unit 9final

7/28/2019 Unit 9final

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International Business Management Unit 9

Sikkim Manipal University Page No. 178

Unit 9 International Accounting Practices

Structure:9.1 Introduction

Objectives

9.2 International Accounting Standards

Domestic vs. international accounting

National differences in accounting

Legal systems

9.3 Accounting for International Business

Classification of accounting systems

Harmonising of accounting systems

9.4 International Regulatory Bodies

9.5 International Financial Reporting Standards

9.6 Summary

9.7 Glossary

9.8 Terminal Questions

9.9 Answers

9.10 Case-Let

9.1 Introduction

In the previous unit you learned about international marketing, strategies,and branding for international markets. In this unit you will learn about

international accounting standards, regulatory bodies, and international

financial reporting standards.

International accounting practices need certain publicly-traded companies to

follow some accounting rules while presenting financial statements, so that

the reader can easily compare between different companies.

This unit covers various factors involved in accounting practices followed by

MNCs. It explains various regulators and accounting standards followed by

different countries and regions across the world. It discusses accounting in

an international perspective. It includes international regulatory bodies and

also the international financial reporting standards.


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Objectives:

After studying this unit, you should be able to: explain international accounting practices.

differentiate between the domestic and international accounting

practices.

describe the international regulatory bodies.

discuss the international financial reporting standards.

9.2 International Accounting Standards

Accounting is understood as the language of business. International

Accounting Standards is a set of standards, which state how certain types of

transactions and other events should be reflected in financial statements.

International accounting refers to international comparative analysis,

accounting measurements, and reporting issues distinctive to multinational

business connections. It also refers to harmonisation of global accounting

and financial reporting through political, organisational, professional, and

standard-setting activities.

Accounting Standards are the key mandatory and regulatory mechanisms

for training on financial reports and conducting successful audit for the

same. It is used almost in all countries throughout the world. They are

concerned with the structure of measurement and discover rules forpreparation and arrangement of financial statements. They emerge as a set

of authoritative statements related to exact type of transactions, events, and

other costs that are recognised and reported in the financial statements.

They are designed to supply practical information to diverse users of the

financial statements such as shareholders, creditors, lenders, organisation,

investors, suppliers, competitors, researchers, regulatory bodies, and so on.

These statements are designed and approved to develop and benchmark

the quality of financial reporting.

A financial reporting system of international standard is required to attract

foreign and also present and potential investors at home, which can beachieved by harmonising the accounting standards.


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9.2.1 Domestic vs. international accounting

Different countries whether domestic or international, have differentaccounting standards. A common belief is that these differences reduce the

quality and the importance of accounting information. Accounting standards

determine the financial reporting quality and provides separately verified

information about an organisation's financial performance to investors

creditors.

International businesses encounter number of accounting problems that do

not stop domestic businesses. The accounting system of a domestic

organisation must meet the specialised and regulatory standards of its home

country. But, an MNC and its subsidiaries must meet differing accounting

and auditing standards of all the countries in which it operates. This leads toa need for comparability between businesses in the group. In order to

successfully manage and organise their operations, local managers require

accounting information, which should be prepared according to the local

accounting concepts and denomination in the local currency. Yet, for

financial controllers, to measure the foreign subsidiarys performance and

worth, the subsidiarys accounts must be translated into the organisations

home currency. This translation is done using accounting concepts and

measures, which are detailed by the organisation. Investors worldwide look

for the highest possible returns on their capital, in order to interpret the track

record, though they use a currency and an accounting system of their own.The organisation also has to pay taxes to the countries in which it does its

business, based on the accounting statements it prepares in these

countries. Besides this, when a parent corporation tries to combine the

accounting records of its subsidiaries to produce consolidated financial

statements, extra complexities occur because of the changes in the value of

the host and home currencies in due course.

There are many differences between Domestic Accounting Standards (DAS)

and International Accounting Standards (IAS). Based on the list of

differences between the DAS and IAS, two indices are created-'absence'

and 'divergence'. Absence measures the differences between DAS and IAS

as an extent to which, the rules on certain accounting issues are missed out

in DAS and covered in IAS. Divergence represents the differences between

DAS and IAS as an extent to which, the rules on the same accounting issue

differ in DAS and IAS.


