IA04E01 - INTERNATIONAL ACCOUNTING –– Elective Course

Semester IV Credit – 3
Module – 1
International Accounting – An overview – Introduction – Importance of IA – Scope of IA – Analytical
study of I.F.R.S – Need for Transnational Reporting and Disclosure - Transnational Reporting – The
complexities of Reporting Practices

INTERNATIONAL ACCOUNTING
The disciple of accounting, which originated merely as an art of recording activity has passed
through different phases of refinement. Accounting has become a full fledged information system
which provides financial information to internal as well as external users. Accounting not only fulfils
queries of managerial personnels, but also assists them in taking day to day operational decisions.
With the coming up of multinational companies , expansion of foreign trade, internet tradings,
emergence of e-commerce on global scenario, the accounting professionals throughout the world
have recognized the international dimensions of accounting discipline. The current trends in the
global economy are now interpreted by using concepts such as internationalization and liberalization
in view of global economy. These concepts of globalization , liberalization and competition are likely
to remain the rules of the international economy for many years to come.
Emergence of globalization, growth of Multinational Corporations, development of world trade,
Internationalization of capital markets, expansion of European Union, have led to the increased
emphasis on International Accounting in recent years.
Aristotle, has written that “if you would understand anything, understand its beginnings and
development.” So therefore, it will be appropriate to have historical look back on emergence of
international accounting. The importance of international accounting can be attributed to its past
developments. Accounting as we find it today , is the result of combined efforts of number of different
nations. Italy is considered as the birth place of modern accounting. Double entry system originated in
Italy and spreaded to other European countries. English people, in 18th century became instrumental
to play an important role in transferring accounting and auditing not only to the USA but also to other
countries. However in the beginning of 20th century, situation was totally changed . USA emerged as
a super power not only in the field of political developments but also in the developments of
accounting theory and practices.
 USA is also dominating throughout the whole world in the development of accounting
literature. American institutes like AAA and AICPA are playing an important role in spreading US
accounting thought and practices to the European countries. So, it can be concluded that accounting
has always been international from the time of its origin in Italy.
“Modern accounting is not the invention of one country; it has always been international in its
scope.” - Parker
“That set of accounting and auditing standards which could be accepted internationally” –
Jennings
Most accounting students are familiar with financial accounting and managerial
accounting, but many have only a vague idea of what international accounting is. Defined broadly, the
accounting in international accounting encompasses the functional areas of financial accounting,
managerial accounting, auditing, taxation, and accounting information systems.
The word international in international accounting can be defined at three different levels.
1. The first level is supranational accounting, which denotes standards, guidelines, and rules of
accounting, auditing, and taxation issued by
Supranational organizations. Such organizations include the United Nations, the
Organization for Economic Cooperation and Development, and the International
Federation of Accountants.
2. At the second level, the company level, international accounting can be viewed
in terms of the standards, guidelines, and practices that a company follows
related to its international business activities and foreign investments. These
would include standards for accounting for transactions denominated in a foreign
currency and techniques for evaluating the performance of foreign operations.
3. At the third and broadest level, international accounting can be viewed as the
study of the standards, guidelines, and rules of accounting, auditing, and taxation
that exist within each country as well as comparison of those items across
countries. Examples would be cross-country comparisons of (a) rules related to
the financial reporting of plant, property, and equipment; (b) income and other tax
rates; and (c) the requirements for becoming a member of the national
accounting profession.
 Clearly, international accounting encompasses an enormous amount of
territory— both geographically and topically. It is not feasible or desirable to cover
the entire discipline in one course. In twenty-five years, international accounting, as G.
Mueller1 states, has outgrown its childhood and adolescence to become a young adult, and its
growth is reflected in the large quantity of accounting literature in the sphere. At the end of the
twentieth century, a period shaped by the forces of global competition, operating, financing, and
investing decisions are colored by their international implications. As many of these
decisions are premised on accounting data, a knowledge of international accounting issues is
crucial for achieving proper interpretation and understanding in international business
communications.

INTERNATIONAL ACCOUNTING is defined as the 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; accounting in communist countries;
performance evaluation of foreign subsidiaries.

Approaches to the definition of International Accounting

There are four different approaches. They are:
1. World Accounting: This approach says that IA is a universal system of accounting which is
easily acceptable in all the countries.
2. Comparative IA: Under this approach IA do include all varieties of accounting principles and
methods of accounting in all the countries throughout the globe.
3. Operational IA: This approach covers the particular technical problem being faced by
domestic corporations and multinational corporations in foreign business. These are typical
operational problems like foreign currency translation, consolidation, foreign exchange risk
management etc.
4. Politicized IA: This approach as itself clears emerged from the involvement of global political
institutions such as UNs which are busy in bringing harmonization in divergent IA practices.
 In a simplest way, IA may be defined as that branch of accounting which involves the
various accounting principles and practices prevalent throughout the world, deals with the
particular technical problem being faced by individuals and enterprises in global operations. IA
may attempt to develop a universal system of accounting which would be accepted by the
whole world.

