Question

International accounting diversity In consolidated can be found in terms of Terminology used in the financial statements and format could you please explain these issues for me in details?

Answer 1

Diversity in accounting refers to differences in recording and using financial information in different countries.

Considerable differences exist across countries in the accounting treatment of many items. These differences can result in significantly different amounts being reported in the financial statements prepared by companies using different GAAP.

To demonstrate how accounting terminology can vary worldwide, consider the following examples:

Balance Sheet

For most companies in the United States, the first item on the balance sheet is the most liquid: cash and cash equivalents. This line item includes cash in bank accounts, currency and checks on hand but not yet deposited, petty cash, and other other highly liquid assets. In New Zealand, those assets are referred to as cash and liquid deposits. It’s safe to assume that most American English speakers would understand that terminology easily, but other differences are not as subtle.

In the United States, we’re accustomed to seeing the term common stock to describe a security that represents ownership in a corporation. In the United Kingdom, what we call common stock is referred to as called-up share capital. In France, the word for a share of stock is action, so shareholders are called actionnaires; however, you typically won’t find that term on a balance sheet. There, you will see ownership equity in a corporation referred to simply as capital. Russian financial statements use the term share capital.

In the United States, we use accounts receivable to refer to the money a company is owed from its clients because it has delivered a product or service. In New Zealand, that amount would be presented as debtors. In the United Kingdom, those amounts are called trade debtors.

In the United States, the raw materials, work-in-process products and finished goods that are ready for sale are called inventories. In New Zealand, those assets are called stocks.

Income Statement

The financial statements of companies headquartered in Saudi Arabia feature a line item you won’t find on financial statements in the West: zakat. Zakat is an alms tax paid by Muslims. It’s required under Islamic law and is used for charitable or religious purposes.

The term "sundry" is familiar to speakers of American English, but we would rarely expect to see it used in financial statements. However, U.K. financial statements may use the terms sundry expenses and sundry income in place of other operating expenses and other operating income.

Even the basic components of an income statement differ when you compare U.S. and Swedish financial statements. In the United States, an income statement typically presents revenues and expenses. In Sweden, it presents receipts and disbursements.

Goodwill

a.   There is no goodwill amortization expense in Country A, so the goodwill amortization expense recognized by SKD must be added back to determine income under Country A GAAP.

SKD amortizes goodwill over a longer period (20 years) than is allowed in Country B (5 years), so an additional amount of goodwill amortization expense must be recognized to determine income under Country B GAAP, which reduces Country B GAAP income.

b.   The goodwill adjustment affects the retained earnings in stockholders’ equity.   The increase in Country A GAAP income results in an increase in retained earnings and the decrease in Country B GAAP income results in a decrease in retained earnings.

c.         The adjustment to income is for the current year only. The adjustment to stockholders’ equity is cumulative. The fact that the stockholders’ equity adjustment is three times as larger as the income adjustment implies that the goodwill was purchased three year ago.

A survey of the relevant literature has identified the following five items as being commonly accepted as factors influencing a country’s financial reporting practices: (1) legal system, (2) taxation, (3) providers of financing, (4) inflation, and (5) political and economic ties.

Hence, Consolidating foreign subsidiaries requires that the financial statements prepared in accordance with foreign accounting rules must be converted into parent company GAAP.