International Accounting, 7/e Frederick D.S. Choi Gary K. Meek Chapter 1: Introduction
Learning Objectives • How is international accounting distinct from domestic accounting? • What does international accounting diversity entail? • Does international accounting have a history? • What factors are contributing to the importance of international accounting as a field of study? • What external and internal reporting issues arise when business and investing transcend national borders? • What is meant by the term, global capital markets, and what does development mean for capital market participants?
What is International Accounting? • Domestic accounting: an information specialty providing information about a firm to users of that information as a basis for economic decisions. • 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.
Contributing Factors (contin) • 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.
Contributing Factors (contin) • Growth and spread of multinational operations
Contributing Factors (contin) • 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
Contributing Factors (contin) • Global competition • Competitive benchmarking necessitates international comparisons.
Contributing Factors (contin) • 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.
Contributing Factors (contin) • 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?