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7. Global Accounting Issues

Understand that international trade no longer simply means importing and exporting. The notion of domestic and foreign operations is replaced by an understanding that trade and ownership has become global in nature. Companies have added subsidiaries in many countries, formed cooperative alliances, listed shares on multiple stock exchanges around the globe, engaged in global cross-border debt financing, and set up service centers that utilize technology to provide seamless customer support around the world. This is indeed a "megatrend" and a foray into uncharted terrain. Each of us, no matter where we live on this planet, is being touched by the phenomena. Indeed, persons from around the world are reading these same words at the same time as you. Likewise, financial data is being shared globally!

What is the implication of global utilization of accounting information? In the simplest of terms, users must understand something about how accounting information is prepared to be able to effectively rely on it. What if each country had its own accounting rules? You can see that misinterpretation and lack of understanding could be a real problem. For example, what if a company reported their "turnover" as 10,000,000 Euros? What would you conclude? For starters, you would need to know that "turnover" is synonymous with "revenue," and you would need to know how much a euro is worth. But, my example is not hypothetical; it is real. Terminology and methods are not consistent from country to country. That is why the audit opinion illustrated earlier in this chapter includes a reference to the country of GAAP origin.

Accounting rule makers from around the globe are scrambling to bring about global convergence of accounting techniques. No major country has opted out of this endeavor. The FASB has been working feverishly to rework certain accounting rules to match global approaches. For example, the EPS approach you learned earlier in this chapter was the result of a FASB reworking of the U.S. rules to match the global approach.

The International Accounting Standards Board (IASB) is another important body. It issues its own accounting standards, which in many respects provide a beacon to guide the efforts going on within each country. Countries without their own standard setting body may legitimately expropriate the IASB standards as their own. The IASB membership is broad based, bringing together experts from many countries. Although each contributor to the IASB probably brings ideas to the table with a "home-country" bias, the general tenor has remained one of cooperation toward a shared goal. The IASB maintains an excellent web site ( if you wish to learn more.

Another useful site to explore global accounting issues is accountingeducation. There are many global contributors to that site, and they provide a weekly electronic newsletter that is available at no charge.

7.1. Issues in International Trade

Companies engaging in global business face some specific reporting challenges. Two of those challenges are (1) how to consolidate global subsidiaries and (2) how to account for global transactions denominated in alternative currencies. These subjects quickly become complex, and only a brief introduction to each is appropriate at this time.

7.2. Global Subsidiaries

When a parent corporation has a subsidiary outside of its home country, the financial statements of that subsidiary may be prepared in the "local" currency of the country in which it operates. But, the parent's financials are prepared in the "reporting" currency of the country in which it is domiciled. Thus, to consolidate the parent and sub first requires converting the sub's financial information into the reporting currency. Facts and circumstances will dictate whether the conversion process occurs by a process known as the functional currency translation approach or an alternative approach known as remeasurement:

• Translation is appropriate when the subsidiary is somewhat autonomous. It will be self-supporting by virtue of generating and reinvesting cash flows in its own operations; the parent is primarily an investor. This approach converts the assets and liabilities to the reporting currency based upon prevailing exchange rates at the balance sheet date. A "plug" translation adjustment may be needed to maintain a "balanced" translated set of financials, and that plug is an item of "other comprehensive income" (not operating income).

• Remeasurement would be used when translation is not appropriate (e.g., the subsidiary is a purchasing group established to obtain inventory for the parent). Remeasurement converts assets and liabilities at a variety of exchange rates, depending on the type of asset or liability and the date of its origination. Again, a "plug" may be needed to balance, but this plug will produce a positive (credit) or negative (debit) effect on operating income.

The above discussion is quite oversimplified. Entire chapters in advanced accounting texts are usually devoted to this subject, and even those chapters rarely fully develop the theory and rationale underlying the prescribed mechanics.

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