International Accounting

International Accounting

History

            According to Young (2015), convergence of accounting standard is the goal that helps in the establishment of a single set of accounting procedures used in different countries in the world. Young (2015) states that the aim of converging is to minimise the differences in thresholds of accounting. Various factors enhance convergence, for example, believing that a single set of accounting standards would raise the comparability of different accounting entities.

Research by Young (2015) shows that the United States Financial Accounting Systems have been working together with IASB since 2002 to obtain the convergence between the US GAAP and IFRS. A study by Young (2015) records that IASB and FASB made an agreement of working together in September 2002 in collaboration with other bodies with an aim to remove the difference between the US GAAP and the foreign standards. The parties enclosed the decision in memorandum of understanding called Norwalk Agreement. The commitment of the board was strengthened further in 2006 when IASB together with FASB set specific objectives that were to be achieved by 2008. In 2007, securities of the United States and the exchange commission removed the requirements for companies registered in the US but do not belong to the country. The initiative helped reconcile financial reports of the organization with the US generally accepted accounting principles if the accounts were complying with International Financial Reporting Standards. Also, the US Securities and Exchange Commission published a road mark proposed for the US domestic companies to adopt International Financial Reporting Standards.

As Young (2015) observes that in 2008 the boards issued an update to US Securities and Exchange Commission that identified milestones and priorities that emphasised the goal of merged projects to produce common standards. A group of twenty managers called the project setters to increase efforts to finish convergence in accounting standards. IASB and FASB published the progress report on November 2009 following the request that described the intensification programme. Young (2015) postulates that IASB and FASB made an interim report in April 2012 and gave an explanation on financial instrument progress. On February 2013, the boards published an update on the timeline and status of the remaining projects including impairment stage of the joint project on the financial tools.

Differences between US GAAP and IFRS applications

            McEwen (2009) links GAAP to rules and International Financial Reporting Standards to principles. With International Financial Reporting Standard there exists the possibility of various interpretations of the same transaction that may result in disclosures in financial statements. Even though the setting board can clarify unclear areas in a principle based system can only result in fewer exceptions as compared to the rule-based system. McEwen (2009) postulates that treatment of intangible assets helps to demonstrate the consideration on IFRS as a principle based system. On the other hand, under US GAAP, the acquired and intangible assets are recognized at fair value. IFRS and GAAP use different methodologies to assess the accounting treatment. The research under GAAP concentrates more on literature whereas, in the case of IFRS, there is a thorough review of the fact patterns.

Research conducted by McEwen (2009) argues that consolidation also differentiates the two. US GAAP favours a risk and reward while IFRS prefers control model. McEwen (2009) reveals that under IFRS some entities are solely displayed. Income report under IRFS system excludes unusual characters, but GAAP indicates all the elements with the unnecessary characters shown below net income.

Inventory Costs

McEwen (2009) explains that the LIFO accounting system for inventory cost is not allowed under IFRS while in the US GAAP, the method together with first in, first out inventory estimate criteria can be used. McEwen (2009) points out that, a uniform method of costing can lead to enhanced comparability among countries.

Write downs

             McEwen (2009) explicitly states that once inventory is written down under IFRS, it is possible to reverse in future the outlined criteria met. Once inventory has been written down under US GAAP, changing the write down is prohibited.

Earnings per share

            According to research by McEwen (2009), the computation of earnings per share under IFRS does not bring out the interim period calculation of an individual while under GAAP, the computation averages the transitional period computation of a single share increment.

Development cost

IFRS can capitalise on the value if the different parties can meet the outlined criteria under the US GAAP. McEwen (2009) explains that the expenses are considered as expenditures.

Countries that have adopted IFRS

Country             year of adoption

Austria                  2002

Belgium                 2002

Canada                  2006

Cyprus                   1981

Denmark               2002

Croatia                   2007

Finland                   2002

France                    2002

Germany                2002

India                       2007

Italy                         2002

Japan                       2007

Russia                        2011

Impact of cultural differences on interpretation of IFRS

            A study by Young (2015) records that diversity in culture prompt accountant professionals in diverse states perceive accounting standards in different ways. A country’s culture influences the two values of accounting enumerated as secrecy and conservatism that affect the disclosure and measurement of information in financial reports. The values have the ability to affect the comparability of a financial statement. McEwen (2009) states that data collected by Geert Hofstede on cultural values from more than 110000 workers of a multinational organization identified four cultural dimensions that help in explanation of similarities and differences in culture. The dimensions are:

  • Secrecy versus transparency
  • Conservatism versus optimism
  • Statutory control versus professionalism
  • Uniformity versus conformity

Secrecy versus transparency and Conservatism versus optimism relate to the disclosure and measurement of accounting information in a country while the third and fourth relate to enforcement and authority of accounting practices in a nation. McEwen (2009) elaborates that after examining the dimensions and other factors that affect the accounting system, it is evident that cultural differences of one country affect the accounting standards of another country thus hindering normal convergence. Many nations are not embracing harmonious international accounting as a result of the cost involved. The internal control systems and financial reports are affected by price. Public perception of the integrity of the converged set of standards is another cost involved in changing to IFRS by a country. The reporting requirements of SEC needs to be modified to reflect the change in the converged system (Young, 2015).

McEwen (2009) postulates that two beliefs form the foundation of convergence.  Establishment of high-quality rules leads to the realisation of the uniformity of accounting principles over time. Secondly, new and common standards should be developed because elimination of standards on either side is counterproductive.

