Expert Answer:ACT480 Research and Development at Thomas Company

  

Solved by verified expert:Assignment Choice #1: Research and Development at Thomas CompanyThe Thomas Company is in the process of developing a revolutionary new product. A new division of the company was formed to develop, manufacture, and market this product. As of the end of the year December 31, 2010, the product has not been manufactured for resale; however, the prototype unit was built and is in operation. Throughout 2010, the division incurred certain costs including design and engineering studies, prototype manufacturing costs, administration expenses (including salaries of administrative personnel), and market research costs. In addition, $500,000 in equipment (estimated useful life of 10 years) was purchased for use in developing and manufacturing the preproduction prototype and will be used to manufacture the product. Approximately $200,000 of this equipment was built specifically for the design and development of the product; the remaining $300,000 of equipment will be used to manufacture a product once it is in commercial production.Required: In the U.S. (SFAS No. 2), development costs are expensed but under the IFRS (IAS 38), many development costs are capitalized. Judge and support which treatment adheres best to the matching principle, basic to the conceptual frameworks of both U.S. GAAP and IFRS.Your well-written paper must be 2-3 pages, in addition to title and reference pages. The paper should be formatted according to the CSU-Global Guide to Writing and APA Requirements (Links to an external site.)Links to an external site.. Cite at least two peer-reviewed sources, in addition to the required reading for the module.
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July 13, 2012
Work Plan for the Consideration of Incorporating
International Financial Reporting Standards into
the Financial Reporting System for U.S. Issuers
Final Staff Report
OFFICE OF THE CHIEF ACCOUNTANT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
This is a paper by the Staff of the U.S. Securities and Exchange Commission.
The Commission has expressed no view regarding the analysis, findings,
or conclusions contained herein.
Introductory Note
The following report was prepared by the staff of the U.S. Securities and Exchange
Commission to summarize the observations and analyses of the staff regarding six key areas
identified for study in the Work Plan for global accounting standards. The Commission directed
the staff to develop and execute the Work Plan in February 2010. At that time, the Commission
issued a statement indicating that the information obtained through the Work Plan, among other
considerations, would aid the Commission in evaluating the implications of incorporating
International Financial Reporting Standards into the financial reporting system for U.S. issuers.
The Commission believes it is important to make clear that publication of the Staff
Report at this time does not imply—and should not be construed to imply—that the Commission
has made any policy decision as to whether International Financial Reporting Standards should
be incorporated into the financial reporting system for U.S. issuers, or how any such
incorporation, if it were to occur, should be implemented.
Although the Staff Report is constructive and an important contribution, the Work Plan
did not set out to answer the fundamental question of whether transitioning to IFRS is in the best
interests of the U.S. securities markets generally and U.S. investors specifically. Additional
analysis and consideration of this threshold policy question is necessary before any decision by
the Commission concerning the incorporation of IFRS into the financial reporting system for
U.S. issuers can occur.
The Staff Report has not been approved by Commission action and does not necessarily
reflect the views of the Commission or any Commissioner.
Work Plan for the Consideration of Incorporating
International Financial Reporting Standards
into the Financial Reporting System
for U.S. Issuers
Final Staff Report
July 13, 2012
OFFICE OF THE CHIEF ACCOUNTANT
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
This is a paper by the Staff of the U.S. Securities and Exchange Commission.
The Commission has expressed no view regarding the analysis, findings, or conclusions
contained herein.
Table of Contents
I.
II.
Executive Summary ……………………………………………………………………………………………… 1
A.
Methodology …………………………………………………………………………………………….. 2
B.
Focus of the Staff’s Work …………………………………………………………………………… 2
C.
Summary Findings …………………………………………………………………………………….. 4
Development of IFRS ……………………………………………………………………… 4
2.
Interpretive Process…………………………………………………………………………. 4
3.
IASB’s Use of National Standard Setters …………………………………………… 5
4.
Global Application and Enforcement ………………………………………………… 5
5.
