International Accounting Overview

International Accounting

• Four reasons for studying international accounting: historical, multinational, comparative, and harmonization reasons.

Contribution to Accounting Development

• Romans: Bookkeeping forms (not double-entry) and profit calculation.
• Italy: Double-entry bookkeeping (13th-15th centuries), Luca Pacioli's Summa de Arithmetica, and Italian origins of bank, capital, cash, debit, credit, and journal terms.
• Britain and United States: 19th-century Britain emphasized true and fair view in accounting; establishment of accounting bodies (ICAEW, ACCA); English as a global accounting language; US Management Accounting (Activity-Based Costing).
• Japan: 20th-century focus on management accounting, standard costing, and Just-In-Time (JIT) to reduce storage costs.

Multinational Enterprises (MNEs)

• MNEs produce goods/services in two or more countries.
• Reasons for this: lower transportation costs, trade barriers, resource seeking, market seeking, distribution system establishment, reputation.
• Financial capital raising in one country for investment elsewhere.
• Consolidation of financial statements, translation of currencies, transfer of accounting technology to various countries, and financial expertise building across multiple countries.

Factors of Differences in Accounting Systems

• External Environment and Culture:
  • Individualism vs. Collectivism: Loosely-knit social frameworks (e.g., USA) versus tightly-knit ones (e.g., Europe).
  • Large vs. Small Power Distance: Large power distance societies accept hierarchical order (e.g., Mexico); small ones strive to equalize power distribution (e.g., Austria).
  • Strong vs. Weak Uncertainty Avoidance: Strong avoidance societies demand uniformity and tolerate deviance less readily (e.g., Greece); weak ones have less structure (e.g, Norway).
  • Masculinity vs. Femininity: Masculinity emphasizes emotional roles; femininity prioritizes quality of life.

Authority & Enforcement

• Professionalism vs. Statutory Control: High professionalism correlates with self-regulation and decreased need for government intervention.
• Uniformity vs. Flexibility: Uniformity relates to accounting plans and imposition of tax rules (Strong Uncertainty Avoidance & Large Power Distance) (e.g., France); Flexibility reflects a less rigid approach (e.g., UK).
• Measurement & Disclosure: Conservatism (e.g., France) versus optimism (e.g., UK, USA) in evaluating risk; adherence to traditional practices or openness to new ones. Secrecy versus transparency.

Legal Systems

• Common Law (Case Law): Relies on precedent and court interpretations of rules, as opposed to statute law. (e.g., England/Wales, USA).
• Roman Law: Rules are intertwined with morality and linked to justice via legislation (e.g., France, Germany).

Providers of Finance

• Capital financing from banks and families (Germany, France, Italy) vs. shareholders (UK, USA, Netherlands).

Taxation

• Accounting rules are bound to tax rules in some countries (France, Germany, Turkey) while others (UK, USA) demonstrate separate rule-sets.
• Financial statements are considered as performance indicators for investments in Anglo-Saxon countries (e.g. UK), while in continental Europe (e.g., France) they are more tied to taxation.

The Profession

• Impact of the size of the accounting profession (and public companies) on demand for skilled and reliable auditors.

Other Factors

• Inflation: High inflation mandates the use of price-level adjustment models for asset valuation. (Affects asset valuation methods).
• External Factors: Company ownership, economic crises, and EU requirements influence financial reporting practices.

Major International Differences in Financial Reporting

• Fairness: Correctness, legality, and adherence to the Substance over Form.
• Conservatism and Accruals: Conservative tendencies reduce the reporting of profits and include provisions for bad debts or potential losses.
• Provisions and Reserves: Allowances, liabilities, and business reserves (in various countries), and their handling.
• Valuation Bases: Historical cost vs. current costs or revaluations in different contexts. (Germany, UK, France, Spain, Netherlands.

Consolidation

• Combining subsidiary company financial results into the parent company's reports.
• Balance Sheet (vertical or report form, assets and liabilities on left/right or single page).
• Balance Sheet and Income Statement (By-Nature and By-Function formats).

Uniformity and Accounting Plans

• Various countries have accounting plans adopted for particular industries.
• Legal rules that mandate a degree of uniformity across business operations.
• Hedging against foreign currency fluctuations (foreign currency options, and forward contracts).

Transfer Pricing

• The pricing of goods and services exchanged between different divisions of a company or related firms.
• Impacts profitability.

Harmonization vs. Convergence

• Harmonization seeks consistency within legal standards, while convergence aims for a single standard, such as IFRS (International Financial Reporting Standards).
• Significant global differences exist in accounting standards.
• IFRS emerged from the IASB in 2001 (previous IASs) and is now common amongst businesses across the globe.
• IFRS are preferred over IASs in a conflictual situation.

Standards (IAS/IFRS)

• IFRS Framework: Provides guidance for financial statements and assists with sound decisions.
• IAS 1 - Presenting financial statements (accrual accounting; going concern concept; fair presentation; materiality and comparability).
• IAS 2 - Inventories (cost or net realizable value (NRV); FIFO, average-cost, or weighted-average).
• IAS 7 - Statement of cash flows; classifying cash flow transactions into operating, investing, and financial activities.
• IAS 8 - Accounting policies and changes to those; retrospection or prospectiveness, correcting errors of previous periods. Retrospective approach is generally preferred.
• IAS 16 - Property, Plant, and Equipment (tangible fixed assets, costing principle, depreciation; straight-line, diminishing balance).
• IAS 36 - Impairment of assets; assets with carrying amounts higher than recoverable amounts undergo impairment valuation.
• IAS 23 - Borrowing costs (direct and indirect borrowing costs)
• IAS 38 - Intangible assets (e.g., copyrights, research, patents, marketing).
• Recoverable/Irrecoverable taxes: taxes that are included/excluded in the cost.