Giáo trình international accounting 4e by doupnik

International Accounting Fourth Edition Timothy Doupnik University of South Carolina Hector Perera Macquarie University INTERNATIONAL ACCOUNTING, FOURTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2012, 2010, and 2005 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper QVS/QVS ISBN 978-0-07-786220-6 MHID 0-07-786220-1 Senior Vice President, Products & Markets: Kurt L Strand Vice President, General Manager, Products & Markets: Michael Ryan Vice President, Content Production & Technology Services: Kimberly Meriwether David Managing Director: Tim Vertovec Brand Manager: James Heine Director of Development: Ann Torbert Development Editor: Gail Korosa Marketing Manager: Kathleen Klehr Content Production: Terri Schiesl Content Production Manager: Faye Schilling Content Project Manager: Judi David Buyer: Susan K Culbertson Cover Designer: Studio Montage, St Louis, MO Cover Image: Brand X Pictures Compositor: MPS Limited Typeface: 10/12 Palatino Printer: Quad/Graphics All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Doupnik, Timothy S International accounting / Timothy Doupnik, University of South Carolina, Hector Perera, Macquarie University.—Fourth Edition pages cm Includes bibliographical references and index ISBN 978-0-07-786220-6 (alk paper) Accounting International business enterprises—Accounting Foreign exchange— Accounting I Perera, M H B II Title HF5636.D68 2014 657'.96—dc23 2013039346 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com To my wife, Birgit, and children, Stephanie and Alexander —TSD To my wife, Sujatha, and daughter, Hasanka —HBP About the Authors Timothy S Doupnik University of South Carolina Timothy S Doupnik is a Professor of Accounting at the University of South Carolina, where he has been on the faculty since 1982, and primarily teaches financial and international accounting He served as director of the School of Accounting from 2003 until 2010, and then as Vice Provost for international affairs until 2013 He has an undergraduate degree from California State University–Fullerton, and received his master’s and Ph.D from the University of Illinois Professor Doupnik has published exclusively in the area of international accounting in various journals, including The Accounting Review; Accounting, Organizations, and Society; Abacus; Journal of International Accounting Research; Journal of Accounting Literature; International Journal of Accounting; and Journal of International Business Studies Professor Doupnik is a past president of the International Accounting Section of the American Accounting Association, and he received the section’s Outstanding International Accounting Educator Award in 2008 He has taught or conducted research in the area of international accounting at universities in a number of countries around the world, including Brazil, China, Dominican Republic, Finland, Germany, and Mexico Hector B Perera Macquarie University Hector Perera is an Emeritus Professor at Massey University, New Zealand, and an Adjunct Professor at Macquarie University, Australia Prior to joining Macquarie University in January 2007, he was at Massey University for 20 years He has an undergraduate degree from the University of Peradeniya, Sri Lanka, and a Ph.D from the University of Sydney, Australia Professor Perera’s research has dealt mainly with international accounting issues and has been published in a number of scholarly journals, including Journal of International Accounting Research; Critical Perspectives on Accounting; Journal of Accounting Literature; International Journal of Accounting; Advances in Accounting, incorporating Advances in International Accounting; Journal of International Financial Management and Accounting; Abacus; Accounting and Business Research; Accounting Historians Journal; Accounting, Auditing and Accountability Journal; Journal of Contemporary Asia; British Accounting Review; Accounting Education—An International Journal; Australian Accounting Review; International Journal of Management Education; and Pacific Accounting Review In an article appearing in a 1999 issue of the International Journal of Accounting, he was ranked fourth equal in authorship of international accounting research in U.S journals over the period 1980–1996 Professor Perera served as chair of the International Relations Committee of the American Accounting Association’s International Accounting Section in 2003 and 2004 He was an associate editor for the Journal of International Accounting Research and on the editorial boards of Accounting Horizons and Pacific Accounting Review Currently, he is on the editorial boards of Review of Accounting and Finance; International Journal of Accounting, Auditing and Performance Evaluation; and Qualitative Research in Accounting and Management Professor Perera has been a visiting professor at a number of universities, including the University of Glasgow in Scotland; New South Wales University, Wollongong University, and Charles Darwin University in Australia; Turku School of Economics and Business Administration and Åbo Akademi University in Finland; Unversiti Teknologi Mara, Malaysia; and University of Sharjah, UAE iv Preface ORIENTATION AND UNIQUE FEATURES International accounting can be viewed in terms of the accounting issues uniquely confronted by companies involved in international business It also can be viewed more broadly as the study of how accounting is practiced in each and every country around the world, learning about and comparing the differences in financial reporting, taxation, and other accounting practices that exist across countries More recently, international accounting has come to be viewed as the study of rules and regulations issued by international organizations—most notably International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) This book is designed to be used in a course that attempts to provide an overview of the broadly defined area of international accounting, but that focuses on the accounting issues related to international business activities and foreign operations and provides substantial coverage of the IASB and IFRS The unique benefits of this textbook include its up-to-date coverage of relevant material; extensive numerical examples provided in most chapters; two chapters devoted to the application of International Financial Reporting Standards (IFRS); and coverage of nontraditional but important topics such as strategic accounting issues of multinational companies, international corporate governance, and corporate social reporting This book contains several important distinguishing features: Numerous excerpts from recent annual reports to demonstrate differences in financial reporting practices across countries and to demonstrate financial reporting issues especially relevant for multinational corporations Incorporation of research findings into the discussion on many issues Extensive end-of-chapter assignments that help students develop their analytical, communication, and research skills Detailed discussion on the most recent developments in the area of international harmonization/convergence of financial reporting standards Two chapters on International Financial Reporting Standards that provide detailed coverage of a wide range of standards and topics One chapter focuses on the financial reporting of assets, and the second chapter focuses on liabilities, financial instruments, and revenue recognition (IFRS related to topics such as business combinations, foreign currency, and segment reporting are covered in other chapters.) The IFRS chapters also include numerical examples demonstrating major differences between IFRS and U.S GAAP and their implications for financial statements Separate chapters for foreign currency transactions and hedging foreign exchange risk and translation of foreign currency financial statements The first of these chapters includes detailed examples demonstrating the accounting for foreign currency derivatives used to hedge a variety of types of foreign currency exposure Separate chapters for international taxation and international transfer pricing, with detailed examples based on provisions in U.S tax law v vi Preface A chapter devoted to a discussion of the strategic accounting issues facing multinational corporations, with a focus on the role accounting plays in strategy formulation and implementation Use of a corporate governance framework to cover external and internal auditing issues in an international context, with substantial coverage of the SarbanesOxley Act of 2002 A chapter on corporate social responsibility reporting, which is becoming increasingly more common among global enterprises CHAPTER-BY-CHAPTER CONTENT Chapter introduces the accounting issues related to international business by following the evolution of a fictional company as it grows from a domestic company to a global enterprise This chapter provides the context into which the topics covered in the remaining chapters can be placed Chapters and focus on differences in financial reporting across countries and the