Features of IA
 Aims at setting of accounting and auditing standards which could be accepted internationally
 Aims at developing a universal system of accounting
 Aims at harmonizing standards and accounting practices
 Aims at collection of methods and standards of all countries
 Aims at developing accounting for international transactions
 Aims at comparative analysis of accounting principles and practices found in different countries

Scope of IA
 IA covers very vast area
 IA deals with unique technical accounting problems
 IA covers comparative study of accounting principles and practices prevalent in different
countries throughout the world
 The operational dimensions of IA includes both financial and management accounting aspect
 IA covers important managerial accounting issues
 IA concentrates on harmonization of divergent accounting practices
 IA also deals with new emerging IA issues like accounting for new financial instruments, global
joint ventures, environmental protection and international taxations

Importance of IA
Number of factors has led to increased emphasis on IA in new millennium. Some of the
significant factors can be listed out as under:
1. Rapid developments in foreign trade: Foreign trade existed in early stages of civilization,
when cravans used to travel from one country to another. Means of transportation have led to
change in volume and character of foreign trade. Mobility of labour-broke new records,
 creating new world markets for goods, services and capital. This changed face of foreign trade,
has given rise to a number of unique accounting problems which further led to the need of
specialized branch of accounting having an International dimensions
2. Increased number of multinational companies: Multinational Company is a form of
business organization which operates in more than one country. The number of such
companies is increasing with the passage of time. This increased number of multinational
companies on the international scene can be considered a single largest cause responsible for
enhanced importance of IA. MNCs also play a dominating role in boosting accounting reforms.
For instance any MNC operating in two countries like India and Iran has to prepare
consolidated financial statements by incorporating accounts of both subsidiaries having
different accounting environment by providing a uniform basis for preparation of financial
statements.
3. Global capital market: The capital market is the market where from productive capital is
raised and made available for development purposes. The flow of capital has crossed national
boundaries in recent years. Internationalization of capital market has led to the concept of
global capital market. The concept of global capital market concentrates on providing reliable
and comparable financial information to investors belonging to different countries. Uniform
accounting principles and practices can help the participant companies in global market to
provide comparable financial information to investors. IA will be helpful to eliminate barriers or
obstacles in free flow of international capital.
4. Environmental awareness: Environmental accounting has become part and parcel of IA.
Efforts are being made to make corporations all over the world environment sensitive so as to
adopt green accounting as a part of IA.
5. Historical precedents: Historians are of the view that accounting has passed through
different phases of developments after its emergence in the form of recording activity.
Accounting as it seems today in its present form as a modern accounting system is an
outcome of a historical process which initiated in ancient civilization and ended in highly
developed industrial society. The successive stages of evolution of scientific accounting
passed through various periods of pre-capitalistic, commercial capitalism, industrial capitalism
and finally in the present periods. So we can conclude heritage of accounting is truly
international in nature.
 6. Divergent accounting practices: Accounting practices differ from one nation to other may be
probably because of primarily different national or regional patterns of accounting
developments. Accounting being language of business should speak and convey same
meaning to users of financial statements irrespective of the place to which they belong to,
whether India, Japan or USA. IA attempts to develop this common language for users of
financial statements.
7. Emergence of e-business on global scenario – Concept of e-business which emerged in
developed countries has entered in developing as well as in underdeveloped countries at a
very rapid speed and spreaded over on international scenario in new millennium. This concept
of e-business has posed number of international problems. IA may help accounting
professionals not only in sorting out such problems but also solving them too.
8. Cross –border terrorism: Cross border terrorism is not a new phenomena for Asian
countries. However a terrorist attack on WTCs has made cross-border terrorism an
international issue. USA which was earlier acting as super power in solving terrorism even
from underdeveloped countries by providing them financial help not only in US dollars but also
by providing business. This dependence of super power on developing and underdeveloped
economies has led to transferring accounting technologies to these countries also and has
caused to give due recognitions to IA.

