International Accounting Exam 1

Company level

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 includes standards for accounting for transactions denominated in foreign currency and techniques for evaluating the performance of foreign operations

Common Law

- Fewer statutes—more court interpretation - Creation of precedents or case laws - Great Britain and other English-speaking countries - Accounting law is detailed and specific (clear cut-off) - Sources are non-legislative organizations

issues related to credit sales to international customer using foreign currency. (look at chapter 1 slide for more info.)

- First encounter with international business occurs as sales to foreign customers - Credit sales are made to foreign customers who will pay in their own currency --- Gives rise to foreign exchange risk

what are reasons of foreign direct investment?

- Increase sales and profits - Enter rapidly growing or emerging markets - Reduce costs (labor, material) - Gain a foothold in economic blocs (lower/no external tariff on imported goods, less restrictions) (e.g., North American Free Trade Association, EU, Association of Southeast Asian Nations) - Protect domestic markets (weaken international competitors') - Protect foreign markets (from local competitors) - Acquire technological and managerial know-how

reasons behind accounting diversity

- Legal systems - Basis for taxation - Providers of financing - Inflation (or even hyperinflation) - Political and economic ties - Correlation of factors

The Legal Compliance Model (Continental European model)

- Legalistic - Used to provide information for taxation and government-planning - Used in Europe, Japan, and code law countries - More conservatism

Code law (civil law)

- More statutes - Non-English-speaking countries - Legislated accounting rules - Accounting law is general - Other guidance required

The Fair Presentation/Full Disclosure Model (Anglo-Saxon or Anglo-American model)

- Oriented toward the decision needs of large numbers of investors and creditors - Used in English-speaking countries influenced by the United Kingdom or the United States - Less conservatism

problems associated with accounting diversity

- Preparation of consolidated financial statements - Access to foreign capital markets - Comparability of financial statements - Lack of high-quality accounting information (especially when estimation and risk exposures are involved)

Lack of high-quality accounting information (especially when estimation and risk exposures are involved)

- Related party transaction; Off-balance sheet financing (e.g., lease) - Exposures to foreign currency exchange risks are not evident - Information for speculative assets - Contingent liabilities Lack of high-quality accounting standards Inadequate risk assessment Lack of appropriate disclosure requirements Disclosure deficiencies - Related-party transactions and off-balance-sheet financing - High exposure to foreign exchange risk - Investments in highly speculative assets - Contingent liabilities guaranteeing foreign currency loans - Loan loss provisions

The Inflation-Adjusted Model

- Resembles the Continental European model - Requires extensive use of adjustments for inflation

3 accounting clusters

- The Fair Presentation/Full Disclosure Model (Anglo-Saxon or Anglo-American model) - The Legal Compliance Model (Continental European model) - The Inflation-Adjusted Model

International accounting

- broadest level - study of the standards, guidelines, and rules of accounting, auditing, and taxation existing within each country and comparison across countries - examples would be cross-country comparison of 1. rules related to the financial reporting of plant, property, and equipment 2. income and other tax rates 3. the requirements for becoming a member of the national accounting profession

what is international accounting?

- includes study of various functional areas of accounting (financial, managerial, auditing, taxation, and accounting information systems) - focuses on the accounting issues unique to multinational corporations

Reporting principles for defining quality:

Balance: the report should reflect positive and negative aspects of the company's performance (it should come across as unbiased). Comparability: issues and information should be selected, compiled and reported consistently and presented in a manner that stakeholders can analyze over time. Accuracy: the information should be sufficiently accurate and detailed and verifiable. Best practice gaining traction is to have the information third party assured. Timeliness: reporting should be done on a regular schedule and made available in time for stakeholders to make informed decisions. Clarity: the information should be understandable and accessible to the stakeholder using the report Reliability: information and processes used to prepare the report should be gathered, recorded, compiled, analyzed and disclosed in a way that could be examined and that establishes the quality and materiality of the information.

meaning of CSR

Derived from notion of organizational societal responsibility: - Which comes from notion of the accountability of management for the resources entrusted to an organization - Accountable to shareholders and other stakeholders (employees, creditors), and society at large - Accountability is proactive—A mental attitude that recognize the need to take responsibility of one's action - Example—morally irresponsible for corporations to profit by depleting natural resources or polluting the environment Recognize the need to take responsibility for one's actions

nobes's judgmental classification model

Developed by Nobes Micro-based—Anglo-Saxon model Macro-uniform—Continental European model

convergence

Enforcement of single set of accepted standards by several regulatory bodies

aspects of CSR

Environment Economic Human Rights Labor Practice Product Responsibility Society (corruption, community) E.g., Cisco

Stakeholder theory

Environmental disclosures made in response to stakeholder demand for environmental and social information Major problem-- fails to explain different disclosures by similar industries in same geographic area

Micro-based—Anglo-Saxon model

First sub-class influenced by Business economics Accounting theory Example: Netherlands Second sub-class influenced by Business practice Pragmatic Example: British-origin United Kingdom and United States dominated

Macro-uniform—Continental European model

First sub-class: Aligned with national economic policies Example: Sweden Second sub-class: Continental: government, tax, legal Example: Continental European countries Law-based family: Germany, Japan Tax-based family: Southern European countries

what are the two financial instruments used in hedging?

