International Accounting

and Multinational Enterprises 5/e

International Accounting
and International Business

Chapter One

Learning objectives:
Identify

the key trends in the development of

accounting through history
Introduce some of the key national differences
in accounting systems worldwide
Highlight the evolution of business to modern
times
Discuss the important accounting dimensions of
global business and the major topics that
comprise the field of international accounting
Introduce the chapters in the textbook

Main contents of chapter one

1. Introduction
2. The International Development of the Accounting Discipline
(1) Early Italian Influence
(2) Luca Pacioli
(3) Subsequent Developments
3. National Differences in Accounting Systems
(1) Implications of National Differences in Accounting
4. The Evolution and Significance of International Business
(1) The Pre-Industrial Period
(2) The Industrialization Period
(3) The Post-World War II Period
(4) The Multinational Era
A. Reasons for International Involvement
B. Forms of International Involvement
C. Global Enterprises
D. Large MNEs
E. The Decision to Become Global
5. Accounting Aspects of International Business
(1) Establishing an Internal International Accounting Capability
6. The Field of International Accounting
(1) The Importance of Studying International Accounting
7. Overview of the Text
8. Summary

I.

Introduction

Definition of International Accounting

The definition includes (1) international transactions (2)
comparative GAAP
(3) harmonization and (4) control of global operations.
International accounting encompasses all major areas of
accounting.
Why Study International Accounting?
Since the operating environments for economic entities are
dynamic, accounting must also stay current with changing
environments. Only then can it possibly retain its relevance and
reliability for economic decision-making. International
accounting is in direct response to the globalization
phenomenon.

I.

Introduction

The Reasons for Going International

The greatest reason for becoming a participant in the
global economy is the growth opportunities. However,
there are several other reasons that need to be
mentioned.
The problems encountered in international operations
should also be noted. The most serious problem found
while doing business in the Eastern European
countries is uncertain legislative and business
environment, while in the rest of the world it is
bureaucratic red tape.

II. The International Development of the Accounting Discipline

A.

Early Italian Influence

1.Record keeping can be traced to 3600BC
2.Italy became the center of trade routes
3.Genoa in 1340AD -- double entry, business
entity, money
4.Florentine -- development of large
corporations and compagnie (partnerships)
5.Venice -- responsible for the spread of double
entry accounting

II. The International Development of the Accounting Discipline

B.Luca

Pacioli
1.Franciscan monk educated in mathematics
2.Taught at several universities, turored three
sons of a Venetian merchant
3.In 1494, published Summa de arithmetica
geometria proportioni et proportionalita
4.Introduced three books of record -- the
memorandum book, the journal and the ledger
-- that required a debit and credit for the
transaction to remain in equilibrium

II. The International Development of the Accounting Discipline

C.Subsequent Developments
1.Decline of Italy as a commercial power, shifting
influence to Atlantic
2.Rise of the nation-state in the 1500s -- public finance
3.French revolution in late 1700s brought Italy under
the influence of the French and Austrians, resulting in
some changes in accounting
4.Scale of enterprises increased, followed by rapid
industrialization, and finally multinationalization

III.

National Differences in Accounting Systems

A. Accounting systems evolve from and reflect the
environments they serve
B. Legal, political, economic, cultural, educational
environments create differences

IV. The Evolution and Significance of International Business

A.The Pre-Industrial Period

B.The Industrialization Period
C.The Post-World War II Period
D.The Multinational Era
1.Reasons for International Involvement
2.Forms of International Involvement
3.Global Enterprises
4.Large MNEs
5.The Decision to Become Global
i. Factors include environment constraints and firmspecific advantages

V. Accounting Aspects of International Business

A.Establishing an internal international accounting capability

1.Different ways of operating abroad and the accounting
problems they create

VI. The Field of International Accounting

A. Two major areas: Descriptive/comparative; accounting

dimensions of international transactions/MNEs

VII. Overview of the Textbook

A.Topical Organization
1.Introduction (Chapter 1)
2.Comparative Accounting and International
Harmonization (Chapters 2,3,5,&6)
3.International Financial Reporting Issues (Chapters
7-11)
4.International Financial Analysis (Chapters 4)
5.External Auditing Issues (Chapter 12)
6.International Management Accounting and Control

