Going Global: International Accounting Firms and Their Role in Business

THE ROLE OF ACCOUNTANTS IN INTERNATIONAL BUSINESS:

The purpose of accounting firms is to communicate the organization’s financial position to business leaders, investors, banks, and governments. Accounting Standards provide a set of rules and principles that govern the form and content of financial statements. With these consistent reports, the company’s executives and investors can assess the company’s financial position. Accounting standards cover accounting for inventory, depreciation, research, development costs, income taxes, investments, intangible assets, and other employee benefits.

Several Investors and banks use these types of financial statements to decide whether to invest or lend money to companies, while governments use financial statements to ensure companies pay their taxes fairly. Moreover, as countries develop different cultures, languages, and socioeconomic traditions, they also develop different accounting methods. However, better options exist for properly functioning international business in an increasingly globalized world.

THE BIRTH OF A NEW INTERNATIONAL ACCOUNTING STANDARD

The International Accounting Standards Board abbreviated as (IASB) is the main body that proposes international accounting standards. Originally established in 1973 as the International Accounting Standards Committee, abbreviated as (IASC) and renamed the International Accounting Standards Board in 2001. The IASB is an independent body developing accounting standards. 

The accounting standard is known as International Financial Reporting Standards (IFRS). Council, consult

The main reason for adopting an international standard is this only if different accounting standards are used. It is difficult for investors or lenders to compare the financial position of two companies. Furthermore, if a single international standard is used, multinational companies will not have to prepare different reports for the countries in which they operate.

Finally, accounting rules in China do not follow IFRS or GAAP, making it difficult for investors to assess a company’s true value. Doug McIntyre, “Accounting China:

To solve this problem, a number of large Chinese companies publish their results per Chinese Accounting Standards and IASB standards. However, two accounting standards can show very different results for the same business, so advocates of convergence favor using a single GAS global accounting standard.

CHARACTERISTICS OF THE INTERNATIONAL ACCOUNTING STANDARDS AND THEIR IMPLICATIONS FOR INTERNATIONAL TRADE

On the one hand, complying with GAAP and IFRS rules creates extra work and paperwork for multinationals. For example, a U.S. company seeking to raise capital in Germany must prepare financial statements following IFRS accounting rules and US GAAP rules. Other problems arise when different accounting rules in a country make financial statements look different. 

If the same transaction is accounted for in different ways according to the accounting rules of different countries, the comparability of the financial statements will be affected.

The difference between US GAAP  and IFRS rules is huge in some cases. For example, last-in, first-out (LIFO) accounting is allowed by GAAP but prohibited by IFRS. As a result, some companies, such as the aluminium company Alcoa, get a tax advantage by using the LIFO method. This is why adopting IFRS in the U.S. takes time and why the FASB and IASB work hard to harmonize standards.  

FINANCIAL REPORTING IN INTERNATIONAL TRADE

Multinational companies often organize themselves into separate legal entities (i.e., many countries require companies doing business in their home country to set up separate companies. As a result, any multinational company may have many foreign subsidiaries, all owned by the parent company. Consolidated financial statements consolidate the parent company’s financial statements and subsidiaries into a single statement. Consolidated financial statements must reconcile all investments and capital as well as the company’s assets, liabilities, and operating accounts.

The consolidated financial statements demonstrate that companies, although legally separate from the parent company and each other, are economically dependent on each other. Most developed countries require consolidated reporting so that losses cannot be concealed under an unconsolidated subsidiary. In addition, the International Accounting Standards Board (IASB) standards require consolidated financial statements.

Consolidating the financial statements of subsidiaries in different countries poses problems because different currencies are used in different countries. Therefore, companies must decide on what basis they will convert these various currencies into the national currency of the parent company. 

Risk of change

Currency values ​​fluctuate daily, posing risks to businesses that operate internationally. Currency risk is the risk that changes in foreign exchange rates will adversely affect business operations. Businesses face this risk because they often price their products and services in each country’s local currency to make it easier for locals.

Change foreign currency

When multinational companies consolidate the financial statements of their subsidiaries, they must convert all currencies into the currency that is used by the parent company in the home country. There are two known methods that businesses can use to convert currencies: the current rate method and the time method.

Current exchange rate method

The current exchange rate method is a foreign currency conversion method in which the financial statement items of a subsidiary are translated into the parent company’s currency at the prevailing exchange rate (i.e., the exchange rate on the Report). In this case, the present value may differ on the date it is converted from when the asset was originally purchased. While this difference is just a profit or loss on paper, it still affects the company’s valuation. As a result, this method is the most widely used currency conversion method.

Temporary method

The interim method is a foreign currency conversion method that uses an exchange rate based on the rates in effect when the assets and liabilities were originally purchased or incurred. The transient method avoids the paper increase or decreases the problem of the current proportional method. But because subsidiaries purchase assets at different times of the year, an MNE’s balance sheet may not be balanced if the interim method is used.

Currency volatility

When the Chinese government announced in 2010 that it would allow the yuan to float more freely against other global currencies, U.S. financial executives knew the change would affect their currency risk image. When the yuan was pegged to the dollar (from 2008 to 2010), China’s currency had a lower value, which gave China an advantage in world trade. Chinese products are already cheaper on the world market. Once the yuan floats more freely, it will appreciate against the dollar.