international convergence of accounting standards Chapter presents evidence of the diversity in financial reporting that exists around the world, explores the reasons for that diversity, and describes the problems that are created by differences in accounting practice across countries In this chapter, we also describe and compare several major models of accounting used internationally We discuss the potential impact that culture has on the development of national accounting systems and present a simplified model of the reasons for international differences in financial reporting The final section of this chapter uses excerpts from recent annual reports to present additional examples of some of the differences in accounting that exist across countries Chapter focuses on the major efforts worldwide to converge financial reporting practices, with an emphasis on the activities of the International Accounting Standards Board (IASB) We explain the meaning of convergence, identify the arguments for and against convergence, and discuss the use of the IASB’s International Financial Reporting Standards (IFRS), including national efforts to converge with those standards The almost universal recognition of IFRS as a high-quality set of global accounting standards is arguably the most important development in the world of international accounting Chapters and introduce financial reporting under IFRS for a wide range of accounting issues Chapter summarizes the major differences between IFRS and U.S GAAP It provides detailed information on selected IFRS, concentrating on standards that relate to the recognition and measurement of assets—including inventories; property, plant, and equipment; intangible assets; and leased assets Numerical examples demonstrate the application of IFRS, differences between IFRS and U.S GAAP, and the implications for financial statements This chapter also describes the requirements of IFRS in a variety of disclosure and presentation standards Chapter focuses on current liabilities, provisions, employee benefits, sharebased payment, income taxes, revenue, and financial instruments, including major differences between IFRS and U.S GAAP Preface vii Chapter describes the accounting environment in five economically significant countries—China, Germany, Japan, Mexico, and the United Kingdom—that are representative of major clusters of accounting systems The discussion related to each country’s accounting system is organized into four parts: background, accounting profession, accounting regulation, and accounting principles and practices Exhibits throughout the chapter provide detailed information on differences between each country’s GAAP and IFRS, as well as reconciliations from local GAAP to U.S GAAP Chapters 7, 8, and deal with financial reporting issues that are of particular importance to multinational corporations Two different surveys of business executives indicate that the most important topics that should be covered in an international accounting course are related to the accounting for foreign currency.1 Because of its importance, this topic is covered in two separate chapters (Chapters and 8) Chapter covers three additional financial reporting topics of particular importance to multinational corporations—inflation accounting, business combinations and consolidated financial statements, and segment reporting Emphasis is placed on understanding IFRS related to these topics Chapter begins with a description of the foreign exchange market and then demonstrates the accounting for foreign currency transactions Much of this chapter deals with the accounting for derivatives used in foreign currency hedging activities We first describe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk We then explain the concepts of cash flow hedges, fair value hedges, and hedge accounting Finally, we demonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions Chapter focuses on the translation of foreign currency financial statements for the purpose of preparing consolidated financial statements We begin by examining the conceptual issues related to translation, focusing on the concept of balance sheet exposure and the economic interpretability of the translation adjustment Only after a thorough discussion of the concepts and issues we then describe the manner in which these issues have been addressed by the IASB and by the U.S FASB We then illustrate application of the two methods prescribed by both standard-setters and compare the results We discuss the hedging of balance sheet exposure and provide examples of disclosures related to translation Chapter covers three additional financial reporting issues The section on inflation accounting begins with a conceptual discussion of asset valuation and capital maintenance through the use of a simple numerical example and then summarizes the inflation accounting methods used in different countries The second section focuses on International Financial Reporting Standards related to business combinations and consolidations, covering issues such as T Conover, S Salter, and J Price, “International Accounting Education: A Comparison of Course Syllabi and CFO Preferences,” Issues in Accounting Education, Volume 9, Issue 2, Fall 1994; and T Foroughi and B Reed, “A Survey of the Present and Desirable International Accounting Topics in Accounting Education,” International Journal of Accounting, Volume 23, Number 1, Fall 1987, pp 64–82 viii Preface the determination of control, the acquisition method, proportionate consolidation, and the equity method The final section of this chapter focuses on International Financial Reporting Standard 8, Operating Segments Chapter 10 introduces issues related to the analysis of foreign financial statements We explore potential problems (and possible solutions to those problems) associated with using the financial statements of foreign companies for decisionmaking purposes This chapter also provides an example of how an analyst would reformat and restate financial statements from one set of GAAP to another Business executives rank international taxation second only to foreign currency in importance as a topic to be covered in an international accounting course.2 International taxation and tax issues related to international transfer pricing are covered in Chapters 11 and 12 Chapter 11 focuses on the taxation of foreign operation income by the homecountry government Much of this chapter deals with foreign tax credits, the most important mechanism available to companies to reduce double taxation This chapter provides a comprehensive example demonstrating the major issues involved in U.S taxation of foreign operation income We also discuss benefits of tax treaties, translation of foreign currency amounts for tax purposes, and tax incentives provided to attract foreign investment Chapter 12 covers the topic of international transfer pricing, focusing on tax implications We explain how discretionary transfer pricing can be used to achieve specific cost minimization objectives and how the objectives of performance evaluation and cost minimization can conflict in determining international transfer prices We also describe government reactions to the use of discretionary transfer pricing by multinational companies, focusing on the U.S rules governing intercompany pricing Chapter 13 covers strategic accounting issues of particular relevance to multinational corporations This chapter discusses multinational capital budgeting as a vital component of strategy formulation and operational budgeting as a key ingredient in strategy implementation Chapter 13 also deals with issues that must be addressed in designing a process for evaluating the performance of foreign operations Chapter 14 covers comparative international auditing and corporate governance This chapter discusses both external and internal auditing issues as they relate to corporate governance in an international context Chapter 14 also describes international diversity in external auditing and the international harmonization of auditing standards Chapter 15 introduces the current trend toward corporate social reporting (CSR) by multinational corporations (MNCs) We describe theories often used to explain CSR practices by companies and the motivations for them to engage in CSR practices We also examine the implications of climate change for CSR Further, we discuss some issues associated with regulation of CSR at the international level and identify international organizations that promote CSR, such as Global Reporting Initiative (GRI) Finally, we provide examples of actual CSR practices by MNCs Ibid Preface ix CHANGES IN THE FOURTH EDITION Chapter Updated statistics provided in the section titled “The Global Economy” Updated End-of-Chapter (EOC) assignments based on annual reports and other dated material to the most current information available Chapter Noted that inflation is no longer as important in explaining accounting diversity as it once was and that European accountants need to develop an expertise in both local GAAP and IFRS Chapter Updated exhibits on excerpts