Foreign currency option - Right but not obligation to sell foreign currency at a predetermined exchange rate and time as the strike price Forward contract - Obligation to exchange foreign currency at a future date

Comparability of financial statements

Format Terminology Recognition rules Measurement rules (FV, historic cost, lower market or historic cost....) Lack of comparability between financial statements from different countries This adversely affects: - Investment decisions - Lending decisions - Performance analysis - Foreign acquisition decisions

what is transferring pricing? what are the issues behind transferring pricing?

Issue for multinational companies making intercompany sales - Companies use of discretionary transfer pricing -- Price negotiation between buyer and seller not feasible due to tax rate differences - Companies shift profits from countries with high-tax rates to countries with low tax-rates - Countries regulate international transfer pricing to ensure companies pay their fair share of local taxes

organization that promote CSR

Kyoto Protocol Global Reporting Initiative

The principles for DEFINING REPORT CONTENT HELP companies identify topics and related indicators that are relevant to report:

Materiality: the information should reflect the organization's significant economic, environmental and social impact or is information that would substantively influence the assessments and decisions of stakeholders. Stakeholder inclusiveness: stakeholders should be identified and the report should explain how the company has responded to their reasonable expectations and interests. Sustainability context: the report should present the company's performance in the wider context of sustainability. This involves discussing performance in the context of the limits and demands place on environmental or social resources at different levels (local, regional and global) and not just on an individual level. Completeness: coverage and report boundary should be sufficient to reflect significant economic, environmental and social impacts (should encompass the dimensions of scope, boundary and time).

Kyoto Protocol

Passed in 1997; Effective from early 2005 Created under UN Framework Convention on Climate Change (UNFCCC) Combination of country-specific Green Houses Gases (GHG) emission reduction targets and emission trading mechanisms Companies ratifying it provide greater pollution disclosures First commitment period 2008-2012 Non-Ratification of US; Many country withdraw

Political and economic ties

Political and economic ties affect how accounting rules are conveyed (British and French style)

regulating CSR practices (challenges)

Problems of regulation through legislation - Lobbying in favor of economic over social/environmental interests may undermine regulatory enforcement - If corporate legitimizing activities successful—public pressure for governmental disclosure legislation may be low leaving it up to managers to control details of social reporting - Needs to be stringent enforcement mechanism (e.g. Thailand's social and environmental legislation hasn't promoted more management CSR disclosure) - Regulatory agencies weak due to dependency on expertise and information of those they are trying to regulate

what is IFRS 1 about?

Provides guidance to companies that are adopting IFRS for the first time Requires compliance with all effective IFRS at the reporting date of an entity's first IFRS financial statements - Allows exemptions when costs outweigh benefits In preparing its opening IFRS balance sheet, IFRS 1 requires an entity to do the following: 1. Recognize all assets and liabilities whose recognition is required by IFRS. 2. Derecognize items previously recognized as assets or liabilities if IFRS do not permit such recognition. 3. Reclassify items that it recognized under previous GAAP as one type of asset, liability, or component of equity, but are a different type of asset, liability, or component of equity under IFRS. 4. Apply IFRS in measuring all recognized assets and liabilities.

Basis for taxation

Published financial statements -- Germany—same taxable income and book income Financial statements adjusted for tax purposes -- U.S.—different taxable income and book income -- Difference between tax and accounting income gives rise to deferred income taxes Value added tax (VAT is levied on the gross margin at each point in the supply chain of an item)

harmonization

Reduction of alternatives while maintaining a high degree of flexibility in accounting practices Can be considered in two ways: -- Harmonization of accounting regulations and standards -- Harmonization of accounting practice: ultimate goal of international harmonization efforts Harmonization of standards may or may not result in harmonization of practice Different from standardization -- Standardization involves using the same standards in different countries -- Allows for different standards in different countries as long as they do not conflict

Access to foreign capital markets

US SEC eliminated the US GAAP reconciliation requirement for countries using IFRS - Requires financial statements as per local accounting standards - Considerable effort and cost involved

Supranational accounting

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

What is foreign direct investment?

the ownership and control of foreign assets, such as manufacturing plant

regulating CSR Practices (International Evidence)

