International

Accounting
DR. Karim Mansour
Lecturer of accounting
Cairo university
1- Introduction to International accounting .
2-Translation of foreign currency Financial
statements .
3-Translation of foreign currency Financial
statements (continue) .
4-Foreign currency transactions and hedging
foreign exchange .
5-Foreign currency transactions and hedging
foreign exchange (continue) .
6- Comprehensive problems .
7 -Additional financial reporting issues
8-Additional financial reporting issues
(continue)
9-Analysis of foreign financial statements .
10-Analysis of foreign financial statements
(continue) .
11-Comprehensive problems.
12-Comprehensive problems .
13- Revision - Part I .
14- Revision - Part II.
 What the meaning of accounting

- Accounting is the process of recording and

classifying data about financial transactions of
different organizations, and provide
information to different parties that benefit
from this information.
 What is the main function of accounting

The main function of accounting is measuring the

different activities results of the firms and
communicate the information about these
activities to the different parties that interested in
this information.

The main function of accounting is

Measuring and communicating
- The information vary from firm to another
according to the activity nature and users of
each firm.
• Firms go global in two ways:
1 - they either have individual transactions in
foreign currencies, or

2 - when they grow bigger, they often set up

foreign operations (separate business abroad).
- As a result of that international accounting

is a branch of the accounting branches, that

provide data and information suitable for

firms that have transactions in foreign

currencies or foreign operations (foreign

activities).
The definition of international accounting

- International accounting as a concept can be

defined as the process of identifying, collecting,
recording, measuring, classifying, verifying,
summarizing, interpreting and communicating
financial information to various users globally
for meaningful financial decision making.

- The use of the financial statements globally

separate international accounting from domestic
accounting.
The definition of international accounting

• international accounting can be viewed in

terms of the standards, guidelines, and practices
that a company follows related to its
international business activities and foreign
investments.

• These would include standards for

accounting for transactions denominated in a
foreign currency and techniques for evaluating
the performance of foreign operations.
The concept of international accounting
becomes important where accounting
reports are used by diverse users in
various countries
 Importance of International accounting
The factors that make international accounting
important are :
1: External Finance

- The source of finance (sole – shares – debts)

to organizations differ in various countries and
this influence their accounting profession.
•In situation where a company grows due to
the need for capital increase:

- the shareholder group becomes large and

diverse.
-ownership is separated from management.

- Owners of the business (shareholders)

become essentially uninvolved in the day-to-
day management of the companies they
owned.
- In such situation, in order to know how
well a company is doing, financial
accounting information becomes an
important source of information
- the relationship between a company and
provider of capital changes when new
capital is secured from international
financial markets means that the
information demands of both domestic and
international sources of finance must be
satisfied.
2- Rapid developments in foreign trade:

Rapid developments in foreign trade has

given rise to a number of unique accounting
problems which further led to the need of
specialized branch of accounting having an
International dimensions.
3- Increased number of multinational
companies:
-Multinational Company is a form of business
organization which operates in more than one
country.
-The number of such companies is increasing with
the passage of time.
-This increased number of multinational
companies on the international scene can be
considered a single largest cause responsible for
enhanced importance of IA
4- Global capital market:
-The flow of capital has crossed national
boundaries in recent years.
Internationalization of capital market has led
to the concept of global capital market.

- The concept of global capital market led to

provide reliable and comparable financial
information to investors belonging to
different countries.
IA will be helpful to eliminate barriers or

obstacles in free flow of international

capital.
5- Environmental awareness:
-Environmental accounting has become part
and parcel of IA.

- Efforts are being made to make corporations

all over the world environment sensitive so as
to adopt green accounting as a part of IA.
6- Divergent accounting practices:

- Accounting being language of business should

speak and convey same meaning to users of
financial statements irrespective of the place
to which they belong to, whether India, Japan
or USA.
- IA attempts to develop this common language
for users of financial statements.
7- Emergence of e-business on global scenario
Concept of e-business which emerged in
developed countries has entered in developing
as well as in underdeveloped countries at a
very rapid speed and spreaded over on
international scenario in new millennium.

