Advanced accounting spring 2012 william f o brien mba cpa
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Advanced Accounting Spring 2012 William F. O’Brien, MBA, CPA. Sessions XIII. The Perfect Storm FX Accounting. Session XIII Objectives. Update on the Perfect Storm Foreign Currency (FX) Basics FX Transaction Gains and Losses Introduction to FX Accounting Exposure Gains and Losses.

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Advanced Accounting Spring 2012 William F. O’Brien, MBA, CPA

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Advanced accounting spring 2012 william f o brien mba cpa

Advanced Accounting

Spring 2012

William F. O’Brien, MBA, CPA


Sessions xiii

Sessions XIII

The Perfect Storm

FX Accounting


Session xiii objectives

Session XIII Objectives

  • Update on the Perfect Storm

  • Foreign Currency (FX) Basics

  • FX Transaction Gains and Losses

  • Introduction to FX Accounting Exposure Gains and Losses

ADVANCED ACCOUNTING-2012


The perfect storm

The Perfect Storm

  • IFRS Adoption

  • Completion of the Convergence Project

  • Private Company GAAP

  • Not-for-Profit Accounting

ADVANCED ACCOUNTING-2012


Why a single set of standards

Why a Single Set of Standards

A level playing field

Common rules for a global economy

Consistent high quality standards

Efficiency and effectiveness

Improved understanding

Cost effective approach

ADVANCED ACCOUNTING-2012

5


History of prior attempts

History of Prior Attempts

The problem: A worldwide Tower of Accounting Babel

The solution?:

The U.S. way or the highway

Harmonization

Convergence

Adoption of IFRS

ADVANCED ACCOUNTING-2012

6


U s gaap the only way

U.S. GAAP—the Only Way

Before Enron and WorldCom: U.S. GAAP is the highest quality financial reporting in the world

After Enron and WorldCom: Let’s talk

ADVANCED ACCOUNTING-2012

7


Harmonization

Harmonization

A perceived win-win

Countries keep their own standards

Differences are minimized

Close doesn’t count

Inconsistencies remained

Comparability problems continued

ADVANCED ACCOUNTING-2012

8


Convergence

Convergence

The best of the best

Define “best”

Local standards remain

Pronouncements are jointly produced but separately issued

Minor differences continue

Define “minor” difference

Currently, “in trouble”

ADVANCED ACCOUNTING-2012

9


Ifrs adoption update

IFRS Adoption Update

SEC Feb. 24, 2010 Update:

No early adoption

2011 final vote (Missed!)

Periodic progress reports starting in 10/10

Substantial role for FASB post adoption

Strong regulation and enforcement needed

Envision 2015 as the commencement date

ADVANCED ACCOUNTING-2012


Ifrs adoption update continued

IFRS Adoption Update, continued

Key Issues Noted:

Development of sufficient and consistent standards

Independent standard setter

Investor, user and preparer education

Impact on other non-reporting laws

Impact on business issues

ADVANCED ACCOUNTING-2012


Ifrs adoption current status

IFRS Adoption—Current Status

12/5/11…need a few more months

1/5/12…Shapiro: “blending”; “middle of a hurricane”

4/30/12…still waiting

Endorsement model

Commitment to incorporation

ADVANCED ACCOUNTING-2012


Recall this concept what exactly is convergence

Recall this Concept: What Exactly is Convergence?

  • Global options

    • Single standard mentality-US GAAP

    • Harmonization: minimal differences

    • Convergence: best of the best

  • Stated goal:

    • Single set of high quality, understandable & enforceable global accounting standards

    • Transparency and comparability

ADVANCED ACCOUNTING-2012


Current convergence projects

Current Convergence Projects

The Norwalk Agreement – 2002

FASB – IASB commitment to mutual development of standards

On-going recommitments to conclusion

2006 and 2008

Conceptual Framework Project

The foundation of financial accounting theory and financial statement format

ADVANCED ACCOUNTING-2012

14


Status of 11 convergence projects as of 4 30

5 complete:

