global financial reporting(1)

7/28/2019 Global Financial Reporting(1)

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Unit 5


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Global Financial reporting


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Objectives of Accounting in global

context

To standardize Accounting methods , procedures,

and treatments.

To lay down principles for preparation and

presentation of financial statement uniformly.

To establish benchmark for evaluating the quality

of earnings and reporting internationally.

To ensure that international community of usersof financial statements get creditable financial

information.


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Efforts towards Global Harmonisaton

There are two bodies working for this concept.

International Accounting Standard Board(IASB)

Institute of Chartered Accountants of India(ICAI)

International Financial Reporting Standards(IFRSs)

and International Accounting Standards are issued by

IASB.


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Difference between IAS/IFRS and

GAAP(Indian and U.S.)

There are so many dissimilarities in these threeaspects.

Contents of Financial Statements.

Cash and Cash equivalents. Classification of Assets and liabilities

Classifications of incomes and expenditure

Preparation of cash flow statement

Spin off/carve Out Accounting

Fixed Assets


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Cont

Depreciation

Miscellaneous Expendeture

Revenue Recognisation:

Changes in policy or rule

Intrime Financial reporting.

Post balance sheet events.

Contengenses

Earning per Share

Correction of fundamental errors.


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Need for uniform Global Financial

Reporting.

Globlisation of Economies

Companies are collecting capital from

overseas

Investors invest money globally.

Harmonisation required in MNCs.

Incearsing corporate awareness Corporates having future plans to raise capital

from oversees.


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Benefits and strength of US GAAP

Most developed economy.

Sets benchmark

Except the balance sheet other annual financialstatemnts are also requuired to be submited

Multi step income statement presentation as anoption.

Detailed Accounting Standards for Accounting of spinoff, specific industries,etc.

Upward valuation of any fixed Asset is notpermissible.Deferral of expenses , exceptadvertisement is not permitted.


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Benefits

Wider aceptability among the investor

community.

Better international credit rating

Internationalization of companys brand.

Reduced cost of capital

Improved internal decision making process. Improved financial discipline.


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Foreign Currency Accounting,


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When companies using different currencies

transact business, at least one of the

companies will have to translate a foreign

currency into its home currency. For sales

made in cash, this can be done at the time of

sale.


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Cont

When the sale is made on credit , the company will have to recordan account receivable or account payable until the account issettled. During the interim, the relative values of the currenciescould change. The accounting treatment for such changes isgoverned by International Accounting Standard (IAS) 21 and U.S.

Financial Accounting Standard (FAS) 52. The treatment is the sameunder either method. At the time of sale, the sale is recorded at the current exchange rate

and an equivalent value asset or liability is created.

If balance sheets are prepared prior to collection, the asset or liabilitymust be restated to the then-current exchange rate value. The change

is recognized as an unrealized exchange rate gain/loss on the incomestatement.

When the account is collected, the asset or liability is removed andany previously unrecognized gain/loss is recognized on the incomestatement.


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Foreign Exchange Risk Management

Transaction exposure

Change in the value of financial position created by foreigncurrency changes between establishment and settlementof contract

Translation exposure Potential change in value of a companys financial position

due to exposure created during consolidation process

Economic exposure

Potential for value of future cash flows to be affected byunanticipated exchange rate movements


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Transaction Exposure: Hedging

Hedging process to reduce or eliminate financial risk

Forward market hedge

Foreign currency contract sold or bought forward in order to protectagainst foreign currency movement

Currency option hedge Option to buy or sell specific amount of foreign currency at specific

time to protect against foreign currency risk

Money market hedge Method to hedge foreign currency exposure by borrowing and lending

in domestic and foreign money markets


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Transaction Exposure: Swaps

Swap contract Spot sale/purchase of asset against future purchase/sale of

equal amount in order to hedge financial position

Bank Swap Swap made between banks to acquire temporary foreign

currencies

Currency Swap

Exchange of debt service of loan or bond in one currencyfor debt service of loan or bond in another currency


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Transaction Exposure: Swaps contd.

Interest Rate Swap

Exchange of interest rate flows to manage interest rate

exposure

Spot and forward market swaps Use spot and forward markets to hedge foreign currency exposure

Parallel Loans Matched loans across currencies made to cover risk


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Translation Approaches

Current rate method

Current assets and liabilities are valued at current spot

rates and noncurrent assets and liabilities aretranslated at historic exchange rates

Temporal method

Monetary accounts are valued at spot rate and

accounts carried at historical cost are translated athistoric exchange rates


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Inflation Accounting,


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Inflation

Monetary inflation occurs when the money supply of

a country is increased over and above the demand

and need for currency (too much money chasing

too few goods). This results in depreciation in thevalue of currency.

The impact of monetary inflation on prices is usually

not evenly distributed across all goods and services

within an economy.


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Inflation

Inflation distort, or eradicates, the meaning of

financial statement numbers.

As such, when inflation is a substantial

problem, its effects need to be

removed/adjusted so that financial reports

remain useful.


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Inflation Accounting Conceptual Issues

Impact of inflation on financial statements

Understated asset values.

Overstated income and overpayment of taxes.

Demands for higher dividends.

Differing impacts across companies resulting in lack of

comparability.

Learning Objective 1


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Inflation Accounting

Inflation creates two basic reporting

mistakes when traditional accounting

methods are alone employed:

Purchasing power gains/losses are not detected

and reported.

Historical cost numbers lose their relevance.


