Financial Accounting, Appunti di Contabilità Finanziaria

Scarica Financial Accounting e più Appunti in PDF di Contabilità Finanziaria solo su Docsity! LESSON 1 10/01/2022 Why we speak about HARMONIZATION worldwide in the financial accounting domain? Because there are several main issues that we can focus on: a) The need to compare financial accounting data for investors, regulators, and the state. They are prepared by companies based in different countries in the world: if we have a set of harmonized financial accounting standards, the comparison may become easier. b) The distribution of financial resources nationwide and/or worldwide on the markets. c) The regulation and controls: legislations and also the control that public authorities will do on the respect and compliance to those pieces of regulation. If the rules are harmonised this thing should be easier. d) The audit issues, especially in case of international groups: an auditor can be an individual or, for large groups, an audit firm. When the auditor has to audit a multinational group of companies (multinational group means that the subsidiary that belong to the consolidation area is made of the holding company plus the controlled companies which are also called subsidiaries). e) The international market of shares, bonds, and other financial instruments. f) The international Mergers & Acquisitions market. International accounting developed many decades ago and the first main scholars were Anglo- Saxon academics (British and American): they tried to understand at that time why differences across different countries existed in the financial accounting rules and regulations. They developed two models:  THE FOUR CLUSTERS THEORY (1978) of accounting systems (David and Brierley): They tried to classify the main countries of the world according to the rational beyond their accounting systems and they found 4 different clusters of accounting systems of countries: 1) Roman-Germanic cluster: it is the cluster of countries which have a legal and an accounting tradition coming from the Latin-roman civil law and this cluster included and still include the Latin speaking countries and Germany. The legal system in these countries is based on written laws and so also the accounting rules in these countries tended and still tend to be written in pieces of legislation. 2) Common-law cluster: it is the cluster of the Anglo-Saxon tradition of United Kingdom, and of those countries related to the United Kingdom from a linguistic, cultural, historical, or political point of view. It is called Common-law cluster because in the UK, the constitution is not written even if it exists. This cluster is characterised by counties that give strong importance to the accounting profession and the technical development that comes from the accounting profession are paramount, more important that the specific laws of the states which is not true in the first cluster. 3) Socialist cluster: it is the cluster of those countries where there is a strong power of the central authorities of the state on the life and management of the companies (both public and private companies) and even on the accounting regulations. 1 4) Philosophical-religious cluster: it is the cluster of countries where there were some philosophical and religious believes influenced also on the legislation which affected the life of the companies. There are specific accounting rules for loans (ex. “Islamic accounting”)  THE NOBES’ CLASSIFICATION (1983): It is a relevant classification model in which Nobes divided the accounting measurement system in two main classes: a) Micro-fair-judgemental and commercially driven systems: Micro stands for microeconomics: so, the private initiative, the free competition of the market and the paramount importance of the single entrepreneur and the single company. So, the focus is on the company not on the economic system as a whole. Fair and judgemental means that the accounting professions and the financial directors, when they have to prepare the financial statements according to the laws of the State, they are also allowed to use their judgement on the fairness of the values that they put in the accounts. The fair value is the value of an asset or of a liability which is seems to be right and respectful of the company and its counterpart and it is normally based on the market price. There are two subclasses:  The first is based on business economic, social consensus and it is extremely judgmental. An example is the Netherlands: it is a democratic and free country where the individual has a strong importance so the judgement of the single company in preparing the financial statements is paramount and it comes form the tradition of the country.  The second is based on business practise, private sector and it has a British origin. Then there are two families: 1. UK influence professional regulation: the institutes of accountants are very important also from a political point of view. In the UK the account profession is paramount. 2. US influence SEC enforcement: they developed a more strictly written regulation than the UK and what counts a lot is the Securities and Exchange Commission (SEC)  market regulator. In the US the non-listed limited liability companies don’t have to publish a full set of financial statement. Only listed companies publish financial statements. In the EU all limited liability companies, no matted if they are listed or non-listed or their dimensions, must publish a full set of financial statements. In some cases, there exist the possibility to publish simplified financial statements, but they are still public. 