.
Barriers to Globalization
Today'scompaniesoperate in countries around
the world. As thesebusinessesmove toward true
globalization, accounting standards must move with
them. International investors and businesspeople
must be able to understand accounting informationfrom
all countries, not just their own. This
supplement describeshow and why the United
States is moving to adopt international accounting
standards, and what kinds of changesyou can expect
to seein thefuture. After reading this material, you
should understand how thesechangeswill impact
you, both as an accounting student and as a future
user of accounting information.
.Global Economy
There is no denying that the world is moving toward
a global economy.For example:
Individual investors are now able to purchase
stockseasily on the Hong Kong and London
exchanges,amongothers.
American companies, such as McDonald's,
Microsoft, Kodak, and Disney, conduct business
around the globe to the tune of billions of dollars
per year.
Foreign companies, such as Nokia, Samsung,
Toyota, and Nestle, conduct business in the
United States.
American companiesare merging with foreign
companiesto createinternational conglomerates
such as DaimlerChrysler and Anheuser-Busch
InBev.
Out of the 500 largest companies in the world,
only 153 (30%) are based in the United States.
(source: Forbes Global 500 list, 2008)
No matter where your future business career takes
you, it is very likely that you will need to deal with
foreign markets to some extent. -
There are several barriers to globalization of the econ-
omy, and one of these involves accounting.
Historically, the major economic players in the world
have all had their own accounting standards.
American guidelines, known as Generally Accepted
Accounting Principles (GAAP), are different from
those found in the United Kingdom, Japan, and so on.
But as companies operate in different parts of the
world, the need to constantly restate and convert
accounting data from one country to the next becomes
a burden.
.Solutions
In order to solve this problem, the International
Accounting Standards Board (IASB) has developed
International Financial Reporting Standards (IFRS),
which are used by many countries around the world.
Until recently, accountants in the United States have
not paid much attention to these standards, but that
situation has changed.
In November 2008, the Securities and Exchange
Commission (SEC) in the United States confirmed that
it intends to adopt IFRS for all public U.S. companies.
Some companies can choose to begin implementing
these international standards by 2010, with mandatory
implementation likely to begin in 2014.
.Advantages of Using IFRS
The advantage of using IFRS is that financial state-
ments from one country will be comparable to finan-
cial statements from another. It will be far easier for
investors and businesspeople to evaluate information
from across the globe, and companies will only have
to prepare one set of financial statements instead of
multiple versions. Currently, companies that are listed
on multiple stock exchanges in different countries
have to follow different guidelines in each country for
reporting purposes. When global businesses change to
IFRS, these companies will have more consistent and
more widely understood financial information, yet
they will spend less time and money on its prepara-
tion, as they will only have to conform to one set of
~tandards, instead of those in multiple countries.
.Implications for u.s. GAAP
These are impressive goals, but what do these changes
mean for v.s. GAAP? In a general sense,V.S. GAAP
will no longer exist, as it will be replaced by internation-
al standards. But does this mean that the accounting
rules you are studying in this course are going to soon
become outdated?
No. The good news is that the majority of what you
are learning right now is alreadypart of the IFRS. Many
of the most commonly used accounting practices are
essentially the same under both V.S. GAAP and IFRS.
Additionally, the American Financial Accounting
Standards Board (FASB) and the IASB are currently
working toward convergenceof standards, that is,
adjusting V.S. GAAP to more closely match interna-
tional standards. As a result, when this transition takes
place, it will happen with a minimum of disruption.
Over the past few years, numerous new V.S. GAAP
pronouncements have already been made, which fur-
ther conform V.S. practices to international ones.
.DiHerences between GAAP and IFRS
But there are still areas of disagreement between the two
sets of accounting rules. Certain accounting practices
that are widely accepted in the United States,such as the
use of LIFO inventory costing, are disallowed under
IFRS.These differences must be resolved before IFRScan
be fully adopted in the United States.At the moment it
appears that much of the compromise will come from
the American standard-setters, yet nothing is certain.
So what are the main differences between U.S.
GAAP and IFRS?
Generally speaking, IFRS allow more professional
judgment than U.S. GAAP. In other words, the