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Inflation Accounting Conceptual Issues

Impact of inflation on financial statements

Historical cost ignores purchasing power gains and losses.

Purchasing power losses result from holding monetary assets, such as

cash and accounts receivable.

Purchasing power gains result from holding monetary liabilities, such

as accounts payable.

The two most common approaches to inflation accounting are

general purchasing power accounting and current cost

accounting.



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Inflation Accounting -- Methods

General Purchasing Power (GPP) Accounting

Updates historical cost accounting for changes in the general

purchasing power of the monetary unit.

Also referred to as General Price-Level-Adjusted HistoricalCost Accounting (GPLAHC).

Nonmonetary assets and liabilities, stockholders equity and

income statement items are restated using the General Price

Index (GPI).

Requires purchasing power gains and losses to be included in

net income.



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Inflation Accounting -- Methods

Current Cost (CC) Accounting

Updates historical cost of assets to the current cost to replace

those assets.

Also referred to as Current Replacement Cost Accounting. Nonmonetary assets are restated to current replacement

costs and expense items are based on these restated costs.

Holding gains and losses included in equity.



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Human Resource Accounting,


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Men, materials, machines, money and methodsare the resources required

for an organization. These resources are broadly

classified into two categories,viz., animate andinanimate (human and physical) resources. Men,otherwiseknown as the human resources, areconsidered to be animate resources.

Others,namely, materials, machines, money andmethods are considered to be inanimate orphysical resources.


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Human Resource Accounting is an attempt to

identify and report investments made in

human resources of an organization that are

presently not accounted for in conventionalaccounting practice. Basically it is an

information system that tells the management

what changes over time are occurring to thehuman resources of the business.


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Importance of Human Resource Accounting: Human Resource Accounting helps the management in the Employment,

locating and utilization of human resources.

It helps in deciding the transfers, promotion, training and retrenchment ofhuman resources.

It provides a basis for planning of physical assets vis--vis human

resources.

It assists in evaluating the expenditure incurred for imparting further

education and training in employees in terms of the benefits derived by

the firm.

It helps to identify the causes of high labour turnover at various levels and

taking preventive measures to contain it.

It helps in locating the real cause for low return on investment, like

improper or under-utilization of physical assets or human resource or

both.

It helps in understanding and assessing the inner strength of an

organization and helps the management to steer the company well

through most adverse and unfavourable circumstances.

It provides valuable information for persons interested in making long


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Limitations of Human Resource

Accounting:

There is no proper clear-cut and specific

procedure or guidelines for finding cost and

value of human resources of an organization.

The systems which are being adopted havecertain drawbacks.

The period of existence of human resource is

uncertain and hence valuing them underuncertainty in future seems to be unrealistic.


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As human resources are not capable of beingowned, retained and utilized, unlike the physicalassets, there is problem for the management totreat them as assets in the strict sense.

In spite of all its significance and necessity, taxlaws do not recognize human beings as assets.

As far as our country is concerned human

resource accounting is still at the developmentalstage. Much additional research is necessary forits effective application.


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Environment Accounting,


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Environmental accounting is an important tool for

understanding the role played by the natural

environment in the economy. Environmental

accounts provide data which highlight both thecontribution of natural resources to economic

well-being and the costs imposed by pollution or

resource degradation.

"Environmental accounting" - sometimes referred

to as "green accounting", "resource accounting"


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What Environmental Accounting Is -

And Is Not:

It is: a set of aggregate national data linkingthe environment to the economy, which willhave a long-run impact on both economic and

environmental policy-making. It is not: valuation of environmental goods or

services, social cost-benefit analysis ofprojects affecting the environment, or

disaggregated regional or local data about theenvironment.

accounting depends on two crucial


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accounting depends on two crucial

factors:

First, it must be focused on answering important policyquestions. This ensures that the accounting workresponds to a real demand for policy guidance, and isnot driven simply by a desire to build databases.

Second, it must bring in the major players in the areasof environmental policy, economic policy, nationalincome accounting, and the development ofinformation systems on the environment, the

economy, and the population. This ensures that peoplewho could either use or provide the data required willcooperate with and support the project.


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Responsibility Accounting.


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Meaning..

Responsibility accounting is a management

control system based on the principles of

delegating and locating responsibility. The

authority is delegated on responsibility centreand accounting for the responsibility centre.

Responsibility accounting is a system under which

managers are given decisions making authorityand responsibility for each activity occurring

within a specific area of the company.


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Significance of Responsibility

Accounting

Easy Identification:

Motivational Benefits :

Data Availability :

Planning and Decision Making:

Delegation and Control:


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Principles of responsibility Accounting

The main features of responsibility accounting

are that it collects and reports planned and

actual accounting information about the

inputs and outputs of responsibilityaccounting.

Objectives of Responsibility


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Objectives of Responsibility

Accounting

: Responsibility accounting is a method of dividing theorganizational structure into various responsibility centersto measure their performance.

1. To determine the contribution that a division as a sub-unit makes to the total organization.

2. To provide a basis for evaluating the quality of thedivisional managers performance. Responsibilityaccounting is used to measure the performance ofmanagers and it therefore, influence the way the managersbehave.

3. To motivate the divisional manager to operate hisdivision in a manner consistent with the basic goals of theorganization as a whole.


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Problems in Responsibility Accounting

Classification of costs

Inter-departmental Conflicts

Delay in Reporting

Overloading of Information

Complete Reliance will be deceptive


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Thank you

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