international accounting and financial reporting
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TRANSCRIPT
International Accounting and Financial Reporting
Summer 2007
William F. O’Brien, MBA, CPA
Session III-A
International FSA
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Session III-A Objectives
Revisit MGM Revisit Reporting Levels General FSA considerations International FSA challenges Major GAAP differences Index of conservatism
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MGM’s Classifications
British-American-Dutch (B.A.D.) Continental South American Mixed Economy Socialist Islamic
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Six Levels of Foreign Reporting
Do-Nothing Convenience translation (Japan) Currency restatement GAAP disclosure Partial restatement Full restatement
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The 3 P’s
Preparation Processing Presentation
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Reasons for Analysis
Investment decisions* Credit decisions* Performance* Valuation (investment) Legal liability amount (credit & perf.) Going concern decisions (credit & perf.) Unreasonable returns (performance)
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Traditional FSA Methods
Index analysis Trend analysis Percentage analysis Comparative analysis Horizontal analysis Vertical analysis Use of critical ratios
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Typical Ratio Classifications
Liquidity and solvency ratios Efficiency or performance ratios Profitability ratios Coverage or leverage ratios Key Financial Statement Ratio handout
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FSA Cautions
General Numerator and denominator content
Comparative issues Timeliness GAAP alternatives Management aggressiveness/pro-forma stmts. “Just win, baby” attitude Size Geographic span of operations
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Other F/S Considerations
Quality of Earnings/Transparency Measurement Bias Management Bias
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Quality of Earnings Issues
Non-recurring items…sustainability Essentially we are trying to determine if what is
reported is going to recur in the future.
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Sustainability Issues
Discontinued operations Extraordinary gains and losses Changes in accounting principles Impairment of long-lived assets Restructuring charges Changes in estimates Peripheral gains and losses
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Sources of Information
Annual Report Form 10-K Form 10-Q Form 8-K Prospectus Form 20-F (foreign entity 10-K) SEC’s EDGAR service
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International FSA Challenges
Risk of applying home country perspective Risk of failure to understand the local reporting
context Risk associated with diverse GAAP and
economics
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Major GAAP Differences
PPE Depreciation R&D costs Borrowing costs Exchange rates Pensions Income Taxes Goodwill Intangibles
A detailed discussion of these differences is beyond the scope of this class. Research is required for each specific application of GAAP.
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Index of Conservatism
1 – Home GAAP – Local GAAP
Home GAAP
Less conservative = greater than 1 More conservative = less than 1
Partial index can be calculated for components
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Global Earnings Measurement
UK…higher, therefore, less conservative vs. US
Continent…lower, therefore, more conservative Japan…lower, therefore, more conservative
Often biased by formal debt…context issue
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Reasons for Measurement Differences
Driven by environmental and social values Revisit Hofstede and Bond and Gray
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Global Accounting Convergence
Single standard Harmonization Convergence IASC (1973); now IASB IOSCO role
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Key Points-Session III-A
Follow basic FSA considerations Note the contextual factors Be aware of conservatism biases Note the challenges that remain with respect to
convergence Remember the importance of enforcement and
the legal system
Session III-B
International Disclosure
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Session III-B Objectives
Revisit Reporting Levels Transparency Concepts Disclosure Concepts Disclosure Trends—Overview only Reporting Summary Frequency of Reporting
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Six Levels of Foreign Reporting
Do-Nothing Convenience translation (Japan) Currency restatement GAAP disclosure Partial restatement Full restatement
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Transparency
Looking through the numbers to see reality What you see is what you get--WYSIWYG What is. Is! Investor confidence
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Disclosure
Overload? Essential More disclosure leads to more disclosure Recall the financial accounting model
Useful and relevant information
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Disclosure Incentives and Disincentives
Incentives Lower cost of capital Compliance
Disincentives Competitive disadvantage See Exhibit 6.1
General issues 4th & 7th Directives Research inconsistencies
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Reporting Trends
Corporate Review Chairman’s statement Strategy review Unusual information M & A information H/R information Social responsibility information R & D information Investment information Future information
Operations Review MD&A Disaggregated analysis
Financial Review Results Liquidity and capital resources Asset valuations and inflation
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Frequency
EU directive: every six months IASB: IAS 34—content only discussed
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Key Points-Session III-B Transparency is important Enforcement is not universal Information goes far beyond the basic financial
data Frequency varies from the U.S.
Session III-C
Convergence
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Session III-C Objectives
Pressures and Participants for Convergence Key Directives International Standard Setting Challenges Remain
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Pressures & Participants
Governments Flow of capital Business growth Regional disadvantages
Trade unions & employees Consequences of transfer pricing Impact on future operations
Investors & analysts Information comparability
Bankers Transparency with respect to solvency
Accounting professionals Compliance Ease of implementation
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Key Directives
Grounded in laws of member nations 4th
Disclosure and presentation of financial information
7th
Elements of consolidated financial statements 8th
Qualification and work of auditors
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International Standard Setting
IAS Committee Foundation (Trustees) IASB (2000)
14 Members UK-3; US & Canada-3 Prof. Mary Barth from Stanford
Refer to www.iasb.org for current standards IFRS and US GAAP
Reconciliation to US GAAP required Current convergence project underway
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IFRS-FASB Convergence
Benefits Increased capital market efficiency Reduced administrative burdens Access to capital outside of home market
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Challenges Remain
Quality issues surrounding use, interpretation and enforcement
Rules-based versus principles based foundation What about legal bright lines?
Lack of broad IFRS compliance Some believe a global commitment is not in place
Differences based on local needs will continue Complexity of accounting and operations is growing Significant research is needed
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Key Points-Session III-C Increasing pressure for convergence Participants have varied interests in
convergence Development of converged standards is a
political process Significant issues remain