Chapter 1
Introduction
Discussion Questions
1. In the domestic case, accounting is an information service that provides financial
information about a domestic entity to domestic users of that information.
International accounting is distinctive in that the entity being reported on is
either a multinational company with operations and transactions that transcend
national boundaries or involves an entity with reporting obligations to readers
who are located outside the reporting entity’s country of domicile.
2. Advantage: Some might argue that measurement, disclosure, and external
auditing are three distinct (although related) processes, involving different
members of the company. For example, corporate attorneys often are involved
in disclosure issues, but seldom intervene in measurement issues. The Board of
Directors works with the external auditors but not necessarily with the
comptroller s office. Thus, discussion of accounting requirements and voluntary
accounting choices in different jurisdictions is simplified by focusing on the
three components of accounting.
Disadvantage: measurement, disclosure and auditing are interdependent, and
should not be viewed in isolation of one another. A company choosing to
disclose as little as possible, for example, may use accounting measurement
approaches that reduce the information content of financial statements, and
select an external auditor who will be relatively lenient in enforcing accounting
requirements. One alternative classification might include accounting
(measurement and disclosure), and auditing. A second classification might
include financial reporting (annual and interim reporting, regulatory filings) and
ad hoc disclosure (press releases, analyst meetings, etc). Any classification is
arbitrary, and potentially useful depending on its purpose.
3. Factors contributing to the internationalization of the subject of accounting
include: the growth and spread of multinational operations around the world,
the phenomenon of global competition, the increasing number of cross-border
, mergers and acquisitions that occur almost daily, continued advances in
information technology, and the internationalization of the world’s capital
markets.
4. International trade involves importing and exporting activities. The major
accounting issue associated with foreign trade involves accounting for foreign
currency transactions. Foreign direct investment, on the other hand, involves
conducting operations abroad. This activity exposes accountants to a new set of
issues that run the gamut from having to consolidate foreign currency accounts
based on diverse measurement rules to issues of evaluating the performance of
foreign subsidiary managers.
5. Students will overwhelmingly argue in favor of harmonization. This is probably
a good starting point for the course. After they are introduced to the chapters
leading up to Chapter 8, some may no longer feel that harmonization is
necessarily the answer to all of their international accounting problems.
6. Recent developments such as the growth and spread of multinational
operations, internationalization of the world’s capital markets, increased cross
border mergers and acquisitions, the phenomenon of global competition, and
financial innovation have increased reader dependence on foreign financial
statements. An understanding of accounting differences and their effect on
reported measures of profitability, efficiency, solvency, and liquidity are critical
if proper decisions are to be made. International accounting issues have become
more complex in recent years for several reasons. Financial transactions are
becoming more complex, affecting both national and international accounting.
For example, the use of complex financial instruments and developing
accounting standards for these exotic instruments has been problematic. Global
financial markets also are becoming more volatile, leading to large changes in
asset and balance sheet amounts (such as related to investments) and major
sources of income and expense. The related accounting issues are difficult. The
growing internationalization of business also promotes complexity. Foreign
currency transactions and translation have been troublesome accounting issues
for years, and are becoming more important as cross-border business and
finance increase. Also, differences in national accounting principles potentially
are more troublesome as business becomes more international. However, as
convergence efforts worldwide accelerate, and more and more companies and
countries adopt International Financial Reporting Standards (IFRS), complexity
arising from differences in national accounting principles will decrease.
,7. Examples of external reporting issues include:
a. Does translation from one set of measurement rules to another change the
information content of the original message?
b. Should accounts of foreign operations be translated to parent currency
when consolidated statements are prepared?
c. Which exchange rates should be employed when translating from one
currency to another?
Examples of internal reporting issues include:
a. Which exchange rates should be used for budgeting purposes?
b. Should foreign managers be evaluated in terms of parent currency or the
local currency of the country in which the manager operates?
c. Which prices should one use when transferring goods or services between
members of the multinational enterprise—cost, market, cost-plus, or some
other metric?
8. Global capital market activities and transactions reach beyond single political or
legal jurisdictions. For example, global capital market transactions include the
following: (1) an American tourist buying Australian dollars for travel purposes
in the South Pacific; (2) a Japanese insurance company buying German
government bonds as an investment; and (3) a Nigerian agricultural
development project receiving cash subsidies from the European Union (EU).