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Measurement of differences between IAS and DAS

You can measure the differences between IAS and DAS in the followingway:

Literature on international accounting differences - You can use

various data sources to measure international accounting differences in

earlier literature. Most of the earlier studies understand international

accounting differences as different options adopted by various nations

for the similar accounting issues, which correspond to divergence

concept.

Framework of analysis - Earlier studies established various links

between differences in accounting standards across countries and

financial reporting quality. We should consider the institutional

determinants of accounting differences such as legal origin, governance

structure, economic development, and equity market.

9.2.2 National differences in accounting

One of the major problems encountered by an international business is lack

of consistency in accounting standards of various countries. Organisations

show opposite financial results because of the differences in accounting

standards.

Differences in accounting standards exist because of diverse political, legal,

economic, and cultural systems existing across the countries. Accounting

standards and practices are also prejudiced by the sources of capital used

to fund business. Figure 9.1 shows the influencing factors on a c ountrys

accounting practices.

Figure 9.1: Influences on a Countrys Accounting System


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You might think that certain historical developments had a uniform effect on

accounting systems all over the world. Of course there are some similaritiesand also there are many accounting systems, as much as countries and no

two systems are alike. The main reason for these differences is basically

environment. Accounting systems develop from and reflect the

environments they serve. The reality of the world is that, environments have

not evolved equally. While accounting practices were developing, there

were differences in the private ownership, industrialisation, inflation, and so

on. When there are differences in economic conditions, it is not surprising to

find differences in accounting practices. However, economic factors are not

the only influences you find. Educational systems, legal systems, political

systems, and socio cultural features also influence the need for accounting

and the direction and speed of its development. Today, the key reason for

understanding different national accounting systems lies in the increasing

globalisation of business.

9.2.3 Legal systems

Law system is divided into civil law and common law countries worldwide. In

countries like US, Australia, UK and New Zealand accounting procedures

originate from decisions of independent standards setting boards, such as

US Financial Accounting Standards Board (FASB), and so on. Each board

works with professional accounting groups. The common law countries

accountants follow, Generally Accepted Accounting Principles (GAAP),which provides a 'true and fair view' of the organisation's performance,

based on the standards approved by these professional boards. Many civil

law countries also have a similar approach of GAAP. Functioning within the

limitations of these standard accountants provides freedom to implement

their professional judgment in reporting a 'true and fair' representation of the

organisation's performance.

Countries following civil law are likely to codify their national accounting

measures and standards. In these countries, accounting practices are

determined by the law. To assist the legal role, all business accounting

records must be officially registered with the government.

The way in which the accounting practices are imposed depends on the

legal system. Most of the developed countries depend on both private and

public enforcement of business performance, even though the public or


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private combination varies from country to country. The degree of the legal

system is a major restriction in the growth of accounting standards by theaccounting profession. In some countries, the accounting policies are

restricted to detailed legislation, which is passed by governments. This

restriction forms a major problem to the international accounting bodies that

are determined to increase harmonisation of national accounting

frameworks. This is because, such government-controlled regimes are

inclined to be less flexible, and discover private sector influences as less

acceptable.

Self Assessment Questions

1. Accounting Standards are the key mandatory and regulatory

mechanisms for training on financial reports and succeeding audit of

the same. (True/False)

2. __________ and ___________ are the two indices created based on

the differences between IAS and DAS.

3. GAAP stands for generally accepted accounting principle. (True/False)

Activity 1

The link below provides an article on International Accounting

Standards. Find out how the standards helped to bring financia l stability

in the market and also discuss how it affected the companies.Hint: Refer link: www.iasplus.com/dttpubs/dtiias.pdf

9.3 Accounting for International Business

In the previous section you learnt about international accounting standards

and the national differences between accounting standards. In this section

you will cover accounting for international business.

An organisation's first contact to international accounting occurs as an

outcome of an import or export opportunity. In exports, a domestic

organisation may receive an unwanted inquiry, or obtain order from aforeign buyer. If this foreign buyer needs an addition of credit, then the

buyer is examined once before exporting. This process is not as easy as it

appears.