from annual reports of various companies Added two new sections at the end of the chapter titled “Challenges to International Convergence of Financial Reporting Standards” and “New Direction to the IASB” Added three new Exercises and Problems to the EOC material Chapter Noted that the discussion in the section on “Leases” is based on guidance in effect at the time of publication, and that a revised IASB-FASB exposure draft issued in 2013 was likely to substantially change and converge lease accounting at some unknown future date Chapter Deleted the subsection on “Proposed Amendments to IAS 37” Rewrote the subsection on “Post-Employment Benefits” to reflect the new guidance provided in IAS 19 (Revised), which was issued in 2011 Rewrote several Exercises and Problems in the EOC material related to postemployment benefits to reflect the changes in IAS 19 (Revised) Deleted the subsection on “Termination Benefits” Removed reference to a 2009 IASB Exposure Draft from the section on “Income Taxes” In the subsection titled “IASB-FASB Revenue Recognition Project,” removed some of the specific discussion and an example based upon the 2011 IASB-FASB joint Exposure Draft, and noted that a new standard, if approved, would not become effective any earlier than 2017 Chapter Updated annual report excerpts Added new material incorporating the latest developments with regard to financial reporting in China, Germany, Japan, Mexico, and the United Kingdom Added three new Questions and one new Exercise and Problem to the EOC material Chapter Updated annual report excerpts and the related discussion Updated Exhibit 7.1 to provide recent exchange rates and the related discussion 766 Chapter Fifteen Second, following recent events—such as the global financial crisis, the revolutions in the Arab world, “Occupy Wall Street,” fighting in Europe to survive austerity, the developing countries (Brazil, Russia, India, and China, or BRIC) turning out to be the most influential financial superpowers—the world seems to have given up on the effort to build a global scheme to combat climate change The GRI basically embraced a global governance approach as represented by the U.N institutions and offered a single global reporting framework However, under the current circumstances, for it to become a true global tool, the GRI may need to consider taking a more decentralized approach, harnessing governments and other stakeholders To this end, the term glocalization, which combines two opposing views of “globalization” and “localization,” may be used to guide its efforts Third, there is a lot of hype about Integrated Reporting as the universal solution to the inadequacies of today’s CSR Perhaps, in order to encourage CSR by business organizations, emphasis should also be placed on Integrity Reporting! Summary Traditionally, companies have focused on economic aspects in external reporting However, the current trend is to integrate economic, social, and governance aspects for this purpose Social accounting was popular in the 1970s, but in the 1990s, social accounting was swamped by environmental accounting with the title “corporate social reporting” (CSR), which is based on the notion of organizational social responsibility The organizational social responsibility exists to shareholders and other stakeholders such as employers, creditors and society at large There are two theories that are often used to explain CSR: stakeholder theory and legitimacy theory Stakeholder theory posits that CSR is in response to the stakeholder demand for such information, while according to legitimacy theory, CSR is a means to deal with firms’ exposure to political and social pressures It is now expected that firms not only act as good citizens, but report this good behavior to their stakeholders CSR disclosures are made on a voluntary basis in many countries National and organizational cultural values are among the main factors influencing firms to engage in CSR practices It has been pointed out that climate change has implications for CSR by firms, and as a result, concepts such as “emissions trading,” “carbon credits,” “carbon footprints,” “carbon funds,” “emissions brokerage,” “carbon neutral,” and “carbon tax” have become common usage in discussions on CSR Due to shortcomings of voluntary disclosures, there have been several attempts at the international level to regulate CSR practices by firms—for example, the Kyoto Protocol, Global Reporting Initiative (GRI), European Union Emission Trading scheme, and Asia-Pacific Partnership on Climate Change 10 GRI research findings indicate that there is a worldwide trend toward CSR practices; in particular, firms from countries that have ratified the Kyoto Protocol provide greater pollution disclosures compared to firms from other countries 11 International organizations such as the World Bank and IFAC, and programs such as the Kyoto Protocol and GRI, are actively promoting CSR International Corporate Social Reporting 767 Questions Exercises and Problems What is corporate social reporting (CSR)? What are the theories often used to explain the CSR practices of firms? What is the conceptual basis for CSR? What motivates firms to engage in CSR practices? What are the implications of climate change for CSR? Identify five key terms used in assessing the impact of climate change on a firm Why is it necessary to regulate the CSR practices of firms? Identify five mechanisms for regulating CSR practices at the international level What are some of the problems of trying to regulate CSR practices through legislation? 10 What are the items often included in CSR reports? 11 What is the Kyoto Protocol? 12 What is the Global Reporting Initiative? The Corporate Responsibility Report 2010 of Coca-Cola Amatil Company is at http://ccamatil.com/InvestorRelations/AnnualReports/2009/2010%20 Sustainability%20Report.pdf It mentions four global pillars Required: Discuss the strategies, programs, and targets of the company in relation to each of those global pillars, as mentioned in the report Exhibit 15.4 provides an example of an audit report of a Brazilian company for 2011, which refers to GRI-G3 sustainability guidelines Required: Identify a 2012 audit report for a U.S company which refers to GRI-G3 sustainability guidelines and compare the two audit reports Exhibit 15.7 provides an extract from the 2009 CSR report of a company in the IT industry, IBM Corporation Required: Discuss the motivations for a company in another industry of your choice to prepare a CSR report, and identify the nature of the information which is most likely to be included in such a report Exhibit 15.10 provides an example of a company, Toyota, which has clearly stated its CSR policy in its annual report of 2010 Required: Identify another company which has stated its CSR policy in its 2012 annual report, and compare the main points highlighted by the two companies Case 15-1 The Case of Modco Inc There is no clear definition of corporate social reporting (CSR) The European Commission defines CSR as “the responsibility of enterprises for their impacts on society.” In the United States, there is no governmental regulation regarding CSR 768 Chapter Fifteen Companies tend to develop their own codes of conduct which their members as a whole should aspire to follow Early notions of CSR can be traced back to the 1960s Currently, CSR generally includes the economic, legal, ethical, and philanthropic responsibilities of companies The economic responsibilities of companies refer to the provision of goods and services to the public and making a profit; the legal responsibilities refer to the need to act within the law; the ethical responsibilities relate to the recognition of doing what is right and fair, when this has not been codified into the law; and philanthropic responsibilities refer to the acceptance of the need to be good corporate citizens and improve the quality of life Since the beginning of this century, multinationals and their operations have slowly begun to be scrutinized by different segments of society, using social responsibility as a criterion Consequently, CSR has evolved into a complex concept that is now a key component of corporate decision making However, campaigns and public scandals involving issues ranging from environmental pollution to child labor and racial discrimination resulted in increased media attention to the activities of multinationals Nowadays, many leading multinationals seem to prepare sustainability reports voluntarily based on the Global Reporting Initiative (GRI) Guidelines, which are a set of guidelines for businesses, created to stimulate socially responsible corporate behavior The GRI has developed reporting guidelines for companies to assist them in disclosing nonfinancial information about the way they pursue their activities The guidelines address, among other things, the environmental and social conduct of companies Company Profile Modco was founded in 1960, with the opening of the first Modco discount store, and was incorporated as Modco Stores Inc in January 1970 The company’s shares were listed on the NYSE in 