Governance of the IASB………………………………………………………………….. 5
6.
Status of Funding ……………………………………………………………………………. 6
7.
Investor Understanding……………………………………………………………………. 6
Sufficient Development and Application of IFRS for the U.S. Domestic Reporting
System………………………………………………………………………………………………………………… 7
A.
Summary Observations ………………………………………………………………………………. 7
B.
Comprehensiveness of IFRS ……………………………………………………………………….. 8
C.
D.
III.
1.
1.
The Boards’ MoU and Other Joint Projects………………………………………. 10
2.
Standards with a Similar Objective, that Are Substantially Converged,
or Both ………………………………………………………………………………………… 13
3.
Fundamental Differences ……………………………………………………………….. 14
4.
Industry Guidance…………………………………………………………………………. 17
Comparability Within and Across Jurisdictions …………………………………………… 21
1.
Staff Analysis of IFRS in Practice …………………………………………………… 22
2.
Formal Interpretative Process …………………………………………………………. 25
Auditability and Enforceability………………………………………………………………….. 25
1.
Principles versus Rules ………………………………………………………………….. 27
2.
Effect of Audit Firm Structure on Comparability ………………………………. 28
3.
Enforcement and Compliance …………………………………………………………. 29
4.
International and Other Regulatory Bodies ………………………………………. 32
Independent Standard Setting for the Benefit of Investors ……………………………………….. 34
A.
Summary Observations …………………………………………………………………………….. 35
B.
Overview of the IASB’s Governance Structure……………………………………………. 36
C.
Background on IFRS Foundation Trustee and Monitoring Board Reviews ……… 37
1.
Trustees’ Strategy Review ……………………………………………………………… 37
i
2.
D.
E.
F.
G.
IV.
Monitoring Board’s Governance Review …………………………………………. 38
Oversight of the IFRS Foundation ……………………………………………………………… 39
1.
Current State of Governance Structure …………………………………………….. 39
2.
Composition of the Monitoring Board……………………………………………… 40
3.
Monitoring Board Observers ………………………………………………………….. 40
4.
Role of Application of IFRS and Funding in Monitoring Board
Membership …………………………………………………………………………………. 41
5.
Role of the Monitoring Board in Selection of Trustees ………………………. 42
6.
Role of the Monitoring Board in the IASB’s Standard-Setting Process… 44
Composition of the IFRS Foundation and the IASB …………………………………….. 45
1.
IFRS Foundation Trustee Composition and Duties ……………………………. 45
2.
IFRS Foundation Trustee Selection Process ……………………………………… 47
3.
Trustee Involvement in the Standard-Setting Process ………………………… 47
4.
Composition of the IASB……………………………………………………………….. 50
Funding of the IFRS Foundation ……………………………………………………………….. 52
1.
Four Characteristics of a Funding Approach …………………………………….. 52
2.
Funding of the FASB …………………………………………………………………….. 54
3.
Monitoring Board Role in Funding………………………………………………….. 55
4.
Approaches in Other Jurisdictions to Contribute to the IFRS
Foundation …………………………………………………………………………………… 56
5.
Contributions by the Large Accounting Firms ………………………………….. 57
6.
Funding from the United States ………………………………………………………. 58
IASB Standard-Setting Process …………………………………………………………………. 58
1.
Focus of the Staff’s Review……………………………………………………………. 58
2.
IASB’s Standard-Setting Process ……………………………………………………. 59
3.
Pre-eminence of Investors — IASB’s Interaction with Investors ………… 61
4.
Timeliness ……………………………………………………………………………………. 63
5.
Objectivity……………………………………………………………………………………. 66
6.
Observations on IASB’s Standard-Setting Process ……………………………. 68
Investor Understanding and Education Regarding IFRS ………………………………………….. 71
A.
Summary Observations …………………………………………………………………………….. 72
B.
Current Awareness and Knowledge of IFRS……………………………………………….. 74
C.
