Chapter-Five International Accounting (IA) : Rift Valley University, Department of Accounting

Chapter- Five
International Accounting (IA)

 Over the last two decades, the global financial landscape has undergone a significant
transformation.
o These developments have been attributable, in part, to dramatic changes in the
business and political climates, increasing global competition, the
development of more market based economies and rapid technological
improvements.
 At the same time, the world’s financial centers have grown increasingly
interconnected. Corporations and borrowers look beyond their home country’s border
for capital.
o An increasing number of foreign companies routinely raise or borrow capital.
In US financial markets, US investors have shown great interest in investing
in foreign enterprises.
o Due to these newly emerged issues the word international accounting becomes
more and more familiar topic in the accounting environment.
 International Accounting is considered to be a universal system that could be adopted
accounting principles, such as the set maintained in the united style. (t/f)
 It is collection of all principles, methods and standards of all countries would be
considered as the international accounting system.
 Definitions of International Accounting

 According to F. Choi and G. Mueller, international accounting extends general-
purpose, nationally oriented accounting in its broadest sense to:
o international comparative analysis,
o accounting measurement and reporting issues unique to multinational
enterprises,
o accounting needs of international financial markets, and
o Harmonization of worldwide accounting and financial reporting diversity via
political, organizational, professional, and standard-setting activities.
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Rift valley university, department of accounting
 According to A. Belkaoui, the new environmental factors of
o The global economy,
o The international monetary system,
o The multinational corporation, and
o Foreign direct investment, have created an environment in which business
transactions, their conduct, measurement and disclosure, take new and
distinctive forms that call for a specific accounting sub discipline. That
accounting sub-discipline is international accounting.
 In the words of T. Evans, M. Taylor and O. Holzmann, international accounting,

which includes both financial and managerial accounting, is defined as:-
o Accounting for international transactions,
o the operations of international firms, and
o Comparisons of accounting principles and practices found in foreign lands and
the procedures by which they are established.
 According to M. Iqbal, T. Melcher and A. Elmallah (1997, p. 2), international

accounting is defined as:-
o Accounting for international transactions,
o comparisons of accounting principles in different countries, and
o 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.
 Advantages of International Accounting (short answer)
o International Accounting gives greater comparability of financial
reports.
o Financial executives think that a more level playing field will result if
international accounting standards are widely used.
o Some economists believe that such standards would improve global
business competitions and
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o Some international agencies advocate international standards as a form of
assistance to developing countries.
o In more operational sense, international standards may:-
i. Reduce bookkeeping costs and
ii. Allow more efficient preparation of financial statements.
 Beneficiaries of International Accounting

o Investors: both individual and corporate, would like to be able to
compare the financial results of different companies internationally as well
as nationally in making investment decisions .
o Multinational Companies (MNCs): These organizations would benefit
in many respects such as
i. easier consolidation of foreign subsidiaries and associated
companies,
ii. easier to source foreign investor funds,
iii. easier management control, because harmonization would aid
internal communication of financial information,
iv. easier to transfer accounting staff across national borders, and
v. Possibly a reduction in audit cost.
o Large international accounting firms: would make Accounting and
Auditing much easier if similar accounting practice existed throughout the
world.
o Tax authorities: Easier to asses the tax liability of investors including
MNCs who receive income from overseas sources.
 Criticism of International Accounting
The internationalization of accounting standards has had its fair share of critics.
 As early as in 1971, (before formation of IASC), the academic Irving Fanti
condemned international standard setting as a solution too simple for a problem
too complex. He argued that these are an inherent flexibility to accounting as a
social science that yields adaptability as a chief value. He identified three
barriers to international accounting standardization among countries
(1) Differences in national backgrounds and traditions
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(2) Differences in the needs of various economic environment
(3) The challenges of standardization to national sovereignty
 Other observers have argued that international accounting standard setting is
essentially a play of the large international professional accounting service firms
to enhance their revenue potential.
o Multinational accounting firms are needed so the argument goes to apply
international standards that might seem distant and complex to given
national environments.
o Also, as international financial institutions and international markets insist
on the application of international standards, only larger international
accounting firms are able to satisfy this demand.
 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.
 International Accounting standard setting bodies

(1) International Accounting Standard Committee (IASC)
o IASC was formed in June 1973 in furtherance of an agreement by the
accounting bodies of 10 countries.
o A revised agreement was signed in 1982.
o Its head quarter is at London.
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The main objectives of IASC are:-
 To formulate and publish, in the public interest, accounting
standards to be observed in the presentation of financial
statements and to promote their world-wide acceptance and
observance and
 To work generally for the improvement and harmonization of
regulations, accounting standards.
o It was existed until 2000.
o In March 2001, the International Accounting Standards Committee
(IASC) Foundation was formed as a not-for-profit corporation
incorporated in the State of Delaware, US.
o The IASC Foundation is the parent entity of the International Accounting
Standards Board (IASB), an independent accounting standard-setter based
in London, UK.
o As per the new constitution, IASC Foundation
 Appoints the members of IASB, Interpretations committee and
Advisory councils
 Review the strategies of IASC and
 Approve budgets.
o And IASB:
 Develop and issue IAS and
 Approve interpretations developed by International Financial
Reporting Interpretations Committee (IFRIC).
(2) International Accounting Standards Board (IASB)

o IASB took over the responsibility of setting IAS from April 1, 2001 from IASC.
o The International Accounting Standards Board is an independent, privately-funded
accounting standard-setter based in London, UK.
o The Board members come from nine countries and have a variety of functional
backgrounds.
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o The IASB is committed to developing, in the public interest, a single set of high
quality, understandable and enforceable global accounting standards that require
transparent and comparable information in general purpose financial statements.
o In addition, the IASB co-operates with national accounting standard-setters to
achieve convergence in accounting standards around the world.
(3) International standard setting by IASC and IASB:
o International Accounting Standards (IASs) were issued by the International