international regulations allow accountants and
managers to apply the rules in the way they think
is best. For example:
0 IFRS provides significantly less guidance than
U.S. GAAP and has far fewer industry-specific
rules for revenue recognition.
0 IFRS has more liberal rules for classification of
held-to-maturity securities.
0 Adjusting for goodwill impairment is much
simpler, with fewer guidelines, under IFRS
than under U.S. GAAP.
0 Under IFRS, companies have the option of
recording long-term assets at either cost or fair
value. U.S. GAAp, on the other hand, requires
measurement of such assets primarily at histor-
ical cost.
2
.u.s. GAAP are much more specific than IFRS in
many areas. The environment in the United States
has historically been much more litigious than in
other countries. This has led to more detailed
accounting rules, so accountants and managers
have clear guidelines to follow. The latitude that
IFRS provides allows companies in different
fields to handle revenue recognition in whatever
manner is appropriate for their industry. Once
IFRS are adopted, the "additional" U.S. rules will
likely be used as "secondary" guidance in places
where the IFRS are less clear. So much of the
GAAP you are learning right now will be used, if
not as a primary source of regulation, then as a
supplementary source.
.The other major difference between IFRS and
U.S. GAAP lies in the valuation of assets and
liabilities. In U.S. GAAp, the cost principle tells
us that we should value assets we acquire at cost.
IFRS, on the other hand, prefers more of a fair
value approach, reporting assets and liabilities on
the balance sheet at their up-to-date values, rather
than their historical costs. However, U.S. GAAP
already allow for some of the IFRS approach,
with rules such as lower-of-cost-or-market,
accounting for the impairment of long-term
assets,and adjusting trading and available-for-
sale investments to market value.
.There are also terminology differences, and
Americans may have to get used to some new
words that replace old, familiar ones. In these
cases,the concepts involved would likely not
change, but there would be new terms and phras-
ings. For example:
0 On an IFRS income statement, net income is
referred to as 'profit.'
0 On an IFRS balance sheet, long-term assets and
liabilities are referred to as 'non-current' assets
and liabilities.
.Portions of the income statement and balance
sheet may also be rearranged, as IFRS presenta-
tion is slightly different from the financial state-
ments you are used to seeing. The information
would still be there, but possibly in a new loca-
tion. For example:
0 On an IFRS balance sheet, long-term assets are
listed beforecurrent assets and long-term liabil-
ities are listed beforecurrent liabilities. By con-
trast, under U.S. GAAP, current items are list-
ed before long-term items for both assets and
liabilities.
 0 An IFRSbalance sheetpresents assetsfirst (as
under U.S. GAAP), but equity is listed second,
with liabilities shown last. Under U.S. GAAp,
assetsare listed first, then liabilities, with equity
shown last.
0 Under U.S. GAAP, current assetspresented on
the balance sheet must be listed in order of liq-
uidity, with the account that is most liquid (usu-
ally cash) shown first. On an IFRSbalance sheet,
current assetsare shown in reverse liquidity
order, meaning that the least liquid assetsare
shown first (and that cash is usually listed last).
The following table describes the current differences
between U.S. GAAP and IFR5 that relate to topics you
are covering in your introductory accounting course.
While no one can predict exactly what will happen in
the future, the last column of the table explains what
For more up to date information about IFRS and how to integrate it into your classroom, visit the Instructor Resource
Center for your Pearson Prentice Hall accounting textbook at www.pearsonhighered.com
3
could happen if the U.s. GAAP of today were to
switch to IFR5 as they currently exist. This will help
you assessthe potential impact of these changes on
U.S. financial statements.
You can expect to hear more about the adoption of
international accounting standards in the future.
When you do, the most important things to remember
will be that this change will be beneficial to financial
statement users in the long run, and that most of
what you learned in this accounting course will still
apply. There are far more areas of common ground
than of disagreement.
Your knowledge of accounting will only benefit
you in your future business career, whatever it may
be. The globalization of the world economy will pro-
vide yet one more opportunity for you to succeed in
the business world.
 Inventory Inventory Companies can choose to use LIFO is not allowed under any LIFO could be eliminated for
(Asset) Cost Costing UFO inventory costing, if circumstances. financial accounting purposes.
of Goods desired. Companies could still choose to
Sold (Income Many use UFO for its tax use the FIFO, Average Cost, or
benefits. Specific Identification inventory
Statement)
costing methods.