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The buyer is not always a scheduled buyer in the international credit rating

directories. Either the seller will have to ask its bank to have foreignaffiliations to check the buyer's credibility or the seller can ask the buyer to

supply financial information. The buyer might be ready to supply financial

statements, but these statements might be complicated for domestic

organisations to understand. The statements might be in a foreign language,

and based on accounting assumptions and measures that are strange to the

organisation's accountants. Most of the organisations that are new to

international business must get assistance either from a bank or from an

accounting organisation with international proficiency. If the foreign buyers

pay in their own currency, the selling organisation becomes familiar with the

possible gains and losses from changes in the exchange rate that occurs

between the moment the order is booked and the moment the payment is

received.

The selling company also has to deal with many international details, such

as special international shipping and insurance documents, customers

declaration forms, international legal documents, and so on. Here, again the

services of lawyers, shippers, bankers, and accountants with international

knowledge are essential.

In case of a probable import, the foreign seller has all the responsibilities,

therefore the international accounting aspects are not disturbed. Yet, if the

foreign seller requires payments in his or her currency, or if the domestic

buyer wishes to gain information about the dependability of the foreign

supplier, the buyer might consult an international bank, lawyer, or

accounting firm.

9.3.1 Classification of accounting systems

All accounting systems are planned to supply information to people who

take decisions. So, it is essential to classify accounting systems. The

classification of accounting systems in financial and cost systems leads to

this difference between the people, who take decisions. Investors, creditors,

government agencies, tax authorities and others are people who involve inthe accounting systems, but are outside the organisation. Whereas,

managers are within the organisation and they also take part in the

accounting decisions.


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Financial accounting

Information in financial accounting is planned for decision makers and notfor people who manage the organisation daily. These users are normally

outside the organisation. The information for public organisations is public,

and normally available on the websites of the organisations. Managers in

the organisation are sincerely concerned about reports that produce the

financial accounting, but the information would not be sufficient for making

operational decisions of the organisation. Individuals, who take decisions by

using information from the financial accounts, are normally interested in

comparing their own organisation with other firms. For example, deciding

whether to invest in the organisations like Apple Computer or Microsoft. An

important characteristic of financial accounting information is that, it is

comparable between organisations. This means that, when an investor

looks at revenues from Apple Computers, these revenues signify the same

thing for Microsoft. Due to this, financial accounting systems are

characterised by a series of regulations that describe how transactions

should be treated.

Cost accounting

Cost accounting information is planned for managers. As managers take

decisions only about their own organisation, there is no need for the

information to be compared with similar information from other

organisations. Instead, the significant principle is that the information mustbe appropriately decided. Cost accounting information is generally used in

financial accounting information, but first we should concentrate on its

benefit to managers in making decisions. The accountants handle the cost

accounting information, and add value by providing excellent information to

managers who take decisions. The cost accounting system results from the

decisions made by managers about an organisation. Some aspects of cost

accounting in regard to its clients, with GAAP and ethics are given below:

Cost accounting and GAAP - The key principle of financial accounting

is to supply information about the organisation and the performance of

the management to the investors or creditors. The financial information

organised for this purpose is governed by the Generally Accepted

Accounting Principles (GAAP), which supply consistency in the

accountancy data used for the purpose of reporting from one

organisation to another. The information of cost accounting used to


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estimate the expenditure of goods sold, inventory assessment,

accounting and other financial information used for external reportsshould be arranged in accordance with GAAP.

Clients of cost accounting - The administration must consider

customer as important out of all the participants in a business. Without

customers, the organisation loses its capability and reason to exist. The

cost information itself is a product with its individual customers. The

major problem with accounting system occurs, when managers utilise

accounting information that was designed for external reporting, in

decision-making.

Cost accounting and ethics - The design of costing systems is finally

about the payment of costs to various activities, products, projects and

corporate units, and people. The method in which this is done, affects

prices, reimbursement and payment. Based on the events, the cost

accounting systems plan the potential to misuse and fraud the

customers, employees or shareholders. As user or preparer of the cost

information, you should be aware of what it implies, and how the

information is utilised. The most important point is that, you should be

aware of when the system has the potential to be ill-treated.

9.3.2 Harmonising of accounting systems

Though there are many differences in accounting standards and practices, anumber of forces are leading to harmonisation. Some of these forces are:

A movement to present information well-matched with the

requirements of investors.

