Additional Financial
Reporting Issues
PROGRAM STUDI AKUNTANSI FAKULTAS EKONOMI DAN BISNIS
UNIVERSITAS ESA UNGGUL
EBA 604
AKUNTANSI INTERNASIONAL
Additional Financial Reporting
Issues
Chapter Topics
• Infation accounting – general purchasing power
and current cost accounting approaches.
• Infation accounting – diferences in standards
worldwide.
• Business combinations and consolidated
financial statements (ggroup accounting..
Additional Financial Reporting
Issues
Learning Objectives
1. Explain the concepts underlying two methods of accounting for changing prices (ginfation.—
general purchasing power accounting and current cost accounting.
2. Describe attempts to account for infation in diferent countriesr as well as the rules found in International Financial Reporting Standards
Additional Financial Reporting
Issues
Learning Objectives
3. Discuss the various issues related to the accounting for business combinations and the preparation of consolidated financial statements (ggroup accounting..
4. Present the approaches used internationally to address the issues related to group accountingr focusing on IFRSs.
5. Describe segment reporting requirements in
Infation Accounting – Conceptual
Issues
Impact of infation on fnancial
statements
• Understated asset values.
• Overstated income and overpayment of taxes. • Demands for higher dividends.
• Difering impacts across companies resulting in
lack of comparability.
Infation Accounting – Conceptual
Issues
Impact of infation on fnancial
statements
• Historical cost ignores purchasing power gains
and losses.
• Purchasing power losses result from holding
monetary assetsr such as cash and accounts receivable.
• Purchasing power gains result from holding
monetary liabilitiesr such as accounts payable.
• The two most common approaches to infation
Infation Accounting – Conceptual
Issues
Net Income and Capital Maintenance
• Historical costr general purchasing power and
current cost accounting all fow from diferent concepts of capital maintenance.
• Net income represents the amount of dividends
that can be paid out while still maintaining the company’s capital balance.
Infation Accounting – Conceptual
Issues
Net Income and Capital Maintenance
• Historical cost net income maintains a nominalr
not adjusted for infationr amount of contributed capital.
• General purchasing power net income maintains
the purchasing power of contributed capital.
• Current cost net income maintains the productive
Infation Accounting -- Methods
General Purchasing Power (GPP)
Accounting
• Updates historical cost accounting for changes in
the general purchasing power of the monetary unit.
• Also referred to as General Price-Level-Adjusted
Historical Cost Accounting (gGPLAHC..
• Nonmonetary assets and liabilitiesr stockholders’
equity and income statement items are restated using the General Price Index (gGPI..
• Requires purchasing power gains and losses to be
included in net income.
Infation Accounting -- Methods
Current Cost (CC) Accounting
• Updates historical cost of assets to the current
cost to replace those assets.
• Also referred to as Current Replacement Cost
Accounting.
• Nonmonetary assets are restated to current
replacement costs and expense items are based on these restated costs.
Infation Accounting
Internationally
United States and United Kingdom
• SFAS 33r Financial Reporting and Changing Prices
briefy required large U.S. companies to provide GP and CC accounting disclosures.
• This information is now optional and few
companies provide it.
• In the UKr SSAP 16 required current cost
informationr this was also was only briefy required.
• Both countries have experienced low rates of
infation since the 1980s.
Infation Accounting
Internationally
Latin America
• Latin America has a long history of significant
infation.
• Brazilr Chiler and Mexico have developed
sophisticated infation accounting standards over time.
• Like the U.S. and UKr Brazil has abandoned
infation accounting.
• Mexico’s Bulletin B-10r Recognition of the Efects
Infation Accounting
Internationally
Mexico – Bulletin B-10
• Requires restatement of nonmonetary assets and
liabilities using the central bank’s general price level index.
• An exception is the option to use replacement
cost for inventory and related cost of goods sold.
• Another exception is imported machinery and
equipment.
• This exception allows a combination of country of
origin price index and the exchange rate between Mexico and country of origin.
Infation Accounting
Internationally
Netherlands – Replacement Cost
Accounting
• Prior to the required use of IFRSs in 2005r Dutch
companies could use replacement cost accounting.
• In 2003 only Heineken used this approach.
• Heineken presented inventories and fixed assets
at replacement cost.
• Cost of sales and depreciation were also based on
replacement costs.
Infation Accounting
Internationally
International Financial Reporting
Standards
• IAS 15r Information Refecting the Efects of
Changing Prices was issued in 1981.
• This standard has been withdrawn due to lack of
support.
• The relevant standard now is IAS 29r Financial
Reporting in Hyperinfationary Economies.
• IAS 29 is required for some companies located in
environments experiencing very high levels of infation.
