the United States along with the US list listing the sale of these Securities must be registered through the filing of f one we made that clear the form that allows a non- US
• 53:30 - 54:00 company to retain its local Gap reporting and still be able to list a US Stock Exchange is form 20 the annual reporting firms that want to raise capital from the public Equity Market in the US and also list on a major US Stock Exchange used the level three they have to register with the SEC the iasc or iasb allows a unite uh
• 54:00 - 54:30 uniting of Interest method which is quite similar to pooling of interest to qualify all of the conditions must be met except for all of these are conditions that must be met the combining firm must not you can study this question to appreciate how the iasc sees business combination harmonization in the
• 54:30 - 55:00 International Accounting standard setting focus on the communication of information in a form that can be interpreted and understood internationally the lifeo inventory method is not acceptable for tax purposes and it's not commonly used in which country Canada doesn't like any of it which is the global harmonization of standards the international business Community is striving for understandable
• 55:00 - 55:30 communication and interpretation of every everyone how could the format differ differences from country to Country affect us businesses financial statements with different accounts in different orders are very difficult to consolidate let's do that again financial statement with different accounts in different orders are very difficult to consolidate so how could formats affect in that way when you have
• 55:30 - 56:00 different formats and different accounts which of the following is not the basic gra geographical CL classification Germany Latin Asia Pacific all of this are basic geographical so none of them are not which of the following are not SEC register documents for foreign companies that wish to sell stock on the US market all of these are important forms for
• 56:00 - 56:30 that reasons but F2 is not a form what is an ADR it is a negotiable which is substitute for foreign stock not Bonds so let's examine how the approach Works converting accounting principles how do we take a company that is sent to us and adjust their income statement along with their Equity section to make that
• 56:30 - 57:00 company compliant to American accounting principles here's how it works supposing Barkley Inc maintains his financial statements as follows 2019 2020 sales and all of these things down to net income Barkley is a non- US Gap company could have been for many any country Barkley Inc balance sheet is as
• 57:00 - 57:30 follows if you notice looks very much like an American balance sheet what is different it's in foreign currency so Point number one they must send you their financial statements in foreign currency if you are to make changes from Accounting in in the way of accounting principles from local gap of a foreign country to the United States
• 57:30 - 58:00 Gap cannot do this any other way it must be done in foreign currency or else you will be incorrect let's take a look at few other items here foreign currency denotes foreign currency Barkley wishes to issue Security in the United States and the needs to prepare reconciliation scheduled to the US Gap the following differences with the US Gap are noted all amounts are stated in foreign
• 58:00 - 58:30 currency Goodwill in amount of40 foreign currency thousands acquired in the acquisition of the beginning of 2019 was written off to equity that must be Germany they wrote it off hey in the United States we will not write it off so what we need to do for this particular item is to debit Goodwill and credit retained earnings so let's see how we fix that debit
• 58:30 - 59:00 Goodwill credit retain earnings 140 that now takes that particular item and correct it on the financial statement say it's now American compliant us Gap comp compliant second item certain R&D cost 35,000 worth capitalized on the balance sheet in 2020 none of this amount has been armatized in the United States these
• 59:00 - 59:30 costs would have been expensed of course so what we have to do is we need to reclassify this 35,000 take it out of assets and put it into expense so what we're going to do is debit expense and credit the asset we could call it defer charges that's fine if we knew the asset we could go straight to the asset as well number three interest incurred on the
• 59:30 - 60:00 bonds issu strictly for the construction of a building was expenses 19 and 20 the amount expens was 28,000 the building was completed in 2021 what do we do with interest charges in the United States we capitalize of course we don't capitalize all of them we capitalize the unavoidable interest which is a calculation however let's just suppose that this is on avoidable 28,000 so what we're going to have to do is we're going to have to expense it and
• 60:00 - 60:30 and take it uh capitalize it and remove it from the expense so 28 * 2 we will capitalize it debit the asset credit the expense now the year before 2019 is closed in 2020 so we can't go to expense we have to go to retain earnings fourth item deferred taxes have been recorded is that tax expense reflect the
• 60:30 - 61:00 amount of tax actually owed temporary differences between tax and the accounting was 350 420 in 19 and 20 respectively both temporary differences result in taxable income being lower than accounting pre-tax income so that means it's an expense cumulative temporary differences are at the beginning of 201 19 was 140 so they given us a balance which is great because the way as you recall
• 61:00 - 61:30 uh Tax Works we first isolate all the permanent differences there's no permanent differences there's no way we going to change that so we do nothing about it but where the tax law and the accounting principles vary temporarily we're going to make adjustments for those the way we do it is typically we'll say okay what's the beginning balance what's the ending balance and typically it's a deferred tax asset or deferred
• 61:30 - 62:00 tax liability if in this case it's deferred tax liability because it's an expense so we'd want to know what's the beginning balance how did it change in 2019 how did it change in 2020 so the changes will affect current period netting uh uh taxes that we pay and it will keep accumulating so the entry we will make is as follows for the current period we will affect tax expense 126 retained earnings for the last year
• 62:00 - 62:30 portion and we're going to set up the liability because they're both tax expense so those are the entries we will have to make because of all these differences in accounting principles from that local country's Gap to the United States Gap now we have made the journal entries how do we fect the statements first we're going to affect the income statement then once we get these numbers
• 62:30 - 63:00 we're going to roll it in to the equity section so net income was 195 this is what they give to us 195 290 we're going to take that convert it to the correct number so 195 290 R&D we need to subtract capitalization expense restore it because we need to capitalize it
• 63:00 - 63:30 bring up back the income defer tax it subtract brings us down to net income of 118 157 now it's interesting that the tax number over here is 105 it was one 26 and 147 remember the impact to net income is the change from one year to the next and the change was
• 63:30 - 64:00 350 by3 and 420 by3 here it includes the beginning balance as well so now here's the equity section the equity section given to us was as follows the equity were including all of these numbers so here's the stock and here's the retain
• 64:00 - 64:30 earnings so if we put the equity section together it will give us 590 and 670 we know that Goodwill was written off so how do we restore the equity we will increase the equity because we had to go and increase the asset interest we know should increase the equity because it's also going to increase the
• 64:30 - 65:00 asset defer taxes is going to reduce net income so we're going to reduce it for the cumulative amount in 2020 and the cumulative amount up to 2019 here's the recalibrated equity recalibrated net income and the journal entries to take that Local Company in Loc local currency and convert its financial statement into US Gap
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