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

  2. Sessions XIII The Perfect Storm FX Accounting

  3. 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

  4. The Perfect Storm • IFRS Adoption • Completion of the Convergence Project • Private Company GAAP • Not-for-Profit Accounting ADVANCED ACCOUNTING-2012

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. 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

  18. “Draft” Exposure draft – July 1, 2010 Team reassigned On the backburner F/S Reformatting Update ADVANCED ACCOUNTING-2012 18

  19. 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

  20. 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

  21. 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

  22. Drivers of FX Differences • Fundamental supply and demand • Balance of payments • Interest rates • Inflation • Emotion ADVANCED ACCOUNTING-2012

  23. 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

  24. 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

  25. 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

  26. 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

  27. FC Transaction G/L Summary ADVANCED ACCOUNTING-2012

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