Chapter 19: Issues in International Accounting

1. Chapter 19: Issues in International Accounting • Translation of foreign operations • National accounting differences • Anglo-American model • Continental model • International harmonization of accounting standards

2. Translation of Foreign Operations • CAP issued two ARBs on the subject • 4 • 43 • APB issued APB Opinion No. 6 • FASB has issued three SFASs • No. 1 • No. 8 • No. 52

3. Exchange Rate Between Currencies of Different Countries • Assumed to be the result of two factors: • different nominal interest rates arising from differences in expected inflation rates occurring in different countries • the ratio of the relative prices of a common “market basket” of goods and services • Instability in foreign exchange rates that has the potential to create large translation gains and losses

4. Approaches to Translation • U.S. dollar orientation • Foreign currency orientation

5. SFAS No. 8 • Consistent with the U.S. $ orientation • Temporal method of translation was required: all balance sheet items that were carried at current or future exchange prices • Foreign currency exposure • Accounting exposure • Economic exposure

6. SFAS No. 52 • May 1978, FASB requested comments from constituents regarding the first twelve SFASs • 88% of the comments received requested that the board reconsider SFAS No. 8 • primary complaints about SFAS No. 8: exchange gains and losses are reported, when from an economic viewpoint the reverse had occurred • Adopts a functional currency orientation rather than a U.S. dollar orientation

7. SFAS No. 52 • Net income is measured in the foreign currency and then restated into dollars at the average exchange rate for the period • Balance sheet items are translated at the current exchange rate at the end of the period • Objective is to avoid reporting • accounting exchange gains and losses when an economic gain or loss has not occurred • foreign-currency-denominated operations as if they had occurred in U.S. dollars

8. Functional Currency Determination • Cash flow indicators • Sales price indicators • Sales market indicators • Expense indicators • Financing indicators • Intercompany transactions and arrangements indicators

9. National Accounting Differences • Anglo-American model • Continental model

10. Anglo-American model • USA • United Kingdom • Canada • Australia • New Zealand

11. Continental Model • France • Germany • Japan

12. International Harmonization of Accounting Standards • IASC • IFAC • European Union • United Nations • OECD • IOSCO

13. Chapter 19: Issues in International Accounting • Translation of foreign operations • National accounting differences • Anglo-American model • Continental model • International harmonization of accounting standards