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International Accounting Issues

Hetal Rohini

International Business

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Chapter Objectives To examine the major factors influencing the development of

accounting practices in different countries To examine the global convergence of accounting standards To explain how companies account for foreign-currency

transactions and translate foreign-currency financial statements To discuss different forms of performance evaluation of foreign

operations and how foreign exchange can complicate the budget process

To explain how arbitrary transfer pricing can complicate performance evaluation and control

To introduce the balanced scorecard as an approach to evaluating performance

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Factors Influencing International Accounting

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What the controller controls ?

VP Of Finance Or CFO

Controller Treasure

President and COO

Board of Directors

Chairperson

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Cont….

Helping forCorporate strategy

Internal auditing

Tax planning

Hedging activities

Cash flow mgt

Evaluation Of

operations

Preparation of

financial statements

Accounting Standards

&procedures

Controller

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Accounting for International Differences

Accounting standards and practices vary around the world Both the form and the content of financial statements are

different in different countries Example:In U.S Companies Balance Sheet format like this : Assets =Liabilities + Shareholder’s FundThe format is known as “BALANCE FORMAT”.

In British Company : Capital & Reserves= Fixed Assets + Current Assets –

Currents Liabilities - Non Current Liabilities.The format is known as “ANALYTICAL FOMAT”.

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Accounting Objectives The accounting process identifies, records, and interprets

economic events. The Financial Accounting Standards Board (FASB) sets

accounting standards in the United States. FASB provides information for three purposes:- 1) investment & credit decisions 2) assessments of cash flow prospects 3) evaluation of enterprise resources, claims those resources & changes in them The International Accounting Standards Board (IASB) is

an international private-sector organization that sets accounting standards.

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Who Uses Accounting Information?

The Public

Govern- ments &

their agencies

CustomersSuppliers & other

Trade creditors

Lenders

Employees

Investors

IASB USERS

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Environment influences on Accounting Practices

Enterprise Users : 1) Management 2) Employees 3) Supervisory Councils 4) Board of Directors Accounting Profession: 1) Nature & Extent of profession 2) Professional associations 3) Auditing Government 1) Users & tax planners 2) Regulators

Development of accounting objectives, standards & practices

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Cont… International influences 1) Foreign History 2) IASB 3) Regional Cooperation 4) Regional Capital Market Academic influences 1) Educational infrastructure 2) Basic & Applied Research 3) Academic associations Nature of the enterprise 1) Form of business Organization 2) Operating characteristics

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Cont……… Characteristics of local environment. 1) Rate of economic growth 2) Inflation rate 3) cultural attitudes 4) public v/s private ownership & control of the

economy Other external users. 1) Creditors 2) Institutional investors 3) Non institutional investors 4) securities exchange

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Cultural Differences in Accounting Culture can have a strong influence on the

accounting dimensions of measurement and disclosure.

=>measurement - how to value assets =>disclosure - the presentation of information & discussion of results.Matrix : The cultural values of secrecy and transparency

refer to the degree which corporation disclosure of information to the public.

The cultural values of optimism and conservatism refer to the degree of caution companies displays in valuation of assets and the recognition of income.

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Cont….

British companies are optimistic when recognizing income.

U.S companies are slightly less optimistic. Japanese and European companies are even less

optimistic than U.S. companies.

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Financial Statements Financial statements differ in terms of:

Language (e.g. German company daimlerychrysler issues financial statements in both German n English.)

Currency (e.g. dailerchysler presents its financial statements in euro and Intel presents in u.s. dollers)

type of statements (income statement, balance sheet, etc.)

the underlying GAAP on which the financial statements are based.

Cont………

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Major approaches to dealing with accounting and reporting differences:

Mutual recognition. Reconciliation to local GAAP. Recasting of financial statements in terms of

local GAAP.

Convergence is the process of bringing different national Generally Accepted Accounting Principles (GAAP) into line with International Financial Reporting Standards (IFRS) issued by the IASB.

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International Accounting Standards and Global Convergence

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Major forces leading to convergence Investor orientation. Global integration of capital markets. MNEs’ need for foreign capital. Regional political and economic

harmonization. MNEs’ desire to reduce accounting and

reporting costs. Convergence efforts of standards-setting

bodies.

International Financial Reporting Standards (IFRS)

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o The IASB is attempting to harmonize accounting standards through issuing International Financial Reporting Standards (IFRS).

o The EU and other countries have agreed to require IFRS for publicly listed companies.

o FASB and IASB are trying to converge their standards through a variety of different activities.

o Enforcement of IFRS is a major concern.o The SEC may soon allow U.S.-listed firms

to report financial results using IFRS.

Recording Foreign Currency Transactions

o Foreign-currency receivables and payables give rise to gains and losses whenever the exchange rate changes. Transaction gains and losses must be included in the income statement in the accounting period in which they arise.

o The FASB requires that U.S. companies report foreign currency transactions at the original spot exchange rate and that subsequent gains and losses on foreign-currency receivables or payables be put on the income statement. The same procedure must be followed according to IFRS.

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Translating Foreign-CurrencyFinancial Statements

Translation: the process of restating foreign-currency financial statements.

Consolidation: the process of combining the translated financial statements of a parent and its subsidiaries into one set of financial statements.

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Translation Methods The functional currency is the currency of

the primary economic environment in which the entity operates.

The current-rate method applies when the local currency is the functional currency.

The temporal method applies when the parent’s reporting currency is the functional currency.

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Disclosing Foreign-Exchange Gains and Losses With the current-rate method, the

translation gain or loss is recognized in comprehensive income rather than net income, and therefore it goes to owners’ equity.

With the temporal method, the translation gain or loss is recognized in the income statement.

Management Accounting Issues

Performance evaluation and control The impact of transfer pricing on

performance evaluation The use of the balanced scorecard

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Different measures are used to evaluate performance of foreign operations, including ROI, sales, cost reduction, quality targets, market share, profitability, and budget to actual.

When using a budget, management must select a currency to set the budget and a currency to evaluate performance.

The most widely used approaches to translate budgets and compare with performance use forecasts of the exchange rate.

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Performance Evaluation And Control

U.S. – ROI British – budget to actual Japanese - sales

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Transfer Pricing And Performance Evaluation

Transfer pricing refers to prices on intra company transfers of goods, services, and capital.

There are conflicting reasons for setting transfer prices that make it difficult for top management to select the correct price.

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The Balanced Scorecard

The balanced scorecard is an approach to performance measurement that closely links the strategic and financial perspectives of a business.

Using the balanced scorecard helps management avoid using only one measure of performance.

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Corporate Governance The external and internal factors designed

to safeguard the assets of a company and protect the rights of shareholders.

Corporate governance practices worldwide are partly a function of the legal environment in the countries where companies operate.

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Thank you………

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