Accounting Standards Committee (IASC) from 1973 to 2000.
o IASC has issued 41 Accounting Standards , dealing with such accounting issues
as:-
 Consolidated financial statements,
 Depreciation,
 segment reporting,
 lease,
 revenue recognition,
 Business combination and related party disclosures.
o IASB took over the responsibility of setting IAS from April 1, 2001 from IASC.
 Since then, the IASB has:-
 Amended some IASs,
 has proposed to amend other IASs,
 has proposed to replace some IASs with new International Financial
Reporting Standards (IFRSs), and
 Has adopted or proposed certain new IFRSs on topics for which there
was no previous IAS.
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Chapter-Six
INTERNATIONAL ACCOUNTING STANDARDS (IAS)
 IAS 1 Presentation of Financial Statements
 IAS 2 Inventories
 IAS 3 Consolidated financial Statements, Originally issued in 1976, effective from
Jan 1977. No longer effective. (Superseded in 1989 by IAS 27 and IAS 28)
 IAS 4 Depreciation Accounting. Withdrawn in 1999
 IAS 5 Information to be disclosed in Financial Statements. Originally issued in
1976, effective from Jan 1977. No longer effective. (Superseded by IAS 1)
 IAS 6 Accounting Responses to changing prices ( Superseded by IAS 15)
 IAS 7 Cash Flow Statements
 IAS 8 Accounting policies. Changes in Accounting estimates and errors
 IAS 9 Accounting for Research &Development activities (Superseded by IAS 39 )
 IAS 10 Events after the Balance sheet date
 IAS 11 Construction contracts
 IAS 12 Income Taxes
 IAS 13 Presentation of Current Assets and Current liabilities(Superseded by IAS
1) IAS 14 Segment Reporting
 IAS 15 Information reflecting the effects of changing prices ( Withdrawn in
December, 2003)
 IAS 16 Property , Plant and Equipment
 IAS 17 Leases
 IAS 18 Revenue
 IAS 19 Employee benefits
 IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance
 IAS 21 The effects of changes in foreign exchange rates
 IAS 22 Business combinations ( Superseded by IFRS 3 effective 31 March, 2004)
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 IAS 23 Borrowing costs
 IAS 24 Related Party disclosures
 IAS 25 Accounting for Investments ( Superseded by IAS 39 and IAS 40)
 IAS 26 Accounting and Reporting by Retirement Benefit plans
 IAS 27 Consolidated and Separate Financial Statements
 IAS 28 Investments in Associates
 IAS 29 Financial Reporting in Hyper inflationary Economies
 IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial
Institutions
 IAS 31 Interests in joint ventures
 IAS 32 Financial Instruments: disclosure and presentation
 IAS 33 Earnings per share
 IAS 34 Interim financial reporting
 IAS 35 Discontinuing operations ( Superseded by IFRS 5)
 IAS 36 Impairment of Assets
 IAS 37 Provisions, contingent liabilities and contingent assets
 IAS 38 Intangible assets
 IAS 39 Financial Instruments: Recognition and Measurement
 IAS 40 Investment Property
 IAS 41 Agriculture
o Applicability of International Standards

International accounting standards are applied as a result of either
o International or Political Agreement or
o (b) Voluntary (or professionally encouraged) compliance.
 The application of European Union (EU) accounting –related directives is an

illustration of the first case.
 In second case, their acceptance depends upon the goodwill of those using
accounting standards. The easiest situation occurs when an international standard
simply reiterates a national standard.
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o In such a case there is no conflict and acceptance and compliance with
national standards can then be said to extend to acceptance of and
compliance with international standards as well.
 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 apply to the published financial statements of
business, although many countries restrict their use to larger companies or to
consolidate financial statements.
 International accounting standards are not intended to apply to financial
statements that are prepared for other purposes such as determination of tax
liability or distributable profits. IASC has also decided not to deal with
harmonization of financial statements of non-profit enterprises including non-
business activates of governments.
 The standards do apply, however to government business enterprises.
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Chapter- Five

International Accounting (IA)

 Definitions of International Accounting

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

 According to M. Iqbal, T. Melcher and A. Elmallah (1997, p. 2), international

 Beneficiaries of International Accounting

 Obstacles and deterrents to harmonization

 Nationalism: This is an unwillingness to accept somebody else’s

 International Accounting standard setting bodies

(2) International Accounting Standards Board (IASB)

(3) International standard setting by IASC and IASB:

o International Accounting Standards (IASs) were issued by the International

o Applicability of International Standards

 The application of European Union (EU) accounting –related directives is an

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