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INTERNATIONAL ACCOUNTING

Introduction Accounting as a field of study, can be classified as  Financial Accounting  Managerial Accounting Financial Accounting provides information for decision-making groups outside the firm, i.e., Stockholders (both current and potential), financial analysts, creditors, regulators and general public. Managerial Accounting offers financial & operating information into the firm’s management to help them plan; control and help the management make decisions about the allocation of the firm’s resources. International Accounting includes both financial & managerial accounting. It is defined as accounting for international transactions, the operation of an international firm and the composition of accounting principles and practices found in foreign lands and the procedures by which they are established. International Accounting is a well-established area and has two dimensions:  Comparative examining how & why accounting principles differ from country to country.  Pragmatic Accounting for operational problems & issues encountered by individuals and firms international business. Important factors affecting the development & outlook for International Accounting in a country / economy 1. Legal System:

The system of laws determine how individuals interact and relate to the laws of the land. The law is divided into the following orientation (a) Legalistic (Code of Civil Law) (b) Non-legalistic (Common Law) In Code Law countries, i.e., Germany, Japan, Switzerland etc., compliance with the Letter of the Law is expected. Codification of Accounting Standards and procedures appears natural and appropriate in those countries. Common Law oriented countries develop Accounting Standards on a case-by-case basis. There is no all-encompassing code, which cover all cases. Accounting rules in these countries, i.e., the USA, the UK etc., are not incorporated into statute law but established by professional organisations. This permits them to be more adaptive and innovative. 2. Sources of Finance Economies, from the sources of finance perspective can be classified as (a) Equity oriented (b) Debt oriented In countries with strong capital markets such as the USA, the UK etc., accounting focuses on how well management has operated the company i.e., its profitability. It is designed to help investors assess future cash flows and the associated risks. Disclosures are extreme and consistent with widespread public ownership. By contrast, debt / credit based economies are those in which banks are the dominant source of finance. Here accounting focuses on creditor protection through comparative accounting measurement. Public disclosures are limited, for example Germany, Japan, etc. 3. Taxation In some countries, financial & tax reporting are separate. Financial reporting aims at showing higher profitability and is targeted at current & future stockholders whereas tax reporting is targeted at paying as minimum tax as possible. The tax influence is, therefore, an important aspect that shapes the international accounting practices in a country. 4. Political & Economic Influence A country’s political system has a profound effect on its accounting practices. For example, under Communism, say the old Soviet Union, accounting practices were set by the Central Government and were intended to provide information that would be useful in meeting government’ s macroeconomic goals. EPS, for example, was meaningless.

who have funds to invest & who have the knowledge to understand financial reports. but they are important variables that affect normally any aspect of daily life. employees. Accounting practices differ from country to country. So. many industrial economies are becoming serviced oriented. For example. Under these circumstances. in turn. British colonialism exported both accountants & accounting concepts through their colonies and today the effect is felt in the Commonwealth countries. there are many people. From an accounting perspective. During time of inflation. which isn’t worth as much. But this is not so in the USA. which. Education level Highly sophisticated accounting standards and practices are useless if misunderstood and misused. Rate of Inflation Inflation strains the historical cost accounting and affects the tendency of a country to incorporate price changes into accounts. Accounting ideas & ideologies are also transferred through conquest. both current & potential. A small country trading with a larger one may also adopt the latter’s system out of expediency. the financial information that is presented using historical cost may no longer be useful. 5. Sometimes a country may deviate from its own historical system of accounting by means of military conquest by another country. For example. WIPRO listed its workforce as an asset in their Balance Sheet! 6. management-labour relations. 7. commitme nt to work. Cultural dimensions exist in people’s attitude towards authority. for example.But now. Every firm operating in several countries must be aware of the cultural variables and take care not to inadvertently offend customers. Such securities can be sold only in countries with educational system that produce investors who understand them. 8. In a well-educated society. government officials & other stakeholders. affects accounting practices. stock based executive compensation (ESOPS) or asset securitisation makes little sense in an underdeveloped country. the accounting practices of the subject country may be shaped to fit that of the ruling country. The bodies that make the accounting rules in such a society assume that the investors. German accounting is conservative and allows the establishment of hidden resources not shown in financial statements. if inflation is a problem. class structure & leisure activities and these dimensions form the cultural environment in which businesses operate. Traditional Accounting that was creditor oriented is now moving to equity / investor oriented. A statement. even such communist economies are moving towards a market economy. today. Holding a monetary asset is not desirable during times of inflation. A number of very sophisticated marketable securities have come into the market in recent years. Inflation would have to be taken into account in the financial statements by incorporating inflation adjusted numbers. commerce & other forces. Accountants need to understand that these are not just matters of difference in business attitudes. have the knowledge to make informed decisions. that the US accounting system is better than that used in Germany and that Germany should adopt US GAAP is not justified. Level of Economic Development This factor affects the types of business transactions conducted in the economy. This shift has brought about lot of changes in the accounting perspectives. Also. given that they are provided relevant & reliable information. accounting information such as valuation of fixed assets & the depreciation on the same is turning irrelevant. Culture Culture may be thought of as the values and attitude of the society. owning debt is desirable because the company can pay off that fixed liability later with currency. . They face new challenges such as valuation of intangibles & human resource.

