Brazilian Economy Perpetuates Shift in Global Economy

By: Jeremy Michael, CPA

Manager, Assurance Services; IFRS Certified

I recently read a thought-provoking article, “Brazilian economy overtakes UK’s, says CEBR,” in the BBC News.  It served as a reminder that there is a major shift occurring in the countries making up the world’s economical environment.

According to The Centre for Economics and Business Research (CEBR), Brazil overtook the UK as the sixth largest economy in 2011. This emphasizes the importance that developing BRIC countries (Brazil, Russia, India and China) will have on the global economy over the next 10 years.  This will provide both an opportunity and a significant advantage for businesses seeking to grow, or maintain their current growth trend, as long as they can strategically position themselves within these developing countries.

Below is a quick overview of Brazil’s 2011 economy that was provided in the article.  And it should be noted that Brazil’s current population is 200 million – more than three times the population of the UK.

Brazilian economy

  • GDP: $2.52tn (£1.6tn); CEBR estimate for 2011
  • Main exports: manufactured goods, iron ore, coffee, oranges and other agricultural produce
  • Exports in 2010 totalled $201.9bn*
  • Imports in 2010 of $181.6bn*
  • Its main export partners are China, the US and Argentina*
  • Government forecasts growth of 3.5% in 2011, compared with 7.5% in 2010

*Source: Brazilian Ministry of Development, Industry and Export

The article also included the following chart, which shows the ranking of the economies in 2011 and where they are expected to be by 2020.

CEBR World Economic League Table
Rank
 2011
 2020 (forecast)
1 US US
2 China China
3 Japan Japan
4 Germany Russia
5 France India
6 Brazil Brazil
7 UK Germany
8 Italy UK
9 Russia France
10 India Italy

Information source: ‘Brazilian Economy Overtakes UK’s, says CEBR,’ BBC News, December 26, 2011.

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BCG Blogger, January 12th 2012 | Tags: , , , , ,
Posted in General, Uncategorized

Proposal on Revenue Recognition Taking Shape

By: Jeremy Michael, CPA

Manager, Assurance Services; IFRS Certified

Journal of Accountancy recently reported the details of a proposal expected to be finalized in 2012, which will drastically change how businesses recognize revenue in the U.S.

This proposal on revenue recognition is a direct fallout of one of the major projects between the Financial Accounting Standards Board (FASB) and the International Standards Board (IASB) have been working on over the last couple of years in an effort to move the U.S. to IFRS.  The proposal details a five-step model that companies will need to apply before recognizing revenue.

Companies will be given some time to implement once the final decision to adopt the standard is made with the effective date expected to be no earlier than for annual reporting periods beginning on or after Jan. 1, 2015.  Privately-held companies will be given an additional year to implement. However, keep in mind that the business will need to apply the standard retrospectively to the prior year financial statements.

Information source: ‘A New System for Recognizing Revenue,’ Journal of Accountancy, January 1, 2012.

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BCG Blogger, January 11th 2012 | Tags: , ,
Posted in General, Uncategorized

SEC Chairman Addresses Imminent IFRS Decision

By: Jeremy Michael, CPA

Manager, Assurance Services; IFRS Certified

The IASB and the US Financial Accounting Standards Board (FASB) have been working together since 2002 to achieve convergence of IFRS and GAAP.

After a decade of waiting for a final decision, the U.S. Securities and Exchange Commission’s Chairman Mary Schapiro made several interesting statements in a recent article in Bloomberg Businessweek magazine – shedding some light on the current status of the U.S.’s transition to IFRS.

Schapiro’s statement illustrates just how difficult of a decision it is for the SEC to move to IFRS.

  • Schapiro said another major agency effort — potentially blending U.S. accounting practices with a unifying system of International Financial Reporting Standards — will be decided “in the next few months.”
  • “There are some hurdles that have to be passed before we’re going to be comfortable making the ultimate decision about whether to incorporate IFRS into the U.S. reporting regime,” she said. Sticking points include the independence of the International Accounting Standards Board and “the quality and enforceability of standards,” she said.

