How the International Environment Affects Accounting
Despite courses in international accounting just recently becoming more prevalent, the art of international trade has been around for over thousands of years. What has created new challenges in International Accounting over the past few decades is the extensive increase in international business and the rise of new business activities that did not exist in the past. Also, while there are significant similarities between accounting systems in the United States and those in other countries, there are notable differences. Understanding these differences can assist you as your business ventures around the globe.
Accounting is an integral part of making any business in the world successful. It allows you to keep track of the amount of money flowing into and out of your business, an essential factor in making any business or financial decision, and enables you to compute your taxes and put together financial statements. Companies that solely operate in the United States, and a few other countries, will generally prepare these financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). Most of the rest of the world, however, is operating under International Financial Reporting Standards (IFRS). Conflicting philosophies in how these accounting regulations are created is the major difference between U.S. GAAP and IFRS. U.S. GAAP’s philosophy is often rules based. Companies will generally categorize transactions based upon numerical cutoffs. IFRS, on the other hand, reflects principles with its philosophies. “Supporters of this approach argue that companies should be looking at the nature of a transaction, not arbitrary cutoffs.” (Freedman) IFRS focuses on more qualitative guidance than clear and confining rules.
Financial accounting typically consists of analyzing and recording transactions. However, the second your company performs a transaction with another country you enter into international accounting. The main difficult that can be created here is the possible exchange of another currency. You may be forced to receive a foreign currency when selling or be required to make a payment in a foreign currency when buying. This immediately creates new problems for international accountants that you don’t have to deal with in domestic accounting. Accountants working internationally may have to handle changes in exchange rates during transactions, translating foreign currency amounts into U.S. dollars, and recasting foreign financial statements from subsidiaries into U.S. GAAP. Similar problems come up in financial analysis. It will be almost unavoidable to never have to analyze a foreign financial statement. Most foreign accounting rules can be very different from what an accountant is used to domestically. “You might be able to recast all of these financial statements using U.S. GAAP, but there would still be major differences in business environments to contemplate.” (Holt) This is proof it is not as simple as it may seem to transition into the international business environment.
Other accounting functions are affected internationally as well. In some countries, auditors must determine if a company is conforming to national law and not those generated like U.S. GAAP. Tax accountants must be aware of the different and always changing tax laws that differ from country to country. Similar expectations can be made for all areas of accounting, such as cost and managerial accounting. All international accountants will have to be aware of the different business environments, culture, and differences in GAAP that they will experience in each country they may work with. “If you are going to be a professional accountant in the 21st century, you are going to be an international accountant.” (Holt) No matter what area of accounting you may find yourself in, you will eventually find yourself working internationally in one way or another, and you will face of the many challenges that comes with it.
The issue of the United States adapting to the IFRS has sparked intense debate in the accounting world for years. Some argue that the international standards used worldwide would reduce the quality of American’s own financial statements. The argument for this adaption is obviously the efficiency it would bring to the international market. Investors, as well as accountants, could compare companies from different countries much easier. “For more than a decade, politicians and regulators around the world have claimed to want a common set of high-quality accounting standards that applied globally.” (Norris) A process called convergence has attempted to accomplish this goal for years. Sadly, agreements have not been able to be reached in numerous areas. Despite the philosophical differences between U.S. GAAP and IFRS, there continues to be work done on the convergence process in the effort to make international accounting less complicated then it needs to be.