1. Regulation of CSR in other countries and regions a. Environmental laws increased dramatically in Australia, New Zealand, U.K., and the European Union b. Environmental Protection Agency establishes behavioral standards/enforces compliance through punitive measures c. The Asia-Pacific Partnership on Clean Development and Climate signed in mid-2005 to deploy clean energy technology 2. International Arrangements to Regulate CSR a. Bodies such as World Bank and IFAC and organizations such as Kyoto protocol and GRI promote CSR practices -- World Bank set up PCF to stimulate development of the emissions trading market and assist investment in carbon credits -- IFAC developed Sustainability Framework to influence the way organizations integrate sustainability b. ISO 26000: 2010 provides guidance on social responsibility -- https://asq.org/quality-resources/iso-26000 c. Kyoto Protocol (2005), created under UNFCCC is a combination of country-specific GHG emission reduction targets and emissions trading mechanisms

international accounting can be defined at three levels. what are these three levels? what do they mean? Examples?

1st level: Supranational accounting 2nd level: Company level 3rd level: International accounting

Legal systems

2 major types of legal systems used around the world - common law - code law (civil law)

evidence of accounting diversity

?

Providers of financing

Accounting and disclosure is less important (more transparent) where major sources are families, banks, and the government Accounting and disclosure is more important (transparent) where major sources are diverse shareholders Some countries do not even have stock exchange or very limited stock trading

what are ways of foreign direct investment? give an example and ask what kind of FDI it is.

Acquisition: investment in existing operations in foreign countries - E.g., Indian truck company Tata Motors acquired Land Rover and Jaguar from Ford. Chinese carmaker, Geeley, acquired Volvo from Ford. Greenfield investment: new operation in foreign countries - E.g., McDonald's and Starbucks - Either way firms need to calculate the NPV. Financial statements is needed to forecast future profits and cash flow.

Legitimacy theory

CSR is means to deal with firm's exposure to political, economic and social pressures Behavior motivated by society's perceived goals to legitimize their performance Society's perceived goals represented by various interest groups such as environmental public interest groups (e.g. motivation for disclosures by other petroleum firms after Exxon Valdez oil spill and expected disclosures from firms other than BP after 2010 Gulf of Mexico oil spill) Has sometimes led to increased skepticism. - In Ireland who has no demand for CSR, so any attempt at CSR is questioned - Australian managers consider CSR disclosures useful for maintaining or reestablishing legitimacy

Correlation of factors

Common law countries have domestic listed companies relying on equity for capital Code law countries tend to link taxation to accounting statements and rely less on financing provided by shareholders

Global Reporting Initiative (GRI) level for reporting

Companies can choose an application level for reporting, titled C, B and A, where criteria reflect an increasing application or coverage of the GRI reporting framework. A company can also provide a plus (+) designation if it has utilized external assurance of the information. LEVEL C is intended for entry-level reporting organizations and for this level, a company needs to report on a set of the profile disclosures and at least 10 performance indicators, which includes at least one from each dimension (economic, environmental and social). LEVEL B is intended for intermediate reporters having policies in place for their sustainability performance. Companies must report on all profile disclosures, all disclosures on management approach and at least 20 performance indicators, which includes at least one from each indicator category (economic, environmental, labor practices and decent work, human rights, society, and product responsibility). LEVEL A is intended for advanced reporters who are able to report or explain to the fullest extent given the execution of a thorough materiality process in consultation with their stakeholders. For this level, a company must report on all profile disclosures, all disclosures on management approach and all core performance indicators.

Hierarchy of IFRS

Companies first look to: 1) International Financial Reporting Standards 2) International Accounting Standards 3) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

what are the issues related to performance evaluation of foreign operations?

Evaluation is through periodic reports on individual unit's performance Issues in evaluation - Translation from one currency to another - Inflated price paid in transfer pricing - Issues unique to foreign operations

argument for convergence

Facilitate better comparability of financial statements -- Easier evaluation of companies Facilitate international mergers and acquisitions Reduce financial reporting costs -- Cost-listing would allow access to less expensive capital Reduce investor uncertainty and the cost of capital Reduce cost of preparing worldwide consolidated financial statements -- Simplify auditing Easy transfer of accounting staff internationally Raise the quality level of accounting practices internationally -- Increase credibility of financial information -- Enable developing countries to adopt a ready-made set of high-quality standards with minimum cost and effort

Global Reporting Initiative (GRI)

