INTERNATIONAL ACCOUNTING

Lecture 1 – Introduction Accounting:

• Language of business • Communicates information about the businesses financial state to allow people to

make decisions Characteristics of accounting information:

1. Understandability 2. Relevance 3. Reliability 4. Comparability – compare to different businesses 5. Consistency – compare within the business 6. Materiality 7. Conservatism

International accounting:

• Increasingly important as more companies globalize o Sales to foreign customer o Hedging FX risk o Foreign direct investment o Financial reporting in foreign operations

Reasons for diversity within international accounting:

• Legal system • Taxation • Inflation • Providers of financing e.g. family vs. banks • Culture

Issues due to diversity:

• Comparability • Preparation of financial statements • Access to foreign capital markets

Lecture 2 – International Accounting Framework Int. Acct. Harmonization – refers to harmonization of accounting regulations, standards and practices.

ADVANTAGES DISADVANTAGES 1. Comparability 2. Reduced costs 3. Consolidating – fewer errors 4. More efficient analysis 5. Wider investor interest 6. Wider use of accounts

1. Distortions from inherent cultural differences 2. Impedes national sovereignty 3. Different interpretations @ national levels 4. Ineffective due to varying enforcement

standards 5. Too simple a solution for a complex problem 6. Different to local business conduct

Major harmonization efforts: 1. International Organisation of Securities Commission 2. International Federation of Accountants 3. European Union 4. South Asian Federation of Accountants 5. Confederation of Asian and Pacific Accountants (CAPA) 6. Asean Federation of Accountants (AFA)

International Accounting Standards Board (IASB):

• Formerly Int. Acct. Standards Committee (IASC) 1973 – 2001 • Global standard setting – International Financial Reporting Standards (IFRS) • Board has co-operations with national standard setters • Supported by IOSCO

IFRS: Objective = to create a sound foundations for future accounting standards that are principles

• Adopted by Australia 2005 • NO = China, USA, India • Principles based approach ∴ subject to interpretation, judgement • Whereas, rues = method of unambiguous decision making – these are incorporated

and enforced by individual countries Requirements of IFRS:

1. Purpose of financial statements 2. Quantitative characteristics 3. True & fair presentation 4. Complete set of financial statements 5. General features of financial statements

a. Fair presentation b. Going concern c. Accrual basis d. Consistency e. Materiality f. No offsetting

Enforcement:

• Only suggest principles • Not rules and ∴ IASB cannot enforce • Enforcement is done at a country level by regulatory board

In Australia:

o AASB issues standards o Company compliance ensured by ASIC o Financial Reporting Council has fiscal and policy oversight of AASB o Acct. Professional & Ethical Standards Board (APESB), CPA, AS and NIA also

assist

Stakeholders:

Must maintain communication with all stakeholders. It is critical that accounting information reflects:

• Who the user is • What their information needs are • How the information is best communicated • Where the information is obtained from

Lecture 3 – Foreign Currency Transactions Foreign exchange rates:

• Price at which currency is purchased Types of currency arrangements:

1. Independent float 2. Pegged to another country 3. European Monetary System

Reasons for movement in currency:

1. Interest rates 2. Inflation 3. Economic growth 4. Surplus or deficit 5. Purchasing power 6. Capital flows 7. Foreign exchange reserves 8. Confidence 9. Political factors

Terminology: Spot rate – price for immediate delivery Closing rate – spot rate at the end of the reporting period Functional currency – main currency used by the entity Presentation currency – currency in which the statements are presented Foreign currency transactions:

• Governed by ISFA

Internal Connected External Directors Managers Employees

Shareholders Customers Suppliers Creditors Competitors

Government Local community Interest groups Media