1. Chapter 18: Issues in International Accounting Translation of foreign operations National accounting differences  Anglo-American model  Continental model Role of EU toward harmonization IASB and setting accounting standards

2. Relevant Terms Multinational or transnational corporation Crossborder financings Harmonization Convergence

3. Translation of Foreign Operations CAP issued two ARBs on the subject  4  43 APB issued APB Opinion No. 6 FASB has issued three SFASs  No. 1  No. 8  No. 52

4. Exchange Rate Between Currencies of Different Countries Assumed to be the result of two factors:  different nominal interest rates arising from differences in expected inflation rates occurring in different countries  the ratio of the relative prices of a common “market basket” of goods and services Instability in foreign exchange rates that has the potential to create large translation gains and losses

5. Approaches to Translation U.S. dollar orientation Foreign currency orientation

6. SFAS No. 8 Consistent with the U.S. $ orientation Temporal method of translation was required: all balance sheet items that were carried at current or future exchange prices Foreign currency exposure  Accounting exposure  Economic exposure

7. SFAS No. 52 May 1978, FASB requested comments from constituents regarding the first twelve SFASs  88% of the comments received requested that the board reconsider SFAS No. 8  primary complaints about SFAS No. 8: exchange gains and losses are reported, when from an economic viewpoint the reverse had occurred Adopts a functional currency orientation rather than a U.S. dollar orientation

8. SFAS No. 52 Net income is measured in the foreign currency and then restated into dollars at the average exchange rate for the period Balance sheet items are translated at the current exchange rate at the end of the period Objective is to avoid reporting  accounting exchange gains and losses when an economic gain or loss has not occurred  foreign-currency-denominated operations as if they had occurred in U.S. dollars

9. Functional Currency Determination Cash flow indicators Sales price indicators Sales market indicators Expense indicators Financing indicators Intercompany transactions and arrangements indicators

10. National Accounting Differences Anglo-American model Continental model

11. Anglo-American model USA United Kingdom Canada Australia New Zealand ASEAN Nations

12. Continental Model France Germany Japan

13. Accounting Differences between USA and Noncapital leases Partial income tax allocation LIFO not used Goodwill charged against SE Extensive capitalization of software development France United Kingdom UK and Australia UK Japan

14. Harmonization Material harmonization  also known as de facto harmonization  refers to harmonization among accounting practices of different enterprises whether or not stemming from regulations Formal harmonization  also called de jure harmonization  refers to the process or degree of harmonization present among the accounting rules or regulations of different countries or groups

15. European Union (EU) an important political grouping which brought, in its wake, an attempt to harmonize accounting standards and reporting Council of Ministers of the EU nations has issued several directives with important implications for accounting

16. EU Directives become binding upon the member countries contain some degree of flexibility and choice that is left to each member nation’s discretion

17. Fourth Directive from EU Adopted in 1978. Concerns basic issues of financial reporting that are applicable to companies within the EU community. In addition to providing standard formats for financial statements, the directive states that financial statements be based on four concepts:  Consistency  going concern  prudence, and  accrual accounting

18. Seventh Directive from EU passed in 1983 extends consolidation accounting to firms within the member states of the EU under a very wide group of circumstances where one firm has substantive control over one or more other firms

19. International Harmonization of Accounting Standards IASC IFAC European Union United Nations OECD IOSCO

20. International “Convergence” of Accounting Standards Work of harmonization, now being called convergence, continues. EU requires the use of IASB standards for consolidated financial statements by 2005 Foreign firms listed for trading on the NYSE may use either IASB standards without reconciliation or American GAAP

21. Chapter 18: Issues in International Accounting Translation of foreign operations National accounting differences  Anglo-American model  Continental model Role of EU toward convergence IASB and setting accounting standards