Transfer Pricing

             McEwen (2009) defines transfer pricing as the price at which the sections of an organization conduct a transaction with each other for example trading of labour and supplies between departments. Transfer pricing is applicable when individual entities of any large firm can be measured and treated separately. The term refers to price setting for goods and services traded among legally controlled partitions within an organization.  Feinschreiber (2004) reveals that if a parent enterprise buys goods from a subsidiary firm, the amount paid by the parent company to the branch termed as transfer price. McEwen (2009) postulates that branches and corporations owned by the parent corporation are legal entities considered in controlling a single organization.  McEwen (2009) states that enterprises can be deemed to be under common control by certain jurisdictions if there exist family members on the board of directors.

                        According to McEwen (2009), the pricing may be used as a method of allocating profit that is used to attribute multinational corporation profit or loss before reduction of tax. McEwen (2009) argues that transfer pricing is a tool for tax avoidance. Transfer price should correspond with what the supplier or seller could charge an independent buyer or what the customer can pay to a vendor. Unrealistic transfer prices are of concern to the taxing body of a country when used to decrease profits in a partition of an organization that is in a state that charges high taxes on income and increases benefits in a nation that imposes less or no tax on income.

Transfer pricing covers documentation, setting, analysis and adjustment of costs made among related groups of products, service and use of property through independent accounting for each related party. The transfer should show the allocation resources to the components (McEwen 2009). A study by McEwen (2009) indicates that the transfer prices must be the same to charges by unrelated parties.

McEwen (2009) records that transfer pricing changes have been a characteristic of many country’s tax system since 1930. The Organization for Economic Cooperation and Development together with the America had some road marks by 1979. In 1988, the US spearheaded creation of comprehensive and detailed transfer pricing between 1990 and 1992 that later became rules in 1994. Organization for Economic Cooperation and Development gave out the first draft of the transfer pricing guidelines in 1995 that expanded between 1996 and 2010 (McEwen, 2009). The two systems state that prices may set by members of an organization but may be changed to match with the arm’s length standard. Both systems contain methods of testing costs and allow the country’s government to interfere with arm’s length standard by changing the price.

Use of transfer pricing by multinationals

            McEwen (2009) postulates that drug companies and other multinational organizations in the United States avoid paying taxes to the government on the earnings. The organizations establish subsidiaries in countries that charge little tax on incomes to maximise on the earnings. The financial reports of Apple Company show that the organization had $145 billion and securities in an accounting year. But a week later after drawing the financial statement, the company borrowed $17 billion. The company employed this tactic to avoid paying tax Feinschreiber (2004) argues that distributing the earnings to the member would force the company to pay tax to prevent the organization that borrows to buy the share and increase the stock dividend. According to research by McEwen (2009) some enterprises pay income taxes close to nominal 35% of the United States and the organizations tend to be in ventures like retailing. However, businesses with a lot of property notably pharmaceutical and technology companies employ techniques that help avoid or minimise the amounts paid as tax.

Methods of translating foreign currency financial statements.

According to Feinschreiber (2004) enterprises find it necessary to convert overseas currencies when conducting businesses and when engaged in international operations that make use of different currencies. Standards of accounting insist on uniform translation methods to ensure that financial reports reflect the underlying economic circumstances. Translating methods are:

Accounting standards

            Feinschreiber (2004) on his research states that rule 11 of international accounting board established accounting standard as an acceptable method of currency translation. The method resembles rule 52 of the United States accounting authority. According to Feinschreiber (2004) defines the functional currency as the one that is common in the economic environment of a foreign subsidiary. Functional currency can be different from the official currency of a nation. Parent enterprises home currency as the presentation currency in their financial reporting (Feinschreiber, 2004). A study by Feinschreiber (2004) indicates that monetary conversion entail translating the functional cash into a presentation form.

Monetary conversion technique

            According to Feinschreiber (2004), accounting standard methodologies use the method that relies on the current rate technique when the functional currency is same with the home currency. Assets and liabilities employ the current exchange rate that was on existence on during conversion. The approach translate equity characters excluding cash retained by employing the transaction date’s spot rate.

Temporal Rate conversion approach

            Accounting principles demand overseas undertakings to employ historical rate technique when regional and functional currencies are different. For example a branch enterprise affiliated to an Indian firm carrying international activities in a country where businesses use the United States dollar and no the home currency may use temporal technique. Revenue earning undertakings have to be adjusted on the income statements items using the method from the transaction date when employing the approach (Feinschreiber, 2004). The adjustments recognised by the business person is the current earning. Feinschreiber (2004) argues that the rule is also applicable when operating in an environment that is hyperinflationary.

Monetary- Nonmonetary Translation Method

             Feinschreiber (2004) explains that when the external subsidiary is highly integrated with the parent organization, the company should use the monetary-nonmonetary translation technique. The goal is to show the translated resources as if coming from exports drawn from parent enterprise to the markets of the subsidiary. The entrepreneur translate assets and liabilities for example cash and accounts when undertaking non-monetary items conversion including common stock and inventories.

References

Devonshire-Ellis, C., Scott, A., & Woollard, S. (2011). Transfer pricing in China. Berlin: Springer Press.

Feinschreiber, R. (2004). Transfer pricing methods: An applications guide. Hoboken, NJ: J. Wiley Pub.

McEwen, R. A. (2009). Transparency in financial reporting: A concise comparison of IFRS and US GAAP. Petersfield: Harriman House Press.

Young, & E. (2015). International GAAP 2015: Generally Accepted Accounting Principles under International Financial Reporting Standards. Hoboken: Wiley Pub.

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