This report is written as a final assignment for the course ‘International Accounting’. In this report, the author will discuss about international business, objectives of international business, and the issues related to international accounting will also be discussed. The author will be concentrating on current issues in international accounting as well as the possible future issues related to international accounting. Finally, the report will end up with a conclusion and possible references in the end of the report.
International Business and its objectives
International business has been the biggest interest for a growing company. Companies are created to achieve growth and to gain huge profit for the shareholders or the owner of the company. When a company starts growing in its home country, then it seeks to do business outside from the territory of home country and start operation in other territories of foreign countries. Here starts the concept of international business. Several books and authors have defined international business in their own terms and some of the definition has been mentioned below. According to safaribooksonline.com; “International business consists of transactions that are devised and carried out across national borders to satisfy the objectives of individuals, companies, and organizations. These transactions take on various forms, which are often interrelated. Primary types of international business are export-import trade and foreign direct investment.
The latter is carried out in varied forms, including wholly owned subsidiaries and joint ventures. Additional types of international business are licensing, franchising, and managing contracts. (Definition of International Business) According to icmab.net; “International business is the performance of business across national boundaries. Every nation in the world participates in international business to some extent. All countries are not endowed with the same type of natural resources. A country specializes in the production of those goods for which it has maximum advantages. It can produce those goods at lower cost and export the same to other countries. It imports those goods which it cannot produce or for which it has no specific advantage. This is the basis of international trade.” (Define international Business) So from above two this definition it is clear about basic ideas of international business and the next thing that company should understand is the objective of companies that are involved in international business. The main objectives of companies to get involved in international business are listed below.
1. To build brand image 2. Sales growth 3. Access to scarce resources 4. Leverage core competition 5. Too small home market 6. External initiatives to spread the product 7. To diversify sources of sales and supply 8. Rules and regulation 9. Diversify risks 10. Increase customer demand (Reason for going international) s In is now clear from the above bullet points about the company’s main objective for going global. It is very rare that every company that has gone global has succeed, but there are some companies which has achieved their objectives and doing well in outside market from their home market. There are several factors that prohibit company’s becoming successful and the company which can properly manage these factors grows prosperous and huge. And the one which fails gets either bankrupt or leave the foreign markets. The lists of factors that affect companies that are operating globally are listed below. External factors: 1. Importance of environmental factors 2. Economic environment 3. Social environment 4. Political environment 5. Cultural environment 2
6. Technological environment 7. Legal environment 8. Competitive environment The above mentioned factors are the major hindrance for companies operating outside their home country. The one which can play well with this kind of factors can easily achieve its goal and the one which fails either quits or get bankrupt. These factors are outside the company but there are some factors lies inside the company and that should be handled properly. These factors are listed below. Internal factors: 1. Value system
2. Missions and objectives 3. Management structures 4. Human resources 5. Company image and brand equity 6. Physical assets and facilities 7. R&D and Technological capabilities 8. Financial Factors It is very difficult to handle the outside environment or control outside environment but it is possible to some extent to control the internal factors. Company transform themselves according to external environment to survive in the market and control internal factors by several means. This report is somehow linked with internal factors, their solutions.
The word international in international accounting can be defined at three different levels. The first level is supranational accounting, which denotes standards, guidelines, and rules of accounting, auditing, and taxation issued by supranational organizations. Such organizations include the United Nations, the organization for Economic Cooperation and Development, and the International Federation of Accountant. At the second level, the company level, international accounting can be viewed in terms of the standards, guidelines, and practices that a company follows related to its international business activities and foreign investments. These would include standards for accounting for transactions denominated in a foreign currency and techniques for evaluating the performance of foreign operations. At the third and broadest level, international accounting can be viewed as the study of the standards, guidelines, and rules of accounting, auditing, and taxation that exist within each country as well as comparisons of those items across countries.
Examples would be cross-country comparisons of rules related to financial reporting of plant, property and equipment, income and other tax rates, and the requirements for becoming a member of the national accounting profession. International accounting is an extremely broad topic. At a minimum, it focuses on the accounting issues unique to multinational corporations. At the other extreme, it includes the study of the various functional areas of accounting in all countries of the world, as well as a comparison across countries. The world economy is becoming increasingly more integrated. International trade has grown substantially in recent years and is even becoming a normal part of business for relatively small companies. The tremendous growth in foreign direct investment over the last two decades is partially attributable to the liberalization of investments laws in many countries specifically aimed at attracting FDI. ( (Introducton to internationa Accounting) Due to the complexities in international accounting standards and its rules, wide horizon, there are several issues present and several to come.
