Introduction International Accounting

In this ppt i have given Introduction International Accounting which covers approaches in international accounting, importance of ia, introduction international accounting.
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1. INTRODUCTION TO INTERNATIONAL ACCAOUNTING SUNDARA B. N. ASSISTANT PROFESSOR

2. The purpose of accounting is to provide information that is useful for making business and other economic decisions. For this reason, accounting is commonly referred to as the language of business. The important categories of information contained in accounting are operating information, financial accounting information, management accounting information and tax accounting information.

3. Since countries have their own set of socio-economic, political, legal, cultural, technological and linguistic environment, financial reporting diversities are quite eminent. With diverse financial reports in hand, decision makers find it difficult to make effective decisions. To overcome this difficulty and to have a more uniform and harmonized financial reporting across the globe, the concept of INTERNATIONAL ACCOUNTING has gained momentum.

4. International accounting is nothing but 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, performance evaluation of foreign subsidiaries.

5. An understanding of the international dimension of the accounting processes that were just described is important to those seeking to manage a business or obtain or supply of financing across notional borders. A ccounting amounts may vary significantly according to the principles that govern them. Differences in culture, business practices, political and regulatory structures, legal systems, currency values, local inflation rates, business risks, and tax codes all affect how the MNC conducts its operations and financial reporting around the World. Financial statements and others disclosures are impossible to understand without an awareness of the underlying Accounting Principles and business culture.

6. Definition of International Accounting: “International accounting would involve accounting for international transactions, the operational aspects of international firms, comparison of accounting principles and practices found in foreign countries and the procedures by which they were established”. “International accounting is that branch of accounting which analyses the different accounting principles and practices prevalent around the globe, deals with the specific technical problems encountered by individuals and MNCs in international operations and as its ultimate goal, attempts to develop a universal system of accounting that would receive acceptance the world over”.

7. International accounting may thus be defined as that “branch of accounting which deals with the recording and translation of foreign transactions, preparation and presentation of consolidated foreign financial statements and presentation of international financial reporting in accordance with international GAAP and auditing practices”.

8. Importance of International Accounting: It facilitates achieving harmonization of accounting practices across nations. It helps in reaching out to global investors. It helps in taking informed decisions. It helps in mobilizing global resources It helps in establishing uniformity in global financial reporting and disclosure practices It helps in the professionalization of accounting education world over. It helps in inculcating ethics and transparency into accounting practices.

9. Approaches to International Accounting: Universal or world Accounting Comparative International Accounting Pragmatic or operational international Accounting Politicized International Accounting

10. Development of International Accounting: The factors, which have contributed towards the development of international accounting, are: Expansion of world trade Emergence of multinational corporations Increase in international flow of capital Historical evolution of accounting Need for harmonization of accounting practices

11. Scope of International Accounting: The scope of International accounting has been justified with 3 concepts: A. Financial Accounting B. Management Accounting C. Social and Allied Accounting activities

12. A. Financial Accounting: 1. Recording of foreign transactions 2. Foreign currency translation 3. Accounting for foreign inflation 4. Consolidation of foreign financial statements 5. Segment and Interim reporting

13. 1. Recording of foreign transactions: International accounting essentially begins with the recording of foreign transactions. A transaction, in relation to importing, exporting, foreign borrowings and lending, and forward contracts, taking place between parties belonging to two different countries, is said to be an international or foreign transactions. As far as recording foreign transactions is concerned, two approaches i.e., single transaction approach and the dual transaction approach are found to be popular. The dates of the transaction such as a) The initial transaction date b) The interim reporting date c) The settlement date

14. 2. Foreign Currency Translation: Foreign currency translation means, converting the financial figures which is one country’s currency to other country's currency. Foreign currency translations refers to the change in the monetary expression of the financial data contained in the financial statements. Ex. Figures of the balance sheet and income statement expressed in rupees when restated in dollar equivalent or in other similar foreign currency. Issues or steps involved in FCT: Recognition and recording of foreign currency transactions Recording of forward exchange contracts Translation of foreign currencies Understanding the international GAAP on foreign currency translation.

15. 3. Accounting for foreign inflation: Price level changes refer to the increase or decrease in the purchasing power of money. Purchasing power, in turn, refers to the ability of a given sum of money to buy a certain amount of goods or services now in comparison to what the same of money could have bought at a previous date.

