Scope of International

Accounting
International Accounting covers a vast
area. The emulating effect of the changed
character of international trade,
Predominance of multinational
corporation and the internationalization
of money and Capital markets resulted in
certain unique technical accounting
problems having an international
dimension.
Its Scope includes both financial and
management accounting aspects and certain
new issues which have cropped up in the area
on account of developments in the financial
markets which need attention.

 Thus the scope of international accounting

covers financial accounting, management
accounting and social and allied accounting
activities:
 Scope of Multinational accounts
Financial Accounting
Recording of foreign transactions
 Foreign Currency translation
 Accounting for foreign inflation
 Consolidation of foreign financial statements,
reporting and disclosure.
Segment and international reporting.
 Management Accounting
 Analysis of foreign financial statements
 Multinational transfer pricing
 Budgets and performance evaluation of
foreign subsidiaries
Management of foreign exchange risk
 International Taxation
Social and Allied accounting issues
Social Accounting
Accounts for newer financial instruments
 Accounting for mergers and acquisitions
 Global joint Ventures
 Environmental and Social disclosure
 Integration of ethics into accounting
curriculum
 Recording of Foreign Transaction

International accounting beings with the

recording of foreign transactions. An
international and foreign transaction means
and includes any transaction taking place
between parties belonging to two different
countries such as transaction pertaining to
importing, exporting, foreign borrowing and
lending and forward contracts.
• eg. If a Japanese firm decides to buy goods
from an Indian firm and agree to pay in yen ,
then the transaction becomes an international
one for the Indian firm as foreign currency is
involved. The same transaction does not
amount to a foreign transaction for the
Japanese firm as the payment by the said firm
is made in Yen, their own currency.
• AS 21 provides that “transactions whose
terms are denominated in a foreign currency
or which require statement in foreign
currency” are foreign currency transaction .
• IAS further states that foreign currency
transactions are when an enterprises
a) buys or sells a credit goods or services whose
prices are denominated in foreign currency.
b) Borrows or lends funds and the amounts
payable or receivable are denominated in
foreign currency.
c) It is a party to an unperformed foreign
exchange contract
d) for other reasons, acquires or disposes of
assets or incurs or settles liabilities denominated
in foreign currency
 Foreign Currency Translation
• It refers to the change in the monetary
expansion of the financial data contained in
the financial statements.
e.g. Figures of the balance sheet and income
statement expressed in rupees when restated in
dollar equivalent or in other similar foreign
currency translation is said to have occurred.
The need for translation of currencies
arises for
 Consolidation of financial statements of the
subsidiaries located in countries other than
the parent country of domicile with the
financial statements of the parent company

 Performance evaluation of the subsidiaries

globally by restating their financial data into a
common currency ie currency of the parent
country
Steps involved in foreign currency translations:
1. Recognition and recording of foreign
currency transaction
2. Recording of forward exchange contracts. A
forward exchange contract is an agreement
under which a business agrees to buy a
certain amount of foreign currency at a
specific future date. The purchase is made at
a pre determined exchange date.
3. Translation of foreign currencies .
4. Undertaking the international GAAP on
foreign currency translation.
 Better Decision making by
Stakeholders
Independent company, domiciled in one
country may also undertake translation of
financial statement in a view to reaching out
to the global audience of interest.
Foreign Inflation
 Financial Statements prepared as per the
traditional methods are based on the basic
assumptions that the purchasing power of money
is always stable. However as the monetary unit
does not remain stable due to inflation,
The information contained in the financial statement
without adjustment for inflation becomes highly distorted
owing to misinterpretation of elements like cost of good
sold, depreciation, deferred expenses and purchasing
power gains and loses. Generally profit as revealed by the
profit and loss amount prepared under historical cost
accounting method has a tendency to be overstated in
times of rising prices. As a consequence corporate firms
end up paying higher taxes. Financial Statement lose their
credibility and interpretative benefit for overstatement of
values of asset, inflated rate of return an capital, lenient
distribution of dividend, higher wage payment and poor
liquidity due to inflated profits. These reasons causing
distortions in financial statements with the associated
consequences, call for the adjustment of financial
statement against price level changes.
 Consolidation of Foreign Financial
Statements
Consolidated or integrated financial statements are
prepared by incorporating the financial data of the
subsidiaries in the financial statement of the parent
company with a view to giving the stakeholder
information as regarding the economic resources
being controlled by the group. Such Consolidated
Financial Statements convey the results of
operations and the financial position of group
companies as if they were single economic entity.
Such report is done to make the users of the
financial statement aware about the economic
resources controlled by the group and also its
obligations.
Indian accounting standard 21 also deals with the
provisions for preparation of consolidated financial
statements by parent companies except when
1) a parent company acquires the controlling right in
the subsidiary ( through investment), which is
intended to be temporary as the investment
(controlling interest) is to be disposed of in the
near future, and
2) (2) the subsidiary operates under severe long term
restrictions for which its ability to transfer the
funds to parent is significantly weakened. It also
states that consolidated financial statements are
not the substitute for separate financial statements
of a parent and it's subsidiary (ies)
 Segment and Interim Reporting

Segment reporting refers to the reporting of financial

information relating to the different business activities of
the firm classified as business segment or geographical
segment. IAS 14 and AS 13 specify the bases of
classification of such segments.
Internal reporting refers to the presentation of financial
statements of the Enterprise covering periods of less than a
full financial year .IAS 34 and AS 25 contain detailed
provisions as regards interim financial reporting.
The purpose of such presentation of financial information
is to provide the decision makers with timely information
for taking investment and credit decisions.
Foreign Financial Statement Analysis

Financial Statement Analysis refers to an information processing

system that is meant for providing Financial Data which are
relevant for the decision makers who are concerned with
evaluating the economic situation of the firm and predicting its
future course.
The tools used for analysing the financial statements of domestic
company and for the MNCs are basically the same .
The most widely used techniques are :. vertical or common size
analysis and ratio analysis.
A few modern techniques like Economic Value Added( EVA )
Market Value Added (MVA), and Multiple Discriminate Analysis
(MDA)are also used for effective analysis of the financial
statements.
The choice and use of any or all of these techniques would depend
on the analyst's own objective and terms of reference.
 Budgeting and Performance evaluation

In the context of global environment budgeting

and Performance evaluation tools should be
chosen appropriately so as to fit the environment
of the country of their own domicile and also of
the foreign countries. The budget should be
prepared in a manner as would lead to
employees' motivation and goal congruence
between the employees and the organization.
Performance evaluation should also be
appropriately designed keeping in view the
domestic and international environment in which
the subsidiaries and affiliates operate.
 Transfer Pricing

Transfer Pricing related to the pricing of goods and services that

change hands between entities engaged in interim trade. Transfer
price is the price at which goods or services are transferred
between affiliated entities within organization.
IAS 14 on segment reporting defines transfer as " the pricing of
products or services between industry segments or geographic
areas".
Appropriate evaluation of segment vis a vis managerial
performance and avoidance of foreign currency restrictions and
quotas , minimisation of exchange risks, avoidance of profit
repatriation restrictions and enhancement of shares of profits in
joint ventures are some of the other important objectives that are
accomplished through transfer Pricing mechanism.
The methods used for transfer Pricing are cost - based , market
based and negotiated prices.
 Exchange Risk Management

Exchange risk management aims at monitoring

and managing the firm's foreign exchange
exposure so as to maximize its profitability ,cash
flow and market value.
Foreign exchange exposure primarily involved
three forms:
Translation exposure - It refers to the potential of
an increase or decrease in the parent company's
net worth and reported net income due to
fluctuations in the exchange rates.