Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-1 International Business Environments & Operations 14e Daniels ● Radebaugh ● Sullivan

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-2 Chapter 18 International Accounting Issues

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-3 Learning Objectives  To examine the major factors influencing the development of accounting practices in different countries  To examine the global convergence of accounting standards  To explain how companies account for foreign-currency transactions and translate foreign-currency financial statements  To discuss different forms of performance evaluation of foreign operations and how foreign exchange can complicate the budget process  To explain how arbitrary transfer pricing can complicate performance evaluation and control  To introduce the balanced scorecard as an approach to evaluating performance

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-4 Introduction  Accounting provides information used by CFOs to make decisions  Accounting and finance rely on each other to fulfill their responsibilities

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-5 The Crossroads of Accounting and Finance What the Controller Controls

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-6 Accounting for International Differences  Financial statements differ by country Form Content Terminology

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-7 Accounting Objectives  The Financial Accounting Standards Board (FASB) establishes accounting standards in the United States  The International Accounting Standards Board (IASB) sets accounting standards for the broader global community

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-8 Accounting Objectives Who Uses Accounting Information?

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 18-9 Factors in International Accounting Practices Learning Objective 1: To examine the major factors influencing the development of accounting practices in different countries

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Factors in International Accounting Practices Sources of Influence on Accounting

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Cultural Differences in Accounting A Disclosure/Assessment Matrix for National Accounting Systems

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Cultural Differences in Accounting  Greater involvement in capital markets leads to a shift towards greater use of standards and practices according to U.S. Generally Accepted Accounting Principles (GAAP) International Financial Reporting Standards (IFRS)

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Classifying Accounting Systems Weak vs. Strong Equity Markets and the Influence on Accounting Standards

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall From Micro-Uniform to Micro-Based Systems  Macro uniform accounting system Government influenced  Japan, Germany, China, France  Micro based system Pragmatic business practices  The U.S., Mexico, Canada, Australia

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Strong vs. Weak Equity Markets  Strong equity markets vs. weak equity markets Movement towards strong Transition towards IFRS

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Differences in Financial Statements  The financial statements of one country differ from those of another by Language Currency Statement type Underlying GAAP on which the statements are based

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Differences in Financial Statements  Dealing with accounting and reporting differences Mutual recognition Reconciliation to local GAAP Recasting of financial statements in terms of local GAAP

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall International Standards and Global Convergence Learning Objective 2: To examine the global convergence of accounting standards

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall International Standards and Global Convergence  Forces leading to global convergence Investor orientation Global integration of capital markets MNE’s need for foreign capital Regional political and economic harmonization MNE’s desire to reduce accounting and reporting costs Convergence efforts of standards-setting bodies

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall The First Steps in Convergence  International Organization of Securities Commissions (IOSCO) regulators of most of the world stock markets endorses IASB

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall The International Accounting Standards Board  FASB and IASB are working to achieve a convergence of accounting standards  The process has been slowed by the credit crisis and global recession the new SEC chairman who is less committed to the process

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Transactions in Foreign Currencies Learning Objective 3: To explain how companies account for foreign-currency transactions and translate foreign-currency financial statements

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Transactions in Foreign Currencies  Recording transactions exchange rate losses and gains reported on the income statement at the end of the accounting period FASB Statement 52 is used in the U.S.

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Translating Foreign Currency Financial Statements  Translation the process of restating foreign currency financial statements into U.S. dollars  Consolidation the combination of translated financial statements into one

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Translating Foreign Currency Financial Statements  Translation methods Current rate  applies when the local currency is the functional currency Temporal rate  applies when the parent’s reporting currency is the functional currency

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Management Accounting Issues Learning Objective 4: To discuss different forms of performance evaluation of foreign operations and how foreign exchange can complicate the budget process

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Management Accounting Issues  MNEs must consider Performance evaluation and control The impact of transfer pricing on performance evaluation Using the balanced scorecard

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Performance Evaluation and Control Exchange Rates and the Budget

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Performance Evaluation and Control Exchange Rates and the British MNE Budget

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Transfer Pricing and Performance Evaluation Learning Objective 5: To explain how arbitrary transfer pricing can complicate performance evaluation and control

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Transfer Pricing and Performance Evaluation  Transfer pricing the pricing of goods and services that are transferred between members of a corporate family

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Transfer Pricing and Performance Evaluation Factors Influencing High and Low Transfer Prices

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall The Balanced Scorecard Learning Objective 6: To introduce the balanced scorecard as an approach to evaluating performance

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall The Balanced Scorecard  The balanced scorecard endeavors to link more closely the strategic and financial perspectives of a firm and takes a broad view of business performance

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Corporate Governance  Corporate governance refers to the combination of external and internal mechanisms implemented to safeguard the assets of a company and protect the rights of shareholders  External control mechanisms  Sarbanes-Oxley  Internal control mechanisms  Management and ownership structures

Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall Will IFRS Become the Global Accounting Standard?  IFRS is modeled after the capital market orientation of the U.K. and the U.S. More companies are choosing to list on the European stock markets Sarbanes-Oxley Act 2002

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