Current and Future issues
Over the past few years many countries around the world have replaced their own national standards with the international standards. All European countries today have adopted the international Financial Reporting standards forcing companies to switch over international standards. There are many issues in today’s business environment related to international standards. Some of these issues that have recently emerged are due to the increase in global competition, international trade and companies conducting business overseas. In the U.S, companies use GAAP when creating financial statements but it could change in the near future if they decide to adopt IFRS. There are many differences when comparing IFRS to GAAP because IFRS is lot less detailed when it comes to reporting. Business and investors today are conducting business on a global level and this has led many countries to adopt the international accounting standards. Today there are more than 110 countries who have adopted IFRS.
Some of the reasons why these countries have turned to the international accounting standards are because it gives investors better information concerning financial statements since every country has different standards and different ways of classifying assets and liabilities. Another reason for this is that it would cut down the cost of trying to prepare and interpret financial statements when dealing with non US companies. (Issues with International accounting) A multi-national firm (MNF9 has its assets, liabilities, revenues and expenses expressed in more than on currency. To aid in the understanding and use of its financial statements in financing and use of its resources, procedures must be developed to translate the foreign subsidiary financial statements in terms of a common comparable unit of measurement. The common unit chosen is usually the parent company currency so that the translated financial statements can be consolidated. Accounting procedures for translation and consolidation are important for a number of reasons.
First, accounting data is the means whereby outsiders, outsiders, including investors, form expectations and opinion about the operations of the multi-national firms. This not only affects the ability of the firm to operate financially by influencing its financing opportunities, but also, in part, determines its cost of capital. In an era of increasingly closer scrutiny of the operations of firms by governments, labor and other public interest groups, publishes accounting data could have other important implications for the MNFTranslation procedures have become even more important to the MNF’s investor relations since the publication of Accounting standards, because it is now mandatory for Firms to disclose in the annual report the translation procedure used and the exchange losses or gains incurred. (Problem in international accounting)
Some of the other major issues in international accounting are: Translation of foreign operation National Accounting differences for each countries of operation Cross border financing Harmonization Global convergence Multinational or transnational corporation Accountants and users of accounting information have not been able to agree on the goals of Financial statements The accounting profession has developed differently in various countries
There are difference in the laws regulating companies There are differenced in the governmental and other requirements The failure to deal with differences among countries in the basic economic factors in different countries Preparing consolidated financial statement of all branches The influence of tax laws on financial reporting. (Problem in international Accounting)
Conclusion Now a day’s several companies are going global due to different reasons. There are several objectives of companies that compel them to operate in different countries. The major reasons are to reduce cost, reduce risk, Governmental rules and regulation, availability of resources etc. With this decision comes lot of challenges for the companies. Challenges are direct or indirect, internal or external etc. Some of major challenges for a companies operating in another countries are culture, laws, currencies, exchange rates etc. Hence it is crucial for an organization to perform and manage these challenges properly. As discussed in the above text, the major challenges faced by companies in recent days are accounting problem. A company operating in more than one country has lots of bottle neck in its operation. A small mistake in accounting figure can cost the company in a huge manner.
Consolidating all the financial report of each companies operating in different countries is very difficult. Similarly, converting the currency figure to the accounting currency also carries lots of loss for the companies. In order to decrease these risks, company management use modern ERP software and currency hedging techniques. This enables the companies to reduce their risk and become profitable. Similarly, accounting standard are also big problems for the companies. They have to convert the international accounting principle to local GAAP of the respective countries and vice-versa and it creates lots of hiccup in the accounting reports. There will be certainly more and more challenges to come for the companies working in different companies but proper guidelines and laws, techniques will certainly help them to lower their operating cost and transform the accounting system easier and reliable.
Define international Business. (n.d.). Retrieved January 21, 2013, from icmab: http://icmab.net/defineinternational-business-and-describe-how-it-differ-from-domestic-business Definition of International Business. (n.d.). Retrieved Jaunary 21, 2013, from Safaribookonline: http://my.safaribooksonline.com/book/-/9780470530658/chapter-1-the-international-businessimperative/navpoint-19 Introducton to internationa Accounting. (n.d.). Retrieved January 21, 2013, from mcgraw-hills: http://highered.mcgraw-hill.com/sites/dl/free/007337962x/618763/Sample_Chapter.pdf Issues with International accounting. (n.d.). Retrieved January 21, 2013, from articlesbase: http://www.articlesbase.com/business-articles/issues-with-international-accounting3692481.html Problem in international accounting. (n.d.). Retrieved