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CHAPTER 9
UNDERSTANDING THE ISSUES
1. A variety of environmental factors may account
for the differences in accounting principles
among countries. A major factor relates to the
influence that other countries may have had on
a particular country. For example, countries
that were ruled or colonized by England are
more likely to have accounting principles similar
to those of England. Another important factor is
the standard-setting process and whether the
accounting principles have been developed
more in the private versus public (government)
sector. In some countries, government rules
and regulations heavily influence accounting
principles. Other factors resulting in differences
in accounting principles include types of busi-
ness activities and economic conditions, forms
of capital markets, typical forms of doing busi-
ness, social and cultural values, and the coop-
erative efforts between nations with respect to
trade and capital markets.
3. U.S. GAAP differs from IFRS in a number
2. The objectives of the International Accounting
Standards Committee Foundation are:
(a) to develop, in the public interest, a single
set of high quality, understandable and en-
forceable global accounting standards that
require high quality, transparent and com-
parable information in financial statements
and other financial reporting to help partic-
ipants in the worlds capital markets and
other users make economic decisions;
(b) to promote the use and rigorous applica-
tion of those standards;
(c) in fulfilling the objectives associated with
(a) and (b), to take account of, as appro-
priate, the special needs of small and me-
dium-sized entities and emerging econo-
mies; and
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(d) to bring about convergence of national
accounting standards and International
Accounting Standards and International
Financial Reporting Standards to high
quality solutions.
The FASB supports the objectives of the
Foundation primarily through its commitment
to the convergence project. The FASB signed,
and subsequently reaffirmed, its memorandum
of understanding with the IASB formalizing its
commitment to the convergence of U.S. GAAP
with IFRS. A number of initiatives have been
undertaken in order to move toward the goal
of convergence. Some of these initiatives in-
clude joint projects with the IASB, short-term
convergence project, an IASB in residence at
the FASB, and the consideration of conver-
gence in all agenda items taken up by the
FASB.
of areas although through the convergence
project the areas of difference are becoming
fewer. Exhibit 9-2 sets forth a number of areas
where there are differences. Students may
be encouraged to select a topic covered
by one of the IFRS and research it on
the IFRS Web site (http://www.iasb.org) or at
http://www.iasplus.com/standard/standard.htm
and then compare the standard to that in the
United States. Another site of interest may be
the comparisons between U.S. GAAP and
IFRS as set forth by PricewaterhouseCoopers
Similarities and DifferencesA Comparison
of IFRS, US GAAP and Indian GAAP
(http://www.pwc.com/extweb/pwcpublications
.nsf/docid/C979CF8DC0F18F77CA2571F5003
9012E).
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Ch. 9Exercises

EXERCISES

EXERCISE 9-1

1. A company might incur several costs in connection with converging to International Accounting
Standards. Certainly, accounting staff will have to be educated regarding the new standards, which,
in some cases, may differ significantly from U.S. GAAP. Accounting systems and software will also
have to be redesigned to process and measure transactions per the new standards. Financial in-
formation that is prepared by the new standards will be used for both internal and external purpos-
es. Users within the company as well as outside users will have to be educated regarding the
statements. All of these transitional items have monetary costs associated with them. In addition,
change within an organization is often resisted, and such resistance can cost a company in a varie-
ty of monetary and nonmonetary ways.

2. Although the client currently operates only in the central United States, it should be positioning itself
to expand its operations in such a way that international vendors, customers, and lenders become
part of its environment. For example, if materials are purchased from a foreign vendor, that vendor
may want to review the clients financial statements for purposes of assessing its creditworthiness.
If the foreign vendor makes such decisions based on IFRS, decisions based on U.S. GAAP could
be significantly different. In turn, the client company would want to evaluate the creditworthiness of
its foreign customers and, therefore, must be familiar with IFRS. Securing capital is no longer just a
local or regional process. Capital markets are worldwide, and those markets are making decisions
based on financial information that is prepared according to international standards. Your client
needs to embrace international standards so that it can position itself for operating in a global econ-
omy.

EXERCISE 9-2

Developing a presence as an exporter of high-technology products is going to require several things,

including capital, research and development, and market share. Accounting information will be used to
attract capital; it will therefore have to present information that can be compared against other entities
seeking capital. This suggests that accounting will have to develop so that it is in harmony with ac-
counting principles used by other nations.
A number of specific issues will also arise in this situation. For example, companies at a development
stage will be concerned about accounting for the expenditures preceding the revenues to be realized
from products. Principles will need to be developed regarding expense and revenue recognition, report-
ing by development stage enterprises, accounting for leased assets, and accounting for research and
development costs.
Additional accounting issues will arise to account for the form and size of organizations involved in high
technology. Unlike an agrarian economy, which normally consists of small family businesses, develop-
ment in this new industry will require the formation of corporations, partnerships, and joint ventures hav-
ing different equity theories underlying them.

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Ch. 9Exercises

EXERCISE 9-3

1. Several advantages to investors result from the harmonization of accounting standards. First and
foremost, investors will have information that is more comparable. This will result from financial
statements that are prepared using the same accounting principles used by entities in other coun-
tries. No longer will investors be comparing apples to oranges. Harmonization will also result in the
development of accounting principles that are less responsive to national influences and more res-
ponsive to economic reality. The principles of less-developed nations will be improved and other na-
tions principles, which are politically justified, will hopefully be reduced. To the extent that these im-
proved principles more fairly reflect economic reality, then the underlying equity of the entities will
also be more fairly reflected. This might result in security prices that more closely reflect underlying
economic value. Similar to this, companies that are currently at a competitive advantage or disad-
vantage in security markets will be placed on a more equal par with other countries if harmonization
occurs.