1975 Modco has a full range of groceries and general merchandise in a single store Modco is proud of the fact that it offers its customers a one-stop shopping experience and is one of the largest private employers in the United States and one of the world’s largest retailers It has more than 8,000 retail units under several banners in 15 countries They all share a common goal of promoting the idea “better life for people by helping them save money.” Modco has million employees worldwide, and generated net sales of $200 billion during fiscal year 2012 Since 2005, Modco has published its annual report on its Web site According to its CEO, Modco’s annual report reflects the social and environmental dimensions of its activities, and its constant and progressive work toward social responsibility issues Modco’s 2012 annual report states how its emphasis on sustainability has helped the company to be the retail leader in the market According to the report, Modco has investments in education, health, commitments to fight hunger, support for local farmers, and access to healthier and affordable food Such reports portray an image of the company as a role model on CSR Company Conflicts There has been a national class action against Modco which started nearly a decade ago Plaintiffs allege that female employees in Modco retail stores were discriminated against based on their gender, regarding pay and promotion to top management positions In 2006, the relevant U.S District Court issued a judgment in favor of the class action Modco unsuccessfully appealed to the U.S Court of Appeals Later Modco appealed to the U.S Supreme Court, which reversed the International Corporate Social Reporting 769 Appeals Court’s decision in May 2012, concluding that the millions of plaintiffs and their claims did not have enough in common In September 2012, the plaintiffs’ lawyers filed an amended lawsuit limiting the class to female Modco employees in the district where the company head office was located The new lawsuit alleges discriminatory practices against approximately 100,000 women regarding pay and job promotion, as well as requiring nondiscriminatory pay and promotion criteria At the end of 2011, it was announced in the local radio that Modco was using child labor at two factories in Bangladesh Children aged 10–14 years old were found to be working in the factories for less than $50 a month, making products of the Modco brand for export to the United States Modco’s annual report, called “Global Responsibility Report,” covers the three dimensions of “People, Planet, Profit.” This report emphasizes gender equality and a diverse workforce In 2010, Modco took the commitment one step further with the incorporation of the Advisory Board on Gender Equality and Diversity, with the specific function of providing equal and enhanced opportunities for all in top leadership roles Modco has also committed itself to selling products that sustain people and the environment Required Assuming that you are part of a research team examining the CSR policies of large companies, evaluate the CSR policy of Modco References Adams, C., and N Kuasirikun “A Comparative Analysis of Corporate Reporting on Ethical Issues by UK and German Chemical and Pharmaceutical Companies.” European Accounting Review 9, no (2000), pp 53–79 Ball, S., and S Bell Environmental Law, 2nd ed London: Blackstone, 1994 Bates, G M Environmental Law in Australia Sydney: Butterworth, 1995 Bebbington, J., R Gray, and D Owen “Seeing the Wood for the Trees—Taking the Pulse of Social and Environmental Accounting.” Accounting, Auditing & Accountability Journal 12, no (1999), pp 47–51 Buhr, N., and M Freedman “Culture, Institutional Factors, and Differences in Environmental Disclosures between Canada and the United States.” Critical Perspectives on Accounting 12 (2001), pp 293–322 Deegan, C., M Rankin, and J Tobin “An Examination of the Corporate Social and Environmental Disclosures of BHP from 1983–1997—A Test of Legitimacy Theory.” Accounting, Auditing & Accountability Journal 15, no (2002), pp 312–43 Deegan, C., and B Gordon “A Study of Environmental Disclosure Practices of Australian Corporations.” Accounting and Business Research 26, no (1996), pp 187–199 Freedman, M., and B Jaggi “Global Warming, Commitment to the Kyoto Protocol, and Accounting Disclosure by the Largest Global Public Firms from Polluting Industries.” International Journal of Accounting 40 (2005), pp 215–32 Gallhofer, S., and J Haslam “The Direction of Green Accounting Policy: Critical Reflections.” Accounting, Auditing & Accountability Journal 1, no (1997), pp 148–74 770 Chapter Fifteen Gamble, G., K Hsu, C Jackson, and C Tollerson “Environmental Disclosures in Annual Reports: An International Perspective.” Accounting Horizons 31 (1996), pp 293–331 Gray, R “Does Sustainability Reporting Improve Corporate Behaviour: Wrong Question? Right Time?” Accounting and Business Research 36, Special Issue (2006), pp 65–88 Gray, R., C Dey, D Owen, R Evans, and S Zadek “Struggling with the Praxis of Social Accounting—Stakeholders, Accountability, Audits and Procedures.” Accounting, Auditing & Accountability Journal 10, no (1997), pp 325–64 Gray, R., R Kouhy, and S Lavers “Corporate Social and Environmental Reporting: A Review of the Literature and a Longitudinal Study of UK Disclosures.” Accounting, Auditing & Accountability Journal 8, no (1995), pp 47–77 Gray, S J “Towards a Theory of Cultural Influence on the Development of Accounting Systems Internationally.” Abacus (1988), pp 1–15 Guthrie, J., and L Parker “Corporate Social Disclosure Practice: A Comparative International Analysis.” Advances in Public Interest Accounting (1990), pp 159–76 Hofstede, G Culture’s Consequences Thousand Oaks, CA: Sage, 1980 Jones, M J “Accounting for Biodiversity: Operationalising Environmental Accounting.” Accounting, Auditing & Accountability Journal 16, no (2003), pp 762–89 Kuasirikun, N., and M Sherer “Corporate Social Accounting Disclosure in Thailand.” Accounting, Auditing & Accountability Journal 17, no (2004), pp 629–60 Lindblom, C K “The Implications of Organisational Legitimacy for Corporate Social Performance and Disclosure.” Paper presented at the Critical Perspectives on Accounting Conference, New York (1994) Milne, C D A Handbook of Environmental Law Wellington: Royal Forest and Bird Protection Society, New Zealand, 1992 Mobus, J L “Mandatory Environmental Disclosures in a Legitimacy Theory Context.” Accounting, Auditing & Accountability Journal 18, no (2005), pp 492–517 O’Dwyer, B “Conceptions of Corporate Social Responsibility: The Nature of Managerial Capture.” Accounting, Auditing & Accountability Journal 16, no (2003), pp 523–57 O’Dwyer, B., and R H Gray “Corporate Social Reporting in the Republic of Ireland: A Longitudinal Study.” Irish Accounting Review 5, no (1998), pp 1–34 Ozu, C., and S Gray “The Development of Segment Reporting in Japan: Achieving International Harmonization through a Process of National Consensus.” Advances in International Accounting 14 (2001), pp 1–13 Patten, D M “Changing Superfund Disclosure and Its Relation to the Provision of Other Environmental Information.” Advances in Environmental Accounting and Management (2000), pp 101–21 Patten, D “Intra-industry Environment Disclosures in Response to the Alaskan Oil Spill: A Note on Legitimacy Theory.” Accounting, Organizations and Society 15, no (1992), pp 471–75 Perera, H “The International and Cultural Aspects of Social Accounting.” In R Gray and J Guthrie, Eds., Social Accounting, Mega Accounting and Beyond: A Festschrift in Honour of M R Mathews City, Scotland: Centre for Social and Environmental Accounting Research, School of Management, The University of St Andrews, 2007, pp 215–251 International Corporate Social Reporting 771 Perera, M H B., and M R Mathews “The Cultural Relativity of Accounting and International Patterns of Social Accounting.” Advances in International Accounting (1990), pp 215–51 Stern, N The Economics of Climate Change: The Stern Review Cambridge, UK: Cabinet Office–HM Treasury, 2007 Suchman, M C “Managing Legitimacy: Strategic and Institutional Approaches.” Academy of Management Review 20, no (1995), pp 571–610 Tilt, C A “The Content and Disclosure of Australian Corporate Environmental Policies.” Accounting, Auditing & Accountability Journal 14, no (2001), pp 190–212 Tilt, C A “The Influence of External Pressure Groups on Corporate Social Disclosure: Some Empirical Evidence.” Accounting, Auditing & Accountability Journal 7, no (1994), pp 24–46 Treadway Commission, Report of the National Commission on Fraudulent Financial Reporting Washington, DC: National Commission on Fraudulent Financial Reporting, 1987 Index Absences, compensated, 185 Accountancy Foundation, 305–306, 685–686 Accounting Act of 1985, 260 Accounting analysis, 493 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), 40 Accounting for investments in associates and joint ventures (IAS 28), 473 Accounting Interpretations Committee (AIC), 260 Accounting policies, changes in accounting estimates and errors (IAS 8), 156–157 Accounting profession in