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

Relevant Terms

Multinational or transnational corporationCrossborder financingsHarmonizationConvergence

Translation of Foreign Operations

CAP issued two ARBs on the subject443

APB issued APB Opinion No. 6 FASB has issued three SFASs No. 1No. 8No. 52

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

Approaches to Translation

U.S. dollar orientation

Foreign currency orientation

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

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

SFAS No. 52

Net income is measured in the foreign currency and then restated into dollars at the average exchange rate for the periodBalance sheet items are translated at the current exchange rate at the end of the periodObjective 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

Functional Currency Determination

Cash flow indicators

Sales price indicators

Sales market indicators

Expense indicators

Financing indicators

Intercompany transactions and arrangements indicators

National Accounting Differences

Anglo-American model

Continental model

Anglo-American model

USA United Kingdom Canada Australia New ZealandASEAN Nations

Continental Model

France

Germany

Japan

Accounting Differences between USA and

Noncapital leasesPartial income tax allocationLIFO not usedGoodwill charged against SEExtensive capitalization of software development

FranceUnited Kingdom

UK and AustraliaUK

Japan

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

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

EU Directives

become binding upon the member countries

contain some degree of flexibility and choice that is left to each member nation’s discretion

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

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

International Harmonization of Accounting Standards

IASC IFAC European Union United Nations OECD IOSCO

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

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