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 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, 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.

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, commitme nt 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.

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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. A culture 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. aware of the thin line of difference between the two. Accountants must be

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 business Step 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.

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 multicountry, 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 of the 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 about accounting reporting requirements of the domestic country. When an MNC accounts for its subsidiaries at various global locations, consolidation of accounts for such global 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 and international 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 international side 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 for their 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 it conducts business. Other challenges that the MNC faces can be - Current political scene - World recession - Unemployment - Protectionism - Capital shortage - Ethical & social issues

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