Formed by U.S.-based nonprofits Ceres and Tellus Institute with support of United Nations of Environment Program (UNEP) Independent, yet remains a collaborating centre of UNEP and works in cooperation with the United Nations Global Compact Developed world's most widely used sustainability reporting framework Assists reporting organizations in understanding biodiversity issues Launched international certified training program in 2007 GRI Sustainability Guidelines have two parts: -- Part I—provides reporting principles and guidance on content, ensuring quality, and setting boundary -- Part II—provides standards for disclosure, specifies base content, and identifies types of disclosure: namely, strategy and profile, management approach, and performance indicators G3, third generation of GRI, outlines core content for reporting Biodiversity—A GRI Reporting Resource (2007) assists in understanding biodiversity issues, relationship with organizations, and offers insight to biodiversity reporting Other initiatives: a. GRI-Certified Training Program- to create worldwide common understanding of the sustainability reporting process b. Sponsored Global Conference on Sustainability and Transparency to discuss issues on reporting and assurance c. G4—standardized approach to reporting, encouraging the degree of transparency and consistency d. Formation of the International Integrated Reporting Committee (IIRC)—to develop globally acceptable framework that brings together financial, environmental, social, and governance information in a clear, concise, consistent, comparable, and integrated manner

principal-based vs. rule-based accounting

IASB follows a principles-based approach to standard setting vs a rules-based approach - Standards establish general principles for recognition, measurements, and reporting requirements for transactions - Limits guidance and encourages professional judgment in applying general principles to entities or industries

what are the issues related to performance evaluation of international auditing?

Internal auditing is an important component of a management's control process Issues faced by internal and external auditors - Differences in language and culture - Differences accounting standards and auditing standards

regulating CSR practices (CCX)

Regulation of CSR in the United States - Chicago Climate Exchange (CCX) is the only cap and trade system for all six greenhouse gases (GHGs) in North America - Emitting members—voluntary but legally binding commitments to meet annual GHG reduction targets: -- If below target—can sell or bank surplus allowances -- If above target—purchase CCX Carbon Financial Instrument contracts—tradable commodities (each contract = 100 metric tons of CO2 equivalent and comprised of exchange allowances and offsets) - $7.4 to a nickel per ton - CCX failed since: -- Governing agencies issue certificates for a fictional commodity of emissions not emitted -- Carbon offsets are nearly impossible to verify as to legitimacy -- Opportunities for fraud - California and nine Eastern Seaboard states have formed Regional Greenhouse Gas Initiative to introduce regulations on GHG emissions

regulating CSR practices (SEC)

Regulation of CSR in the United States (continued) - SEC has taken steps to introduce greater regulatory scrutiny - "Superfund" legislation in the '80s required corporations to actively remediate past problems (even if not responsible for the contamination) and provide disclosures on the superfund exposures - "Superfund" reporting also helped more positive environmental informational financial reporting E.g., Petroleum industry

efforts on accounting harmonization

Several organizations were involved at global and regional levels International Organization of Securities Commissions (IOSCO) International Federation of Accountants (IFAC) European Union (EU) International Forum on Accountancy Development (IFAD) International Accounting Standards Committee(IASC) International Accounting Standard Board (IASB)

argument against convergence

Significant differences in existing standards -- Enormous political cost of eliminating differences Nationalism and traditions -- Arriving at universally accepted principles is difficult Need for common standards is not universally accepted -- Well-developed global capital market exists already May cause standards overload Differences in accounting across countries might be necessary

regulating CSR practices (why)

Significant shortcomings with voluntary CSR practices: - Biased and self-select disclosures—minimal disclosure of negative environmental information - CSR practices insufficient and low in credibility—lack independent verification of performance and selectivity - Difference between accountability and forced accountability, where spirit of accountability may not exist in the latter

what is IAS 1 about?

Single standard providing guidelines for the presentation of financial statements Guidance areas - Purpose of financial statements - Components of financial statements - Overriding principle of fair presentation -- Requires the faithful representation of the effects of transactions and events Accounting policies - Should be consistent with all IASB standards - When specific guidance is lacking, use standards on similar issues, and definitions of the financial statement elements Basic principles and assumptions - Adds to the guidance provided in the Framework -- Immaterial items should be aggregated -- Assets and liabilities, and income and expenses should not be offset Structure and content of financial statements - Current/noncurrent - Items to be included on face of financial statements - Items to be disclosed in the notes

Inflation (or even hyperinflation)

Some countries have historically high rates of inflation -- Necessitates adjustments to offset inflation Common in Latin American countries Inflation accounting (price level accounting) -- IAS 29 of IFRS: Financial statement must be in the values of the currency current at the end of the reporting period, with changes tied to the general price index. The G/L on the net monetary position must be included in profit or loss for the period and separately disclosed. -- Current purchasing power method: accounting adjustments are applied to monetary items to record G/L; non-monetary items value adjusted for price index need to be disclosed -- Current cost method: monetary & non-monetary items are restated to reflect current value

2 theories explaining CSR behavior

Stakeholder theory Legitimacy theory

Preparation of consolidated financial statements

Subsidiaries in other countries Problems due to: - Local regulations - Books In local currency - Local accounting principles Requires: - Considerable effort - Additional cost - Expertise in different country's accounting standards

What is hedging?

Techniques to manage exposure to foreign risk