Information courtesy of ‘SEC’s Schapiro Says She Regrets Loss in Investor – Access Battle’ article, Bloomberg Businessweek, January 6, 2012.

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BCG Blogger, January 10th 2012 | Posted in IFRS vs. U.S. GAAP, SEC, U.S. Conversion Status, Uncategorized

Subpart F Income – Understanding What It Is and How It Applies…

By: Emily Zaubi, CPA, MT

As companies expand outside the United States at a rapidly increasing rate, additional tax laws become applicable. Which brings us to Subpart F Income – as it’s called. Even accountants can sometimes cringe at the complexities involved in the laws of ‘Subpart F income.’ But, I love overcoming challenges, so I recently listened to a webinar on Subpart F income – and I thought I’d share some basic knowledge of what Subpart F income is, and more importantly, how it might apply to you.

Are you subject to Subpart F?

The U.S. does not tax earnings of a foreign corporation until a repatriation event occurs. Generally, this is when dividends from a foreign company are paid to a U.S. shareholder. However, if the corporation is a controlled foreign corporation (CFC) it has the potential to be subject to Subpart F income.

A CFC is defined as a foreign corporation in which U.S. shareholders own more than 50% of the vote or value of the corporation’s stock either directly, indirectly, or constructively. A U.S. shareholder is defined as a U.S. person (individual, corporation, partnership, etc.) that owns more than 10% of the stock of the corporation.

There are various types of income that are subject to the Subpart F rules:

  • Foreign Personal Holding Company Income: This includes interest, rents, royalties, dividends, and gains on sales.
  • Foreign Base Company Services Income: This includes income derived by a CFC from services performed for, or on behalf of, a related person outside of the CFC’s country of organization. The purpose of this type is to prevent tax deferral by isolating services income in a low tax jurisdiction. Services this applies to are technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services.
  • Foreign Base Company Sales Income: This includes income from purchases or sales to a related person where the property was not manufactured in the CFC’s country and was not purchased or sold for use in the CFC’s country. Similar to above, the IRS is trying to prevent tax deferral by utilizing lower tax jurisdictions.

Various exceptions apply to the above income. A few are:

  • De minimis: If a CFC earns only a de minimis amount of Subpart F income during a year, then no part of the income will be taxed.
  • Full Inclusion: If more than 70% of a CFC’s gross income constitutes Subpart F income during a year, then all of the income will be taxed (even if not otherwise subject to Subpart F).

Subpart F income is reported on Schedule I of Form 5471 and the penalty for not filing is $10,000. Once Subpart F income is taxed, it becomes previously taxed income (PTI) and will not be taxed again when it is distributed.

This is just the tip of the iceberg when it comes to the complex laws of Subpart F income. If you think this might apply to your company, and would like more information, contact a BCG&Co. tax advisor.

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BCG Blogger, November 2nd 2011 | Tags:
Posted in General, Uncategorized

International Happenings at BCG&Co. – Change Is Good

By: Jim Keeslar, CPA

Director of Assurance Services

BCG&Co. – Your Certified Resource for IFRS Guidance

BCG & Company is uniquely positioned to assist clients in adapting to a changing financial environment.  To maintain this position, we have been strategically focusing our efforts on building our knowledge in International Financial Reporting Standards (IFRS) in order to prepare our clients for success in today’s global business world.

Recently, three BCG&Co. representatives completed an intensive training program that will allow us to provide our clients with the knowledge and practical advice needed to use IFRS.   Jeremy Michael, BJ Davis and myself, have all become certified in International Financial Reporting Standards (IFRS) by The Institute of Chartered Accountants in England and Wales.  We are now prepared to be your source for IFRS guidance.

