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International accounting M.

com semester 4
Presented Click to edit Master subtitle style By Ashish Siddiqui, Assistant professor, Sanskriti School of Business, AICTE Approved

3/25/12

compiled by Ashish

Introduction
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Most accounting students are familiar with financial accounting and managerial accounting, but many have only a vague idea of what international accounting is. Defined broadly, the accounting in international accounting encompasses the functional areas of financial accounting, managerial accounting, auditing, taxation, and accounting information systems. The word international in international accounting can be defined at three different

levels.1 The first level is supranational accounting, which denotes standards, guidelines, and rules of accounting, auditing, and taxation issued by supranational organizations. Such organizations include the United Nations, the Organization for Economic Cooperation and Development, and the International Federation of Accountants
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Introduction cont..
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At the second level,

The company level, 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
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At the third and broadest level, international accounting can be viewed as the study of the standards, guidelines, and rules of accounting, auditing, and taxation that exist within each country as well as comparison of those items across countries. Examples would be cross-country comparisons of (1) rules related to the financial reporting of plant, property, and equipment; (2) income and other tax rates; and (3) the requirements for becoming a member of the national accounting profession.
3/25/12 compiled by Ashish

INTERNATIONAL ACCOUNTING DEFINITION

INTERNATIONAL ACCOUNTING is the international aspects of accounting, including such matters as accounting principles and reporting practices in different countries and their classification; patterns of accounting development; international and regional harmonization, foreign currency translation; foreign exchange risk; international comparisons of consolidation accounting and inflation accounting; accounting in developing countries; accounting in communist countries; performance evaluation of foreign subsidiaries.

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compiled by Ashish

Importance of of International Accounting


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Emergence of globalization, growth of multinational corporation, development of world trade, Internationalization of capital markets, Expansion of European union All these have emphasized the importance of International accounting recent years. Emergence of MNC: Emergence of MNC on the international scne is one of the most important factors that has increased importance of international accounting. MNC contribution is 1/3rd of the world exports and also the contribution to the world GDP is Approx 10 %.. The efforts that accountant has to put in preparing consolidation of financial statements if accounts all around the world are prepared on uniform basis. Development of world trade: In recent times international trade has increased to enormous figure and these lead to setting the transfer pricing for sale or transfer of raw materials between two international units

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compiled by Ashish

Importance of of International Accounting

Expansion of European union

European union has come long way now a political and economic union of 27 independent sovereign states. This growth in size has also increased the EU economic dominance .The combined EU generates an estimated 30% share of worlds nominal GDP later to implement financial reporting strategy adopted the international; financial reporting standard and insisted companies registered on regulated to prepare consolidated financial statements on the international reporting standard

Internationalization of capital markets: There has been

tremendous increase in cross border financial transaction in the recent decade of two which has given rise to international capital market. The estimated value of the worlds outstanding bonds equities and banking assets stood at whooping USD 190 trillion at the end of 2006. All these development has given rise to application of international accounting.
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Scope of International Accounting


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it covers a comparative study of financial accounting practices and principles in important countries of the world and similarities and diversities prevailing therein. Financial accounting coverage extends to problems foreign currency transactions and translation ,accounting foreign inflation and consolidated financial reporting and its disclosure, segment reporting and preparation of multi financial reporting. The management accounting coverage includes muitinational transfer, budgeting , forex risk management ,performance evaluation of foreign subsidiaries, foreign investment analysis ,international taxation. Analysis of new financial market issues and their managmetn through international derivative products. Derivative accounting ,global corporate governance, environmental accounting , integration of ethics and global joint ventures etc

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compiled by Ashish

NEED FOR TRANSNATIONAL REPORTING AND DISCLOSURE The expanding horizon of business activity in recent years particularly as a
consequences of opening up of economies has resulted in expansion in world trade. Rapid growth in international capital market Increase of cross border merger and acquisition Predominance of MNC Reporting to existing and new investors spread world wide. Companies entering in to foreign capital market to list their securities in to foreign stock exchanges. Submission of reports as per requirement of foreign securities exchanges.

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compiled by Ashish

Transnational reporting -complexities


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Reporting financial statements across he border is not an easy task it requires lot of efforts and cost. Some of the complexities encountered during transnational reporting are as follows; Language and currency Accounting principles Disclosure requirement Audit requirement

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compiled by Ashish

Transnational reporting -complexities

Language and currency

An enterprise would generally prepare its financial reporting in the language that its local investors would understand for eg a Japanese company would prepare its financial statement in Japanese language and similarly in India few would like to have a translated version of non-indian companies financial statement in Hindi script. In short local investors would find difficult to understand financial statement of other countrys companies. Similarly a companies listed on as stock exchanges which have different language than the companies reporting have to send translated version of their financial statement reports. In the same way reporting companies also finds difficulties since every has unique currency.

3/25/12

compiled by Ashish

Transnational reporting -complexities

Accounting principles

The more serious problem the reporting company faces is in contemplating the accounting principles of the another country. For eg indian company would prepare its financial statement in accordance ti indian coimpanies act 1956 and in accordance Indian GAAP. Therefore U.S investors would find difficult to understand further certain information would be lacking as required by US GAAP.

3/25/12

compiled by Ashish

Transnational reporting -complexities

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 up with different disclosure requirement .

3/25/12

compiled by Ashish

Transnational reporting -complexities

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 requirement of international standards of auditing.

3/25/12

compiled by Ashish