IFRS - International Finance Reporting Standard

Accounting is defined as the language of finance. The basis of accounting is financial
accountability attained through financial reporting and can be explained as the communication of
financial information useful for making investment, credit, and other business decisions. Financial
reporting includes income statements, cash flow summary, tax and equity reports and balance
sheets. Companies across the globe use reporting systems for the general purpose of financial
communiqué and annual statements. A good number of countries have built up a set of accounting
principles that will provide a general platform, for the reporting of financial standing for the trade and
commerce sector under their jurisdiction. These are a set of common accounting principles, globally
referred to as the Generally Accepted Accounting Principles or simply as GAAP. Since each
nation develops these principles according to requirements that best suits them as well as based on
rules that favors them in commercial disputes, each GAAP is apparently quite unique in nature.
They serve the purpose of providing a general and established standard for the appraisal and
assessment of the financial status of the companies doing international trade. On a general rule,
countries consider U.S GAAP as a universal and key system of evaluating businesses and
business dealings. But U.S GAAP is quite invasive in nature, as it has a say on every aspects of
 decision-making either when you are conducting business within the boundaries of the U.S.A or
even while you do business on the other half of the world. Uncle Sam's GAAP (US GAAP) dictates
several key aspects, for example the method in which business transactions are to be constituted or
the manner in which legal framework of the trade should be outlined. Since this dominance of US
GAAP has pushed the countries having trade relations with U.S into severe disadvantage during
international trade. This drawback called in for a new set of financial reporting system which
supports all the international business houses equally without country preference. This has resulted
in a non standardization of accounting statements in international finance, trade and banking
scenario, and as a result made the true and fair analysis of various types of accounting statements
a laborious task. Countries like U.S.A, U.K, France, China and India were following individual
versions of Generally Accepted Accounting Procedures (GAAP), a common set of accounting
standards and procedures. But more and more countries are agreeing on a convergence towards
IFRS or the international Finance Reporting Standard.

This newly suggested system i.e. International Financial Reporting Standard (IFRS), analysis
in detail the significance of IFRS and its adoption globally. IFRS accommodates many standards for
the emergent economies that can increase their fiscal revenues by presenting an actual reflection of
their economy.

IMPORTANCE OF A COMMON SET OF REPORTING STANDARDS

While analyzing and comparing IFRS with other current accounting standards, it stands to win
hands down on various fronts. The most important and easily understood advantage is the reduction
in investment costs as a result of the same standard being implemented across the globe. By using
an unswerving and dependable reporting process, a great amount of time and expense can be saved
unlike while using a diverse and non comparable accounting process. It is just like doing away with
the cost of translation by using the same language. Another important aspect is that information for
judgment is greatly improved by a common set of reporting standards. It facilitates a common base
for comparison. In other words you can compare 'Lemons to Lemons' and arrive at a business
decision as against 'Lemons to Limes' as the basis of comparison. However small these differences
may be, the second comparison will bring in vagueness in financial decision-making and lead to
diverse and possibly erroneous interpretations. These problems can be overridden only by
introducing an internationally accepted common finance reporting system which has been attained to
a great extent through IFRS.

WHY ADOPT IFRS AND NOT U.S GAAP AS A GLOBAL STANDARD

IFRS is developed and approved by IASB (International Accounting Standard Board), which in
turn after its commencement adopted the body of International Accounting Standards (IAS).
Theoretically IFRS includes IAS until they are replaced in due course of time. The Foundation has its
prime intention as the development of a unique and universal set of accounting standards that are
high-class, transparent, comprehensible, and globally implemental. These international standards
should also be carefully and consistently applied in the financial transactions. Based on these criteria
the current IFRS principles are formulated and suggested. Many countries are hesitant to shift to
IFRS mainly because in most of its features IFRS resembles US GAAP although in various others
they are distinctly diverse. The influence US GAAP has on IFRS is understandable as many on board
of IASB (the foundation in charge of developing and approving the IFRSs), are infact US finance
experts with many years of working experience with U.S GAAP or are trained in the U.S. Both IFRS
and U.S GAAP work on a fair value asset and liability theory. But the main difference begins in the
core principle, in which they work; while U.S GAAP is totally rule based, IFRS is principle based.
Analysis also shows that IFRS has a common law based reporting while U.S GAAP follows civil law
method.

Although IFRS has been getting appreciation from most of the sources, some countries
including India and the United States have yet not gone for an adoption of IFRS. This is mainly due to
the opposition from various quarters owing to various reasons. In India the corporate houses are
following the Indian GAAP and are apprehensive about various points while going for the adoption of
the new system. The main factors affecting a fast paced adoption are:

Key Divergence in GAAP and IFRS Systems

Implementation of IFRS all of a sudden will ask for a drastic change in the whole financial
statement process. The two systems are different extensively in policies and process. This is a
challenging issue as to bring in awareness about the new system in a fast paced process is
impractical. Hence the India is going in for a phased out process of IFRS adoption from April 2012.

