ORIENTATION AND UNIQUE FEATURES

International accounting can be viewed in terms of the accounting issues uniquely confronted by companies involved in international business. It also can be viewed more broadly as the study of how accounting is practiced in each and every country around the world, learning about and comparing the differences in financial reporting, taxation, and other accounting practices that exist across countries. This book is designed to be used in a course that attempts to provide an overview of the broadly defined area of international accounting, but that focuses on the accounting issues related to international business activities and foreign operations.

The unique benefits of this textbook include its up-to-date coverage of relevant material, extensive numerical examples provided in most chapters, a separate chapter devoted to the application of International Financial Reporting Standards (IFRS), and coverage of nontraditional but important topics such as strategic accounting issues of multinational companies and international corporate governance. This book contains several important distinguishing features:

• Numerous excerpts from recent annual reports to demonstrate differences in financial reporting practices across countries and to demonstrate financial reporting issues especially relevant for multinational corporations.
• Incorporation of research findings into the discussion on many issues.
• End-of-chapter assignments that help students develop their analytical, communication, and research skills.
• Detailed discussion on the most recent developments in the area of international harmonization/convergence of financial reporting standards.
• A separate chapter on International Financial Reporting Standards that provides detailed information on selected standards. (Many other IFRS are covered in other chapters.) The chapter also includes numerical examples demonstrating major differences between IFRS and U.S. GAAP and their implications for financial statements.
• Separate chapters for (1) foreign currency transactions and hedging foreign exchange risk and (2) translation of foreign currency financial statements. Detailed examples demonstrating the accounting for foreign currency derivatives used to hedge a variety of types of foreign currency exposure.
• Separate chapters for (1) international taxation and (2) international transfer pricing, with detailed examples based on provisions in U.S. tax law.
• A chapter devoted to a discussion of the strategic accounting issues facing multinational corporations, with a focus on the role accounting plays in strategy formulation and implementation.
• Use of a corporate governance framework to cover external and internal auditing issues in an international context, with substantial coverage of the Sarbanes-Oxley Act of 2002.

CHAPTER-BY-CHAPTER CONTENT

Chapter 1 introduces the accounting issues related to international business by following the evolution of a fictional company as it grows from a domestic company to a global enterprise. This chapter provides the context into which the topics covered in the remaining chapters can be placed.

Chapters 2–5 focus on differences in financial reporting across countries and the international harmonization of accounting standards.

• Chapter 2 presents evidence of the diversity in financial reporting that exists around the world, explores the reasons for that diversity, and describes the problems that are created by differences in accounting practice across countries. In this chapter, we also describe and compare several major models of accounting used internationally. We discuss the potential impact that culture has on the development of national accounting systems and present a simplified model of the reasons for international differences in financial reporting. The final section of this chapter uses excerpts from recent annual reports to present additional examples of some of the differences in accounting that exist across countries.
• Chapter 3 focuses on the major efforts worldwide to converge financial reporting practices with an emphasis on the activities of the International Accounting Standards Board (IASB). We explain the meaning of convergence, identify the arguments for and against convergence, and discuss the use of the IASB's International Financial Reporting Standards (IFRS), including national efforts to converge with those standards.
• The growing international recognition of IFRS is arguably the most important development in the world of international accounting. More than 80 countries now use IFRS for financial reporting purposes, with the United States being the economically most important country not to do so. Chapter 4 summarizes the major types of differences between IFRS and U.S. GAAP. It provides detailed information on selected IFRS, concentrating on standards that relate to the recognition and measurement of assets. (Standards related to liabilities and some other issues are covered in an appendix to this chapter.) Chapter 4 also includes numerical examples demonstrating major differences between IFRS and U.S. GAAP and their implications for financial statements.
• Chapter 5 describes the accounting environment in five economically significant countries—China, Germany, Japan, Mexico, and the United Kingdom—that are representative of major clusters of accounting system. The discussion related to each country's accounting system is organized into four parts: background, accounting profession, accounting regulation, and accounting principles and practices. Exhibits throughout the chapter provide detailed information on differences between each country's GAAP and IFRS, as well as reconciliations from local GAAP to U.S. GAAP.

Chapters 6–8 deal with financial reporting issues that are of particular importance to multinational corporations. Two different surveys of business executives indicate that the most important topics that should be covered in an international accounting course are related to the accounting for foreign currency. Because of its importance, this topic is covered in two separate chapters (Chapters 6 and 7). Chapter 8 covers three additional financial reporting topics of particular importance to multinational corporations—inflation accounting, business combinations and consolidated financial statements, and segment reporting.

• Chapter 6 begins with a description of the foreign exchange market and then demonstrates the accounting for foreign currency transactions. Much of this chapter deals with the accounting for derivatives used in foreign currency hedging activities. We first describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk. We then explain the concepts of cash flow hedges, fair value hedges, and hedge accounting. Finally, we demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions.
• Chapter 7 focuses on the translation of foreign currency financial statements for the purpose of preparing consolidated financial statements. We begin by examining the conceptual issues related to translation, focusing on the concept of balance sheet exposure and the economic interpretability of the translation adjustment. Only after a thorough discussion of the concepts and issues do we then describe the manner in which these issues have been addressed by the IASB and by the U.S. FASB. We then illustrate application of the two methods prescribed by both standard setters and compare the results. We discuss hedging the net investment in foreign, and highlight some of the international differences in translation procedures.
• Chapter 8 covers three additional financial reporting issues. The section on inflation accounting begins with a conceptual discussion of asset valuation and capital maintenance through the use of a simple numerical example, and then summarizes the inflation accounting methods used in different countries. The second section focuses on International Financial Reporting Standards related to business combinations and consolidations, covering issues such as the determination of control, the acquisition method, proportionate consolidation, and the equity method. The final section of this chapter focuses on International Financial Reporting Standard 8, Operating Segments.

Chapter 9 introduces issues related to the analysis of foreign financial statements. We explore potential problems (and possible solutions to those problems) associated with using the financial statements of foreign companies for decisionmaking purposes. This chapter also provides an example of how an analyst would reformat and restate financial statements from one set of GAAP to another.

Business executives rank international taxation second only to foreign currency in importance as a topic to be covered in an international accounting course. International taxation and tax issues related to international transfer pricing are covered in Chapters 10 and 11.

• Chapter 10 focuses on the taxation of foreign operation income by the home country government. Much of this chapter deals with foreign tax credits, the most important mechanism available to companies to reduce double taxation. This chapter provides a comprehensive example demonstrating the major issues involved in U.S. taxation of foreign operation income. We also discuss benefits of tax treaties, translation of foreign currency amounts for tax purposes, and tax incentives provided to attract foreign investment.
• Chapter 11 covers the topic of international transfer pricing, focusing on tax implications. We explain how discretionary transfer pricing can be used to achieve specific cost minimization objectives and how the objectives of performance evaluation and cost minimization can conflict in determining international transfer prices. We also describe government reactions to the use of discretionary transfer pricing by multinational companies, focusing on the U.S. rules governing intercompany pricing.

Chapter 12 covers strategic accounting issues of particular relevance to multinational corporations. This chapter discusses multinational capital budgeting as a vital component of strategy formulation and operational budgeting as a key ingredient in strategy implementation. Chapter 12 also deals with issues that must be addressed in designing a process for evaluating the performance of foreign operations.

Chapter 13 covers comparative international auditing and corporate governance. This chapter discusses both external and internal auditing issues as they relate to corporate governance in an international context. Chapter 13 also describes international diversity in external auditing and the international harmonization of auditing standards.