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International Financial Reporting – Current Trends: Contents

Consolidated financial statements according to IAS or U.S. GAAP

Harmonization of financial reporting in Europe

Effects on individual financial statements

Differences in financial accounting

Contents:

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Give examples of international trends

Give examples of the differences between the various financial accounting methods

Give examples of the possible effects on individual financial statements and on consolidated financial statements

International Financial Reporting – Current Trends: Unit Objectives

At the conclusion of this unit, you will be able to:

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Overview Diagram

AC206

Implementation Project

Implementation Options

Current Trends

Balance Sheet Itemsand Reporting

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Your company is examining trends in external financial reporting on national and international levels.

The company is particularly interested in the effects on individual financial statements and consolidated financial statements.

Business Scenario

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Consolidated Financial Statements According to International Rules / Standards

Access to international capital markets

Access to international sales markets

Individual financial statements are subject to various local requirements

USA

MEX

AR

EF D

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International financial statements are becoming increasingly important

Compared with individual financial statements, consolidated financial statements are becoming more and more important. Individual financial statements form the basis for the subsequent consolidated financial statement.

Two reasons for the increasing importance of the consolidated financial statement:

Current legislation :

Law on accountability and transparency in enterprises: Supervisory boards must now also audit consolidated financial statements.

Law to facilitate the raising of capital

The individual financial statements of specific subsidiaries can be compiled on a simplified basis without annexes, review of operations, audit, and disclosure.

German law governing corporations and companiesAdditional accounting requirements apply for small-scale groups. Specifications regarding size have been halved. The individual financial statements of additional company subsidiaries can be prepared in a simplified form. Sanctions have become stricter as regards non-compliance.

Publishing practices :

Large companies usually publish consolidated financial statements.

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Harmonization of Financial Reporting in Europe

In the future, the IAS will facilitate the harmonization of financial reporting in Europe:

In Europe, IAS will be required as the group method of accounting.

Individual financial statements according to IAS will be a prerequisite for listings on some stock exchange.

In future, IAS will be used to harmonize financial reporting in Europe:

In Europe, the IAS will be required as the group method of accounting.

EU guidelines require the introduction of consolidated financial statements in compliance with IAS in the year 2005.

Consolidated financial statements are increasingly conforming to IAS or US-GAAP

Access to international capital markets (banks financial statement IAS)

Access to international sales markets

Individual financial statements are subject to various local requirements.

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EU Decision

2005 20072000

Strategydocumentapproved

IAS becomes obligatory throughout the EU for companies listed on the stock exchange

In the future, IAS will be used to harmonize financial reporting.

Strategy document from the European Commission

On June 13, 2000, the strategy document was approved by the EU Council of Ministers.

From 2005, IAS consolidated financial statements will be obligatory throughout the EU for companies listed on the stock exchange

From 2007, financial statements will be obligatory for all companies that raise capital on the capital market.

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Effects on Individual Financial Statements

Caution: International financial reporting will not be restricted to consolidated financial statements. Individual financial statements will also be affected.Consolidated financial statements will be more than just a consolidation task.

Local GAAP and financial statements for tax purposes will become increasingly separate (deferred taxes).

Even small and medium-sized businesses will not be able to avoid international financial reporting (in the medium to long term).

GLFin.St.

International financial reporting will not be restricted to consolidated financial statements. Individual financial statements will also be affected.

Standardization, work simplification

Individual financial statements must be published for listing on the new market, in line with IAS or US GAAP.

Problem: Equality of treatment in financial statements and tax balance sheets (tax assessment basis would be higher or lower)

Financial statements and tax balance sheets will become increasingly separate (deferred taxes).

Small- and medium-sized enterprises will be unable to avoid international financial reporting (requirements of banks, supervisory boards, and so on).

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S A P A G 2 0 0 3

D i f f e r e n c e s i n F i n a n c i a l R e p o r t i n g

G e r m a n L a w U . S . G A A P / I A S

P r u d e n c e C o n c e p tR e a l i z a t i o n P r i n c i p l e

I m p a r i t y P r i n c i p l e

A c q u i s i t i o n V a l u e P r i n c i p l e

B a s i s f o r S i n g l e V a l u a t i o n

E q u a l i t y o f T r e a t m e n t P r i n c i p l e

C o n t i n u i t y P r i n c i p l e

F a i r P r e s e n t a t i o nS u b s t a n c e o v e r F o r m

M a t c h i n g P r i n c i p l e

M a t e r i a l i t y P r i n c i p l e

C o n s i s t e n c y P r i n c i p l e

G o i n g C o n c e r n/ P e r i o d i c i t y

G o i n g C o n c e r n/ P e r i o d i c i t y

B a s i c P r i n c i p l eS u b s e q u e n tP r i n c i p l e s

P r e m i s e s

Fair presentation: All information relevant to the true and fair presentation of the economic situation must be prepared and presented clearly

Substance over form: An assessment based on economic reality rather than legal form

Matching principle: Principle of matching expenses whereby expenses are realized in the period when associated revenues are recognized (POC - percentage of completion).

Materiality: Financial statements must provide shareholders with information relevant to their decision on whether to buy or sell (notes for hidden reserves).

Consistency principle: Breaks in consistency are permitted only if the information conveyed in the statement is improved as a result

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Comparable financial statements are becoming increasingly important to international capital and sales markets. An EU strategy document stipulates that IAS financial statements will be obligatory for certain companies from 2005/2007.

Since this trend is unavoidable and individual financial statements form the basis for consolidated financial statements, all financial statements will soon become internationalized.

Overview of Trends

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