International Accounting Forum

Case Study

2008-01-28T00:11:00.000+01:00

I am doing a case study for an international acct class that I am taking and I need some 'expert' opinions on it. Here is an overview of it:
The CEO of a corporation is speaking to the CFO about changing their accounting over to international from domestic GAAP so a loss does not show up while he is the CEO of the company. The country that they are in allows both GAAP and international standards. Should they do this?Why? And what should the CFO say in response to the CEO??

Accounting principles

2007-05-24T14:59:00.000+02:00

On a conceptual basis, should purchase discounts be treated as a revenue or as a contra-expense (reduction of purchases/cost of sales/ inventory)?

Revised IAS 39

2007-03-08T07:59:00.000+01:00

Is the revised version of IAS 39 available for free download?If yes, can somebody tell me the URL?

Should the Audit Report specify the real value destroyed in Retained Income by the global implementation of the Stable Measuring Unit Assumption?

2006-12-30T12:52:00.000+01:00

Historical Cost Accounting is the global basic accounting model.

The International Accounting Standards Board recognize two economic items:

Monetary items: money held and "items to be received or paid in money" – in terms of the IASB definition.

Non-monetary items: All items that are not monetary items: They include variable real value non-monetary items valued for example, at fair value, market value, present value, net realizable value or recoverable value and Historical Cost items based on the stable measuring unit assumption which makes these items equal to monetary items in the case of companies´ Retained Income balances and the issued share capital values of companies with no well located and well maintained land and/or buildings or other variable real value non-monetary items able to be revalued at least equal to the original real value of each contribution of issued share capital.

As a constant real value non-monetary item Retained Income is valued at Historical Cost which makes it subject to the destruction of its real value by cash inflation and cash hyperinflation.

It is an undeniable fact that the functional currency's internal real value is constantly being destroyed by cash inflation in the case of low inflation economies, but this is considered as of not sufficient importance to adjust the real values of constant real value non-monetary items in the financial statements – the universal stable measuring unit assumption.

The combination of the Historical Cost Accounting model and low inflation is thus indirectly responsible for the destruction of the real value of Retained Income equal to the annual average value of Retained Income times the average annual rate of inflation. This value is extremely easy to calculate in the case of each and very company in the world with Retained Income as well as the annual or accumulated or current or future compony or country totals.

Real value destroyed by the combination of low inflation and the Historical Cost Accounting model whereby everybody agrees that the destruction of the internal real value of the monetary unit of account is a very important matter and that cash inflation thus destroys the real value of all variable real value non-monetary items when they are not valued at fair value, market value, present value, net realizable value or recoverable value.

But, everybody suddenly agrees, in the same breath, that for the purpose of valuing Retained Income – a constant real value non-monetary item – the change in the real value of money is regarded as of not sufficient importance to update the real value of Retained Income in the financial statements. Everybody suddenly then agrees to destroy hundreds of billions of Dollars in real value in all companies´ Retained Income balances all around the world.

Yes, inflation is very important! All central banks and thousands of economists and commentators spend huge amounts of time on the matter. Thousands of books are available on the matter.

But, when it comes to constant real value non-monetary items:

No sir, inflation is not important! We happily destroy hundreds of billions of Dollars in Retained Income real value year after year after year.

However: When you are operating in an economy with hyperinflation, then we all agree that, yes sir, you have to update everything in terms of International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. Variable and constant real value non-monetary items.

But ONLY as long as your annual inflation rate has been 26% for three years in a row adding up to 100% - the rate required for the implementation of IAS 29. Once you are not in hyperinflation anymore, for example, anywhere from 2% to 20% annual inflation for as many years as you want, then you are not allowed to update constant real value non-monetary items any more. Then you must destroy their value again – at 2% to 20% per annum - as applicable!