The global mixing of capital markets, which means that investors have

easier and quicker access to investment opportunities around the world,

and thus require financial information that is more equivalent to other

accounting standards.

The need of MNCs to increase the capital outside their home-country

capital markets, while generating few diverse financial statements.

Regional, political and economic harmonisation, such as, the hard workof the European Union (EU), which affects accounting, trade and

investment issues.


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Pressure from MNCs for consistent standards, which allows for reduced

costs in each country, and in reporting that is used by investors in theorganisations home-country.

Differences in accounting systems are confusing and expensive to

international business. Superiority in these systems makes it complex for

organisations to examine their foreign operations and for investors to

understand the relative performance of organisations that are based in

different countries. To help in solving such problems, many accounting

professionals and national regulatory bodies are trying to harmonise diverse

national accounting practices. It is also important to understand the

arguments in favour of harmonisation.

Arguments supporting harmonisation

Harmonisation of accounting and exterior financial reporting assists in the

optimal global delivery of private-sector finance. Harmonisation is concerned

with reducing the diversity that exists between accounting practices, in order

to improve the comparability of financial reports prepared by companies

from different countries. Investors should be able to realise a more proficient

portfolio of organisations on national, as well as, international scale. This will

benefit the investor. When global capital markets operate properly, then the

financial information disclosed to the market-place must be global. Figure

9.2 highlights for and against harmonisation.

Figure 9.2: Arguments for and Against Harmonisation


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The standard of accounting disclosure needs and auditing vary from country

to country, and makes cross-border investigation very difficult. Thesedifferences present a barrier to investors as they feel uncomfortable about

the information presented to them, which is very different from what exists in

their home-country.

Harmonisation of accounting and auditing practices help to reduce the size

of the barrier. Investors must deal with diverse accounting practices and

disclosures, and have trust in the figures presented by accepting the

standard of auditing. Harmonisation programme helps in this task.


4. Information in _______________ is planned for decision makers and

who are not involved in the daily management of the organisation.

5. Cost accounting information is planned for _________.

6. Customer is important of all the participants in a business whom the

administration must consider. (True/False)

9.4 International Regulatory Bodies

In the previous section we covered accounting for international business. In

this section you will learn about the various international regulatory bodies.

Certain regulatory bodies are active in bringing out harmonisation ofaccounting standards. Efforts of some of the bodies are explained.

European Union

The most obvious effort towards harmonisation is seen in the European

Union. The European Commission sets directives, which are orders to the

member countries, to bring their laws inline with EU needs, within some

transition period. The earlier accounting directives addressed the following:

The nature and design of financial statements.

The measurement support on which the financial statements are to be

organised.

The significance of consolidated financial statements.

The need that auditors must make sure that the financial statements

reflect a true perspective of the operations of the organisation that is

being audited.


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Though the EU has enhanced the comparability of financial statements, the

directives do not cover several essential issues. Additionally, somedirectives provide options, and member countries understand the directives

differently. Thus, EU organisations listing outside their home countries must

supply the following two sets of financial statements, they are:

Home country statements.

Reconciliation statements.

United Nations

The United Nations is interested in international accounting since the early

1970s, under a 'Group of Eminent Persons'. This further led to the

establishment of Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting (ISAR) by the UNEconomic and Social Council.

The ISAR attempts to support the developing countries, by creating

recommendations on the accessibility and comparability of information

disclosed by international businesses.

The discussions of the ISAR are reported in annual publications, and cover

the accounting developments worldwide, and also reports on accounting

issues of significance to global accounting.

The ISAR is presently concerned about developing discussions on the

international environment reporting, and the role and responsibilities of

accountants and auditors.

Organisation for Economic Cooperation and Development (OECD)

The OECD was established by world's 24 developed countries such as

Australia, Austria, Belgium, Canada and so on, for promoting world trade

and international economic growth. It considers the matters from the

perspective of economically developed countries. The council of OECD has

established a committee on International Investment and Multinational

Enterprises (MNEs). This committee has established a Working Group on

Accounting Standards.

