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International Accounting

What is Domestic Accounting?

Domestic Accounting: an information specialty providing information about a firm to users of that information as a basis for economic decisions.

What is International Accounting?

International Accounting (defined): same as above except that the firm being reported on is a multinational company with operations and transactions that cross national boundaries or an entity with reporting obligations to non-domestic readers.

What Does International Accounting Diversity Entail?  

  • Measurement principles
  • Financial disclosure (corporate transparency)
  • Auditing practices

Contributing Factors

 Accounting’s international heritage

  • Double-entry originates in the Italian city states.
  • Bookkeeping spreads to Germany and assists the spread of capitalism.
  • Dutch enhance income measurement.
  • French use accounting for governmental planning and control.
  • Double entry assists the British in managing and controlling commercial interests in the colonies.
  • Accounting plays a major role in the U.S. industrial revolution.

Paradox of international accounting

  • In many countries, accounting remains a nationalistic affair.
  • Accounting serves people and institutions whose decisions are international in scope.
  • Accounting diversity creates a demand for harmonization.

Growth and spread of multinational operations

Reporting issues when business transcends national boundaries

  • Consolidation of foreign accounts
  • Accounting for foreign currency fluctuations
  • Accounting for changing prices
  • International planning and control
  • Performance evaluation of foreign operations
  • Financial risk management
  • International taxation and transfer pricing

Financial innovation

  • Identifying potential market risks
  • Quantifying trade-offs associated with alternative risk reduction strategies
  • Measuring risk exposures
  • Accounting for specific hedge products
  • Evaluating the effectiveness of hedging programs

Cross-border mergers and acquisitions

  • Corporate valuation is a function of accounting measurements that vary from country to country.
  • E.g., the e in p/e valuation multiples.

Internationalization of capital markets

  • Raising external finance abroad means that financial reports must increasingly travel internationally.

Reporting issues associated with internationalization of capital markets

  • How to analyze and interpret foreign accounts?
  • How to report to foreign readers?
  • How to harmonize reporting standards internationally?

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