China, 236–241 in Germany, 258–259 in Japan, 278–281 in Mexico, 293–294 in the United Kingdom, 303–304 Accounting Standards Board (AcSB) in Canada, 475 Accounting Standards Board (ASB), 106 Accounting Standards Board of Japan (ASBJ), 280 Accounting standards codification (ASC), 29 Accounting System for Business Enterprises (ASBE), 247–249 Accrual approach, 347–348 Accumulated depreciation, 125–126, 414 Acquisition method, 469 Actuarial gains and losses, 188 Adjusting events, 156 Advance pricing agreements (APAs), 607–609 AICPA (American Institute of CPAs), 105, 475 Airlines foreign financial reporting, 520–522 Allowed alternative treatment, 146 American Institute of CPAs (AICPA), 105, 475 American Jobs Creation Act of 2004 (AJCA), 571–572 American Society of CPAs, 105 Amortized cost, 207 measurement of, 209–210 Anglo-Saxon Model, 34, 35, 110–112 Apples to Apples, 520–522 Appointment of auditors, 698 Arm’s-length range, 604 Asian-Oceanian Standard Setters Group (AOSSG), 96 Assets, 85 Asset test for segments, 476, 477 Associates, 472 Association of Investment Management and Research (AIMR), 475 Association of Southeast Asian Nations (ASEAN), 569 Audit committees, 701–702 Auditing, international, 8–9 appointment of auditors, 698 audit committees, 701–702 checklist approach to, 713 in China, 237–239, 687, 695 competition in, 712 and corporate governance, 676–680, 713 diversity in, 680–688 environments of, 682–684 ethics and, 693–694, 697–698 future directions of, 710–713 in Germany, 258–259, 686–687, 695 independence of auditors, 697–701 internal auditing, 702–710 772 in Japan, 279–280 legislation about internal auditing, 704–710 liability of auditors, 695–697 mandatory regulation of auditors, 699 in Mexico, 294 multinational corporations (MNCs), 704–705, 708–710 purpose of, 680–682 regulation of, 684–687, 695, 698–699 reports of, 687–688 restricted or prohibited activities, 698 sample audit reports, 714–722 splitting operations, 699–700 standards, harmonization of, 688–693 in the United Kingdom, 685–686, 695 Audit quality, 683–684 Available-for-sale financial assets, 207 in foreign currency, 210–211 Balance sheets foreign currency financial statements, translation of, 407–408, 422–423 foreign currency transactions, 347–349 hedging, 429–431 temporal method translation, 425e Baskets for foreign tax credits, 555 Benchmark treatment, 146 Big Bang, 282–283 Bill-and-hold sales, 200–201 Bona fide residence test, 575 Bonds payable, 209–210 Bonus plans, 185 Borrowing costs (IAS 23), 120–122, 146–147 Borrowing foreign currency, 377–379 Bottom-up test for goodwill, 145 Branches foreign income translation, 566–567 foreign tax credit calculation, 552–553 Brightlines, 83 Budget process and economic exposure, 656–659 Business, defined, 471 Business Accounting Deliberation Council (BADC), 282 Business Accounting Principles of Japan, 282 Business analysis, 492–493 Business combinations, 471 carrying value of acquired net assets, 469 and consolidated financial statements, 463–474 equity method, 472–474 goodwill, 469–470 purchase method, 468 Business combinations (IAS 22), 469 Business combinations (IFRS 3), 141 Business consolidations, 469–470 Cairns, David, 74 Call options, 344 Canadian Institute of Chartered Accountants (CICA), 700 Capital budgeting, 622–626 techniques of, 626–629 Capitalization of interest, 514–515 Capital maintenance, 86 Capital markets, international, 14 Carbon footprints, 744–745 Index Carbon neutral, 745 Carbon tax, 745 Carrying value of acquired net assets, 469 Carsberg, Bryan, 65 Cash flow exposure, 353 Cash flow hedges, 354–355 forward contract designated as, 357–360 options, 365–367, 374–375 Cash flows, statement of, 154–155 Cash-generating unit (CGU), 143 Cash-settled share-based payment transactions, 189, 190–191 Cash value hedge, 353 Changing prices (inflation) See Inflation accounting Chartered Institute of Management Accountants (CIMA), 641, 659 Chicago Climate Exchange (CCX), 746–747 China, People’s Republic of, 232, 233e, 234–257 accounting profession, 236–241 auditing environment, 237–239, 682–683, 695 auditing regulation, 687 financial statement example, 251e–257e, 330–336 foreign direct investment (FDI), 234–235 Generally Accepted Accounting Principles (GAAP), 244–245, 250e and International Financial Reporting Standards (IFRS), 249, 250e principles and practices in accounting, 246–257 regulation of accounting business, 241–246, 708 stock exchange, 235–236 vs United Kingdom, 238, 241 Chinese Accounting Standards, 247, 248e Chinese Accounting Standards Committee (CASC), 244 Chinese Association of Certified Practicing Auditors (CACPA), 238 Chinese Institute of Certified Public Accountants (CICPA), 237, 238, 241, 244 Chinese Security Regulatory Commission (CSRC), 235, 244 Choi, Frederick, 83 Choice-of-settlement share-based payment transactions, 189, 191–193 Citizenship taxation, 549 Class A and B accounting systems, 41, 42 Classification systems of financial reporting, 34e Clean Development Mechanism (CDM), 745 Climate change, 743–745 Clusters of shared accounting practices, 33–35, 36e Code law, 28, 31e Legal Compliance Model, 34 Colonialism, 30 Comision Nacional Bancaria y de Valores (CNBV), 296 Commercial Code of Japan, 281 Committee of European Securities Regulators (CESR), 97 Common law, 28–29, 31e Comparability project, 73 Comparable profits method, 600 Comparable profit split method, 600–601 Comparable uncontrolled price method, 596–598 Comparable uncontrolled transaction (CUT) method, 602 Competition in international auditing, 712 Component depreciation, 130 Compound financial instruments, 205–206 Comprehensive income, 351–352 Congruency principle of Germany, 29 Conservatism, 37, 38, 60–61 Consolidated and separate financial statements (IAS 27), 464–466 773 Consolidated financial statements See also Financial statements business combinations, 463–474 control, determination of, 464–467 full consolidation, 467–472 international differences, 465e scope of, 467 Construction contracts, 202 Constructive obligations, 181 Consumer demand, 711 Contemporaneous documentation requirement, 606–607 Continental European model, 34, 35, 42 Contingent assets, 183–184 Contingent liabilities, 180–182 Contingent payment on sale of goods, 198–199 Contract revenue, 203 Control, 471 Controlled foreign corporations (CFCs), 561–562 Controlling financial interest, 466 Convergence of accounting standards, 67–68, 102–108 arguments for and against, 82–83 challenges to, 100–102 FASB and IASB, 153 GAAP and IFRS, 102, 103–105, 470–472 IASB toward IFRS, 92–94, 103–105 to IFRS, 92–94 SEC and IFRS, 99–100 toward FASB, 153, 470–472 Convertible bonds, 206 Cookie jar reserves, 501n Corporate governance and international auditing, 676–680, 713 Corporate Governance Code, 675 Corporate social reporting (CSR), 739–740 climate change and, 743–745 drivers of practice, 741–743 in Japan, 761, 762e–763e multinational corporations (MNCs), 754–764 regulating, 745–754 theories of practice, 741 U.S companies committed to, 763e–764e Corporation law, 28 Correlative relief, 604–605 Corruption in China, 240–241, 246 Cost-based transfer price, 588 Cost minimization in transfer pricing, 591–593 Cost of good sold (COGS) calculation, 413 Cost-plus contracts, 202 Cost-plus method, 599–600 Costs of conversion, 120 initial and subsequent, 123–130 of inventories, 120–121 of purchase, 120 CPA Regulations of China, 237 Credits, foreign tax, 551–557 Cultural influences conservatism, 60–61 financial reporting, 37–40 Culture and management control, 660–661 Currency See also Foreign exchange risk devaluation, 592 exchange rates, 342–343, 342e in foreign financial statements, 498–499 hedging foreign exchange risk, 354–355, 368–373 and operational budgeting, 653–656 profit measurement, 652 774 Index Current cost (CC) accounting, 450–451, 453–454, 454 Current exchange rates, 405–407, 411 Current liabilities, 179–180 Current/noncurrent method, 408 Current rate method, 410–411, 413, 414, 416, 418 translation of financial statements, 421–424 vs temporal method, 428 Current ratios, 506–507 Current replacement cost (CRC), 450 Customer loyalty programs, 201–202 Customer perspectives, 646 Daimler-Benz and New York Stock Exchange listing, 32, 55–57 Data accessibility in foreign statements, 495–496 Debt extinguishment or modification, 212–213 Debt ratios, 507 Decentralization, 587–588 Deductions, 551–552 Deferral approach, 347 Deferred charges, 515 Deficits in revaluation treatment, 126–130 Defined benefit plans, 185–188 Depreciation, 130 accumulated, 125–126 expense under temporal method, 414 Derecognition, 130, 211–213, 214 Derivatives, 4n, 205, 350–352, 517 fair value determination, 351–352 financial instruments, 213 Devaluation of currency, 592 Development costs, 136–139, 140e Differences in accounting See Diversity, accounting Direct foreign tax credit, 552 Direct investments, foreign See Foreign direct investments (FDIs) Disclaimer audit opinions, 697 Disclosures of financial statements, 49–53 entity-wide disclosures, 478–482 foreign financial statements, 500–502 leases, 151–153 operating segments, 478 presentation standards, 154–159 tax assets, 