Accounting in International Business

Accounting information and capital flows

Need for Accounting Information

Enables providers of capital to
access the value of their investment Access security of their loan Make decisions about future resource allocation

Tax assessment Performance evaluation of the firm ontrol internal expenditure Planning for future expenditure and

!eterminants of national accounting standards

"elationship between business and providers of capital

Three external sources of capital#
Individual investors
$uying shares and bonds

$anks%
&oan capital

'overnment
Make loans or investment

"elationship between business and providers of capital # Individual investors E%g in () and (*
individual investors and ma+or source of capital stock and bond market purchase small proportion of stocks and bonds No desire to be involved in day to day management of firms &ack the ability to get information on demand from management ,inancial accounting system provide information re-uired by small investors to

"elationship between business and providers of capital # $anks%

E%g )wit.erland/ 'ermany and 0apan
$anks satisfy most of capital needs $ank officials on board of firms Information need satisfied through personal contacts/ direct visit/ board meetings "eports for public disclosure of financial information Assets and valued conservatively/ and liabilities are overvalued to provide cushion for banks

"elationship between business and providers of capital # 'overnment

E%g ,rance and )weden
'overnment ma+or providers of capital ,inancial information oriented towards need of government planners

Political and economic ties with other countries

Accounting convergence due to close political and economic ties between countries
() system influenced accounting practices in anada and Mexico # NA,TA ,ormer colonies of $ritish Empire follow $ritish system European (nion attempting to harmoni.e accounting practices in its member countries

Inflation accounting
1istoric cost principle:
Assumes currency is not losing value to inflation Most significant impact in the area of asset valuation urrent cost accounting: ,actors out inflation (sed in 'reat $ritain until inflation rate declined

&evel of development
!eveloped countries have more sophisticated accounting procedures
Accounting problems are more complex )ophisticated capital markets &enders re-uire comprehensive reports Educated workforce can perform complex accounting functions

ulture
1ofstede2s uncertainty avoidance has an impact on accounting systems
&ow uncertainty avoidance 3 these countries tend to have strong independent auditing professions that ensure a firm2s compliance with rules

Accounting clusters
,ew countries have identical accounting systems% )imilarities exist in clusters

Accounting clusters

$ritish3American3!utch 'roup ,irms raise capital from

investors% Accounting systems designed to inform investors
South American Group ountries have experienced persistent and rapid inflation% Accounting principles reflect the inflation%

Europe-Japan Group 1ave close ties to banks% Accounting practices meet bank2s needs%

National and international standards

!iverse accounting practices are enshrined in national accounting and auditing standards Accounting standards# "ules for preparing financial statements Auditing standards# )pecify rules for performing an audit

&ack of comparability
4ne result of national differences in auditing and accounting standards is lack of comparability of financial reports
!utch 5 current values for replacement assets 5 0apan 5 prescribes historic cost 'ermany 5 depreciation is liability/ $ritain 5 depreciation is deducted from assets

&ack of comparability
6ith growth of global capital markets both transnational financing and transnational investment have grown ,irm has to explain to investors why its financial position looks different in two accountings

International standards
Efforts to harmoni.e accounting standards across countries ,ormation of International Accounting )tandards $oard in March 7889 Members represent :; countries "esponsible for formulating international accounting standards <IA)= 1as issued over >8 IA)
!ifficult to get re-uisite votes ?oluntary compliance

"ecognition is growing

Accounting aspects of control systems

Annual control process involves three steps#
1ead office and subunit management +ointly determine subunit goals for the coming year% Throughout year/ head office monitors subunit performance against agreed goals% If subunit fails to achieve goals/ head office intervenes to determine why the shortfall occurred/ taking corrective action when appropriate%

Exchange rate combinations in the control process

,ig9;% >

Accounting aspects of control systems

&essard3 &orange Model#
Three exchange rates used to translate foreign currency into corporate currency for budget and performance purposes%
The initial rate/ the spot exchange rate when the budget is adopted% The pro+ected rate/ the spot exchange forecast for the end of budget period <i%e%/ the forward rate= The ending rate/ the spot exchange rate when the budget and performance are being compared%

Transfer pricing and control systems

Transfer prices introduce significant distortions into the control process Transfer price must be taken into account when setting budgets and evaluating a subsidiary2s performance%

)eparation of subsidiary and manager performance

?aluation of a subsidiary should be separate from the evaluation of the subsidiary manager Manager2s evaluation should take into consideration how hostile or benign the countries environment is for business and make allowances over items the manager has no control e%g% inflation rates/ interest rates exchange rates