The Working Group has recently published a 'Clarification of the OECD

Guidelines', and published reports as an element of an 'Accounting

Standards Harmonisation' series. Most recently, the OECD has established

a 'Centre for European Economies in Transition', which along with Working


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Group has prepared workshops, seminars, and meetings, to recognise the

purpose and constituents of accounting systems in these countries.International Accounting Standards Committee (IASC)

International Accounting Standards Committee was created in the year

1973. It has issued a series of standards planned to harmonise the national

management of accounting issues. The chief objective of IASC is the

encouragement of comparability of financial statements between countries,

by establishing standards for inventory assessment, depreciation, delayed

income taxes, and so on.

An important accomplishment of the IASC has been the creation of the

International Accounting Standards (IAS). The publication and global

recognition of these standards is necessary for the harmonisation efforts of

the IASC.

The International Federation of Accountants (IFA)

The International Federation of Accountants was founded in the year 1977.

It completely supports the work of the IASC, and recognises the IASC as

having responsibility and authority to issue rules on international accounting

standards. IFA has parallel responsibility of IASCs objective of developing

international guidelines for auditing, ethics, education and management

accounting.

Other international regulatory bodies are Governmental AccountingStandards Board, Independence Standards Board, International Accounting

Standards Board, International Organisation for Securities Commission,

National Association of State Boards of Accountancy, Public Company

Accounting Oversight Board, UK Accounting Standards Board and so on.


7. The European Commission sets directives which are orders to member

countries to bring their laws inline with EU needs within some transition

period. (True/False)

8. _____________________considers the matters from the perspective

of economically developed countries.

9. The International Federation of Accountants was founded in the year

______________.


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Activity 2

The link below provides an article on various International RegulatoryBodies. Find out the responsibilities of OECD and WHO.

Hint: Refer link: http://www.iraup.com/results.php?page_name=int_org

9.5 International Financial Reporting Standards

After learning about the different international regulatory bodies, we shall

now discuss about reporting standards used in international finance.

International Financial Reporting Standards (IFRS) are principle-based

values; interpretations and the structure followed by the International

Accounting Standards Board (IASB).

Structure of IFRS

International Financial Reporting Standards comprise of the following:

International Financial Reporting Standards (IFRS) - standards issued

after 2001.

International Accounting Standards (IAS) - standards issued before

2001.

Interpretations developed from the International Financial Reporting

Interpretations Committee (IFRIC) - issued after 2001.

Standing Interpretations Committee (SIC) - issued before 2001.

Framework for the Preparation and Presentation of Financial Statements

(1989).

Framework

The framework used for the preparation and presentation of financial

statements states the basic rules for IFRS.

Objective of financial statements

A financial statement should reproduce true and fair view of the business

dealings of the organisation, because these statements are used by

different constituents of the society. They should reflect the true vision of the

financial situation of the organisation.

Underlying assumptions

IFRS approved two basic accounting models, which are:

Financial capital preservation in nominal monetary units.

Financial capital preservation in units of invariable purchasing power.


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The four underlying assumptions in IFRS are given below:

Accrual basis - The result of dealings and other measures arerecognised when they happen.

Going concern - An entity will persist for the predictable future.

Stable measuring unit assumption - Financial capital safeguarding in

nominal monetary units or in conventional historical cost accounting.

That is, accountants believe that changes in the purchasing power of the

functional currency will be up, but not adequately significant for them to

decide on financial capital safeguarding in the units of regular

purchasing power during low inflation and deflation as authorised in

IFRS, in the Framework.

Units of constant purchasing power -Financial capital preservation in

units of regular purchasing power during low inflation and deflation, that

is, the denial of the constant measuring unit statement. Measurement in

units of constant purchasing power (inflation - adjustment) remedies the

destruction caused by historical cost accounting.

Qualitative characteristics of financial statements

There are some qualitative characteristics of financial statements. These are

as given below:

Understandability. Reliability.

Comparability.

Relevance.

True and fair view or fair presentation.

Elements of financial statements

The financial position of an enterprise is mainly provided in the Statement of

Financial Position. The fundamentals of financial statements are given

below:

Asset - An asset is a resource guarded by the enterprise as an effect of

past procedures, from which potential economic benefits are likely to

flow to the enterprise.

Liability - A liability is a present requirement of the enterprise that is

rising from the past procedures, the conclusion of which is likely to result

in an outflow from the enterprise' possessions, that is, assets.


