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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