For example:

Shareholder value permanently destroyed by the implementation of the Historical Cost Accounting model in Exxon Mobil’s Retained Income during 2005 exceeded $4.7bn for the first time. This compares to the $4.5bn shareholder real value permanently destroyed in 2004 in this manner. (Dec 2005 values).

http://www.prweb.com/releases/200632/2/prweb340868.htm

The application by BP, the global energy and petrochemical company, of the stable measuring unit assumption in the accounting of their Retained Income resulted in the destruction of at least $1.3bn of shareholder value during 2005. (Dec 2005 values).

http://www.theopenpress.com/index.php?a=press&id=7394

Royal Dutch Shell Plc, a global group of energy and petrochemical companies, permanently destroyed $2.974 billion of shareholder value during

http://www.theopenpress.com/index.php?a=press&id=7336

Trade debtors and trade creditors are non-monetary items. It is very easy to understand. When the trade debtor/creditor relates to a non-monetary item (amounts owing for purchases of non-monetary items eg, stock, services, raw materials, vehicles, property, etc) it is obviously a non-monetary item. These items have to be updated every time the Consumer Price Index change only during the period of the debt.

Monetary items are money held and accounted monetary values pertaining only to money -where money is the functional currency in an economy.

Non-monetary items are all items that are not monetary items.

Non-monetary items are either variable real value non-monetary items or constant real value non-monetary items.

Variable real value non-monetary items are valued, for example, at fair value, market value, net realizable value, present value or recoverable value in terms of International Accounting Standards and International Financial Reporting Standards. Examples are stock, property, plant equipment, raw material, finished goods, services, vehicles, marketable securities, foreign exchange, etc.

Constant real value non-monetary items have constant real values and have to be continuously updated in terms of the change in the Consumer Price index in low cash inflationary economies and cash hyperinflationary economies.

Examples are trade receivables, trade payables, constant real value items valued at cost, issued share capital, retained earnings, provisions, reserves, taxes, dividends, salaries, wages, fees, interest received, interest paid, all profit and losss expenses and all profit and loss revenue and income.

Monetary loans (personal, national and international debt) are monetary items. They can not be updated and they are not updated.

Interest paid and interest received are non-monetary items. In your personal bank account interest is always immediately settled with the bank. Unpaid interest is thus a non-monetary item and have to be updated. Interest in the profit and loss account is a non-monetary item and have to be updated.

Personal debts for monetary loans are monetary items. Consumer debt for purchases of non-monetary items are non-monetary items. They have to be updated in hyperinflationary and low inflationary economies.

The prime beneficiary is everybody. Workers have their salaries and wages updated monthly as a matter of routine - they receive the same real wage. The nominal value is simply updated all the time. They will not receive any more real value. Their salaries and wages will simply be maintained at their real values all the time.

Companies - even ones with no fixed assets at all - will have their issued capital real values updated all the time. Companies with retained income will have the real value of their retained income maintained for an unlimited period of time - just like the real value of their issued share capital - all else except cash inflation and cash hyperinflation being equal.

For the first time ever, companies will really have an unlimited lifetime - as was originally intended with the creation of companies - all else except cash inflation and cash hyperinflation being equal.

All the above is actually allowed this very moment by International Accounting Standard IAS 29 Financial Reporting in Hyperinflationary economies but ONLY for companies in hyperinflationary economies.

It is prohibited (not generally accepted) for companies that are not operating in a hyperinflationary economy.

That means the following at this very moment in time: Today all companies in only Zimbabwe (1000 % inflation) are allowed to update all their variable real value non-monetary items as well as all their constant real value non-monetary items:

But not the rest of the world.

The rest of the world is forced by current United States Generally Accepted Acccounting Principles and the International Accounting Standard Board´s International Accounting Standards and International Financial Reporting Standards to destroy their/our Retained Income balances each and every year at the rate of inflation because of the global implementation of the stable measuring unit assumption whereby we are all forced/agree to regard the change in the value of the unit of account - our low inflation currencies - as of not sufficient importance to update the values of constant real value non-monetary items in our financial statements.