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Equity - Equity is the outstanding concentration on the assets of the

enterprise after subtracting all the liabilities under the historical costaccounting model. Equity is well-known as owner's equity. Under the

units of invariable purchasing power model, equity is the regular real

value of shareholders equity.

The financial performance of an enterprise is mainly provided in an

income statement or profit and loss statement. The elements of an

income statement or the elements that determine the financial

performance are as follows:

Revenues - Increase in economic profit during an accounting period, in

the type of inflows or enhancements of assets, or diminishing of

liabilities that effect to increase equity. But it does not comprise the

contributions made by the equity participants, that is, owners, partners

and shareholders.

Expenses Reduction in economic benefits in an accounting period, in

the form of outflows, or reduction of assets or committing to liabilities

that effect in decreasing equity.

Measurement of the elements of financial statements

Measurement is the method of determining the monetary amounts. But it

does not comprise the contributions made by the equity participants, that is,

owners, partners and shareholders. The components of the financial

statements are documented and approved in the balance sheet and income

statement. A number of diverse measurement bases are engaged in various

degrees, and in changing combinations in financial statements. These

measurements include the following:

Historical cost - Assets are entered at the amount of cash or cash

equivalents paid or the fair cost of the consideration given to obtain them

at the time of their purchase. Liabilities are recorded at the amount of

earnings received in exchange for the commitment, or in some situations

(for example, income taxes), at the amounts of cash or cash equivalentslikely to be paid to convince the liability in the normal course of business.

Current cost - Assets are approved at the amount of cash or cash

equivalents that needs to be paid, if the similar or an equivalent asset

was acquired at present. Liabilities are approved at the undiscounted


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amount of cash or cash equivalents that would be necessary to settle

the requirement at present. Realisable (settlement) value - Assets are approved at the amount of

cash or cash equivalents that could, at present, be obtained by

exchanging the asset in a methodical removal. Assets are accepted at

the current discounted value of the future net cash inflows that the item

is likely to produce in the typical course of business. Liabilities are

carried at the current discounted value of the future net cash outflows

that are likely to be essential to resolve the liabilities in the typical course

of business.

The measurement basis that is generally adopted by entities in preparing

their financial statements is historical cost. This is generally combined with

other measurement bases.


10. _______________ is one of the underlying assumptions of IFRS.

11. Equity is the outstanding concentration on the assets of the enterprise

after subtracting all the liabilities under the historical cost accounting

model. (True/ False)

12. Which among the following is not an element of financial statements?

a) Asset

b) Liability

c) Equity

d) Accountability

9.6 Summary

Let us now summarise the salient points you learnt in this unit on the

international accounting practices:

Accounting standards are the type of compulsory and regulatory

mechanisms for training on financial reports and conducting successful

audit for the same. It is used in almost all countries.

International businesses meet number of accounting problems that do

not stop domestic businesses. There are many differences between

both Domestic Accounting Standards (DAS) and International

Accounting Standards (IAS). Considering the list of differences, two

indices are created-'absence' and 'divergence'.


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Law system is divided into civil law and common law countries in the

world. Harmonisation of accounting and exterior financial reporting helps in the

best international delivery of private-sector finance. Harmonisation of

accounting and auditing practices help to diminish the size of the barrier.

Certain regulatory bodies are dynamic in bringing harmonisation of

accounting standards. Some of them are European Union, United

Nations, and so on.

International Financial Reporting Standards (IFRS) are principle-based

values; interpretations and the arrangement followed by the International

Accounting Standards Board (IASB).

9.7 Glossary

Benchmark - It is used to evaluate performance in the organisation.

Depreciation - it refers to the decrease in price or value.

Harmonisation - It refers to the process of making a pleasing or consistent

whole.

9.8 Terminal Questions

1. Explain briefly how the differences between IAS and DAS be

measured.2. Explain briefly about accounting for international business.

3. Explain the forces that lead to harmonisation of accounting system.

4. Explain briefly the work of United Nation as one of the international

regulatory bodies.

