7/28/2019 International_Accountting-Week 1 (1)

1/4

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 (bothcurrent and potential), financial analysts, creditors, regulators and general public.

Managerial Accountingoffers financial & operating information into the firms management to help them plan;

control and help the management make decisions about the allocation of the firms 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 countrys political system has a profound effect on its accounting practices. For example, underCommunism, 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 governments macroeconomic goals. EPS, for

example, was meaningless.

7/28/2019 International_Accountting-Week 1 (1)

2/4

But now, even such communist economies are moving towards a market economy. This shift has brought

about lot of changes in the accounting perspectives. Traditional Accounting that was creditor oriented is now

moving to equity / investor oriented.

Sometimes a country may deviate from its own historical system of accounting by means of military

conquest by another country. Under these circumstances, the accounting practices of the subject country may

be shaped to fit that of the ruling country. A small country trading with a larger one may also adopt the latters

system out of expediency.

Accounting ideas & ideologies are also transferred through conquest, commerce & other forces. British

colonialism exported both accountants & accounting concepts through their colonies and today the effect is felt

in the Commonwealth countries.

5. Level of Economic Development

This factor affects the types of business transactions conducted in the economy, which, in turn, affects

accounting practices. For example, stock based executive compensation (ESOPS) or asset securitisation makes

little sense in an underdeveloped country.

Also, today, many industrial economies are becoming serviced oriented. So, accounting information

such as valuation of fixed assets & the depreciation on the same is turning irrelevant. They face new

challenges such as valuation of intangibles & human resource. For example, WIPRO listed its workforce as an

asset in their Balance Sheet!

6. Education level

Highly sophisticated accounting standards and practices are useless if misunderstood and misused. In a

well-educated society, there are many people, who have funds to invest & who have the knowledge to

understand financial reports. The bodies that make the accounting rules in such a society assume that the

investors, both current & potential, have the knowledge to make informed decisions, given that they are

provided relevant & reliable information.

A number of very sophisticated marketable securities have come into the market in recent years. Such

securities can be sold only in countries with educational system that produce investors who understand them.

7. Culture

Culture may be thought of as the values and attitude of the society. Cultural dimensions exist in

peoples attitude towards authority, commitment to work, management-labour relations, class structure &

leisure activities and these dimensions form the cultural environment in which businesses operate.

Every firm operating in several countries must be aware of the cultural variables and take care not to

inadvertently offend customers, employees, government officials & other stakeholders.

Accounting practices differ from country to country. A statement, for example, that the US accounting

system is better than that used in Germany and that Germany should adopt US GAAP is not justified. German

accounting is conservative and allows the establishment of hidden resources not shown in financial statements.

But this is not so in the USA.

Accountants need to understand that these are not just matters of difference in business attitudes, but

they are important variables that affect normally any aspect of daily life.

8. Rate of Inflation

Inflation strains the historical cost accounting and affects the tendency of a country to incorporate price

changes into accounts.

During time of inflation, owning debt is desirable because the company can pay off that fixed liability

later with currency, which isnt worth as much. Holding a monetary asset is not desirable during times of

inflation.

From an accounting perspective, if inflation is a problem, the financial information that is presented

using historical cost may no longer be useful. Inflation would have to be taken into account in the financial

statements by incorporating inflation adjusted numbers.

7/28/2019 International_Accountting-Week 1 (1)

3/4

9. Ethical Dimension

Ethical environments in different countries are varied from one another. 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.

In many countries bribery is common. A bribe is a payment, usually of money, with the intent of

influencing someone to do something that he / she should not do. 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. In many countries, such illegal payments are almost legalised & are considered legitimate now. Aculture that has developed in a country over centuries cannot be set aside easily. But from an accounting

perspective, one has to remember that such practices affect accounting practices in the company.

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. Concepts of full disclosure may not apply as

certain things must be hidden.

Point to be noted is, an action can be unethical but not unlawful and vice versa. Accountants must be

aware of the thin line of difference between the two.

EVOLUTION OF INTERNATIONAL ACCOUNTING

Firms typically evolve into multinationals; their normal progression can be broken down into different

steps:Step 1: Strictly domestic

No international businessStep 2: Casual international business

Prime, unsolicited, unexpected Not unwelcome

Step 3: Initial International Business

Active, solicited, expected Very limited scale initially

Step 4: Essentially international

Internationalised management International organisation chart Domestic business dominates

Step 5; 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, takes world view of organisation Firms 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.

1900

1972

This period was characterised by meetings and conferences, 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. The emphasis was on regional accounting

issues.

1972 Presents

During this period, the growing problems associated with the emergence of MNCs 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. The World Congress of Accountants met periodically. During this

period following 1972, definite steps were taken by new organisation to resolve the problem associated with

national diversity in accounting practices and the governing power of the MNCs.

7/28/2019 International_Accountting-Week 1 (1)

4/4

Problem faced by Multinational Companies

1. International Executives

A common career goal of those interested in international business is the opportunity to be sent abroad

by a US firm. Another development of the emergency of an MNC is the demand for experts at the Shared

Services / Outsourced business locations. But, in actuality, 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.

CEOs today cannot continue to be one-company, one-industry, and one-speciality chief executives.

Today they need solid background in international accounting. Top executives need to essentially have multi-

country, multi-functional, multi-identify and multi-company experience in both management and operational

capabilities.

2. International Accounting Executives

Within an MNC, typically domestic control is necessary at the following levels:

The controller / his assistant / staff need to exercise complete control over the accounting records ofthe firm world-wide. He must establish and maintain system to collect accounting information from the

firms operations around the world.

Each non-domestic operation will also be controlled by a domestic officer, who is educated aboutaccounting reporting requirements of the domestic country.

When an MNC accounts for its subsidiaries at various global locations, consolidation of accounts for suchglobal operations is a challenge not just by virtue of logistics and accounting standards but also for

foreign exchange.

The multinationals control system must cover its non-domestic operations since many national andinternational agencies issue accounting standards that affect the multinational. The controllers office

should monitor and evaluate these rules and proposals, especially if they directly affect operations of

the firm.

Global accounting activities give rise to challenges in international treasury activities. The internationalside of the treasury functions should be closely monitored in co-operation with the international

environment analysis and taxation matters.

International Accountants must be familiar with the accounting standards of more than one country.More so, when the accounting for firms and contracts and other significant international transactions.

The multinational must also answer to a number of agencies that claim international jurisdiction fortheir accounting principles.

Although it is debatable as to whether or not the MNCs are really subject to these accounting standards, they

must certainly monitor their issuance and provide even from the promulgation stage.

3. Organisation Structure

MNSs may be organised in the following manner to carry on international operations:

Functional Organisations When organisation pattern its functions i.e., production, marketing, sales etc. International Decision Where the organisation and international division is a separate organisational

unit in itself. The organisational changes with the responsibility of the companys entire international

operations.

Geographical Division requires that the firm be organised on the basis of geographical areas in which itconducts business.

4. Other challenges that the MNC faces can be

- Current political scene- World recession- Unemployment- Protectionism- Capital shortage- Ethical & social issues

*********************************