2 THE PROBLEM OF HARMONIZATION IN THE EU In the EU member states, there is a strong process of harmonization of financial accounting rules, but it consists of two different parallel processes: 1) Directives The first process is linked to the EU directives, the other is based on regulations. They are two different legal instruments/juridical tools in the hands of the EU common legislator (the parliament or the European commission). Both directives and regulations are prepared and approved by the central EU legal authorities, legislative power. However, the directive needs, in order to come into force within the single EU member state, a piece of local legislation (a law, a legislative decree). In the accounting field, the accounting regulations for non-listed limited liability companies depends on directives. EXAMPLE An Italian limited liability companies, no matter the dimensions, which is not listed in Italy nor in any other member state market, must prepare a full set of financial statements according to the EU directives and according to the local Italian legislation because the directives are: 1. Central 2. They need a piece of local legislation to be enforced 3. They normally give the single member state the choice among some options to apply in the single state: EXAMPLE the most recent accounting directive in EU allowed the single member state to choose between the substance over form and the form over substance for leasing agreements. What happens in concrete terms in the single member states given that the directive allowed both options from a technical point of view? In the Roman- Germanic cluster of countries, EU member states, the local legislation adopted only the form over substance (ex. Italy). The value of the leased asset is in the balance sheet of the legal owner and not of the user until the end of the agreement. When the agreement ends and the user buys the asset, then the asset is written in the balance sheet of the user. In other EU member states, they adopted both options especially in countries where judgment is very precious. It will be the judgement of the preparers to choose between the two options. It is not the state that decides. 2) Regulations Regulations are approved by the central authority of the EU, but they come into force immediately and at the same time in every member state and does not need any piece of local legislation to be enforced. In some cases, they include options but normally they very strict. In the accounting domain, it is very important because there is one accounting regulation which required the IFRS adoption at least, mandatory, in the consolidated accounts of listed companies. 5 LESSON 2 11/01/2022 THE ADOPTION OF IFRS IN THE EU: THE EC REGULATION EC Regulation 1606/2002: a) IFRS mandatory in consolidated accounts of groups listed on any regulated market in the EU; but there were options to extend or not the use of IFRS demanded to single Member States. b) Immediately (not automatically) enforced in all Member States (different from a “EU directive”, which needs a national law to become enforced in each Member State). The EC Regulation 1606/2002 was approved and published in 2002 and it established the date (FIRST FINANCIAL YEAR OF ENFORCEMENT: 2005) upon which the IFRS became mandatory in consolidated accounts of groups listed on any regulated market in the EU. What drives IFRS mandatory in consolidated accounts of groups? It is the fact that these groups are listed in any Member State, not that they are incorporated in the Member States. So, if we have a group incorporated in China and that group among other is listed in Germany it must use the IFRS for its consolidated accounts. THE ITALIAN CASE: MANY OPTIONS FOR INDIVIDUAL COMPANIES AND HOLDINGS Legislative Decree 38 (Feb. 28, 2005) The Legislative Decree 38, which is an Italian piece of legislation, extended the use of the EC Regulation 1606/2002, according to which the IFRS is already mandatory in consolidated accounts of groups listed on any regulated market in the EU , by adding that: • IFRS is mandatory in the consolidated accounts of non-listed banks and insurance companies since 2005; but since Jan. 1, 2019, IFRS consolidated accounts are not mandatory if such banks and insurance companies do not control other financial institutions. 6 TERMINOLOGY There are three types of financial statements according to IFRS: □ The fist type is the Individual Financial Statement which refers to a single company or legal entity. □ The second type is the Consolidated Financial Statement which refers to a group of companies. A group of companies is made of the companies that belong to the so- called Consolidation Area. The consolidation area is made of the holding company, which is the company that controls/dominates other companies (at least one company) and the controlled entity which is called Subsidiary. □ The third type is the Separate Financial Statement (individual financial statement of the holding company) which are the financial statements of the holding company that prepares also the consolidated financial statements. In the simplest example with one holding company and one subsidiary the holding company will have to prepare two full sets of financial statement: its own (the