2. American businesses may be at a disadvantage due to differences in accounting standards be-

tween nations for several reasons. First, to the extent that U.S. GAAP requires more disclosure
than other nations standards, the U.S. company may have to disclose information that could be
used by its competitors in a harmful way. For example, if a U.S. company is required to report both
basic and diluted earnings per share (EPS), but a foreign competitor is only required to disclose ba-
sic EPS, the U.S. company could be disadvantaged in its efforts to raise capital. Also, it is possible
that compliance with U.S. GAAP will result in lower reported earnings than what would be recog-
nized if other nations standards were applied. For example, assume a U.S. company and its for-
eign competitor both purchase the same materials during periods of rising prices. If the U.S. com-
pany uses LIFO, its cost of sales and gross profit would be lower than what would be disclosed by
the foreign competitor who could use FIFO but not LIFO. To the extent that U.S. GAAP requires
more disclosure and/or more complex measurements, U.S. businesses will incur additional costs to
provide the information.

3. The U.S. accounting profession as represented by the Financial Accounting Standards Board is
committed to the convergence of U.S. GAAP and International Accounting Standards. The FASB
has adopted a number of initiatives which will reduce differences between accounting standards.
The FASB currently identifies areas where the differences can be eliminated without significant de-
lay. Furthermore, as new standards are developed both by the FASB and the IASB, improved
communication and cooperation should result in fewer differences.

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Ch. 9Exercises

EXERCISE 9-4

1. The IASB is under the umbrella of the International Accounting Standards Committee Foundation
and is responsible for carrying out the objectives of the Foundation. The Foundation appoints the
members of the IASB and develops and implements the strategy and operating policies of the
IASB. The chair of the IASB is the chief executive of the Foundation and is supervised by the Foun-
dation.

2. Both organizations are committed to developing international standards for the accounting profes-
sion. However, the IASB is primarily concerned with financial accounting standards and financial
reporting. The International Federation of Accountants is more concerned, not with technical report-
ing standards, but with standards that affect the professional accountant and the practice of ac-
counting. Standards affecting the professional accountant include those dealing with ethics, quality
control, and education. Standards dealing with the practice of accounting address auditing and as-
surance services as well as compilation and review services. The IFAC does set requirements for
financial reporting by governments and other public sector entities. Students may be encouraged to
visit the IFAC Web site at http://www.ifac.org.

3. Although the LIFO inventory method is GAAP in the United States, it is not allowed by IFAS. Re-
garding lower-of-cost-or-market adjustments, U.S. GAAP does not allow for subsequent reversals
of inventory write-downs, whereas IFRS do allow such reversals.

EXERCISE 9-5

1. Pension accounting per IFRS would appear to be more conservative. For all years 2004 through
2006, the reconciliation to U.S. GAAP identified pensions as an item that would lower net profit as
reported per IFRS. For example, in 2006, pensions reduced net profit per IFRS by 464 million euros
or approximately 9%. Footnotes to Unilevers financial statements indicate that the major difference
in how pension are accounted for is that variations from the expected cost, such as actuarial gains
and losses, are charged to income as they occur per IFAS. However, per U.S. GAAP, such varia-
tions are recognized over the expected service lives of employees. The balance sheet impact of
pensions is similar between the two sets of standards since the adoption of FASB Statement No.
158, adopted by Unilever in 2006, in that the difference between plan assets and the projected
benefit obligation is recognized in the balance sheet. This explains why the adjustment to equity be-
tween the two sets of standards is only 31 million euros in 2006 as compared to the 1,085 million
euro adjustment in 2005.

2. Per international standards, the 2006 net profit is 5,015 million euros on average equity of 10,219
million euros (average of 11,672 + 8,765), resulting in a return on equity of 49%. Based on U.S.
GAAP, the comparable return is profit of 4,385 million euros on average equity of 16,232 million eu-
ros (average of 17,068 + 15,396), resulting in a return on equity of 27%.

3. Students may be familiar with a number of foreign registrants such as Sony, Toyota, Air France,
Smithkline Beecham, Siemens AG, or DaimlerChrysler AG. As an alternative, students can go to
the Web site for the New York Stock Exchange (http://www.nyse.com) and find the Listed Company
Directory which shows listed companies by geographical area. Once a company is identified, the
student can input the company into EDGAR and locate the footnote that will likely contain the re-
conciliation to U.S. GAAP.

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Ch. 9Exercises

EXERCISE 9-6

An example of how a 10% value-added tax (VAT) would be calculated is as follows:

Level ___
Manufacturer Wholesaler Retailer Consumer
Cost of product .................................... NA 110 165 220
VAT included in cost ............................ NA 10 15
Net cost of product ............................... NA 100 150

Net selling price excluding VAT ........... 100 150 200

Cumulative value added ...................... 100 150 200

Value-added tax (10%) ........................ 10 15 20

Previously remitted tax ........................ 0 10 15
Net tax due .......................................... 10 5 5

Gross selling price ............................... 110 165 220

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