CHAPTER 1 Introduction 1
Historical Perspective 1
Contemporary Perspective 2
Growth and Spread of Multinational Operations 4
Financial Innovation 9
Global Competition 10
Cross-Border Mergers and Acquisitions 11
Internationalization of Capital Markets 12
Americas 13
Western Europe 14
Asia 15
Cross-Border Equity Listing and Issuance 15
Where Are We? 16
Learning Objectives 17
Appendix 1-1 'Changes in Financial Sector Policy in 34 Nations, 1973-1996 21
Appendix 1-2 Stock Exchange Web Sites 24
Appendix 1-3 Financial Statements and Selected Notes from the Annual Report of INFOSYS 26
CHAPTER 2 Development and Classification 27
Development 27
Classification 33
Four Approaches to Accounting Development 33
Legal Systems: Common Law vs. Code Law Accounting 34
Practice Systems: Fair Presentation vs. Legal Compliance Accounting 35
CHAPTER 3 Comparative Accounting: Europe 37
Some Observations about Accounting Standards and Practice 38
IFRS in the European Union 39
Five National Financial Accounting Systems 41
France 41
Germany 46
Czech Republic 51
The Netherlands 54
United Kingdom 58
CHAPTER 4 Comparative Accounting: The Americas and Asia 64
Five National Financial Accounting Systems 65
United States 65
Mexico 70
Japan 74
China 78
India 83
CHAPTER 5 Reporting and Disclosure 88
Development of Disclosure 88
Voluntary Disclosure 89
Regulatory Disclosure Requirements 90
The US. SEC Financial Reporting Debate 91
Reporting and Disclosure Practices 92
Disclosures of Forward-Looking Information 93
Segment Disclosures 94
Social Responsibility Reporting 96
Special Disclosures for Nondomestic Financial Statement Users and Accounting
Principles Used 111
Corporate Governance Disclosures 111
lnternet Business Reporting and Disclosure 120
Annual Report Disclosures in Emerging-Market Countries 121
Implications for Financial Statement Users and Managers 122
CHAPTER 6 Foreign Currency Translation 124
Results of Operations 124
Reasons for Translation 127
BackgrOund and Terminology 127
The Problem 130
Financial Statement Effects of Alternative Translation Rates 130
Foreign Currency Transactions 132
Single- Transaction Perspective 134
Two- Transaction Perspective 134
Foreign Currency Translation 135
Multiple-Rate Methods 136
Financial Statement Effects 138
Which Is Best? 140
Appropriate Current Rate 142
Translation Gains and Losses 142
Where Are We? 144
Translation Accounting Development 144
Pre-1965 144
1965-1975 144
1975-1981 145
1981-Present 145
Features of Standard No. 52/International Accounting Standard 21 145
Translation When Local Currency Is the Functional Currency 146
Translation When the Parent Currency Is the Functional Currency 146
Translation When Foreign Currency Is the Functional Currency 146
Measurement Issues 148
Reporting Perspective 148
What Happened to Historical Cost? 149
Concept of lncome 149
Managed Earnings 149
Foreign Currency Translation and Inflation 150
Foreign Currency Translation Elsewhere 151
Appendix 6-1 Translation and Remeasurement Under FAS No. 52 151
CHAPTER 7 Financial Reporting and Changing Prices 157
Changing Prices Defined 159
Why Are Financial Statements Potentially Misleading During Periods of
Changing Prices? 162
Types of Inflation Adjustments 163
General Price-Level Adjustments 163
Price Indexes 163
Current-Cost Adjustments 167
General Price-Level Adjusted Current Costs 168
National Perspectives On Inflation Accounting 170
United States 170
United Kingdom 171
Brazil 173
International Accounting Standards Board 176
Inflation Issues 177
Inflation Gains and Losses 177
Holding Gains and Losses 178
Foreign Inflation 178
Avoiding the Double-Dip 179
Appendix 7-1 Accounting for Foreign Inflation: A Case Analysis 181
CHAPTER 8 Global Accounting and Auditing Standards 184
A Survey of International Convergence 184
Advantages of International Convergence 184
Criticisms of International Standards 186
Reconciliation and Mutual Recognition I87
Evaluation 187
Some Significant Events in the History of International Accounting Standard
Setting 188
Overview of Major International Organizations Promoting Accounting Convergence 189
International Accounting Standards Board 192
1ASC's Core Standards and the IOSCO Agreement 193