We rather destroy them year after year at the rate of inflation till they will reach zero real value as in the case of Retained Income and the issued capital values of all companies with no well located and well maintained land and/or buildings at least equal to the original real value of each contribution of issued share capital.

The 30 Dow companies destroy $31bn annually in the real value of their Retained Income balances as a result of the implementation of the stable measuring unit assumption. Every single year.

Retained Income can be paid out to shareholders as dividens. Poor Dow company shareholders. They will never see that $31bn of dividens destroyed each and every year.

The same value is at least $100bn plus for the reat of the US economy.

As we have all been doing it for the last 700 years: from around the year 1300 when the double entry accounting model was perfected in Italy.

When we do this at the rate of 2% inflation ("price stability" as per the European Central Bank and as per Mr Trichet, the president of the European Central Bank) we purposefully destroy 51% of the real value of the retained income balances in all companies operating in the European Monetary Union over the next 35 years - when that Retained Income remains in the companies for the 35 years - all else except cash inflation being eqaul. Each and every one of those 35 years will be classified as a year of "price stability" by the ECB and Mr Trichet. He will not be the president of the ECB in 35 years time.

Should this value be showed in the Audit Report?

Maybe it should.

Read the book. It is for free.

Free Download : You can download the book: "RealValueAccounting.Com - The next step in our fundamental model of accounting." on the Social Science Research Network (SSRN) at http://ssrn.com/abstract=946775

Nicolaas Smith
RealValueAccounting.Com

Accounting Compliance

2006-09-03T09:08:00.000+02:00

What is the latest accounting compliance, but i need a easy one

Accounting compliance increases investor fears

2005-03-18T10:15:00.000+01:00

More than a dozen companies on Thursday reported deficiencies with their internal accounting controls, forcing them to delay the filing of annual reports to regulators and sending investors for the exits.

Names such as Advent Software Inc., Ligand Pharmaceuticals Inc. and auto supplier Collins & Aikman Corp. dropped in trading after disclosing they need more time to file audited financial reports with the Securities and Exchange Commission. The companies said they came up short in efforts to comply with Sarbanes-Oxley Act corporate accountability laws -- and might have to restate earnings all together.

These companies join some 500 others -- from Eastman Kodak Co. to SunTrust Banks Inc. -- who have told shareholders they can't ensure their financial reports are accurate and reliable under rules that will now be enforced by regulators. The more stringent guidelines are being thrust upon public companies in the wake of accounting scandals at Enron Corp. and Worldcom Inc. Read on.

Bestselling Accounting Books

2004-12-29T15:30:00.000+01:00

The costs of Sarbanes-Oxley

2004-11-17T13:42:00.000+01:00

A short article by Kevin Fogerty in Baseline Magazine (Sep2004) assesses the typical cost of complying with the Sarbanes-Oxley Act in the U.S. It also contains a handy standard calculation sheet that you can use to calculate your own costs of Sarbanes-Oxley compliance. You can also buy the spreadsheet here ($50).

The amount of money a corporation spends complying with the Sarbanes-Oxley Act depends to such an extent on its existing processes, organization, and technology that it is hard to estimate the total cost, analysts complain.

According to a survey of its members, Financial Executives International says a typical company will spend $4.6 million in 2004 on Sarbanes-Oxley, plus an additional 38 percent per year for future audits. AMR Research predicts compliance budgets will go up 10 percent per year after the act goes into full effect in December 2004.

Those expecting big bills are the smart ones, says Robert Kugel, vice president and research director of Ventana Research. Taking an on-the-cheap approach and then having to re-do the documentation will be far more expensive, even if you do not include potential fines, he says.

Companies are wise to use compliance projects to streamline their processes through business process reengineering efforts, says Brian Wood, research director at Gartner Inc.