Dedicated International Segment Announced

In addition, we have formed an International Segment at BCG& Co. which consists of Tom Gedelian, tax director; Tracy Fitzpatrick, tax sr. manager; Emily Zaubi, tax supervisor; Jeremy Michael, audit manager; BJ Davis, audit supervisor and myself as audit director.  This group looks forward to working with our clients that currently have international transactions or are looking to do business abroad.

This International group will host events and training sessions, write articles and blogs, and meet with clients and other professionals to provide current and relevant information regarding the international scene.

Speaking of blogging, we plan to broaden this blog from just an IFRS focus to include both tax and financial reporting issues.  Look for this change over the next couple of months.

International Business Event Planned

Also, you will want to mark your calendars for November 3, 2011 (from 4:00 – 6:00 p.m.) for our “Doing Business with our European Neighbors” event.  We will be hosting several experts from of our peer firms in Europe here to speak on doing business in Germany, Italy or the United Kingdom.  There will be more details to follow as this event gets closer.

So, as we wait to hear official news from the SEC on whether they will allow U.S. issuers to incorporate IFRS (we are still being told that a decision should be announced by the end of 2011 — and, by the way, our professional accounting association, AICPA, has now come out in full support of U.S. issuers being allowed to report under IFRS), we will continue to monitor this issue along with other international issues and keep you up-to-date.

Until next time….think big, think global!

Jim

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BCG Blogger, August 29th 2011 | Tags: , , , ,
Posted in General, IFRS vs. U.S. GAAP, U.S. Conversion Status

Advantages to Adopting IFRS

By: Jeremy Michael, CPA, Assurance Services, Jeremy.Michael@BCGCompany.com

With the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) again working at breakneck speed over the summer months to complete their convergence project of bringing U.S. Generally Accepted Accounting Principles (GAAP) in line with the International Financial Reporting Standards (IFRS) by the end of 2011, we are finally expecting the U.S. Securities and Exchange Commission (SEC) to make their final decision on whether or not it will require U.S. publically-traded companies to report on IFRS.  If the SEC decides to adopt IFRS, this sets the stage for making it mandatory for all U.S. companies to adopt and report on IFRS by 2015.  So, with the U.S. on the verge of reaching a final decision on IFRS, what will be some of the benefits of first time adoption?

Benefits of IFRS Adoption – Public VS. Private

Publicly-traded Company Benefits

U.S. publically-traded companies stand to benefit significantly by adopting IFRS as they are typically already a huge player in the international business arena and have multi-national subsidiaries.  Therefore, by adopting IFRS they will no longer have to maintain accounting records on two separate sets of standards which will improve internal communications, quality of reporting and management decision-making.

Also, by adopting IFRS it will level the playing field by making U.S. companies better understood in the global marketplace as investors, and management will now be able to accurately benchmark its performance against peers throughout the world; helping to gain access to additional capital and opportunities.

Privately-held Company Benefits

So how will U.S. privately-held companies benefit from adopting IFRS? I think before we answer that question it should be noted that adopting IFRS will require a significant financial and time investment as accounting systems will need to be upgraded and modified to capture data correctly. People will need to be educated in IFRS and its impact on the company’s financial reporting systems. The company will have to undergo its first-time adoption process which will, more than likely, require an outside independent accounting firm well-versed in IFRS. As you can see, this will place a heavy burden on privately-held companies; so, again, how do they stand to benefit?

I think they will benefit (for the most part) similarly as publically traded companies, especially if they also hold multi-national subsidiaries. In fact, it is very plausible that a privately-held company in the U.S. has a subsidiary in either Canada (IFRS required in 2011) or Mexico (IFRS required in 2012) which is now reporting on IFRS, or has committed to adopting IFRS.

I also think there are some other advantages that, for the most part, will create a unique opportunity for privately held companies who are struggling with the issue of growth, increasing production costs, and a shrinking marketplace in the U.S. It has been well-documented that China and India will have a strong sustainable economic growth that will provide an opportunity for privately-held companies to access additional customers.

