Question

One of the greatest challenges the international financial manager faces is in understanding how to deal with international accounting differences. Discuss this contention explaining the nature of the challenge and the ways in which it can and should be dealt with. (600 WORDS)

Answer 1

Maintaining books of accounts of multiple entities spread across different locations, and consolidating them for a cohesive presentation is not always easy, given the different currencies, they deal with as well as conflicting accounting standards, different practices, rules and regulations. Accounting standards cover topics such as how to account for inventories, depreciation, research & development costs, income taxes, investments, intangible assets, and employee benefits – all of which are computed differently in different jurisdictions. some of the major accounting-related challenges faced by financial manager globally, and how they are tackling them:

1. Different Local Regulations For Every Country: Generally Accepted Accounting Principles (GAAP) vary from one country to another. For instance, IFRS, SFRS, US GAAP and Ind AS; there is no single universally-accepted reporting standard. Regulations related to accounting, legal matters, taxation, etc. vary for almost all countries in the world, which impacts accounting and even the profitability of a company operating in different geographies. With emerging new complex business realities, there are frequent changes in these regulations that must be incorporated to stay on the right side of the law. It is extremely important to keep track of the changes in regulations to ensure that financial statements of a corporation that’s spread out in different geographies are in proper order.

2. Consolidation Of Entities In A Group:Accounts of each individual entity needs to be maintained as per the rules and accounting standards of the country of operations. However, given the continuous fluctuations in different currency rates, it is important to ensure that appropriate foreign exchange rates are applied for evaluations and for converting the respective local currency amounts into the reporting currency. As this affects all aspects of an entity i.e., Revenue, Expenses, Fixed Assets, Current Assets and Liabilities, Share Capital, Loans etc., the exercise itself comes with its own set of challenges and is quite time-consuming.

3. Calculation Of Impairment Of Investment In Subsidiaries: Making investments in overseas subsidiaries is a normal affair at multinational corporations. It is important to keep track of the impairment of investments in subsidiaries, especially in the entities which are making losses and/or are in inaccessible locations or countries with a difficult political scenario; until the subsidiary is capable to recover the investment made by the holding company.

4. Transfer Pricing And Intercompany Cost Allocations: Transfer Pricing (TP) is fixing the price of goods and services sold between the related entities, within a group of entities. For instance, if a subsidiary sells goods or services to the parent company, the consideration for those goods/services paid by the parent to the subsidiary is the TP. TP results in the setting of prices among divisions within an enterprise and can be used as a profit allocation method to attribute a multinational corporation’s net profit (or loss) before calculating tax to countries where it does business. Thus, appropriate accounting from the perspective of TP and intercompany cost allocations is highly desirable for multinational corporations who are involved in regular financial transactions with global subsidiaries. There are various laws and rules related to TP, and ensuring compliance in different jurisdictions that the Group operates in is becoming increasingly challenging and costly, as business and regulations evolve continuously. How to overcome these challenges : Adopt universal accounting standards

Globalization has increased the need to have a standard set of accounting standards. Financial users around the globe are working towards establishing common global accounting standards, but the efforts are yet to bear fruits. The process of creating a universal set of accounting standards has received conflicting views from different countries. Some countries support the implementation of a single set of accounting standards, and most of these countries are embracing the IFRS. Some states still use their local GAAP standards and feel that changing to another accounting standard would cause various complications and undermine the sovereignty of a nation.   One of the most influential arguments in support of universal accounting standards is comparability. Today large organizations are looking for opportunities in the global market. Global companies have a considerable number of investors and frequently record higher profits. Investors and various business stakeholders are not involved in the daily management of the business. Therefore, they need to look at the financial statement to understand the performance of the company. When investors are making investment decisions, they are primarily guided by the financial statement of a business building financial reports very critical. Problems arise when an investor has to compare the performance of a company, but the company follows different accounting standards because of its operation in different countries. A country that is located in China will follow different accounting methods from a firm that is found in the U.S. the accounting standards will have an impact on the quality of the financial reports. For instance, the depreciation and amortization methods used and the stock valuation method will impact on the statement of financial statements. It is difficult to compare the performance of different companies if the financial statements are prepared using different accounting standards. If there were a standard accounting standards users of financial statement would have an easy time comparing the creditworthiness, liquidity, solvency, and profitability of different companies. Comparability is enhanced for a single organization operating in different parts of the globe.Establishing a single accounting system would enhance the quality of financial reports. In the current system, businesses are already finding loopholes due to lack of a universal accounting system. When it comes to taxation, enterprises are transferring assets to subsidiaries in lower tax countries through accounting to minimize the amount of tax. Lack of a common accounting system is providing businesses with loopholes to manipulate financial reports and sometimes mislead investors. The case of the 2008 economic crisis is one that indicated the need to have quality global accounting standards. Lack of adequate financial information caused investors to lose millions of investment due to the crisis. A single accounting system will enhance the quality of accounting standards by eliminating loopholes. Additionally, countries that are willing to converge their accounting standards demand that the quality of the new set of a counting standards should be of high quality. The issue of quality is central to the development of accounting standards. The converged accounting standards, IFRS has improved the quality of information. Research indicates thatIFRS standards have played a significant role in ensuring users of financial statements get the right information from financial statements.Implementation of a single accounting system would lead to simplification. Some companies have many subsidiaries and operate different business lines. These companies are expected to consolidate financial reports to provide a comprehensive report on the overall performance of the company. However, if a company is required to follow different accounting standards, it becomes challenging to consolidate business reports. Items are represented differently in various financial statements making it hard to merge the report. Additionally, use of different currencies such as yens, pounds, and dollars make it difficult to consolidate the reports. A global accounting system would simplify the accounting process and enable multinationals to combine their financial statements with ease.The sovereignty of a country makes it hard to unify the accounting standards. Some countries feel that establishing a unified set of accounting standard would impose on the accounting standards of sovereign nations. The new set of rules would undermine the sovereignty of nations. The standard set of criteria is further seen as western dominance. When coming up with the global accounting standards, the West is actively involved, and poor countries do not get to contribute adequately. When the accounting standards are imposed on other nations, it strips them the ability to establish different accounting standards that are unique to the situation.Having different accounting systems creates inconsistency in financial reporting. As the economy is becoming integrated and geographical barriers are eliminated, there is a need to come up with a single set of accounting standards. The harmonization of accounting standards will eliminate inconsistency, enhance quality, and comparability