IASB predicts flaming row over harmonising global accounting rules

2004-11-13T14:00:00.000+01:00

There could be "blood all over the streets", the head of the IA Standards Board (IASB), Sir David Tweedie, warned recently, because of controversy over the next leg of its quest to harmonise global accounting rules.

The IASB is aiming to introduce a single set of global I. Financial Reporting Standards (IFRS) to increase financial transparency and so promote world investment and growth.

Sir David Tweedie said the challenges to come would dwarf those seen in the run-up to adoption of IA standards by European Union-listed companies in January, over which he has wrestled with Brussels. He described the recent setbacks as "a blip". "Now we're coming to the big ones and all of them will have controversy," he said in an interview with the Financial Times. The changes would involve setting standards on sacred cows such as leasing, insurance, performance reporting, and pensions, which he said would be tackled over the next three to five years.
"There will be blood all over the streets," he said, referring to the expected uproar from companies that might object to the new standards if they felt they would put their accounts into a poor light. A new standard on leasing, for example, could involve companies recognising leased assets as a liability, which would shift big items such as property and aircraft on to the balance sheet. "Every company with a big asset is going to erupt," he said.
The timetable for drawing up the new standards coincides with a number of other ambitious IASB initiatives which promise unprecedented reform in global A. practices this decade.
The IASB and the FASB, the US standard-setting body, want convergence between their two systems by 2007-2008, removing the need for reconciliation between US accounting principles and international ones. Truly global accounting rules are expected to make A. considerably easier for multinational companies.
In parallel, Sir David said the IASB hoped to bring China, Latin America and other parts of the world in line with IA standards.
He made clear the A. reforms were more than book-keeping exercises. He believed they could influence the way companies do business, improve market efficiencies, and lower risk premiums. Harmonising global A. standards could also stimulate greater cross-border transactions. "This is world trade; that's what it's all about," he said.
However, the IASB's recent tussle with the European Commission underlines the risk of political interference.

The two European compromises were on hedge A., allowing European banks to continue to hedge against interest rate changes, and on fair value, giving European firms an option on valuing certain financial liabilities at market rates -- an issue that had concerned the European Central Bank.
There will not likely be any changes in the near-term on hedge A., Tweedie said, but the IASB is working with the European Commission to amend the fair value option and to introduce voluntary changes early in the New Year.
"We are crafting new wording (on the fair value option) at the moment and will test that with lobby groups in the New Year and then put on our website as soon as we can."

IASB wrong on IAS39 changes

2004-10-26T11:48:00.000+02:00

A member of the International Accounting Standards Board (IASB) has said that the standard setter was wrong to bow to political pressure from the European Commission and water down proposals on the fair value option in IAS39.

Speaking at PricewaterhouseCoopers' Meet the Experts conference in London today (Monday), board member James Leisenring said of the draft's publication: 'I don't think we behaved as a proper standard setter in issuing this.'
The revised exposure draft was released earlier this year in direct response to the criticisms levelled at financial instrument's standard IAS39, but this was not enough to stop the European Commission choosing to adopt a carved-out version of the standard.

'We have been suitably chastised in the comment letters sent to us over our actions, and I believe they were right to do so,' added Leinsenring.

Also at the conference Jurgen Tiedje, the new head of the EC's accounting and audit unit, said that if the IASB 'rolled up its sleeves, there is no reason technical solutions to the IAS39 issues cannot be found in the next three months.'

Accountants Fees

2004-08-23T16:02:00.000+02:00

An accountant goes into a pet shop to buy a parrot. The shop owner shows him three identical parrots on a perch and says, "The parrot on the left costs $500."

"Why does that parrot cost so much?" asks the accountant.
"Well," replies the owner, "it knows how to do complex audits."

"How much does the middle parrot cost?" asks the accountant.
"That one costs $1,000 because it can do everything the first one can do plus it knows how to prepare financial forecasts".

The startled accountant asks about the third parrot, to be told it costs $4,000. Needless to say, this begs the question, "What can it do?"
To which the owner replies "To be honest, I've never seen him do a darn thing, but the other two call him Senior Partner."