Infation Accounting
Internationally
International Financial Reporting
Standards
• IAS 29 includes guidelines for determining the
environments where it must be used.
• Nonmonetary assets and liabilities and
stockholders’ equity are restated using a general price index.
• Income statement items are restated using a
general price index from the time of the transaction.
Business Combinations and
Consolidated Financial Statements
Background and conceptual issues
• Business combinations are the primary
mechanism used by MNEs for expansion.
• Sometimes the acquiree ceases to exist.
• In other casesr the acquiree remains a separate
legal entity as a subsidiary of the acquirer (gparent..
• Accounting for the parent and one or more
subsidiaries is often called group accounting.
Business Combinations and
Consolidated Financial Statements
Group Accounting – Determination of
control
• Control provides the basis for whether a parent
and a subsidiary should be accounted for as a group.
• Legal control through majority ownership or legal
contract is often used to determine control.
• Efective control can be achieved without majority
ownership.
• IAS 27r Consolidated and Separate Financial
Business Combinations and
Consolidated Financial Statements
Group Accounting – Full Consolidation
• Full consolidation involves aggregation of 100
percent of the subsidiary’s financial statement elements.
• When the subsidiary is not 100 percent ownedr
the non-owned portion is presented in a separate item called minority interest.
• Full consolidation is accomplished using one of
two methods; purchase method or pooling of interests method.
Business Combinations and
Consolidated Financial Statements
Full Consolidation – Purchase Method
• When one company purchases a majority of the
voting shares of another companyr the purchased assets and liabilities are stated at fair value.
• The excess of the purchase price over the fair
value of the net assets is goodwill.
• IFRS 3r Business Combinationsr measures the
minority interest as the minority percentage
Business Combinations and
Consolidated Financial Statements
Full Consolidation – Goodwill
• Significant variation exists internationally in
accounting for goodwill.
• U.S.r IFRSr and most other countries require
goodwill to be capitalized as an asset.
• Some countries require amortization over a
period of up to 40 years.
• U.S.r Canadar and IFRS do not require
amortization but do require an annual impairment test.
• Japan allows immediate expensing of goodwill.
Business Combinations and
Consolidated Financial Statements
Group Accounting – Equity Method
• When companies do not controlr but have
significant infuence over an investeer the equity method is used.
• Twenty percent ownership is often used as the
threshold for significant infuence.
• The equity method is sometimes referred to as
one-line consolidation.
• Some diferences exist between countries
Business Combinations and
Consolidated Financial Statements
Group Accounting – Other
• Pooling of interests method is no prohibited by
IFRS and in many countries.
• Pooling of interests was historically a popular
method because it allowed for lower expense recognition compared to the purchase method.
• Proportionate consolidation method under IAS 31r
Financial Reporting of Interests in Joint Venturesr but is prohibited by U.S. GAAP.
Segment Reporting
Background
• MNEs typically have multiple types of businesses
located around the world.
• Consolidated financial statements aggregate this
information.
• Diferent types of business activity and location
involve diferent growth prospects and risks.
• Financial statement users desire information to be
Segment Reporting
Background
• Beginning in the 1960sr standard setters began to
require disclosures by segment.
• Segments are defined both by line-of-business
and geographic area.
• The AICPA and Association of Investment
Management and Research (gAIMR. recommend
segment reporting consistent with how a business is managed.
• A significant point of resistance to segment
reporting is concerns about competitive disadvantage.
Segment Reporting
IAS 14,
Segment Reporting
• Requires segment reporting both by
line-of-business and geographic area.
• The company chooses one of these as a primary
reporting format.
• Significantly more information is required for the
primary reporting format.
• Generallyr the primary reporting format will be
consistent with internal reporting to upper management.
Segment Reporting
IAS 14,
Segment Reporting
–
Signifcance Test
• Reportability of a segment is based on the
significance of the segment.
• A segment is deemed reportable if it meets one of
three significance tests.
• The significance tests are based on revenuer
profit or lossr and assets.
• A segment is reportable if it equals or exceeds 10
percent on any one of these tests.
Segment Reporting
SFAS 131,
Disclosures about Segments
of an Enterprise and Related
Information
• Requires reporting of significant operating
segments which can be based on either line-of-business or geographic area.
• The significance tests and required disclosures
are similar to IAS 14.
• SFAS 131 does notr howeverr require reporting of
both line-of-business and geographic segments.
• If reporting is based on line-of-businessr some
Segment Reporting
Segment Reporting Internationally
• There is a significant lack of convergence
internationally in the area of segment reporting.
• In a number of countriesr segment reporting is
not required if deemed to be of competitive disadvantage by the company.
• The IASB-FASB short-term convergence project is
looking at this area.
• IASB is planning to follow the SFAS 131
management approach to identifying segments.