Investor Education Regarding Accounting Standards and Changes in
Accounting Standards ………………………………………………………………………………. 75
D.
Investor Preparedness for Incorporation of IFRS …………………………………………. 76
ii
E.
V.
Current Preparedness …………………………………………………………………….. 76
2.
Necessary Time and Activities Needed by Investors in Order to
Transition Successfully to IFRS ……………………………………………………… 77
3.
Investor Preferences with Regard to Transition…………………………………. 78
Other Investor Views ……………………………………………………………………………….. 79
1.
Global Accounting Standards …………………………………………………………. 79
2.
Ongoing Role of the FASB…………………………………………………………….. 80
Regulatory Environment ……………………………………………………………………………………… 82
A.
Summary Observations …………………………………………………………………………….. 83
B.
Manner in which the SEC Fulfills its Mission……………………………………………… 84
C.
VI.
1.
1.
Ongoing Role of the FASB…………………………………………………………….. 84
2.
Analysis of Changes to the Commission’s Rules and Guidance ………….. 88
3.
Analysis of Changes to Commission’s Ability to Issue, Interpret, or
Enforce Accounting Standards ……………………………………………………….. 89
Industry Regulators………………………………………………………………………………….. 89
1.
Regulators Currently Tend to Use U.S. GAAP …………………………………. 90
2.
Commission Incorporation of IFRS Would Impact Regulators …………… 90
3.
Regulators’ Impressions of IFRS …………………………………………………….. 92
D.
Federal and State Tax Impacts…………………………………………………………………… 93
E.
Statutory Dividend and Stock Repurchase Restrictions ………………………………… 95
F.
Audit Regulation and Standard Setting……………………………………………………….. 96
G.
Broker-Dealer and Investment Company Reporting …………………………………….. 97
H.
Public versus Private Companies……………………………………………………………….. 99
Impact on Issuers ……………………………………………………………………………………………… 103
A.
Summary Observations …………………………………………………………………………… 104
B.
Accounting Systems, Controls, and Procedures …………………………………………. 104
C.
D.
E.
1.
Systems, Controls, and Procedures ………………………………………………… 106
2.
Stable Platform……………………………………………………………………………. 108
Contractual Arrangements ………………………………………………………………………. 109
1.
Types and Pervasiveness………………………………………………………………. 109
2.
Effects on Issuers ………………………………………………………………………… 110
Corporate Governance and Other Regulatory Compliance ………………………….. 113
1.
Corporate Governance …………………………………………………………………. 113
2.
Other Effects ………………………………………………………………………………. 115
Accounting for Litigation Contingencies…………………………………………………… 116
iii
F.
VII.
Smaller Issuers versus Larger Issuers ……………………………………………………….. 118
Human Capital Readiness ………………………………………………………………………………….. 121
A.
Summary Observations …………………………………………………………………………… 121
B.
Education and Training…………………………………………………………………………… 122
C.
Auditor Capacity……………………………………………………………………………………. 123
Appendix A, Exhibits A – I ………………………………………………………………………………………….. 127
iv
I.
Executive Summary
In the Commission Statement in Support of Convergence and Global Accounting
Standards,1 the U.S. Securities and Exchange Commission (“SEC” or “Commission”) directed
the staff of the Office of the Chief Accountant of the SEC, with appropriate consultation with
other Divisions and Offices of the Commission (collectively, the “Staff”), to develop and execute
a work plan (“Work Plan”).2 The Staff published the Work Plan in February 2010.3 The
purpose of the Work Plan is to consider specific areas and factors relevant to a Commission
determination as to whether, when, and how the current financial reporting system for U.S.