It’s my opinion that by adopting IFRS, privately-held companies will be better understood in the global marketplace by being perceived as an international player.  This will afford them an opportunity for growth that, for the most part, has only been afforded to U.S. publically-held companies with an abundance of financial resources to gain access to international customers, suppliers and world capital markets, reducing some of the risks and barriers of setting up international joint venture supply arrangements and importing/exporting.

All of these factors significantly aid a U.S. privately-held company in going international by leveling the playing field against their U.S. publically-traded company counterpart.

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BCG Blogger, June 28th 2011 | Tags: , , , , , , , , , , ,
Posted in IFRS vs. U.S. GAAP, SEC, U.S. Conversion Status, Uncategorized

Not-For-Profit Entities and IFRS

By: B.J. Davis, Assurance Services, BJ.Davis@BCGCompany.com

Over the past several years, the momentum has been building for the convergence of U.S. GAAP and IFRS. With this convergence now in full swing, many not-for-profit entities are left wondering how the convergence will affect them. Obviously, not-for-profits are not required to follow SEC requirements for reporting. Currently, not-for-profits can report using any means they deem appropriate, from cash basis to any other comprehensive basis of accounting. Generally, though, their reporting is driven by market forces as well as the donors who provide their funding. However, when considering IFRS as it currently stands, it is not designed to accommodate the needs of the not-for-profit industry. But as for-profit entities move toward the convergence of IFRS and U.S. GAAP, market forces will most likely drive the not-for-profit industry to adopt of some form of IFRS.

One of the goals of IFRS is comparability; in that every entity’s financial statements should be prepared the same way and comparable to another entity’s financial statements. This implies, and some people feel, there are not fundamental differences between for-profit and not-for-profit entities. However, there are fundamental differences between a for-profit entity and a not-for-profit entity. When you purchase something from a for-profit company, you ultimately do not care how they spend the money you give them in exchange for a product or service. However, when you give money to a charity, most people care deeply how much is spent on program services or maintained in an endowment and how much goes to administrative expenses. The donor expects some sort of accountability. It is this need for accountability that led to fund accounting and the adoption of nonprofit accounting (FAS 116, 117 and 117-1). Currently, IFRS has no such provisions to handle this type of accounting, or ultimately, this type of accountability.

One possible solution is with the recently issued IFRS for SMEs. Though IFRS for SMEs is also not designed for not-for-profit entities, it is a good starting point, as it has been considerably “slimmed down” from the standard IFRS. Consider that IFRS for SMEs is simpler and less complex than regular IFRS, it reduces disclosure requirements and cuts out topics from regular IFRS and U.S. GAAP that are not relevant to those entities and the IASB has committed to only revising IFRS for SMEs once every three years. Building on this, IFRS for SMEs could then be revised or amended to incorporate the provisions of  nonprofit accounting (FAS 116, 117 and 117-1). Thus, you add a layer of accountability to the simplicity that is built into IFRS for SMEs.

It is hard to say for sure what the future holds for not-for-profit entities when it comes to IFRS and its convergence with U.S. GAAP, as the process is still ongoing. What is certain, though, is that change is likely coming and not-for-profit entities should be prepared for it.

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BCG Blogger, June 21st 2011 | Tags: , , , ,
Posted in IFRS for SMEs, IFRS vs. U.S. GAAP, SEC, U.S. Conversion Status, Uncategorized

The No. 1 Accounting Issue Companies Face in 2011

By: Jeremy Michael

I recently stumbled across a fascinating article on CFO.com entitled “IFRS Outlook: Hurry Up and Wait.” It was written about a survey indicating the number one accounting issue facing companies in 2011: the convergence to International Financial Reporting Standards (IFRS). The article revealed that approximately 45% of CFOs surveyed, when asked about their companies’ readiness for IFRS, responded that they have not even begun the process of addressing convergence.

I was not surprised by the survey results which I believe reflects the recent downturn in the financial markets that occurred in 2008 and 2009 along with the Securities and Exchange Commission’s (SEC) noncommittal approach to whether U.S. Companies will be required to report using IFRS. However, if the decision to converge was to be made this year, how prepared would your Company – or perhaps your clients – be in making that transition? I think the answer to that question would be similar to the results of the survey in the article.

