1. Chapter 12 International Accounting PowerPoint Presentation by Matthew Tilling ©2012 John Wiley & Sons Australia Ltd

2. DEFINITION OF INTERNATIONAL ACCOUNTING International accounting refers to a description or comparison of accounting in different countries and the accounting dimensions of international transactions.

3. DEFINITION OF INTERNATIONAL ACCOUNTING Can be defined at three levels: 1.Supranational, universal or world accounting 2.The company level standards, guidelines and practices that companies follow relating to their international business activities and accounting for foreign subsidiaries; and 3.Comparative or international accounting.

4. DIVERSITY OF INTERNATIONAL ACCOUNTING PRACTICE Variation in accounting requirements can result in significant differences being recorded in company accounts when they are required to report under the rules of different jurisdictions. While there have been some moves to harmonise accounting practices globally, there are still a number of environmental and cultural factors which are likely to lead to diversity in accounting practices around the world.

5. ENVIRONMENTAL INFLUENCES ON ACCOUNTING

6. In some countries financial reports are used to directly determine an entity’s tax liabilities. – This leads to variations in accounting policy choice even when the same standards are used. Sources of finance differ across countries. – Major sources of finance may be banks, government, families and shareholders. – This leads to a difference in financial statement orientation

7. ENVIRONMENTAL INFLUENCES ON ACCOUNTING Different countries will have different – Political philosophies and objectives – Levels of economic growth and development – Economic systems – Legal systems Codified or civil law Common law All of which will influence accounting practice.

8. Cultural Impact on Accounting Practice Hofstede’s identified five cultural dimensions that could be used to describe general characteristics of cultures around the world 1.Individualism versus collectivism 2.Large versus small power distance 3.Strong versus weak uncertainty avoidance 4.Masculinity versus femininity 5.Long-term versus short-term orientation

9. Cultural Impact on Accounting Practice Gray adapted Hofstede’s categories to identify four accounting values 1.Professionalism versus statutory control 2.Uniformity versus flexibility 3.Conservatism versus optimism 4.Secrecy versus transparency

10. Religion and How it Affects Accounting Practice Religion is often seen as a subset of culture. – It can have a significant effect on business practice For example in Islam – Islamic law regulates all aspects of life. – In addition certain Islamic economic and financial principles have a direct impact on accounting practices. Particularly Requirement for zakat (a religious levy) Prohibition on riba (usury)

11. INTERNATIONAL ADOPTION OF IFRSs Worldwide accounting diversity creates challenges for international business operations and investment. – It is costly for multinational enterprises to restate their accounts to meet the requirements of every jurisdiction in which they report – Investors also incur costs in comparing results of companies when their financial reports are prepared using different rules. There has been a growing demand for international accounting standards.

12. Harmonisation, Convergence and Adoption - What’s the Difference? An number of approaches have been taken to bring about adoption of international accounting – Harmonisation implies reconciling different points of view and reducing diversity, while allowing countries to have different sets of accounting standards. – Convergence A process that takes place over time, implies the adoption of one set of standards across the globe.

13. Benefits of IFRS Adoption The adoption of IFRS provides a number of benefits including: – Providing a cost-effective way to institute a comprehensive system of accounting standards. Especially for developing countries. – Enhanced the operation and globalisation of capital markets. – Reduced costs for financial report preparation. – Transportable accounting skills

14. Limitations of IFRS adoption The adoption of IFRS may have limitations primarily concerning differences in business, financial and accounting culture from one country to another. Certain standards and requirements may not reflect local situations. E.g. – Consolidation standards – Fair value rules – Implicit interest rate requirements

15. Adoption of IFRSs Around the World Table 12.1 lists a selection of IFRS users around the globe. Jurisdictions will have differing degrees of convergence with IFRSs. Nobes suggests that the factors that have previously been associated with international differences in accounting still can be used to explain differences in IFRS adoption practices across jurisdictions.

16. Use of IFRSs All EU listed companies are required to adopt IFRSs for reporting purposes. Publicly accountable Canadian entities are required to apply IFRSs. The countries of South America are in various stages of the adoption process. Asian jurisdictions take a range of approaches to IFRS adoption.

17. Use of IFRSs Though widely adopted questions have been raised about whether adoption leads to convergence. It has been pointed out that standards developed by the IASB are primarily aimed at countries with highly developed capital markets, and it can be questioned whether the resulting standards are optimal for developing and transitional economies that lack the infrastructure to monitor financial reporting decisions.

18. FASB AND IASB CONVERGENCE IFRS cannot be considered truly global until adopted by the United States. This has not happened to date. The key issue that has stood in the way of convergence is that IASB standards are ‘principles-based’, while the FASB have previously taken a ‘rules-based’ approach to standard setting.

19. FASB AND IASB CONVERGENCE Since 2002 efforts have been made to harmonise IFRS and FASB standards. At various times it has looked more or less likely that convergence would be achieved. At present there appears to be significant resistance to the adoption of certain IFRS standards in the US including – Accounting for Leases – Accounting for Income Tax

20. MULTINATIONAL ORGANISATIONS Multinational enterprises are particularly affected by the range of environmental factors and accounting systems in the different countries in which they operate. They tend to be larger and have more complex business operations than their domestic counterparts. There are particular issues around – Organisational culture – Intra-entity transactions – Transfer pricing

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