issuers should be transitioned to a system incorporating International Financial Reporting
Standards (“IFRS”).4
Since February 2010, the Staff has dedicated significant resources to executing the Work
Plan. Throughout this process, the Staff’s understanding of the potential impact and the related
costs and benefits of transitioning to a financial reporting system incorporating IFRS for
domestic issuers has grown significantly. However, this understanding actually began a number
of years ago and has continued in many forms.5 This final Staff paper (“Final Staff Report”)
represents a summary of what the Staff has learned in the areas covered by the Work Plan
regarding the potential impact of any incorporation of IFRS into the financial reporting system
for U.S. issuers. The Final Staff Report, together with such other matters as the Commission
may consider, will inform any Commission determination on whether to incorporate IFRS and
provide transparency to the public related to the Staff’s findings and observations pursuant to the
Work Plan. Regardless of the outcome of the Commission decision on whether to incorporate
IFRS, the Staff expects that the SEC and other U.S. constituents will continue to be involved
with the development or application of IFRS, or both. This involvement may take many
different forms including the Staff’s review of filings of foreign private issuers that prepare their
financial statements in accordance with IFRS, participation in International Organization of
Securities Commissions (“IOSCO”), interactions with other securities regulators on accounting
matters, and review and commentary on the International Accounting Standards Board’s
(“IASB”) standards.
1
See SEC Release No. 33-9109 (Feb. 24, 2010), Commission Statement of Support of Convergence and Global
Accounting Standards [75 FR 9494 (Mar. 2, 2010)] (“2010 Statement”).
2
See SEC Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International
Financial Reporting Standards into the Financial Reporting System for U.S. Issuers (“Work Plan”).
3
The Work Plan was attached to the 2010 Statement. See 2010 Statement at Appendix A.
4
As used in this Final Staff Report, the term “IFRS” refers to “IFRS as issued by the IASB,” unless otherwise
noted. Further, the term “IFRS” refers to the authoritative text of IFRS, which, according to the IFRS
Foundation’s Constitution, is published in English. See “International Financial Reporting Standards (IFRSs)
as issued at 1 January 2010, Preface to International Financial Reporting Standards.” “IFRSs” refers to more
than one International Financial Reporting Standard. Throughout this document, the Staff uses the term
“incorporation of IFRS” and similar phrases. Unless otherwise noted, these phrases refer to the incorporation of
IFRS into the financial reporting system for U.S. issuers.
5
See, e.g., SEC Release No. 33-7801 (Feb. 16, 2000), SEC Concept Release: International Accounting Standards
[65 FR 8896 (Feb. 23, 2000)].
1
A.
Methodology
In executing the Work Plan, the Staff gathered information using a variety of methods,
including, but not limited to: performing research; seeking comment from market place
participants; considering academic research; and researching the experiences both of other
jurisdictions that have incorporated or have committed to incorporate IFRS into their financial
reporting systems and of foreign private issuers that currently report under IFRS. In the Staff’s
outreach to constituents, the Staff worked to solicit views from constituents with diverse
characteristics.6 For example, in response to the Staff’s comment solicitations, it received input
from a number of large issuers, but there was less feedback from investors and smaller issuers.
To supplement the Staff’s outreach in this area, the Staff held a roundtable focused on the
concerns of investors and small issuers.7 The Staff has also periodically issued documents
updating the public on the Staff’s progress in executing the Work Plan.8
B.
Focus of the Staff’s Work
In execution of the Work Plan, the Staff considered a wide spectrum of options on
whether and, if so, how to incorporate IFRS. The spectrum spanned from no action, to
incorporating IFRS, to pursuing the designation of the standards of the IASB as “generally
accepted” for purposes of U.S. issuers’ financial statements. However, early in the Staff’s
research, it became apparent to the Staff that pursuing the designation of the standards of the
IASB as authoritative was, among other things, not supported by the vast majority of participants
in the U.S. capital markets and did not appear to be consistent with the methods of incorporation
employed by the other major capital markets around the world. Accordingly, the Staff focused
6
The Staff, in August 2010, issued two requests for comment. One was directed towards issuers: Release No.
33-9134 (Aug. 12, 2010), Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS
into the Financial Reporting System for U.S. Issuers [75 FR 511 …
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