Chapter 10: International Accounting, Finance, and currency's issuance.

There are a wide variety of interest rates

Taxation applicable in these markets depending on the particular
international financial center involved.

Accounting is a field that is characterized by complexity and

Global Equity Markets
broadness because accounting is different in every nation of the
Equity markets facilitate the transfer of shares of ownership of a
world. International accounting exists to support business and
firm to investors. National equity markets are becoming more
economic decisions that cross borders. This chapter discusses the
international as companies see the benefits of equity financing.
environment of global capital markets, including the crucial role
Euro equities are shares of stock sold outside the boundaries of
of accounting information.
the issuing company's home country. As international equity
investment increases, national accounting establishments must
The Environment of Global Financial Markets
provide information useful to international participants.
As globalization increases, more capital is moving across borders
as well. Companies can raise capital internally, through their own
Global Debt Markets
operations, or externally, through transactions in financial
A company may raise capital by borrowing money from some
markets. External financial markets can be considered short-term,
lender. Foreign bonds are sold outside the borrower's country but
less than a year, or long-term.
are denominated in the currency of the country of issue.

The Rise of Cross-border Financing

Global Bank Markets
Companies engage in cross-border financing for a variety of
A third source of capital involves borrowing from banks subject
reasons. Financial reasons include the fact that a company might
to an infinite variety of credit and banking arrangements.
be able to obtain cheaper financing outside its own borders.
Traditionally, bankers relied more on personal knowledge of the
Nonfinancial reasons include a general desire to be a world-class
management of the firm with whom it had a relationship. With
company maintaining financial relationships in many countries.
international expansion, the need for accounting information
Cross-border financial activity is increasing along with the
increases.
movement of goods and services.

Some Trends
International Money Markets
The collapse of the Soviet Union marked a philosophical collapse
A Eurocurrency is a foreign currency-denominated deposit or
that was even larger than the political collapse. The information
account at a financial institution outside the country of the
revolution made it easier for capital to cross borders. A major
trend worldwide is the rise of a global equity culture,
necessitating the need for international accounting information.
The Environment of International Financial Accounting
International financial accounting is characterized by what
appears to be an almost hopeless amount of diversity. It becomes
reasonable and understandable when the causes of the diversity
are explored. In addition, there is an active and very successful
international movement to harmonize accounting standards for
cross-border flow of capital.
International Financial Accounting Diversity
One of the challenges of international business is that no two
countries have exactly the same accounting standards or
procedures. US accounting procedures require that the value of
plant and equipment on a balance sheet be shown at historical
cost of the asset. UK accounting procedures, however, permit
assets to be revalued to current value. This unfortunate situation
is a considerable barrier to the cross-border flow of capital.
Causes of International Financial Accounting Diversity
Accounting is a social system and the structure and processes of
such a system are determined by the larger system of which it is
a part. Scholars list six classes of variables that shape the
accounting system of a particular country. The accounting system
serves as a mechanism to provide information to the providers of
capital. Accounting system of a nation is influenced by a series of
internal factors, such as the size and complexity of business
enterprises. Political and economic ties, both historic and current,
also influence a nation's accounting system. The United States,
Canada, and Australia imported their original accounting systems
from Great Britain.
Some Manifestations of International Financial Accounting
Diversity
Accounting in each country is constantly under revision, and the
differences between countries are fading as a result of increased
globalization and efforts of national and international accounting
bodies. On a large scale, the diversity does not result in a
completely unmanageable set of differences among nations, but
rather a set of clusters of nations having somewhat similar
accounting practices within each cluster.
Consequences of International Financial Accounting Diversity
Despite the many differences from country to country measured
above, capital still manages to move across borders, so perhaps
the accounting diversity noted above is merely a "bump in the
road" to a truly global financial system. Accounting diversity is a
"bump in the road" to a truly global financial system, according
to economist Richard Branson. If the accounting information
flowed smoothly, perhaps the costs and risks of investing
internationally might be lowered, he says.
Harmonization of Financial Accounting Diversity
Despite the forces favoring international diversity of accounting
systems, there are also a number of strong forces favoring
harmonization of the various national accounting systems. Efforts
have been made to encourage accounting harmonization at the
international level as well as at the local level of various nations.
Standards originally issued by the IASC are known as International
Accounting Standards (IASs). The IASB notes that over 90
countries claim they will be following IFRS in 2005.
Other Players in Financial Accounting Harmonization
In addition to the IASB, the following are the other significant
players in the accounting harmonization movement:
1. Commission of the European Union (EU)
2. International Organization of Securities Commissions
(IOSCO)
3. International Federation of Accountants (IFAC)
4. United Nations Intergovernmental Working Group of
Experts on International Standards of Accounting and
Reporting (ISAR), part of the United Nations Conference
on Trade and Development (UNCTAD).
The EU was set up after World War II, and is composed of 15
European member states. The most significant aspect of the
Fourth Directive is philosophical, the establishment of the "true
and fair" rule. The Seventh Directive requires consolidated
financial statements as opposed to simply presenting the
financial statement of a parent company. Issues involving
consolidation will be discussed later in this chapter.
The IOSCO is composed of over 170 various national securities
regulatory organizations, whose objectives are as follows:
 To cooperate together to promote high quality standards
of regulation in order to maintain just, efficient, and sound
markets.
 To exchange information on their respective experiences
in order to promote the development of domestic markets.
 To unite their efforts to establish standards and an
effective surveillance of international securities
transactions.
 To provide mutual assistance to promote the integrity of
markets by a rigorous application of the standards and by
effective enforcement against offenses.
International Financial Reporting
Two issues that arise in the preparation of international financial
statements are consolidation and foreign currency translation.
Most likely, a multinational has a subsidiary in each country in
which it has substantial operations. This consolidation is made
even more problematic since each subsidiary may be maintaining
its own accounts in its local currency.
International Consolidations
Consolidation involves "adding" up the accounts of two separate
financial statements, eliminating the effects of any transactions
between them, and producing a single set of financial statements.
Inter-company transactions can be quite complex, but the logic
of eliminating them is similar to the logic in the above examples.
The possible existence of an unconsolidated subsidiary that is
controlled by a parent company makes the financial statements
of the company open to manipulation.

