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Scope of International Accounting International Accounting covers a vast area. The emulating effect of the changed character of international trade, Predominance of multinational corporation and the internationalization of money and Capital markets resulted in certain unique technical accounting problems having an international dimension.
Its Scope includes both financial and management accounting aspects and certain new issues which have cropped up in the area on account of developments in the financial markets which need attention. • Thus the scope of international accounting covers financial accounting, management accounting and social and allied accounting activities:
Scope of Multinational accountsFinancial Accounting • Recording of foreign transactions • Foreign Currency translation • Accounting for foreign inflation • Consolidation of foreign financial statements, reporting and disclosure. • Segment and international reporting.
Management Accounting • Analysis of foreign financial statements • Multinational transfer pricing • Budgets and performance evaluation of foreign subsidiaries • Management of foreign exchange risk • International Taxation
Social and Allied accounting issuesSocial Accounting • Accounts for newer financial instruments • Accounting for mergers and acquisitions • Global joint Ventures • Environmental and Social disclosure • Integration of ethics into accounting curriculum
Recording of Foreign Transaction International accounting beings with the recording of foreign transactions. An international and foreign transaction means and includes any transaction taking place between parties belonging to two different countries such as transaction pertaining to importing, exporting, foreign borrowing and lending and forward contracts.
eg. If a Japanese firm decides to buy goods from an Indian firm and agree to pay in yen , then the transaction becomes an international one for the Indian firm as foreign currency is involved. The same transaction does not amount to a foreign transaction for the Japanese firm as the payment by the said firm is made in Yen, their own currency.
AS 21 provides that “transactions whose terms are denominated in a foreign currency or which require statement in foreign currency” are foreign currency transaction . • IAS further states that foreign currency transactions are when an enterprises a) buys or sells a credit goods or services whose prices are denominated in foreign currency.
b) Borrows or lends funds and the amounts payable or receivable are denominated in foreign currency. c) It is a party to an unperformed foreign exchange contract d) for other reasons, acquires or disposes of assets or incurs or settles liabilities denominated in foreign currency
Foreign Currency Translation • It refers to the change in the monetary expansion of the financial data contained in the financial statements. e.g. Figures of the balance sheet and income statement expressed in rupees when restated in dollar equivalentor in other similar foreign currency translation is said to have occurred.
The need for translation of currencies arises for • Consolidation of financial statements of the subsidiaries located in countries other than the parent country of domicile with the financial statements of the parent company • Performance evaluation of the subsidiaries globally by restating their financial data into a common currency ie currency of the parent country
Steps involved in foreign currency translations: • Recognition and recording of foreign currency transaction • Recording of forward exchange contracts. A forward exchange contract is an agreement under which a business agrees to buy a certain amount of foreign currency at a specific future date. The purchase is made at a pre determined exchange date.
3. Translation of foreign currencies . 4. Undertaking the international GAAP on foreign currency translation.
Better Decision making by Stakeholders • Independent company, domiciled in one country may also undertake translation of financial statement in a view to reaching out to the global audience of interest. Foreign Inflation • Financial Statements prepared as per the traditional methods are based on the basic assumptions that the purchasing power of money is always stable. However as the monetary unit does not remain stable due to inflation,
The information contained in the financial statement without adjustment for inflation becomes highly distorted owing to misinterpretation of elements like cost of good sold, depreciation, deferred expenses and purchasing power gains and loses. Generally profit as revealed by the profit and loss amount prepared under historical cost accounting method has a tendency to be overstated in times of rising prices. As a consequence corporate firms end up paying higher taxes. Financial Statement lose their credibility and interpretative benefit for overstatement of values of asset, inflated rate of return an capital, lenient distribution of dividend, higherwage payment and poor liquidity due to inflated profits. These reasons causing distortions in financial statements with the associated consequences, call for the adjustment of financial statement against price level changes.
Consolidation of Foreign Financial Statements Consolidated or integrated financial statements are prepared by incorporating the financial data of the subsidiaries in the financial statement of the parent company with a view to giving the stakeholder information as regarding the economic resources being controlled by the group. Such Consolidated Financial Statements convey the results of operations and the financial position of group companies as if they were single economic entity. Such report is done to make the users of the financial statement aware about the economic resources controlled by the group and also its obligations.
Indian accounting standard 21 also deals with the provisions for preparation of consolidated financial statements by parent companies except when • a parent company acquires the controlling right in the subsidiary ( through investment), which is intended to be temporary as the investment (controlling interest) is to be disposed of in the near future, and • (2) the subsidiary operates under severe long term restrictions for which its ability to transfer the funds to parent is significantly weakened. It also states that consolidated financial statements are not the substitute for separate financial statements of a parent and it's subsidiary (ies)
Segment and Interim Reporting Segment reporting refers to the reporting of financial information relating to the different business activities of the firm classified as business segment or geographical segment. IAS 14 and AS 13 specify the bases of classification of such segments. Internal reporting refers to the presentation of financial statements of the Enterprise covering periods of less than a full financial year .IAS 34 and AS 25 contain detailed provisions as regards interim financial reporting. The purpose of such presentation of financial information is to provide the decision makers with timely information for taking investment and credit decisions.
Foreign Financial Statement Analysis Financial Statement Analysis refers to an information processing system that is meant for providing Financial Data which are relevant for the decision makers who are concerned with evaluating the economic situation of the firm and predicting its future course. The tools used for analysing the financial statements of domestic company and for the MNCs are basically the same . The most widely used techniques are :. vertical or common size analysis and ratio analysis. A few modern techniques like Economic Value Added( EVA ) Market Value Added (MVA), and Multiple Discriminate Analysis (MDA)are also used for effective analysis of the financial statements. The choice and use of any or all of these techniques would depend on the analyst's own objective and terms of reference.
Budgeting and Performance evaluation In the context of global environment budgeting and Performance evaluation tools should be chosen appropriately so as to fit the environment of the country of their own domicile and also of the foreign countries. The budget should be prepared in a manner as would lead to employees' motivation and goal congruence between the employees and the organization. Performance evaluation should also be appropriately designed keeping in view the domestic and international environment in which the subsidiaries and affiliates operate.
Transfer Pricing Transfer Pricing related to the pricing of goods and services that change hands between entities engaged in interim trade. Transfer price is the price at which goods or services are transferred between affiliated entities within organization. IAS 14 on segment reporting defines transfer as " the pricing of products or services between industry segments or geographic areas". Appropriate evaluation of segment vis a vis managerial performance and avoidance of foreign currency restrictions and quotas , minimisation of exchange risks, avoidance of profit repatriation restrictions and enhancement of shares of profits in joint ventures are some of the other important objectives that are accomplished through transfer Pricing mechanism. The methods used for transfer Pricing are cost - based , market based and negotiated prices.
Exchange Risk Management 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 involved three forms: Translation exposure - It refers to 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.