separate financial account) • IFRS mandatory in separate accounts (or separate financial statement) of listed companies and non-listed banks (2006; allowed since 2005) • IFRS not allowed for separate and individual accounts of insurance companies (unless those companies have a single stand-alone listed insurance company (mandatory), since 2006) • IFRS allowed for consolidated accounts of non-listed groups (2005) • IFRS allowed for separate and individual accounts of entities included in consolidation area (2005, except insurance companies) • IFRS now allowed for stand-alone companies since 2014 (art. 20, co.2, D.L. 24/6/2014, nr. 91, converted into Law 1/8/2014, nr. 116): In Italy virtually any company can adopt the IFRS, instead of the local accounting standards driven by the civil code of Italy by the directives. If there is a stand-alone entity and it is not small or medium size (decent dimensions), it can freely choose between the IFRS and the Italian set of standards, but the result of the financial statement will certainly be different accordingly to which set of standards will be adopted. • IFRS not allowed for SMEs «Small and Medium size Entities» (art. 2435-bis Civil Code decides the size), also when included in IFRS consolidated accounts or for small companies prepared by the GAP (Generally Accounting Principles). All the financial decisions will be taken by the Board of Directors and Auditors. EU ACCOUNTING AND AUDING DIRECTIVES: AN EVOLUTION The four main accounting and auditing directives since the creation of the EU are: o The second directive concerns the harmonization as far as the structure and the function of the limited liability companies is our concerns around the EU. 7 TERMINOLOGY There are three types of financial statements according to IFRS: □ The fist type is the Individual Financial Statement which refers to a single company or legal entity. □ The second type is the Consolidated Financial Statement which refers to a group of companies. A group of companies is made of the companies that belong to the so- called Consolidation Area. The consolidation area is made of the holding company, which is the company that controls/dominates other companies (at least one company) and the controlled entity which is called Subsidiary. □ The third type is the Separate Financial Statement (individual financial statement of the holding company) which are the financial statements of the holding company that prepares also the consolidated financial statements. In the simplest example with one holding company and one subsidiary the holding company will have to prepare two full sets of financial statement: its own (the separate financial account) understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements. In addition, the Board cooperates with national accounting standard setters to achieve convergence in accounting standards around the world. So, the IASB is completely autonomous from the EU, the UK, and any single state even though the members of the board come from the most relevant countries in the world according to the political and the economic power of these countries. The Board is the main technical committee even though above it there is the IASC Foundation that is the organization that raises funds. Then there is another committee which is called International Financial Reporting Interpretations Committee (IFRIC): technical committee which deals with the official interpretation of the standards. The IASB works on its own and prepares drafts of standards and draft of interpretation that are called “Exposure Drafts”. They are drafts exposed to the public for a specific period so that commentors can comment on them and send the comments to the board. Then the European but international technical board called European (Union) Financial Reporting Advisory Group (EFRAG). It comments on the drafts and then the IASB publishes the final documents and make them enforceable around the world. but the IASB does not have the political power to enforce anything in any country. So, the step to make the technical rules of the IASB enforceable from a legal point of view in the EU member states is called ENDORSEMENT PROCESS. At this point when the IASB publishes the final documents the EFRAG starts the endorsement process at the EU level and tells the political authorities of the EU about the enforceability or not, from technical point of view, of the new standards finally issued by the IASB. After the EFRAG endorsement, if the Accounting Regulatory Committee (ARC), which is a European legislative technical body, approves the endorsement, at that point the legislative power of the EU transforms each new standards or interpretations in a piece of EU law through a regulation that comes into force immediately. Therefore, the endorsement process is a mandatory process of gradual approval of the new standards and interpretations automatically autonomously approved by the IASB at an international level within the EU legislation. What is the corpus (or body) of the IFRS? The corpus of the IFRS is made of four different series of documents: 10 o Two different series of standards: 1) IFRSs 2) IASs o Two different interpretation series: 3) SICs 4) IFRICs THE ONGOING PROCESS OF GLOBALIZATION OF GAAP Many countries around the world adopt mandatorily or on a voluntary basis the IFRS. The adoption of the IFRS has been more difficult or not completed yet in larger, richer, and