Advanced Accounting

by Debra Jeter and Paul Chaney

Chapter 12: International

Accounting and the Global
Economy

Slides Authored by Hannah Wong, Ph.D.

Rutgers University
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Increasing Interest in International
Accounting Standards

Cross border equity

issuances
Call for:
uniform
Internationalization
international
of portfolio
accounting
holdings
standards

Shift toward
equity financing
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 Divergence in Accounting Standards

In some countries:
Goodwill is not amortized until it is apparent it
has diminished in value
The pooling of interests method is not
allowed
LIFO inventory costing is not permitted
Reserves are recorded for self-insurance or
contingencies for expected future losses

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 International Accounting Standards
Committee (IASC)

An independent private-sector body

established in 1973 by the leading accountancy
bodies of
Australia,Canada, France, Germany, Japan,
Mexico, the Netherlands, the United Kingdom
and Ireland, and the United States
Issues International Accounting Standards (IAS)

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Earnings Differences among Countries
An Illustration
Most
Japan
conservative

Germany

France

United States

Least
United Kingdom
conservative
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 Accounting Models

Accounting Practice Region

Anglo-Saxon United States
Anglo-Saxon United Kingdom
German Germany, Switzerland
Latin France, Italy, Brazil
Asia-Pacific Japan, China
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 International Accounting Issues
Consolidation Methods
U.S GAAP IAS Other Countries
purchase and purchase is pooling is not
pooling required permitted in
allowed Japan and
uniting of
used
interests
infrequently
(similar to
in other
pooling) is
countries
allowed if firm
sizes are
similar
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 International Accounting Issues
Property, Plant and Equipment
U.S GAAP IAS Other Countries
recorded at initial In France and
historical cost measurement U.K., common
is original cost to revalue
carried on
assets to an
books at net revaluation to
equity
book value fair value is
reserve
allowed
account

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 International Accounting Issues
Depreciation
U.S GAAP IAS Other Countries
predominantly method In Japan and
straight line applied on a Latin
method for systematic America,
financial basis taxation
purposes authorities
determine
alternative
depreciation
methods for
methods
tax purposes

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 International Accounting Issues
Research and Development
U.S GAAP IAS Other Countries
all R&D costs research costs In Japan, some
are expensed are expensed R&D costs can
be capitalized
development
and amortized
costs may be
for up to 5 years
recognized as
an intangible In the UK, some
asset development
costs are
capitalized
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 International Accounting Issues
Goodwill
U.S GAAP IAS Other Countries
capitalized capitalized capitalized and
and amortized and amortized amortized over a
for up to 40 for up to 5 shorter time
years years, (up to period in most
20 years if countries
justified)
immediately
written off in
Germany

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 International Accounting Issues
Inventories
U.S GAAP IAS Other Countries
LIFO and lower of cost or LIFO is not
FIFO are net realizable acceptable for
primary value is tax purposes in
methods recommended the U.K. and
Canada, hence
FIFO and
limited use
weighted
average are
primary methods
LIFO allowed
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 International Accounting Issues
Deferred Taxes
U.S GAAP IAS Other Countries
liabilities and liabilities and In the U.K. and
assets recorded assets recorded Germany, the
on all taxable if probable liability method is
and deductible used
temporary no deferred
differences taxes on In Japan,
nontaxable deferred taxes
valuation goodwill are not
allowances used recognized
if asset is not
probable 12 - 12
U.S. Listings for Non U.S. Companies

Required registration with the SEC

to be listed only: form 20-F
to issue securities in the U.S.: F-1
statement
subsequent periods:
form 20-F (annual reports) and
form 6-K (interim reports)

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 20-F Statement

the non-U.S. companys local GAAP reporting

+
reconciliation of net income and shareholders
equity to comply with U.S. GAAP; or
full disclosure of financial information required of
U.S. firms, including segmental disclosures

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 F-1 Statement

Required for first time offer of securities by a non-

U.S. company (foreign private issuer)
The company must meet certain conditions of:
ownership,
location of assets, and
location of executive officers
Must contain the prospectus containing
financial statements (reconciled to U.S. GAAP)
detailed nonfinancial information

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 F-1 Statement - Content

The prospectus containing

financial statements (reconciled to U.S. GAAP)
description of business
regulatory structure
management structure
capital structure
shareholding patterns
shareholder rights

Information about articles of association, bylaws,

significant legal and contractual obligations of the
company
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American Depository Receipts (ADRs)

Definition
a derivative financial instrument usually
representing a certain fixed number of publicly
traded shares of a non-U.S. corporation
Trading
ADRs may trade freely, subject to some
conditions, like any U.S. security on the major
exchanges

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American Depository Receipts (ADRs)

Depository Bank (DR Bank)

anintermediary creating ADRs, usually with the
consent of the issuing company
provides
an interface between the non-U.S.
company and U.S. investors
major DR banks: Bank of New York, J.P.Morgan,
Citibank

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 Process of Creating ADRs

DR bank purchases shares of non-U.S.

company from its home market

DR bank places shares with its

custodian in the home market

DR bank issues ADRs (denominated in U.S. $)

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 Types of ADR Programs

Unsponsored ADRs
The DR bank creates a DR program
without a formal agreement with the
issuing non-U.S. company
usually
arise due to great demand for the
companys securities in the U. S.
becoming obsolete

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 Types of ADR Programs

Sponsored ADRs
TheDR bank creates a DR program with
an exclusive agreement with the issuing
non-U.S. company
The DR bank provides information and
disburse payouts (dividends, rights, etc) to
U.S. investors
account for over 98% of ADRs

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 Types of Sponsored ADRs

NO SEC SEC
Registration Registration
Not Issuing
Capital Level I Level II
Issuing
Capital Rule 144A Level III

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 Advanced Accounting
by
Debra Jeter and Paul Chaney

Copyright 2001 John Wiley & Sons, Inc. All rights reserved.
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