! Inventory Lower-of- Market is usually determined Market is always net realizable LCM writedowns may become
Cost-or - to be the replacement cost of value (essentially, the sellingI less common, as selling prices are
(Asset)
Market inventory. price) of inventory. Under certain usually greater than replacement
(LCM) LCM writedowns cannot be circumstances, LCM writedowns costs. Some of these writedowns
reversed. can potentially be reversed. might be reversed over time.

Property, Asset If long-term assets are impaired, Long-term assets may be written The cost principle might not
Plant & Impairment they are written down. Such up or down, based on fair apply to long-term assets as
and writedowns cannot be reversed. market values (appraisals). Such strongly. Assets could be evalu-
Equipment
Revaluation adjustments can potentially be ated by independent appraisers
(Assets)
reversed. and adjusted either up or down
to new fair market values.

Research & Development All research and development All research is expensed, but all The standards already
Development Costs costs are expensed. The only development costs are capital- developed by u.s. GAAP
(Income exception is for computer software ized and amortized over future might be extended to apply to
Statement/ development costs, which can be sales revenues. all development costs, not just
capitalized and amortized over to computer software
Assets)
future sales revenues. development.
--

Intangible Capitalization u.s. GAAP are reluctant to Intangible assets are recognized More intangible assets could
Assets and recognize intangible assets. if their future benefit is probableI be shown on balance sheets.

(Assets) Recognition Such assets are only recognized I and reliably measurable (the These assets could be adjusted
of Intangible when they are purchased. standard U.S. GAAP currently for amortization or impairment
Assets Internally-developed intangible use for contingent liabilities). over time.
assets (such as brand names These assets may be purchased
and patents) are not recognized or internally generated.
as assets on the balance sheet.
~

Contingent Recording of Probable contingent liabilities Both probable and possible More liabilities could be record-
liabilities Contingent are recorded in a journal entry. contingent liabilities are record- ed. Some of these
liabilities Possible contingent liabilities ed in journal entries. liabilities could be reversed in
( Liabilities)
are disclosed in financial future years if the obligations
statement notes. do not come to pass.

Extraordinary Recording of U.S. GMP allow extraordinary Extraordinary items do not have Extraordinary items may disap-
Items (Income Extraordinary items (that is, items that are both special treatment. Even "unusual pear from the income statement,
Statement) Items unusual and infrequent) to be and infrequent" items are report- to be reclassified as "ordinary"
reported separately on the income ed on the income statement as revenues and expenses.
statementas a component of ordinary income from continuing
income after continuing operations. operations.
-
Interest Indirect Interest revenue and expense Interest revenue and expense are Interest revenue and expense
Revenue Method are part of net income, and as removed from net income (as an may be reported in different
Interest Cash Flows such are included in operating adjustment; similar to what is places on the cash flows
Statement activities (as part of net income) done for depreciation expense) in statement.
Expense
Presentation on an indirect method cash the operating activities section of
(Income
flows statement. Interest is not an indirect method cash flows
Statement) Direct reported under investing activi- statement. Interest revenue is
Method ties or financing activities with reported under investing activities,
Cash Flows either the direct or indirect and interest expense is reported
Statement methods. under financing activities, for both
Presentation the direct and indirect methods.

ISBN-13: 97&-0-13-6100&9-&
ISBN-10: 0-13-6100&9-9