This concept of e-business has posed number

of international problems. IA may help
accounting professionals not only in sorting out
such problems but also solving them too.
The factors that make international accounting
important include……

A The need to B unified C Fraud D None of

internal accounting and before
finance practices errors
Question two: Indicate weather each of the
following statements is true or false and correct the
false one:

1 - International accounting can be viewed in terms

of the standards, guidelines, and practices that a
company follows related to its international business
activities and foreign investments. True

2 - Accounting being language of business should

speak and convey different meaning to users of
financial statements irrespective of the place to
which they belong to. (False – different – same)
3- Multinational Company is a form of business
organization which operates in one country.
(False – one – more than)

4 - E-business has posed number of international

problems. True

5- International accounting can be viewed in terms

of the standards, guidelines, and practices that a
company follows related to its local business.

(False - its local business - its international business

activities and foreign investments.
6- International accounting will be helpful to
eliminate barriers or obstacles in the flow of
international capital. True
 Transnational Reporting – Complexities
Reporting financial statements across the
border is not an easy task. It requires a lot of
efforts and cost. Some of the complexities
encountered during transnational reporting are
as follows:
1- Language and currency
2- Accounting principles
3- Disclosure requirement
4- Audit requirement
Language and currency:
An enterprise would generally prepare its
financial reporting in the language that its local
investors would understand, for e.g., a
Japanese company would prepare its financial
statements in Japanese language.

But companies that have different users and

shareholders have to send translated
versions of their financial statements reports.
- In the same way reporting companies also find
difficulties since every companies has unique
currency.
Accounting Principles:
- The most serious problem the reporting
company faces is in contemplating the
accounting principles of another country.

- For eg Indian company would prepare its

financial statement in accordance with
Indian standards.

- Therefore, US investors would find difficult

to understand these financial statements.
Disclosure requirement:
- Disclosure requirement is essential ingredient of
proper functioning of capital market.
-Therefore, it is utmost requirement of the company
to disclose all required information in the financial
statement to enable the investors to take
appropriate decision.
However the problem is that every nation has
different disclosure requirement and so reporting
company finds it difficult to cope with different
disclosure requirement.
Audit requirement:
The function of audit is to lend credibility to financial
statement. In order to do so auditing professionals
itself need a set of well defined audit standards.
This is particular so when financial statements are
prepared in one country and used by users in
another country. A great deal of diversity prevails in
the international audit environment.
However as we move towards harmonization and as
international standard acquires authority, auditors
will have to conform the requirements of
international standards of auditing.
The complexities encountered during
transnational reporting include……
A Language B Accounting C Disclosure D all of
and principles requirement before
currency

Disclosure requirement is……….

A essential B Important to C A and D none of
ingredient of enable the B the
proper investors to above
functioning of take
capital market appropriate
decision
Foreign currency transactions
 DEFINITIONS :
Foreign currency : a currency other than
the functional currency of the entity.
Functional currency : the currency of the
primary economic environment in which the
entity operates

presentation currency : the currency in which

the financial statements are presented.

Exchange rate: the ratio of exchange

for two currencies.
 DEFINITIONS :
Exchange differences: the difference resulting
from translating a given number of units of
one currency into another currency at
different exchange rates
Closing rate: the spot exchange rate at the year
end date.
Spot exchange rate: the exchange rat for
immediate delivery.

Monetary items: units of currency held and assets

and liabilities to be received or paid in a fixed or
determinable number of units of currency
Foreign currency transactions and hedging
foreign exchange .
Conversion gain and losses:
Conversion is the process of exchanging amounts of
one foreign currency to another.
For example: suppose a local company in the united
state buys a large consignment of goods from a
supplier in Germany, the order is placed on 1 May and
the agreed price is € 124,250. at the time of delivery
the rate of foreign exchange was € 3,5 to $ 1, the
company would record the amount owed in its books
as follows:
 debit credit
Dr. inventory account $ 35,500
(124.250 ÷3.5)
Cr. Payables account $ 35,500

- When the local company comes to pay the supplier, it

needs to obtain some foreign currency, by this time,
however, if the rate of exchange has altered to € 3.55 to $1,
the cost of raising € 124,250 would be (÷ 3.55) $35,000.
-The company would need to spend only $ 35,000 to settle a
debt for inventories “costing” $35,500.
- since it would be administratively difficult to alter the value
of the inventories in the company’s books of account, it’s
more appropriate to record a profit on conversion of $ 500
 debit credit
Dr. Payables account $ 35,500

Cr. Cash $ 35,000

Cr. Profit on conversion $ 500

Profit (or losses) on conversion would be

included in profit or loss (income
statement) for the year in which conversion
(whether payment or receipt) takes place