Point to be noted is. 1900 – 1972 This period was characterised by meetings and conferences. takes world view of organisation  Firm’s capital needs met in world markets Significant Development A brief look at some significant developments in the recent history of international accounting will help you to understand the importance of this area. A bribe is a payment. . The emphasis was on regional accounting issues. the growing problems associated with the emergence of MNC’s began to attract academic interest in international accounting within the American Accounting Association and this led to the creation of many sub-sections and directives. No company can expect to do business in such countries and remain outside the main stream of political payments and this is not expected to change in the future. A culture that has developed in a country over centuries cannot be set aside easily. an action can be unethical but not unlawful and vice versa. such illegal payments are almost legalised & are considered legitimate now. In many countries bribery is common. solicited. seminars for accountants from different countries mainly to exchange accounting information and practices with no deliberate effort to reduce the obvious diversity in accounting practices from country to country. definite steps were taken by new organisation to resolve the problem associated with national diversity in accounting practices and the governing power of the MNC’s. Concepts of full disclosure may not apply as certain things must be hidden. unsolicited. usually of money. This has a big impact on accounting practices and many a time poses to be a dilemma to accountants as what is construed as ethical in one country may not be seen that way in another. But from an accounting perspective. one has to remember that such practices affect accounting practices in the company. aware of the thin line of difference between the two. unexpected  Not unwelcome Step 3: Initial International Business  Active. their normal progression can be broken down into different steps: Step 1: Strictly domestic  No international business Step 2: Casual international business  Prime. Accountants must be EVOLUTION OF INTERNATIONAL ACCOUNTING Firms typically evolve into multinationals. In some countries it may be acceptable to pay bribes and charge them to some legitimate expense account such as government relations or contribution to education. 1972 – Presents During this period. Multi-national (global) co-operation  International business equal if not more than domestic territories  Firm deals in global markets for product and input factors  Firm not tied to one nation.9. expected  Very limited scale initially Step 4: Essentially international  Internationalised management  International organisation chart  Domestic business dominates Step 5. The World Congress of Accountants met periodically. During this period following 1972. Ethical Dimension Ethical environments in different countries are varied from one another. with the intent of influencing someone to do something that he / she should not do. In many countries.

The multinational’s control system must cover its non-domestic operations since many national and international agencies issue accounting standards that affect the multinational.Protectionism . especially if they directly affect operations of the firm. Today they need solid background in international accounting. marketing.Unemployment . when the accounting for firms and contracts and other significant international transactions. sales etc. The controller’s office should monitor and evaluate these rules and proposals.Ethical & social issues  4. Global accounting activities give rise to challenges in international treasury activities. they must certainly monitor their issuance and provide even from the promulgation stage.e. The multinational must also answer to a number of agencies that claim international jurisdiction for their accounting principles. in actuality.       Although it is debatable as to whether or not the MNC’s are really subject to these accounting standards. one-industry.   Organisation Structure MNS’s may be organised in the following manner to carry on international operations: Functional Organisations – When organisation pattern its functions i. Geographical Division – requires that the firm be organised on the basis of geographical areas in which it conducts business.  International Accounting Executives Within an MNC.Problem faced by Multinational Companies 1. More so. 3. CEO’s today cannot continue to be one-company. The international side of the treasury functions should be closely monitored in co-operation with the international environment analysis and taxation matters. Other challenges that the MNC faces can be . Top executives need to essentially have multicountry. typically domestic control is necessary at the following levels: The controller / his assistant / staff need to exercise complete control over the accounting records of the firm world-wide. and one-speciality chief executives.. When an MNC accounts for its subsidiaries at various global locations. But. multi-functional. Each non-domestic operation will also be controlled by a domestic officer. The organisational changes with the responsibility of the company’s entire international operations.World recession . He must establish and maintain system to collect accounting information from the firm’s operations around the world. 2. Another development of the emergency of an MNC is the demand for experts at the Shared Services / Outsourced business locations. who is educated about accounting reporting requirements of the domestic country. multi-identify and multi-company experience in both management and operational capabilities. production. International Decision – Where the organisation and international division is a separate organisational unit in itself. the number of experts serving their companies from a non-US location has actually gone down owing to the cost of maintaining experts and their families at these locations.Capital shortage . International Accountants must be familiar with the accounting standards of more than one country. International Executives A common career goal of those interested in international business is the opportunity to be sent abroad by a US firm. ********************************* .Current political scene . consolidation of accounts for such global operations is a challenge not just by virtue of logistics and accounting standards but also for foreign exchange.