Bus. combinations

Consolidations

Derecognition of liabilities

Fair value

OCI

Future Plans:

2013:

Revenue recognition

Leases

Fin. Instruments

Insurance contracts

Deferred:

F/S presentation

Post employment benefits

Status of 11 Convergence Projects (as of 4/30)

ADVANCED ACCOUNTING-2012

15


Private company gaap

Private Company GAAP

  • Blue Ribbon Panel recommendations

    • Rejected IFRS for SMEs

    • Carve out model

    • 3-5 year review

    • Either separate PCASB or PCSIC

  • FAF results on 5/22-23

ADVANCED ACCOUNTING-2012


Nfp accounting

NFP Accounting

  • Non-profit advisory committee

    • Changes in disclosure

    • Changes in language of MD&S

    • Mandatory metrics in footnotes

  • Project team meets 5/29

ADVANCED ACCOUNTING-2012


F s reformatting update

“Draft” Exposure draft – July 1, 2010

Team reassigned

On the backburner

F/S Reformatting Update

ADVANCED ACCOUNTING-2012

18


Other players prior work i

Other Players; Prior Work-I

  • International Accounting Standards Committee (IASC)

    • Voluntary funding; part-time members

    • Non-binding standards-IAS

    • More focus on accommodation than rigors

    • Becomes IASB (Board) in 2001

    • U.S. has strong influence; therefore, credibility

  • International Accounting Standards Board (IASB)-London

    • 12 F/T members; 2 P/T members (academics); now 15

    • Funding via the IASC Foundation

    • Sets IFRS

  • International Financial Reporting Interpretations Committee (IFRIC)-interprets IFRS & provides guidance

    • Perhaps a similar role for FASB, post adoption?

ADVANCED ACCOUNTING-2012


Other players prior work ii

Other Players; Prior Work-II

  • International Org. of Sec. Commissions (IOSCO)

    • Global org. of sec. regulators

    • Supported stronger IASC and single ww standard

  • European Union

    • Directives written into local law

    • 4th and 7th directives

      • Form and content

      • Consolidation

    • Adopted IFRS on 1/1/05

  • International Federation of Accountants (IFAC)

    • Global auditing standards

    • AICPA is member of IFAC

ADVANCED ACCOUNTING-2012


Foreign exchange basics

Foreign Exchange Basics

  • Foreign exchange-FX

  • Foreign exchange transaction

  • Foreign exchange market

    • Spot rate

    • Forward rate

    • Premium: forward rate is more expensive than spot rate

    • Discount: forward rate is less expensive than spot rate

    • Option: right but not an obligation to exchange currency

    • Swap: simultaneous sale and purchase of FC

    • Bid: buy rate

    • Ask: sell rate

ADVANCED ACCOUNTING-2012


Drivers of fx differences

Drivers of FX Differences

  • Fundamental supply and demand

  • Balance of payments

  • Interest rates

  • Inflation

  • Emotion

ADVANCED ACCOUNTING-2012


Fx history

FX History

  • 1945-1973 narrow range pegged to $35 gold

  • Run on U.S. $ in early 70s

  • Currencies allowed float as of March 1973

ADVANCED ACCOUNTING-2012


Fx rates

FX Rates

  • Direct = cost of one unit of FC (foreign currency) in terms of HC (home currency)

  • Indirect = how many units of FC can be bought with one unit of HC

ADVANCED ACCOUNTING-2012


Hedging or fluctuation protection methods

Hedging or Fluctuation Protection Methods

  • Forward currency contracts

  • Foreign currency options

    • Put option = an option to sell

    • Call option = an option to buy

ADVANCED ACCOUNTING-2012


Fx transactions

FX Transactions

  • Two-transaction approach for US GAAP

  • Gain or loss recognized in the income statement

    • At interim reporting date

    • At settlement

ADVANCED ACCOUNTING-2012


Fc transaction g l summary

FC Transaction G/L Summary

ADVANCED ACCOUNTING-2012


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