10 major consequences of IFRS

2004-08-09T10:26:00.000+02:00

Its official debut comes in accounts with a 2006 closing date. However IFRS, the new international accounting rules, are actually already here, because accounts for the current year are going to have to be expressed under IFRS rules for comparison with the 2005-06 numbers when they are posted.
Here's an overview of 10 major changes due to IFRS that are coming up:

Accountants: are having a boom year. Remarkable if you remember the crisis that led to these changes was caused by accountants to an extent.
Balance sheets: will be smaller and more highly geared. So that should clean up things over there a little bit.
Profit statements: will be more susceptible to unexpected change. Probably leading to increased volatility of stocks. Stock trading may increase as a result.
Intangibles: If they are internally generated, they have to be written off, usually against retained earnings. The change will shrink balance sheets and boost gearing, and may force the renegotiation of debt covenants. Companies with strong brand portfolios in the food, drink and media industries are likely to be affected, as well as companies that place values on items such as research and development, trademarks, copyrights and other intellectual property.
Property: Under IFRS, changes in individual property values must be calculated, and they will all go through the profit and loss statement. As part of this change, existing property revaluation reserves are to be transferred to retained earnings, providing a buffer for some companies against write-downs on intangible assets.
Defined benefit superannuation plans: Most companies have closed their defined benefit plans off, in favour of defined contributions plans. But the defined plans are still slowly running down, and under the new accounting rules, positive and negative changes in their value - when the market soars or slumps for example - will go to the profit and loss statement.
Asset impairment: Companies already justify the carrying values of their assets, and write them down if they cannot. Under IFRS, however, they will have to run much tougher tests, and examine smaller business units - in retailing, individual stores, not just a chain, for example.
Employee stock options: One of the lessons of the '90s boom and the bust that followed was that employee options have a cost that should be accounted for. The new system does this, but in a way that creates distortions. Share options are valued at their creation as if they will be exercised, and then written off against earnings over their life. But even if they are not exercised - because the company's stock price is too low, for example - the written-off amount cannot be written back.
Financial hedging: Under the new rules, general hedges are out. Hedges must be tied to specific deals, and priced realistically. Groups that run big, unallocated hedge books, notably banks, are going to have to book changes in their value through profit and loss statements. Banks in Europe have fought against this provision.
Goodwill: Companies that pay more than net tangible asset value in takeovers at present have to write the goodwill - the excess over net assets - off against earnings, over a maximum of 20 years. Under the new system, they do not have to write that goodwill off at all. Logical, but philosophically opposed to rules on intangibles.

Brussels creates IAS headache for companies

2004-07-09T19:07:00.000+02:00

Companies across Europe have been left with a real headache over the awkward compromise the European Commission has proposed this week on new A. rules for derivatives.
While the debate is not yet over, it looks like Brussels will endorse only parts of the IA standard known as IAS 39 and set aside its most controversial aspects.
"It's a real mess," said John Hitchins, UK banking leader at PwC, the A. and consultancy firm. "Especially if you are SEC registered."
Many European companies with a US share listing, and therefore registered with the Securities and Exchange Commission, had hoped Brussels would back convergence of US and European A. standards so they would no longer have to do things in duplicate. It is not clear the compromise will be enough to achieve that.
Many will probably implement anyway, but fear they will not after all feel the benefit.
IAS 39 has been devised primarily with banks in mind, but nevertheless applies to all of Europe's 7,000 listed companies. Corporate treasurers, the people at the front line, see the deadline of January 1 2005 looming with some difficult decisions to make.

Fair Value and Conservatism

2004-06-24T14:38:00.000+02:00

I wonder: now that the trend on the horizon (both IAS and USGAAP) is to move towards fair value in valuating assets and liabilities, how does that influence the traditional balance between management (a bit on the optimistic/entrepreneurial side) versus the accountants (careful, conservative and trust building)?