It’s been my observation that most U.S. companies are missing or failing to recognize the bigger picture and enormous benefits that can result from adopting IFRS and making financial reporting consistent and comparable across the world. Think of the opportunities for growth this will create for U.S. businesses by making it easier for banks, private equity firms and venture capitalists to operate and invest across borders.  Adoption of IFRS will lead to the increased investing and funding of international businesses because an investor or banker will find it easier to make an apples-to-apples financial comparison.

I also believe the adoption of IFRS could have its biggest impact on small- to medium-sized companies in the U.S. as they will be able to manage their credit risk by effectively evaluating the credit worthiness of a foreign owned customer.  This will prove to be a significant benefit on the small- to medium-sized company by expanding their sales into the larger, untapped international markets, as well asallow them to take advantage of the lower international production costs that have for the most part only been available to larger companies. IFRS will make it easier for these companies to establish longer term relationships with foreign owned suppliers since they will be better equipped to evaluate and understand the financial stability of foreign owned businesses.

These reasons alone cause me to believe that the financial marketplace will eventually drive a U.S. convergence to IFRS.  In fact, the U.S. marketplace is already primed for this to occur when the American Institute of Certified Public Accountants’ (AICPA) governing council voted to recognize the International Accounting Standards Board (IASB) as an accounting body that promulgates international financial accounting and reporting principles, thus paving the way for US privately held companies to adopt IFRS for SME’s (small medium sized entities).

Preparing for IFRS

So what should your company or clients be doing to better prepare for IFRS? The answer to that question is not simple nor can it be answered until one recognizes and understands the key differences between IFRS and generally accepted accounting principles (GAAP).

For one, IFRS provides management and accounting staff with fewer specific rules and “bright-line” tests.  For instance, you will not find the traditional GAAP rules that govern the recognition of a lease as operating versus capital. Instead, IFRS requires you to look at the underlying business purpose in determining if a lease should be treated as operating or capital instead of relying on the specified percentage thresholds outlined in GAAP.  You can only imagine the effect that this one difference will have on financial statements and the interpretation of the traditional ratios that flow from those statements.

Adopting IFRS will require management and accounting staff to rely on more professional judgment than it has in the past. It will also become critical for management and accounting staff to adopt, implement, and monitor effective accounting policies.

So, while there may not be a simple answer to my earlier question on what you or your clients should be doing to better prepare for IRFS, there is a simple starting point in answering that question. It begins with educating yourself on IFRS and its potential to transform accounting as we understand it today.

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BCG Blogger, June 6th 2011 | Posted in General, IFRS for SMEs

Delays in the Convergence Projects

By: Jim Keeslar, CPA

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have pushed back the expected completion date of the convergence priority projects.  They had hoped to have the major projects completed by June 2011, with the remaining projects completed by the end of the year.  Now 2012 looks more realistic.

FASB Chair Leslie F. Seidman and IASB Chair Sir David Tweedie, acknowledged that June 2011 won’t happen.  “After evaluating the issues yet to be addressed we jointly concluded that, without extending the work out indefinitely, we all could benefit from a few more months to develop these standards,” Tweedie said.  Seidman agreed, stating that, “The quality of the standards remains of the utmost importance. We would never let a target date take priority over thorough and robust due process.”

This further delay may also impact the SEC’s decision on when and if the U.S. will adopt IFRS.  It has been widely speculated the SEC would decide sometime in 2011, however this delay may push their decision back as well.

The FASB and IASB have drawn criticism over several of the larger projects like revenue recognition and lease accounting and the speed that they were trying to complete them.  Seidman clarified that the FASB and IASB will “continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalized.”

Although the convergence projects have been delayed, they are continuing and probably not going away.  So, continue to follow us as we continue to follow up with the latest developments for you.

Until next time….think big…..think global.