The international equities market is one global capital market. A second such
market covers foreign exchange transactions, that is, when one national
currency is exchanged into, traded forward, hedged, swapped, or otherwise
converted to another national currency. This market is estimated at hundreds of
billions of U.S. dollars per day. The total world foreign exchange market is the
largest market on earth. The international bond market is still another global
capital market. The bonds constituting this market are underwritten by
international syndicates of banks and are marketed and traded all over the
world. Global capital markets are a vital part of the world economy.
, 9. Privatizations of state-owned corporations have had dramatic effects on global
capital markets. Often, the privatized entities are large, well-known companies
in which the national government retains a large ownership interest, and retail
(individual, noninstitutional) investors often are encouraged to buy shares in
newly privatized entities. As a result, the shareholder base in the market grows
dramatically, investors become more active market participants, and market
capitalization increases.
Privatizations also mean that management must now compete in the
marketplace for market share, external capital, and corporate control. In such a
world, accounting systems must properly motivate managers to work toward
the accomplishment of the organization’s overall goals in an efficient manner
while putting together credible external financial statements that will enable it
to secure the necessary capital to finance corporate growth. Many of these
external and internal reporting issues are covered in the balance of the chapters
in this book.
10. Those opposed to outsourcing see it as a threat to domestic jobs and a form of
exploitation by companies engaged in the practice. Some even see it as a moral
issue. However, they miss the point of international trade. Although outsourcing
may reduce jobs in one sector, they reflect differences in comparative
advantage, which ultimately makes possible greater employment in other
sectors and or lower consumer prices which increases real wealth. One need
only look at higher education in America. Whereas stenographers in the United
States may be losing jobs to stenographers in India, more and more Indian
families are sending their children to the United States for their higher
education, increasing the demand for support services in the higher education
sector.
A look at Exhibit 1-2 shows that over time, countries with greater exports than
imports eventually become net importers and vice versa. The importance of
international accounting will not diminish. Countries have been trading with one
another since antiquity and will continue to do so. Even if the volume of trade
were to diminish, an unlikely event, the network of trading partners continues
to expand globally and with it accounting issues associated with international
trade.
Introduction
Discussion Questions
1. In the domestic case, accounting is an information service that provides financial
information about a domestic entity to domestic users of that information.
International accounting is distinctive in that the entity being reported on is
either a multinational company with operations and transactions that transcend
national boundaries or involves an entity with reporting obligations to readers
who are located outside the reporting entity’s country of domicile.
2. Advantage: Some might argue that measurement, disclosure, and external
auditing are three distinct (although related) processes, involving different
members of the company. For example, corporate attorneys often are involved
in disclosure issues, but seldom intervene in measurement issues. The Board of
Directors works with the external auditors but not necessarily with the
comptroller s office. Thus, discussion of accounting requirements and voluntary
accounting choices in different jurisdictions is simplified by focusing on the
three components of accounting.
Disadvantage: measurement, disclosure and auditing are interdependent, and
should not be viewed in isolation of one another. A company choosing to
disclose as little as possible, for example, may use accounting measurement
approaches that reduce the information content of financial statements, and
select an external auditor who will be relatively lenient in enforcing accounting
requirements. One alternative classification might include accounting
(measurement and disclosure), and auditing. A second classification might
include financial reporting (annual and interim reporting, regulatory filings) and
ad hoc disclosure (press releases, analyst meetings, etc). Any classification is
arbitrary, and potentially useful depending on its purpose.
3. Factors contributing to the internationalization of the subject of accounting
include: the growth and spread of multinational operations around the world,
the phenomenon of global competition, the increasing number of cross-border
, mergers and acquisitions that occur almost daily, continued advances in
information technology, and the internationalization of the world’s capital
markets.
4. International trade involves importing and exporting activities. The major
accounting issue associated with foreign trade involves accounting for foreign
currency transactions. Foreign direct investment, on the other hand, involves
conducting operations abroad. This activity exposes accountants to a new set of
issues that run the gamut from having to consolidate foreign currency accounts
based on diverse measurement rules to issues of evaluating the performance of
foreign subsidiary managers.
5. Students will overwhelmingly argue in favor of harmonization. This is probably
a good starting point for the course. After they are introduced to the chapters
leading up to Chapter 8, some may no longer feel that harmonization is
necessarily the answer to all of their international accounting problems.