more powerful countries in the world. A typical example is the US: in the IASB there are members of the board who are from the US, but the IFRS has not been adopted in the US. In countries were the accounting tradition and the accounting profession, politic and economic power is larger, there was more hostility in adopting something coming from a central authority. Although the headlines often focus on divergence of GAAPs, the achievements over the last few years in moving towards a single global set of standards has been remarkable. As to the US, it has created another catalyst to use IFRSs by removing the reconciliation to US GAAP for foreign filers using IFRSs. In the US there is a CONVERGENCE PROCESS in the sense that the US technical board that prepares the local GAAP (US GAAP). There is a technical process of convergence that has been going on for about 20 years between the IFRS and the US GAAP. Foreign issuers (or foreign companies) listed on any US financial market are allowed to be listed in the US by presenting their own financial statement when they are prepared by using the IFRS. There is the elimination of the requirement for foreign issuers to present a reconciliation of net income and equity from IFRS to US GAAP. ACCOUNTING REGULATION: THE FUNDAMENTALS Two main groups of countries: a. Common-law countries b. Roman codified law countries Some ELEMENTS to be aware of…. • Companies Acts: local laws related specifically to the functioning and governance of companies (limited or unlimited liability companies). • Commercial Code: it can be inside the Civil Code or not depending on the country. • Accounting plans: like the “plan constable général” which is the presence in France, Spain, and Belgium, of a codified centralised stated chart of accounts that companies operating in specific industries must apply besides the international and local accounting standards. 11 EXAMPLE If an Italian group is listed in New Your, as the Italian group normally prepares its own consolidated and separate accounts by using the IFRS, it can go to the American market by presenting the same accounts. This is true for periods ending after 15 November 2007. Before that date, any company listed on any US security market had to convert their own financial statement into US GAAP. But the American listed company must use the US GAAP and also limited liability companies in the US • Mandatory accounting standards: local GAAP or international standards. • Professional guidelines: technical applications of the standards, of the rules, of the laws and they lower importance in the sense that what prevails in any state is the law of the state, then the accounting standards and then the professional guidelines. • Stock exchange requirements: if you are a listed company, you must also comply with the regulations and the requirements of your stock exchange market regulator. • Requirements of a stock exchange regulator Leaving aside the sole trader and the partnership, we concentrate on companies which are fully separated form owners which belong to the limited liability category because the financial statements must be prepare only by the limited liability companies and the publication is mandatory for any limited liability company in any country of the EU. 12 EXAMPLE If an Italian group is listed in New Your, as the Italian group normally prepares its own consolidated and separate accounts by using the IFRS, it can go to the American market by presenting the same accounts. This is true for periods ending after 15 November 2007. Before that date, any company listed on any US security market had to convert their own financial statement into US GAAP. But the American listed company must use the US GAAP and also limited liability companies in the US Most of the local GAAP is included in the Commercial Code The most characteristic is the presence of the Plan Comptable Général (PCG) The financial accounting information and the financial statements should be able to inform all stakeholders in a neutral way not giving a privilege to one category or to the other. However, the IFRS standards, also because of the reasons why and of who created them, the international accounting standard in general aim at informing the investors of listed companies. So, within neutrality there is in any case a bias: the IASB was created for listed companies, so they have a privilege in the sense that they give relevant information especially for investors. 15 The Basic Accounting Equation = Liabilities | + Equity Provides the underlying framework for recording and summarizing economic events. Applies to all economic entities regardless of size. Assets *® Resources a business owns. + Provide future services or benefits. ® Cash, Inventory, Equipment, etc. Liabilities * Claims against assets (debts and obligations). * Creditors - party to whom money is owed. ® Accounts payable, Notes payable, etc. Cerrito The Basic Accounting Equation INustration 1-7 INCREASES DECREASES Investments by shareholders I» n ° Equity I Revenues result from business activities entered into for the purpose of earning income. Generally results from selling merchandise, performing services, 16 renting property, and lending money. Transaction (1) Investment by Shareholders. Ray and Barbara Neal decide to open a computer programming service which he names Softbyte. On September 1, 2014, they invest €15,000 cash in exchange for €15,000 of ordinary shares. 17