Guidance and Training on the IFRS

At present India Inc has a serious drawback; first is that IFRS training is not widespread in India and
also it's not a part of the Business curriculum in colleges. In order to facilitate a smooth transition the
accounting professionals are to be trained in IFRS and its application. Like former chief financial
officer and Vice Chairman of the Board of AT&T Corporation and a former Deloitte &Touché partner,
Charles Noski aptly commented "Educating 100,000 employees on how they must do their business,
is not a trivial activity". ICAI and international business houses are trying to overcome this challenge
by conducting awareness workshops, seminars and training classes.

Statutory and Regulatory Concerns

At present various legal and other regulators are controlling the reporting requirements in India and
their requirements make other laws ineffective. IFRS does not acknowledge such interference in its
course. This is a challenging aspect which are currently looked into and addressed by the respective
regulators.
Tax Assessments

IFRS implementation will affect goods that are traded in the financial statements and therefore the
assessment of tax levied on each item will also has to undergo adjustments. Thus the taxation
regulations should tackle the handling of tax accountability while shifting from Indian GAAP to IFRS.

Fair Value Measurement

IFRS uses fair value as a base measurement while valuing many items in the financial statements.
This will bring a lot of unpredictability and subjectivity to the financial reports while it involves a lot of
sweat and sound judgment to determine and ascertain the fair value which calls for the use of
valuation experts.

Contract Renewals or Re negotiations

Many corporate agreements will have to be either quashed altogether or a need to sit down and re
negotiate on clauses will be a certainty if a country has to go for IFRS as its clauses are very
different. But if the country's trade volume is as big as that of US or India this issue can become a
annoyance.

Indian policy makers, ICAI and regulatory bodies are taking various positive steps to assure
a smooth convergence process. Only if the country is positive towards the idea of adopting IFRS it
will be a systematic and smooth transition. So it is very important to make investors and the
businesses ready for this cumbersome yet fruitful standard renovation procedure under IFRS.
European Countries by and large have accommodated IFRS and certain countries are on the verge
of converging on it. So it is beyond any doubt that a global convergence on IFRS is an inevitable
reality in the recent future itself.

CONCLUSION

As the world gears up for embracing IFRS there is an urgent need to incorporate it in the
business curriculum as creating awareness is the best way to win the confidence of investors,
creditors and market players. US GAAP or its variant GAAPs cannot be considered as a yard stick in
the preparation of financial reports. Convergence of standards will definitely cut the first turf for
convergence is other areas thus help in proficient functioning of the economy. Transparent and
comparable financial statements will allow investor confidence and helps in positive decision making
also. Countries and business will benefit too as this will ensure free flow of funds and direct
investments in other economies. Liberalized and open economies are becoming the need of the hour
as the concept of one world one economy is gaining strength to overcome economic slowdown. IFRS
is undoubtedly a tough yet right step in this direction.
 Need for Transnational Reporting
 The expanding horizon of business activity in recent years particulars as a consequences of
opening up of economies has resulted in expansion in world trade.
 Rapid growth in international capital market
 Increase of cross border merger and acquisition
 Predominance of MNC
 Reporting to existing and new investors spread world wide
 Companies entering into foreign capital to list their securities in to foreign stock exchanges
 Submission of reports as per requirements of foreign securities exchanges

Transnational Reporting - Complexities

Reporting financial statements across the border is not an easy task. It requires a lot of
efforts and cost. Some of the complexities encountered during transnational reporting are as
follows:
1. Language and currency
2. Accounting principles
3. Disclosure requirement
4. Audit requirement
1. Language and currency: An enterprise would generally prepare its financial reporting in the
language that its local investors would understand, for e.g., a Japanese company would
prepare its financial statements in Japanese language and similarly in India few would like to
have a translated version of non-Indian companies financial statements in Hindi script.
Similarly a company listed on stock exchange which has different language than the
companies reporting have to send translated version of their financial statements reports. In
the same way reporting companies also find difficulties since very companies has unique
currency.
2. Accounting Principles: The most serious problem the reporting company faces is in
contemplating the accounting principles of another country. For eg Indian company would
prepare its financial statement in accordance with Indian Companies Act 1956 and in
accordance with Indian GAAP. Therefore, US investors would find difficult to understand
further certain information would be lacking as required by USGAAP.
3. Disclosure requirement: Disclosure requirement is essential ingredient of proper functioning
of capital market. Therefore, it is utmost requirement of the company to disclose all required
 information in the financial statement to enable the investors to take appropriate decision.
However the problem is that every nation has different disclosure requirement and so reporting
company finds it difficult to cope with different disclosure requirement.
4. Audit requirement: The function of audit is to lend credibility to financial statement. In order to
do so auditing professionals itself need a set of well defined audit standards. This is particular
so when financial statements are prepared in one country and used by users in another
country. A great deal of diversity prevails in the international audit environment. However as
we move towards harmonization and as international standard acquires authority, auditors will
have to conform the requirements of international standards of auditing.