(Chapters 13-14)
7.Taxation (Chapter15)

World Capital Markets

North America

New York, San Francisco, Chicago,

Toronto

Asia

Hong Kong, Tokyo

Australia

Sydney

Europe

London, Zurich, Frankfurt, Brussels,

Milan, Paris, Amsterdam, Stockholm,
Madrid

South America

Buenos Aires, Santiago, Mexico City

Africa

Johannesburg

Historical Development of Accounting

Ancient World

Mesopotamia, Egypt, India, China, Rome

Middle Ages

Genoa, Florence, Venice

New World

Maya, Inca, Aztec

Luca Pacioli (1445-1514)

Published Summa de Arithmetica in
1494
First published text on double-entry
accounting
Introduced the Memorandum
Book, Journal, and Ledger

National Differences in Accounting

Systems

Historical developments did not lead to

uniformity in international accounting
practice
Despite similarities, no two systems are
exactly alike

Reasons for Differences:

Economic,
Educational,
Legal,
Political, and
Social/ Cultural Factors

Implications of National
Differences in Accounting

Acts as a barrier to the free-flow of

international business information

Evolution and Significance

of International Business
Greek Period

First international sales of mass-produced

products through Greece in 5 B.C.

Roman Period

First open market with political stability,

better transportation, and few tariffs or
restrictions

Middle Ages

Banking, Insurance, and trade fairs in

Byzantium

The Preindustrial Period

Europe: Rise of Mercantilism

Right to trade regulated by the state,

Colonialism driven by states direct
investment in colonies and nearmonopolistic control of trade, and
Dominated by Western European Nations.

The Industrialization Period: 1780-1945

Technological inventions led to

unprecedented mass production and
standardization,
Implementation of large-scale
infrastructure between historically separate
markets, and
Birth of large multinational corporations
such as: Singer, Ford, Dunlop, and Lever
Brothers.

The Post-World War II Period

Great Depression and WWII

stunted international trade
Following the end of the war,
demand for products and services,
trade and investment sharply
increased.

The Multinational Era

Involvement in International trade

is essential for developing nations,
and
For the continued economic growth
of developed nations.

10

What is International Business?

All business transactions involving

two or more countries.

11

Reasons for International Involvement

Expand sales,
Gain access to raw materials and
other factors of production, and
Obtain information, technical
expertise (i.e. patents, licenses,
know-how).

12

Forms of International Involvement

Exporting and Importing of goods

and services,
Strategic alliances including
licensing agreements, franchises,
and joint ventures, (McDonalds,
Holiday Inn, Pizza Hut), and
Direct investment.

13

Global Enterprises
Multinational enterprises are those
which:

Have a world-wide view of production,

materials, components and final markets;
Have over 10% of sales, assets, earnings,
and employees abroad.

14

Large MNEs
Indicators:
Sales and Market Value,
Profits and Return on Shareholders
Equity, and
Worldwide stock market valuations.

15

The Decision to Become Global:

External Environment v. Internal Capabilities
Environmental ConstraintsDomestic:

Educational,
Sociological (Socioculteral),
Political/ Legal, and
Economic.

Environmental ConstraintsInternational:

May differ from domestic constraints

and mostly concerned with
nationalism

16

Firm Specific Advantages

Intangibles that provide a unique

firm advantage,
Examples include market-niche
capabilities and personnel
advantages.

17

Accounting Aspects
of International Business

Accounting requirements differ with each

successive stage of international
involvement,
For example, import-export stage would
require investigation of potential buyer or
seller for purposes of determining creditworthiness and capacity to perform.
Initial Issues may include: statements
written in foreign language, amounts in
foreign currencies, and information
produced using different standards.

18

Establishing an Internal
International Accounting Capability
Increased international involvement requires:

Internal accounting resources,

Creation of separate organization to handle international
trade, and
Creation of a foreign operation of some kind.

Degrees of Involvement:

International accounting knowledge may be necessary

even with no direct international business involvement
(I.e. company needs to borrow money or sell stock
internationally).

19

The Field of International Accounting

Increased need for accountants who understand the

international accounting environment,
International certification possibilities, and
Fascinating career opportunities.

20