The New IASB Structure 194
Recognition and Support for the IASB 196
US. Securities and Exchange Commission Response to IFRS 196
European Union (EU) 197
Fourth, Seventh, and Eighth Directives 197
Have EU Harmonization Efforts Been Successful? 198
The EU's New Approach and the Integration of European Financial Markets 199
International Organization of Securities Commissions (IOSCO) 200
International Federation of Accountants (IFAC) 203
United Nations Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR) 205
Organization For Economic Cooperation and Development (OECD) 206
Conclusion 206
CHAPTER 9 International Financial Statement Analysis 207
Introduction 207
Challenges And Opportunities In Cross-Border Analysis 207
Business Analysis Framework 208
International Business Strategy Analysis 209
Information Availability 209
Recommendations'for Analysis 210
Accounting Analysis 211
Suggestions for the Analyst 213
International Financial Analysis 213
Ratio Analysis 213
Cash Flow Analysis 216
Coping Mechanisms 216
International Prospective Analysis 217
Further Issues 219
Information Access 219
Timeliness of Information 222
Foreign Currency Considerations 223
Differences in Statement Format 226
Language and Terminology Barriers 226
Financial Statement Analysis and Auditing 227
The Attest Function 227
The Audit Report 228
Auditing and Credibility 230
Coping Mechanisms 232
Internal Auditing 233
Professional Organization 237
Evolving Role of lnternal Auditing 237
Appendix 9-1 Illustration of Restatement of Japanese GAAP Financial
Statements to a U.S. GAAP Basis 238
Appendix 9-2 International Ratio Analysis 242
CHAPTER 10 Managerial Planning and Control 245
Business Modeling 245
Planning Tools 246
Capital Budgeting 247
Financial Return Perspectives 248
Measuring Expected Returns 249
Multinational Cost of Capital 253
Management Information Systems 254
Systems Issues 255
Information Issues 256
Management Information and Hyperinflation 257
Sales Revenue 258 '
Issues In Financial Control 261
Domestic Versus Multinational Control System 261
Strategic Costing 269
Performance Evaluation of Foreign Operations 270
Consistency 271
Performance Criteria 273
Measurement Issues and Changing Prices in Evaluation 275
Performance Evaluation Practices: ICI 275
Foreign Currency Effects 277
Performance Standards 278
Value Reporting 279
CHAPTER 11 Financial Risk Management 281
Essentials 283
Why Manange Financial Risks? 284
Role of Accounting 285
Identifying Market Risks 285
Quantify Tradeoffs 286
Risk Management in a World of Floating Exchange Rates 286
Accounting for Hedge Products 298
Hedge of a Recognized Asset or Liability or an Unrecognized Firm
Commitment 305
Hedge of a Net Investment in a Foreign Operation 306
Speculating in Foreign Currency 308
Disclosure 308
Financial Control 312
Appropriate Benchmarks 313
Reporting Systems 313
CHAPTER 12 International Taxation and Transfer Pricing 314
Initial Concepts 314
Diversity of National Tax Systems 315
Types of Taxes 315
Tax Burdens 316
Tax Administration Systems 318
Foreign Tax Incentives 319
Harmful Tax Competition 320
International Harmonization 320
Taxation of Foreign-Source Income and Double Taxation 320
Foreign Tax Credit 321
Limits to Tax Credits 323
Tax Treaties 324
Foreign Exchange Considerations 324
Tax-Planning Dimensions 325
Organizational Considerations 325
Controlled Foreign Corporations and Subpart F Income 325
Offshore ltolding Companies 326
Financing Decisions 326
Pooling of Tax Credits 327
Cost Accounting Allocations 327
Location and Transfer Pricing 328
Integrating International Tax Planning 328
International Transfer Pricing: Complicating Variables 329
Tax Considerations 329
Tariff Considerations 331
Competitive Factors 331
Environmental Risks 332
Performance Evaluation Considerations 333
Accounting Contributions 333
Transfer Pricing Methodology 333
Market vs. Cost vs...? 334
Arm's-Length Principle 334
Comparable Uncontrolled Price Method 334
Comparable Uncontrolled Transaction Method 335
Resale Price Method 335
Cost-Plus Pricing Method 336
Comparable Profits Method 337
Profit-Split Methods 337
Other Pricing Methods 338
Advance Pricing Agreements 339
Transfer Pricing Practices 339
The Future 341