Foreign Currency Translation
The company operates in over 200 countries, many of which have
different currencies and their subsidiaries' financial statements.
The following are some possibilities:
 Current exchange rate—the exchange rate for the current
date.
 Historical exchange rate—the exchange rate in place when a
particular transaction occurred.
 Average exchange rate—the average rate over a particular
period of time.
Which exchange rate to use has been the subject of much
controversy in accounting. Exchange rate is used to translate a
particular income statement or balance sheet item under each of
the four translation methods. The temporal method translates
monetary items (cash, receivables and payables) at the current
exchange rate. Nonmonetary items (inventories, fixed assets) are
translated at the historical or current rate.
Auditing in an International Environment
Auditing plays a key role in any financial market, since an investor
must have faith that a set of financial statements produced by a
company are reliable. Auditing standards are different from
country to country, and the training and status of auditors are
different as well. Auditing standards are different from country to
country, but Ernst & Young must ensure that any local auditors
used should perform this audit in accordance with the United
States' generally accepted auditing standards. Several
international organizations are working to promote the
harmonization of auditing standard worldwide.
International Financial Statement Analysis
Accounting and auditing rules and procedures vary from nation
to nation. There are also subtle differences in language and
format. For example, UK balance sheets tend to be presented in
a different format from a US one. The reader can examine and see
some of the language differences. A US balance sheet typically
uses the format of the basic accounting equation:
Assets = liabilities+owners’ equity
A UK balance sheet uses the format
Net assets = total capital employed
Equation is equivalent to Equation knowing that net assets =
assets - liabilities and total capital employed owners’ equity. In
the United Kingdom, fixed assets are listed first. Users of financial
statements likely to see this difference in format in a number of
nations that were influenced by the UK such as many of its former
colonies. A corporation might prepare what is called a
convenience translation. This involves translating the statement
into the foreign user's language and retains the home country's
accounting principles.
International Taxation and International Transfer Prices
Every nation sets its own tax policy in line with its own national
goals and traditions. Differences in taxation practices from
country to country exert a huge influence on multinationals. This
section looks at the international tax situation and the tactics used
by multinationals to both cope with and take advantage of
international tax diversity.
International Diversity of Tax Systems and Tax Rates
Tax systems vary widely from country to country, but there are
some basic philosophical differences that can be noted. Gernon
and others note two different national philosophies of taxation:
the territorial principle and the worldwide principle. There is also
a wide variation in the effective tax rates between countries.
International Transfer Pricing
One way to reduce worldwide taxes is through judicious use of
transfer prices - the price paid for the transfer of goods and/or
services between subsidiaries of the same multinational
corporation. Since there are different tax rates from one country
to another, transfer prices give multinationals an incentive to shift
taxable profit to low tax jurisdictions.

Tax Minimization Strategies

Multinationals have a variety of tools to escape double taxation
and minimize the worldwide taxes they have to pay. Some of
them include tax credits, tax treaties, and use of tax incentives tax
havens. A tax credit is a mechanism to mitigate the effects of a
worldwide taxation philosophy on multinationals.

A tax haven is a country with low or perhaps even no income tax.

Tax havens are sometimes used by multinationals to shift income
from a high tax country to a low-tax country.

The OECD has been active in identification of tax havens and

pressuring them to avoid practices considered harmful to the
world economy. Through the efforts of the OECD, real tax havens
are becoming fewer and fewer, but they still can be an effective
mechanism to minimize worldwide taxes.