16. 4. Consolidation of Foreign Financial Statements : consolidated refers to the preparation and presentation of ‘integrated financial statements’, popularly known as consolidated statements. By incorporation the financial data of the subsidiary, to the extent of the controlling interest, in the financial statement of the parent company with a view to giving the stakeholders information as regards the economic resources being controlled by the group.

17. 5. Segment and Interim Reporting: Segment reporting refers to the reporting of financial information in relation to different business activities of the firm classified as business segment or geographical segment. Interim reporting refers to the presentation of financial statements of the enterprise covering periods of less than a full financial year. The purpose of such presentation of financial statements is to provide the decision makers with frequent and timely information for taking investment and credit decisions, based on their ability to predict full year’s financial results from the interim results.

18. B. Management Accounting 1. Analysis of foreign financial statements 2. Multinational transfer pricing 3. Budgeting and performance evaluation of foreign subsidiaries 4. Management of foreign exchange risk 5. International taxation

19. 1. Analysis of Foreign Financial Statements : Financial statement analysis refers to an information processing system that is meant for providing financial data which are appropriate and useful to decision makers who are concerned with evaluating the economic situation of the firm and predicting its future course. Techniques of financial statement analysis: a) Economic Value Added (EVA) b) Market Value Added (MVA) c) Multiple Discriminate Analysis (MDA)

20. 2.Multinational Transfer Pricing: Transfer pricing relates to the pricing of goods and services that change hands between entities engaged in inter firm trade. Transfer price is the price at which goods or services are transferred between affiliated entities within an organization. Objectives of Transfer Pricing: Appropriate evaluation of segment with management performance Avoidance of foreign currency restrictions and quotas Minimization of taxed and tariffs Minimization of exchange risks Avoidance of profit repatriation restrictions Enhancement of shares of profits in joint ventures

21. 3.Budgeting and performance evaluation of foreign subsidiaries : Firms use budgeting and performance evaluation as tools for strategic planning and control. For multinational corporations, it is essential that these budgeting and performance evaluation tools are chosen appropriately so as to fit to the environment of the countries of their own domicile and also of the foreign countries.

22. 4. Management of Foreign Exchange Risk: Exchange risk management aims at monitoring and managing the firm’s foreign exchange exposure so as to maximize its profitability, cash flow and market value. Foreign exchange exposure primarily assumes three forms: a) Translation exposure b) Transaction exposure c) Economic exposure

23. a) Translation exposure: The potential of an increase or decrease in the parent company’s net worth and reported net income due to fluctuations in the exchange rates. It arises from Buying and selling on credit goods or services whose prices are contractually denominated in foreign currency, Borrowing and lending funds in foreign currency, Forward exchange contracts, Acquisition or disposal of assets denominated in foreign currency, settlement of liabilities denominated in foreign currency. b) Transaction exposure: . In contrast, transaction exposure arises due to the sensitivity of the firm’s contractual cash flows denominated in foreign currency to exchange rate fluctuations. c) Economic exposure: It refers to the extent to which the value of the firm would be impacted by unexpected changes in the exchange rates. The managerial efforts to manage economic exposure would be to formulate long term strategies so as to enhance and preserve its value in the event of unexpected exchange rate fluctuations.

24. 5. International Taxation: International taxation is a complex phenomenon that affects all the aspects of multinational operations including foreign investments, transfer pricing, marketing of product and services, cost of capital and capital structure. It is therefore imperative for multinational corporations in particular to understand the diversities that exist in relation to corporate tax laws in different countries for better tax planning and decision making.

25. C. SOCIAL AND ALLIED ACCOUNTING POLICIES Accounting for newer financial instruments Global joint venture Environmental disclosures Social disclosure

26. 1. Accounting for newer financial instruments: IAS 39 a derivative is a financial instrument, by classifying option, swap, future and forward. 2. Global joint venture: IAS 31 deals with the accounting procedure of investments in joint ventures, by classifying jointly controlled operations, jointly controlled assets, and jointly controlled entities. 3. Environmental disclosures: Environmental disclosures by companies have increasingly become a matter of interest not only to the environmentalists but also to stakeholders like the investors, employees, customers, regulatory agencies and the society at large. 4. Social disclosure: Social disclosure primarily aims at informing general public about the social welfare measures taken by the firm and their effects on the society.