195, 196e translation, 432–434 Discontinued operations, 158 Discounted cash flow techniques, 627–628 Discounts in foreign currency sales, 343 Diversity, accounting, 65–66 colonialism, 30 correlation of factors for, 30–31 evidence of, 24–27, 43–54 financial statements, 31, 43 financing, providers of, 29–30 high-quality information, lack of, 33 inflation, 30 international auditing, 680–688 political and economic ties, 30 problems caused by, 31–33 reasons for, 28–31 and taxation, 29 Dividends, 200 Domestic international sales corporation (DISC), 570 Double taxation, 550 Dual pricing, 591 Earnings before interest, taxes, depreciation, and amortization (EBITDA), 505–506 Earnings before interest and taxes (EBIT), 651 Earnings per share, 157 Economic exposure and budget process, 656–659 Economic risk, 629–630 Economy, global, 10–14 capital markets, international, 14 foreign direct investment, 11–12 international trade, 10–11 Effective interest, 360 Effects of changes in foreign exchange rates (IAS 21), 418–419, 419e, 460–463 Eighth Directive, 305, 692–693 Electronic Data Gathering, Analysis and Retrieval (EDGAR), 496 Emissions brokerages, 745 Emissions trading, 744 Employee Benefits, 185–188 Employee share trust arrangements, 517 Enterprise Financial Reporting Regulation, 243 Entity-wide disclosures, 478–482 Equity, 85 Equity instruments, 205 Equity interests, 470 Equity Joint Venture Law, 234 Equity method, 472–474 Equity-settled share-based payment transactions, 189–190 Errors, correction of, 157 Estimates, changes in, 157 Ethics, in auditing, 693–694, 697–698 Ethnocentric structure, 638 EU Directives See specific directives Euro, 341 European Commission, 42, 69, 71 European Financial Reporting Advisory Group (EFRAG), 106 European Monetary System, 341 European Securities and Markets Authority (ESMA), 262 European Union (EU), 69–72 Continental European model, 34, 35 International Financial Reporting Standards, 42, 96–98 Events after the reporting period (IAS 10), 155–156 Excess foreign tax credit, 553–555 Exchange of goods or services, 200 Exchange rates, 340–343 currency, 342–343, 342e current, 405–407 Expatriates, taxation of, 573–575 Expenses, 85 Export incentives from the United States, 570–572 Export sales, 345 Exposure to foreign exchange risk, 345 External events, 131 Fair Presentation/Full Disclosure Model, 33–34 Fair value exposure, 352–353 Fair value (FV), 471 definition, 123, 125 derivatives, 351–352 foreign currency forward contract or option, 351 measurement, 54, 107 Fair value hedges, 353, 355, 368 forward contracts, 361–363 options, foreign currency, 371–373 options as, 368 Fair value of a forward contract, 351 Fair value option, 207–208 Fair value through profit or loss (FVPL), 206, 207 Federal Accounting Board of Brazil (CFC), 49 Federal Financial Supervisory Authority (FFSA), 261–262 Finance leases, 149–150 Index Financial Accounting Standards Board (FASB), 29 convergence with IASB, 153 convergence with IFRS, 103–108 inflation accounting, 454 Financial Accounting Standards Foundation (FASF), 280, 283 Financial analysis, 493 Financial assets, 211–213, 214 at fair value through profit or loss (FVPL), 206 Financial Crisis Advisory Group (FCAG), 104–105 Financial instruments, 204–215, 350 compound, 205–206 measurement of, 208–210 recognition and measurement (IAS 39), 97, 204, 206–208 Financial instruments: disclosure and presentation (IAS 32), 204–205, 350 Financial instruments: recognition and measurement (IAS 39), 97, 204, 206–208, 350 Financial instruments (IFRS 9), 209 Financial liabilities, 204–205 amortized cost measurement, 209–210 at fair value through profit or loss, 207 Financial perspectives, 646 Financial reporting, 35 classification systems, 34e cultural influences on, 37–40 for foreign operations, 6, 10 model for international differences, 41–43 Financial Reporting Control Act, 260 Financial Reporting Council (FRC), 306–307, 677–678 Financial Reporting Enforcement Panel (FREP), 261–262 Financial reporting in hyperinflationary economies (IAS 29), 419–420 Financial Reporting Review Panel (FRRP), 308 Financial risk, 630 Financial statement analysis, 492–493 Financial statements See also Foreign financial statements comparability of, 32–33 detail level, 47 disclosures, 49–53 diversity, accounting, 31, 43 elements of, 85 examples, 50e–53e foreign currency translation, 404–408 format of, 43–47 inflation, impact of, 449–450 measurement in, 53–54 presentation of, 86–90, 196–197 recognition, 53–54 terminology of, 47–49 United Kingdom vs United States, 24–27 Financing foreign capital markets, 31–32 multinational corporations, 542 providers of, 29–30 First-in, first out (FIFO) inventory costs, 121 First-time adoption of international reporting standards (IFRS 1), 90–92, 96 Fixed-price contracts, 202 Flexibility, 37 Forecasted foreign currency transaction hedge, 373–375 Foreign capital markets, 31–32 Foreign Corrupt Practices Act (FCPA), 8, 705–707 and China, 240 Foreign currency available-for-sale financial assets, 210–211 borrowing, 377–379 fair value of a forward contract, 351 financial statement translation, 404–408, 422–423 775 loans, 379 transactions, 568 Foreign currency firm commitments, 349 hedges of, 368–373 Foreign currency risk, 3–4 Foreign currency sales, 343 Foreign currency transactions, 344–349 balance sheet date, 347–349 hedge of forecasted, 373–375, 376e, 377e hedging activities illustration, 380–392 options, 344, 351, 363–368 performance measurement, 652–653 sales, 2–4 Foreign direct investments (FDIs), 4–6, 11–12, 569 in China, 234–235 growth in, 12e reasons for, 5e Foreign earned income exclusion, 574–575 Foreign exchange markets, 340–344 Foreign exchange rates, 340–343 Foreign exchange rates (IAS 21), 418–419, 419e, 460–463 Foreign exchange risk, See also Hedging foreign exchange risk Foreign financial statements analysis of, 494–508 in China, 251e–257e, 330–336 currency in, 498–499 data accessibility, 495–496 disclosure, extent of, 500–502 in English, 497e format of, 500 Germany, 268e–277e Japan, 287e–291e language in, 496–498 Mexico, 300e–302e principles of accounting differences, 503–506 ratio analysis, 506–508 restating, 508–518 terminology in, 499–500 timeliness of, 502–503 United Kingdom, 313e–325e Foreign income translation, 566–568 Foreign sales corporation (FSC), 570–571 Foreign source income, 548–549 translation of, 565–568 Foreign tax credit (FTC), 551–557 Forward contracts used for hedging, 355–363, 368–371 Forward rates, 343–344 Fourth Directive, 70–71, 265, 305, 692 Framework for the Preparation and Presentation of Financial Statements, 73, 84–86 Frequent-flyer awards program, 201–202 Functional currency, 416–417, 417e definition of, 418–419 Generally accepted accounting principles (GAAP), 2, of China, 244–245, 250e controlling financial interest, 466 convergence with IFRS, 102, 103–105, 470–472 of Germany, 263, 265–267, 266e international differences, 23–24, 27, 56 and International Financial Reporting Standards (IFRS), 118–120, 195–196 inventory costs, 121–122 of Japan, 280, 285, 286e local and U.S comparisons, 508–518 of Mexico, 298–299, 299e of the United Kingdom, 311e U.S vs Japan, 285 776 Index General price index (GPI), 451 General price level adjusted historical cost (GPLAHC), 450 General purchasing power (GPP) accounting, 450–451, 452–453 in Latin America, 454–457 measurement, 54 restate/translate method, 460–463 Geocentric structure, 638 German Accounting Act of 1985, 265 German Accounting Standards Board (GASB), 260–261 German Accounting Standards Committee (GASC), 28, 260 German Commercial Code, 259, 681 German Financial Analysts Federation (DVFA), 56 Germany, 232, 233e, 257–258 accounting law, 28, 29, 29n accounting profession, 258–259 auditing regulation, 686–687, 695 financial reporting, 35 financial statement example, 268e–277e generally accepted accounting principles (GAAP), 263, 265–267, 266e and International Financial Reporting Standards (IFRS), 261, 265–267, 266e principles and practices in accounting, 263–267 regulation of accounting profession, 259–263 taxation, 264 Global accounting standards, 10 Global innovators, 638 Global Reporting Initiative (GRI), 749–754 Goal congruence, 588 Goodwill, 141–146, 471 business consolidations, 469–470 impairment of, 142–144 initial measurement of, 141–142 Government grants, 516 Graded-vesting stock options, 190 Gray, Sidney, 60 Gray’s accounting values, 37–39, 60–61 Great Wall fund-raising scandal, 242–243 Gresham’s law, 84n Guanxi, 240–241 Harmonization of accounting standards, 33, 66–67, 68–75 auditing standards, 688–693 Hedging activities illustration, 380–392 Hedging foreign exchange risk, 4, 340, 349–350, 353–354, 375–377 accounting for, 352–353 balance sheet exposure, 429–431 currency commitments, 368–373 currency-denominated assets and liabilities, 354–355 effectiveness of, 353 firm commitments, 368–373 forecasted transactions, 373–375, 376e, 377e Highly inflationary economies, 417–418, 463 Historical cost (HC) accounting, 450–452 Historical cost (HC) measurement, 54 Historical exchange rates, 405, 407, 411 Hofstede’s cultural dimensions, 37, 38e Hold-to-maturity investments, 