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BCG Blogger, May 6th 2011 | Tags: , , , ,
Posted in SEC, U.S. Conversion Status, Uncategorized

Innovation in Financial Reporting

By: Jeremy Michael, CPA, Manager Assurance Services, Jeremy.Michael@BCGCompany.com

Something similar to manufacturing innovation is occurring across the globe in how businesses are reporting financial results. This innovation in financial reporting is called International Financial Reporting Standards or IFRS.

Before IFRS, each country had its own basis of accounting, similar to the United States Generally Accepted Accounting Principles (GAAP), that differed greatly from one another. This caused businesses to record similar transactions differently; thereby, creating a need for a comprehensive set of accounting standards that could be adopted worldwide. The answer to that need is IFRS.

IFRS seeks consistency in the way businesses account for transactions amongst the countries that have adopted IFRS, creating financial reporting comparability. Although there is no firm timeline on whether IFRS will replace GAAP in the United States, one thing for certain is that the world is continuing to shrink and more businesses are conducting business internationally.  Therefore, it is inevitable that U.S. manufacturers will run across IFRS in some form while conducting business, especially considering that there are over 100 countries now using IFRS and it has just landed on the shores of North America. Canada is now using this new basis of accounting in 2011 and Mexico plans to go live in 2012.  

Since it is estimated that there are approximately 30 to 300+ differences between GAAP and IFRS, I intend only to focus on three of the major differences that will impact manufacturers.

Property, Plant & Equipment –

Under IFRS, fixed assets are required to be broken out into their individual components and then depreciated over each component’s useful life; whereas under GAAP, the total cost of the asset could be capitalized and depreciated over the main useful life. 

A good example of this concept could be made witha heavy duty stamping press: capitalizing and depreciating by breaking out the main components such as the main press (15 years), computer hardware (5 years), software (3 years), the hydraulic mule (7 years), and so on. Also under IFRS, a company can elect to record their assets on fair market value as long as it can be measured reliably and at regular intervals. Once you elect this option, it has to be applied for the entire class of assets versus an individual asset.

Revenue Recognition –

Under GAAP, revenue is recognized once persuasive evidence of an arrangement exists, delivery has occurred or the service has been rendered, the price is fixed or determinable and collectability is reasonably assured. Under IFRS, revenue should not be recognized until the risks and rewards of ownership have been transferred to the buyer, the seller has no more obligations such as managerial involvement or effective control, revenue can be reliably measured and it is probable that the economic benefits will flow to the company. 

To illustrate the differences, let’s take a manufacturer who sells a product with a special promotion, a six month deferred payment option and a five year warranty, all for $5,000. Under GAAP, the sale would be recorded once the product has been delivered to the customer for the full $5,000. Under IFRS, the value of each component needs to be split out to each component such as the sales price, the deferred payment option and the five year warranty. For the sake of argument let’s say the value of the warranty is $100 a year and the interest option is valued at $50 a month; therefore, the cash sale price on day one is only $4,200 under IFRS vs. $5,000 under GAAP. The remaining revenue under IFRS would be recognized over the period as time elapses.

Inventory –

Under IFRS, inventory is valued at its net realizable value versus GAAP’s lower of cost or market value.  Net realizable value is defined as the selling price expected to be achieved (market) less an estimate of the cost to complete the production of the finished good and an estimate of the cost to be incurred to make the sale. If by chance under IFRS, inventory is written down due to an NRV issue that in a later period is no longer an issue, it is permissible to reverse the original write down. Also under IFRS, inventory is not allowed to be valued on the last in, first out (LIFO) costing method. 

Here at BCG & Company we are committed to following the innovation in financial reporting along with keeping you informed of the recent developments with IFRS. If you are interested, feel free to check out and subscribe to our ‘Where in the World is IFRS?’ blog.

Until next time, think big…think global!

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BCG Blogger, March 21st 2011 | Tags: , , ,
Posted in IFRS vs. U.S. GAAP, Uncategorized
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