6. Recent developments such as the growth and spread of multinational
operations, internationalization of the world’s capital markets, increased cross
border mergers and acquisitions, the phenomenon of global competition, and
financial innovation have increased reader dependence on foreign financial
statements. An understanding of accounting differences and their effect on
reported measures of profitability, efficiency, solvency, and liquidity are critical
if proper decisions are to be made. International accounting issues have become
more complex in recent years for several reasons. Financial transactions are
becoming more complex, affecting both national and international accounting.
For example, the use of complex financial instruments and developing
accounting standards for these exotic instruments has been problematic. Global
financial markets also are becoming more volatile, leading to large changes in
asset and balance sheet amounts (such as related to investments) and major
sources of income and expense. The related accounting issues are difficult. The
growing internationalization of business also promotes complexity. Foreign
currency transactions and translation have been troublesome accounting issues
for years, and are becoming more important as cross-border business and
finance increase. Also, differences in national accounting principles potentially
are more troublesome as business becomes more international. However, as
convergence efforts worldwide accelerate, and more and more companies and
countries adopt International Financial Reporting Standards (IFRS), complexity
arising from differences in national accounting principles will decrease.
,7. Examples of external reporting issues include:
a. Does translation from one set of measurement rules to another change the
information content of the original message?
b. Should accounts of foreign operations be translated to parent currency
when consolidated statements are prepared?
c. Which exchange rates should be employed when translating from one
currency to another?
Examples of internal reporting issues include:
a. Which exchange rates should be used for budgeting purposes?
b. Should foreign managers be evaluated in terms of parent currency or the
local currency of the country in which the manager operates?
c. Which prices should one use when transferring goods or services between
members of the multinational enterprise—cost, market, cost-plus, or some
other metric?
8. Global capital market activities and transactions reach beyond single political or
legal jurisdictions. For example, global capital market transactions include the
following: (1) an American tourist buying Australian dollars for travel purposes
in the South Pacific; (2) a Japanese insurance company buying German
government bonds as an investment; and (3) a Nigerian agricultural
development project receiving cash subsidies from the European Union (EU).
The international equities market is one global capital market. A second such
market covers foreign exchange transactions, that is, when one national
currency is exchanged into, traded forward, hedged, swapped, or otherwise
converted to another national currency. This market is estimated at hundreds of
billions of U.S. dollars per day. The total world foreign exchange market is the
largest market on earth. The international bond market is still another global
capital market. The bonds constituting this market are underwritten by
international syndicates of banks and are marketed and traded all over the
world. Global capital markets are a vital part of the world economy.
, 9. Privatizations of state-owned corporations have had dramatic effects on global
capital markets. Often, the privatized entities are large, well-known companies
in which the national government retains a large ownership interest, and retail
(individual, noninstitutional) investors often are encouraged to buy shares in
newly privatized entities. As a result, the shareholder base in the market grows
dramatically, investors become more active market participants, and market
capitalization increases.
Privatizations also mean that management must now compete in the
marketplace for market share, external capital, and corporate control. In such a
world, accounting systems must properly motivate managers to work toward
the accomplishment of the organization’s overall goals in an efficient manner
while putting together credible external financial statements that will enable it
to secure the necessary capital to finance corporate growth. Many of these
external and internal reporting issues are covered in the balance of the chapters
in this book.
10. Those opposed to outsourcing see it as a threat to domestic jobs and a form of
exploitation by companies engaged in the practice. Some even see it as a moral
issue. However, they miss the point of international trade. Although outsourcing
may reduce jobs in one sector, they reflect differences in comparative
advantage, which ultimately makes possible greater employment in other
sectors and or lower consumer prices which increases real wealth. One need
only look at higher education in America. Whereas stenographers in the United
States may be losing jobs to stenographers in India, more and more Indian
families are sending their children to the United States for their higher
education, increasing the demand for support services in the higher education
sector.
A look at Exhibit 1-2 shows that over time, countries with greater exports than
imports eventually become net importers and vice versa. The importance of
international accounting will not diminish. Countries have been trading with one
another since antiquity and will continue to do so. Even if the volume of trade
were to diminish, an unlikely event, the network of trading partners continues
to expand globally and with it accounting issues associated with international
trade.