5. How do you measure the elements of financial statements of IFRS?

9.9 Answers


1. True2. Absence, divergence

3. True

4. Financial accounting

5. Managers


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6. True

7. True8. OECD

9. 1977

10. Going concern

11. True

12. Accountability

Terminal Questions

1. You can measure the differences between IAS and DAS in the

following way: Literature on international accounting differences,

Framework of analysis. These are explained in sub section 9.2.1 of this

unit. Refer the same for details.2. An organisation's first contact to international accounting occurs as an

outcome of an import or export opportunity. In exports, a domestic

organisation may receive an unwanted inquiry or obtain order from a

foreign buyer. This is explained in the section 9.3 of this unit. Refer the

same for details.

3. Though there are many differences in accounting standards and

practices, a number of forces are leading to harmonisation: A

movement to present information well-matched with the requirements

of investors. These are explained in sub-section 9.3.2 of this unit. Refer

the same for details.4. The United Nations is interested in international accounting since the

early 1970s under a 'Group of Eminent Persons'. This further led to the

establishment of Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting (ISAR) by the UN

Economic and Social Council. These are explained in the section 9.4 of

this unit. Refer the same for details.

5. Measurement is the method of determining the monetary amounts at

which the elements of the financial statements are to be documented

and approved in the balance sheet and income statement. A number of

diverse measurement bases are engaged in various degrees and inchanging combinations in financial statements. They include the

following: historical cost, current cost, and realisable (settlement) value.

These are explained in the section 9.5 of this unit. Refer the same for

details.


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9.10 Case-Let

Application of International Accounting Standards to Central Banks

As the financial markets are becoming internationalised, the international

accounting standards are applied to central banks. The primary objective

of these entities is to maintain the value of the country's currency.

The idea of applying IAS is to guarantee a high degree of transparency

and comparability among financial statements and can find an efficient

operation of the Community's capital market and the domestic market

also.

A sample of accounting and financial information were published on thewebsites of 19 central banks to know as to how the IASs are being

applied to the accounting policies and practices used by central banks in

the region. The findings of the analysis are described as follows:

1. Accounting standards governing the preparation of financial

statements - It was found that there was a beginning of an alignment

with International Accounting Standards.

2. Publication of financial statements - IAS states that a total set of

financial statements should include a balance sheet, an income

statement, and changes in equity statement, a cash flow statement

and a summary of accounting policies. It was found out that the

biggest problem for central banks was to prepare statements of

changes in equity and cash flow statements.

3. Proper disclosure of information - According to IAS, a business is

appreciative to disclose the accounting policies used and other

explanatory notes. The study show that the central banks reveal

accounting policies and practices in their notes.

4. Use of ultimate exchange rates and fair value - AS states that in each

balance sheet, the dates of the items in foreign currency must be

reported at closing rate. The findings about central bank focuses onthe use of closing rates for assets and liabilities decreased in foreign

currency and on the use of reasonable values for portfolios in both

foreign and domestic currency.


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5. Reporting changes in the exchange rate - According to IAS, exchange

differences that happen when monetary items are developed, must

be reported as fixed cost or income for the phase in which they

appeared. Through the study, it was found out that the central banks

apply diverse policies and procedures to proof their exchange

differences.

All these helped in internalisation of central banks and helped in

maintaining the international accounting standards on the domestic

currency.

Discussion Question

1. Discuss the application of international accounting standards tocentral bank. (Hint: Accounting Standards Governing the Preparation

of Financial Statements)

Source:www.cemla.org/pdf/acp/acp_9_Jairo_Contreras.pdf

References

Aswathappa. K. (2008). International Business. Tata McGraw Hill

Education: New Delhi.

Paul Rodgers (2007), International Accounting Standards, From UK

Standards to IAS An Accelerated Route for Understanding the KeyPrinciples, Elsevier Ltd.

International Accounting Standards Committee (2000), International

Accounting Standards Explained, Chichester: Wiley.

E-References

media.wiley.com/product_data/excerpt/22/EHEP0005/EHEP000522.pdf

http://www.indianmba.com/faculty_column/fc137/fc137.html

http://www.loscostos.info/english/accsyst.html

Retrieved on October 31st, 2010
http://www.indianmba.com/faculty_column/fc137/fc137.htmlhttp://www.indianmba.com/faculty_column/fc137/fc137.html

unit 9final

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