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CHAPTER FIVE

INTERNATIONAL ACCOUNTING
Introduction
 In an effort to generate comparable and reliable
accounting information to help investors, creditors
and others, each country has developed its own
national financial accounting standards.
 These standards reflect the culture, history, and the
characteristics of accounting problems facing that
country.
 In some countries, the professional bodies
formulate the financial accounting standards, while
in many others governments and regulators establish
these standards.
 As a result, much of the 20th century had witnessed
a high degree of variation in the international
Cont.…..
 To reducing the degree of variation in international accounting practices.
 As a result, in 1973, the International Accounting Standards Committee (IASC)
was formed.
 The founders of this Committee included accounting bodies from Australia,
Canada, France, Japan, Mexico, Netherlands, West Germany, the United States,
United Kingdom and Ireland.
 Harmonization of accounting standards around the world was one of the main
objectives of this Committee.
 Harmonization can be defined as the process of reducing the degree of variation
in international accounting practices.
Definitions of International Accounting
 According to M. Iqbal, T. Melcher and A. Elmallah (1997, p. 2), international
accounting is defined as accounting for international transactions, comparisons
of accounting principles in different countries, and harmonization of diverse
accounting standards worldwide. This definition encompasses the operational
needs of the accountant in financial, managerial, tax, auditing, and other areas
of accounting.

 In the words of T. Evans, M. Taylor and O. Holzmann, international accounting,


which includes both financial and managerial accounting, is defined as
accounting for international transactions, the operations of international firms,
and comparisons of accounting principles and practices found in foreign lands
and the procedures by which they are established.
Advantages of International Accounting
Understandability
 Ease of understanding the financial statements.
 The users interpret the financial statements of
different companies using the same
assumptions.
 Once the users understand these assumptions,
they use this knowledge when reading any
financial statement.
Guidance
 The guidance provided to accountants.
 When financial reporting issues arise, the accountant may
refer to the published accounting standard to determine
how to record the event.
 These issues include new accounting transactions arising
from technology, such as Internet sales, or new actions
incorporated by the company, such as changes in pension
plan
Ethics
 Different countries and regions around the world boast very different cultures
and norms,
 International accounting standards set a unified code of accounting ethics to be
followed across cultures.
 One major benefit of international standards is that they consider input from
professionals and legal authorities around the world.
 This can create a set of ethical guidelines that do not favor one culture over
another, as can be the case when a foreign company adheres to its own
domestic ethical values.
Investor benefits
 The format of financial statements simplify international investment
decisions.
 Investors can compare the financial statements of companies following
International Accounting Standards Board standards, or other international
guidelines, regardless of the company's country of origin.
 Without standards, making comparisons becomes less reliable, as the
information presented in financial statements is calculated using different
methods.
Multinational companies
 Simplify accounting for multinational companies that have facilities and
operations in multiple countries.
 Multinationals can institute international standards across all geographical
units to avoid confusion and increase the system's accuracy and efficiency.
 Standard accounting systems across all geographic units within a large
company can simplify the process of transferring managers from one unit to
another and can make cross-unit collaboration on financial matters more
productive.
International trade
 Companies increasingly seek strategic partners, customers or suppliers in foreign
countries.
 International accounting standards give companies a common financial language
and understanding, making it easier for them to do business together.
 International standards also create an entirely new industry, international
accounting consultation, creating new opportunities for entrepreneurs in any
country.
Criticisms of international accounting
Inflexible framework
 Each company faces different experiences
 The accountant must make the company's unique experiences fit into the
guidelines of the published accounting standards.
Cost to comply
 New accounting standards require the company to consider the requirements
of the standard, what actions the company must take to implement the
standard and what the cost will be
 In many cases, the company must design new procedures, which requires a
large financial investment that includes employee labor costs, system
upgrades and employee training.
C. Obstacles and deterrents to harmonization:
 Nationalism: This is an unwillingness to accept somebody else’s standards.
 Different user groups: Countries have different ideas on who are the relevant
user groups and their respective importance
 Different purposes of financial reporting: In some countries the purpose is solely
for tax assessment, while in other it is investor decision making.
 Needs of developing countries: These needs require the development of different
reporting systems to those that exist in developed countries.
 Environmental differences: These result in objectives for accounting systems
differing from country to country.
Applicability of International Standards
 IASC focused its harmonization efforts on the
financial statements which are prepared for the
purpose of providing information about the financial
position,
 Performance and cash flows of business that is useful
to a wide range of users in making economic
decisions.
International accounting standards are applied as a
result of either
(a)International or Political Agreement or
(b) Voluntary (or professionally encouraged)
compliance.