206 Hoogervorst, Hans, 81, 102 “Hooking up” in China, 239–240 Housing costs, foreign, 575 Hyperinflationary economies, 460–463 financial reporting in, 419–420 IASC Foundation Constitution, 80–81 IASs (International Accounting Standards) See International Accounting Standards (IASs) Identifiable intangible assets, 134 IFRS See International Financial Reporting Standards (IFRS) IFRS Advisory Council, 79–80 IFRS Foundation, 78 IFRS Foundation Constitution, 80 IFRS Interpretations Committee, 80 Impairment of assets, 211, 213 Impairment of assets (IAS 36), 131–134, 135e, 141, 150 goodwill, 142–144 loss, measurement of, 132–133 reversal of, 133–134 Implementer, 638 Import duties, minimization of, 592 Import purchase, 345 Income, 85 Income statement remeasurement, 424–426 Income taxes, 193–197, 542–544 Independence of auditors, 697–701 Independent float, 341 Indirect foreign tax credit, 552, 556–557 Individualism, 37 Inflation accounting, 449–463 and diversity, 30 high inflation countries, 463 international, 454–457 methods for, 450–454 in Mexican financial statements, 297, 454–457 translating financial statements, 460–463 in the United Kingdom, 454 Inflation-Adjusted Model, 34 Information reflecting the effects of changing prices (IAS 15), 457–460 Initial measurement of goodwill, 141–142 Insignificant operations of subsidiaries, 468e Institute of Internal Auditors (IIA), 702 Intangible assets, 134–141 Intangible property, licenses of, 601–603 Integrated player, 638 Intercompany loans in transfer pricing, 603–604 Intercompany services, 604 Intercompany transactions See Transfer pricing Interest income, 200 Interim financial reporting, 158 Internal auditing, 702–710 legislation about, 704–710 Internal business process perspectives, 646 Internal events, 131 Internally generated intangibles, 136–141 Internal rate of return (IRR), 628–629 International accounting, defined, 1–2 International Accounting Standards Board (IASB), 10 convergence toward FASB, 153, 470–472 convergence toward IFRS, 92–94, 103–105 creation of, 75–77 financial instruments, 350 framework of, 84–86 new direction for, 102–103 structure of, 77–81, 77e International Accounting Standards Committee (IASC), 65, 66, 72–75 challenges to, 75 International Accounting Standards (IASs), 87e–88e accounting policies, changes in accounting estimates and errors (IAS 8), 156–157 borrowing costs (IAS 23), 120–122, 146–147 business combinations (IAS 22), 469 compliance with, 74–75 consolidated and separate financial statements (IAS 27), 464–466 Index construction contracts (IAS 11), 202 earnings per share (IAS 33), 157 effects of changes in foreign exchange rates (IAS 21), 418– 419, 419e, 460–463 employee benefits (IAS 19), 185–188 events after the reporting period (IAS 10), 155–156 financial instruments: disclosure and presentation (IAS 32), 204–205, 350 financial instruments: recognition and measurement (IAS 39), 97, 204, 206–208, 350 financial reporting in hyperinflationary economies (IAS 29), 419–420 impairment of assets (IAS 36), 131–134, 141, 142–144, 150 income taxes (IAS 12), 193–197 inflation accounting (IAS 15), 457–460 intangible assets (IAS 38), 134–141 interim financial reporting (IAS 34), 158 inventories (IAS 2), 120–122 investment property (IAS 40), 131 investments in associates and joint ventures, accounting for (IAS 28), 473 leases (IAS 17), 147–151 presentation of financial statements (IAS 1), 86–90, 179, 197 property, plant, and equipment (IAS 16), 122–130 provisions, contingent liabilities and contingent assets (IAS 37), 180–184 revenue (IAS 18), 197–203 segment reporting (IAS 14), 158, 474–475 statement of cash flows (IAS 7), 154–155 U.S reaction to, 73–74 International Auditing and Assurance Standards Board (IAASB), 93–94, 689 International Federation of Accountants (IFAC) Auditing and Assurance Standards Board (IAASB), 93–94, 689 and corporate governance, 677 establishment of, 69 International Financial Reporting Interpretations Committee (IFRIC), 260 International Financial Reporting Standards (IFRS), 10, 86, 87e–88e adoption of, 94–96 American Society of CPAs, 105 business combinations (IFRS 3), 141 and China, 249, 250e convergence of accounting standards, 92–94 and the European Union, 42, 96–98 and the Financial Accounting Standards Board, 103, 106 financial instruments (IFRS 9), 209 financial position, illustrative, 91e first-time adoption of international reporting standards (IFRS 1), 90–92, 96 and generally accepted accounting principles (GAAP), 118–120, 195–196 and Germany, 261, 265–267, 266e income statement, illustrative, 90e and Japan, 280, 284–285, 286e joint arrangements (IFRS 11), 473 measuring property, plant, and equipment, 54 and Mexico, 298–299, 299e operating segments (IFRS 8), 158–159, 475 principles-based approach to, 83–84 Security and Exchange Commission convergence, 99–100 share-based payment (IFRS 2), 188–193 translation of foreign financial statements, 418–420 and the United Kingdom, 310, 311e and the United States, 98–108 use of in 2012, 95e 777 International Forum on Accountancy Development (IFAD), 69, 72 International Organization of Securities Commissions (IOSCO), 68, 689 IOSCO Agreement, 73 International Standards on Auditing (ISAs), 689–692, 690e–691e See also International Financial Reporting Standards (IFRS) International Standards on Quality Control (ISQC), 689, 690e–691e International trade, 10–11 International transfer pricing, 7–8, 589–594 Internet reporting, 711 Internet resources for financial information, 496 Intrinsic value, 344 Inventories, reconciling adjustments for, 513–514 Inventories (IAS 2), 120–122 Investment location decision, 541 Investment property (IAS 40), 131 Investments in associates and joint ventures, accounting for (IAS 28), 473 IOSCO Agreement, 73 Islamic financial institutions (IFIs), 40 Japan, 232, 233e, 277–281 accounting profession, 278–281 audit environment, 682 corporate social reporting, 761, 762e–763e financial statement example, 287e–291e generally accepted accounting principles (GAAP), 280, 285, 286e and International Financial Reporting Standards (IFRS), 280, 284–285, 286e principles and practices in accounting, 284–286 regulation of accounting profession, 281–283 Japan Institute of Certified Public Accountants (JICPA), 279–281 Joint arrangements (IFRS 11), 473 Joint operations, 473 Joint ventures, 473 Judgmental classifications, 35–36, 36e Jurisdiction for taxation, 548–550 KPMG accounting firm, history of, 9e Kyoto Protocol, 749 Labor unions in Germany, 264–265 Land, sale of, 515–516 Language difficulties for foreign statements, 496–498 Last-in, first-out (LIFO) inventory costs, 29, 121 Latin American accounting, 454–457 Learning and growth perspectives, 646 Lease capitalization, 28–29 Lease classification, 147–149 Leases, 147–151, 153 disclosures of financial statements, 151–153 Legal Compliance Model, 34 Legal form of operation, 542 Legal systems, 28–29 and audit requirements, 683 Liabilities, 85 for auditors, 695–697 Licenses of intangible property, 601–603 Litigation losses, 182 Loans, 207 foreign currency, 379 Local currency (LC), 654 Local-currency perspective, 416 Local innovator, 638 778 Index Long-term benefits, 188 Long-term orientation, 37 Loss, measurement of, 132–133 Lowest-common-denominator approach, 72 Macro-uniform models, 35 Malaysian Accounting Standards Board (MASB), 40 Management approach to segments, 475–478 Management control, 622 culture and, 660–661 strategy implementation, 637–640 Mandatory regulation of auditors, 699 Market-based transfer price, 588–589 Masculinity, 37 Measurement in financial statements, 53–54 after initial recognition, 124–130 fair value, 54, 107 financial instruments, 208–210 at initial recognition, 123–124 Merger and acquisitions, 494–495 Mexican Institute of Public Accountants (MIPA), 293, 295 Mexico, 232, 233e, 291–293 accounting profession, 293–294 financial statement example, 300e–302e generally accepted accounting principles (GAAP), 298–299, 299e inflation accounting, 297, 454–457 International Financial Reporting Standards (IFRS), 298– 299, 299e principles and practices in accounting, 297–302 regulation of accounting profession, 294–296 Micro-based models, 35 Model treaties, 558–559 Monetary/nonmonetary method, 408–409 Monitoring Board of the IASB, 77 Multinational corporations (MNCs), 12–14 auditing, international, 8–9, 704–705, 708–710 business combinations, 463–474 capital budgeting, 629–636 corporate social reporting, 754–764 evolution of, 2–10 financial reporting for, financing of, 542 foreign currency risk, 3–4 foreign direct investments, 4–6 global accounting standards for, 10 performance evaluation of, sales to foreign customers, 2–3 stock exchanges, foreign, 9–10, 14 taxation, 7, 541–542 transfer pricing, 7–8 Mutual Agreement Procedure (MAP), 605 Negative goodwill, 470 Negative translation adjustment, 423 Negotiated prices, 589 Net defined benefit liability (asset), 186 Netherlands, The financial reporting, 35 replacement cost accounting, 457 Net present value (NPV) determination of, 4–5 strategy formulation, 628 Net realizable value, 121 Net selling price, 131 New York Stock Exchange (NYSE) corporate governance, 678 Daimler-Benz, 32, 55–57 Nobes’ model for financial reporting differences, 41–42 Nonadjusting events, 156 Noncontrolling interest, 471 Noncurrent assets held for sale, 158 Nonfinancial measures, 643–648 Nonlocal currency balances, 427–428 Norwalk Agreement, 103–105 Onerous contracts, 182–183 One-transaction perspective, 345–346 Operating income before depreciation (OIBD), 505 Operating leases, 150 Operating profit, as performance criterion, 651 Operating segments, 158–159 disclosures, 478–482 management approach, 475–478 Operating Segments (IFRS 8), 158–159, 475 Operational budgeting, 640–641, 653–656 Optimism, 37 Option contracts, 344 Option premium, 344 Options, foreign currency, as cash flow hedge, 365–367, 374–375 as fair value hedge, 368, 371–373 foreign currency transactions, 344, 351, 363–368 Ordinary dividends, 517 Organization for Economic Cooperation and Development (OECD), 11, 545, 595 and corporate governance, 676–677 model tax treaties, 558 Other comprehensive income, 352 Other post-employment benefits, 188 Overall foreign tax credit limitation, 552 Owners, 471 Parent company perspective, 630, 634–636 Past service cost, 187–188 Payback period, 626–627 Pegging currency, 341 Penalties in transfer pricing, 606 People’s Republic of China (PRC) See China, People’s Republic of Performance evaluations, 622 designing, 642–643 financial measures, 643, 644–645, 644e of foreign operations, 8, 641–660 implementing, 659–660 multinational corporations, nonfinancial measures, 643–648 operating profit, 651 performance measures, 643 as profit center, 649–650 responsibility centers, 648–649 subsidiaries, 642–643 transfer pricing, 589–591 uncontrollable items, 650–652 Performance measures, 643, 652–653 Physical presence test, 575 Political risk, 629 Polycentric structure, 638 Pooling of interests method, 472 Portfolio investment, 494 Possible obligations, 181 Post-employment benefits, 185–188 Power distance, 37 Premiums in foreign currency sales, 343 Presentation of financial statements disclosures, 154–159 Index Presentation of financial statements (IAS 1), 86–90, 179, 196–197 Present obligations, 181 Principles and practices in accounting in China, 246–257 Germany, 263–267 Japan, 284–286 Mexico, 297–302 United Kingdom, 309–312 Principles-based approach, 83–84, 98–99 Product cycle theory, 11 Professionalism, 37 Profit centers, 649–650 Profit margins, 507 Profit measurement for currency, 652 Profit or loss test for segments, 476, 477 Profit sharing plans, 185 Profit split method, 600–601, 603 Project perspective, 630, 633–634 Property, plant, and equipment (PPE) measurement, 54 capitalization of interest on, 514–515 depreciation, 125–126 international standards (IAS 16), 122–130 revaluation of, 514 Prospective analysis, 493 Provisions, 180–182 Provisions, contingent liabilities and contingent assets (IAS 37), 180–184 Public Company Accounting Oversight Board (PCAOB), 678, 684–685 Public Interest Oversight Board (PIOB), 694 Purchased intangibles, 135–136 Purchase method, 468 Purchasing power, 450 Put options, 344 Qualified Foreign Institutional Investor (QFII) scheme, 236 Ratio analysis, 506–508 Realized foreign exchange loss, 407 Receivables, 207, 213–215 Recognition and measurement (IAS 39), 97, 204, 206–208 Recognition in financial statements, 53–54 measurement after initial recognition, 124–130 measurement at initial recognition, 123–124 Reconciling adjustments, 513–518 Recoverable amount, 131 Redeemable preferred shares, 205 Related party disclosures, 157 Religion and accounting, 39–40 Remeasurement, 363, 424–427 of income statement, 424–426 Repatriation restrictions, 592 Replacement cost accounting, the Netherlands, 457 Replacement of part of an asset, 123 Reporting currency, 416 Resale price method, 598–599 Residence taxation, 549–550 Residual profit split method, 601 Responsibility accounting, 650 Responsibility centers, 648–649 Restate/translate method, 460–463 Restating foreign financial statements, 508–518 Restricted or prohibited activities, 698 Restructuring, 183 costs of, 516–517 Retained earnings, translation of, 411–413 Return on investment (ROI) strategy formulation, 627 Revaluation of assets, 124–125, 141 property, plant, and equipment, 514 Revaluation treatment, 126–130 Revenue (IAS 18), 197–203 Revenue recognition, 197–203 for services, 199–200 Revenue test for segments, 476–477 Reversal of impairment losses, 133–134 Right of return on sale of goods, 198 Royalties, 200 Safe harbor rule, 562 Sale-leaseback transaction, 150–151, 152e Sale of goods, 197–199 Sales transactions, 2–4, 200 Sample international audit reports, 714–722 Sarbanes-Oxley Act, 675, 678 Secrecy, 37, 38 Securities and Exchange Commission (SEC), 55–56 convergence with IFRS, 99–100 Securities and Exchange Law (SEL) of Japan, 281 Segment reporting, 474–482 Segment reporting (IAS 14), 474–475 Services, rendering, 199–200 Service transactions, 200 Servicing fees, 201 Seventh Directive, 70, 71 Shanghai Stock Exchange (SHSE), 235 Share-based payments (IFRS 2), 188–193 Shenzhen Stock Exchange (SZSE), 235 Short-term benefits, 185 Significant influence, 472 Source of income for taxation, 549 South America, 34 Split accounting, 205 Splitting operations of auditors, 699–700 Spot rates, 343–344 and strike price, 367–368 Standard setting, 66–68 Statement of cash flows (IAS 7), 154–155 State-owned enterprises (SOEs), 234 Statutory control, 37 Stock exchanges, foreign, 9–10, 14 in China, 235–236 in Germany, 257–258 in Japan, 281 in Mexico, 292 in the United Kingdom, 308 Stockholder’s equity in foreign reporting, Stock option plan modification, 190 Straight-line allocation, 360 Strategy formulation, 621, 622–636 capital budgeting, 622–629 multinational capital budgeting, 629–636 net present value (NPV), 628 return on investment (ROI), 627 Strategy implementation, 637–641 management control, 637–640 operational budgeting, 640–641 Strike price, 344 spot rates, 367–368 Subpart F income, 561–562 Subsidiaries, 464–466 foreign income translation, 567–568 foreign tax credit for, 556–557 influences on the operating environment, 642e insignificant operations of, 468e 779 780 Index Subsidiaries (Continued) performance evaluation systems, 642–643 taxation of, 549–550 Surpluses, revaluation treatment, 126–130 Sweden, 35 Tangible property, sale of, 596–601 Tax asset, recognition of, 194–195, 196e Taxation of controlled foreign corporations, 562 corporate tax rates, international, 543e foreign source income, 562–565 foreign tax credits, 551–557 and German accounting, 264 incentives, 568–572 income taxes, 193–197, 542–544 international income, 7, 29 and Japanese accounting, 282 jurisdiction for, 548–550 multinational corporations (MNCs), 7, 541–542 of subsidiaries, 549–550 tax havens, 544–546, 545e tax-planning strategy, 547 of U.S expatriates, 573–575 value-added tax (VAT), 547–548 withholding taxes, 546–547, 546e, 591–592 Tax havens, 544–546, 545e Tax holidays, 569–570 Tax home, 574–575 Tax-planning strategy, 547 Tax sparing, 569–570 Tax treaties, 557–561 treaty shopping, 560–561 United States, 558–560 Temporal method, 409–410 balance sheet translation, 425e complicating aspects of, 413–414 remeasurement of financial statements, 424–427 U.S dollar perspective, 416 vs current rate method, 428 Terminology of financial statements, 47–49 foreign, 499–500 Territorial approach to taxation, 548–549 Timeliness of statements, 502–503 Time value, 344 Tokar, Mary, 102 Tokyo Agreement, 285–286 Top-up test for goodwill, 145–146 Transaction exposure, 345 adjustment, 414–415 disclosures related to, 432–434 Transfer pricing, 7–8, 586–587 advance pricing agreements (APAs), 607–609 arm’s-length range, 604 contemporaneous documentation requirement, 606–607 correlative relief, 604–605 cost minimization, 591–593 enforcement of regulations, 609–611 government reactions to, 595 intercompany loans, 603–604 intercompany services, 604 international, 7–8, 589–594 licenses of intangible property, 601–603 methods of, 588–589 objectives of, 589–594 penalties, 606 performance evaluation, 589–591 reporting requirements, 607 rules of, U.S., 595–607 types of, 587e withholding taxes, 591–592 Translation exposure, 407 Translation of foreign financial statements, 408–414, 418–420, 428–429 adjustment computation, 424 current rate method, 421–424 disclosures of financial statements, 432–434 foreign source income, 565–568 illustration of, 420–421 inflation accounting, 460–463 retained earnings, 411–413 Transparency, 37 Treaty shopping, 560–561 Tweedie, David, 81, 83, 102 Two-transaction perspective, 346 Uncertainty avoidance, 37 Uncontrollable items, 650–652 Undistributed profits, 194 Uniformity, 37 United Kingdom, 232, 233e, 303 accounting profession, 303–304 auditing regulation, 685–686, 695 class A accounting system, 42 communication in financial reporting, 325–326 complexity in financial reporting, 312 Fair Presentation/Full Disclosure Model, 34 financial statement example, 313e–325e financial statements, compared to U.S., 24–27 generally accepted accounting principles (GAAP), 311e inflation accounting, 454 International Financial Reporting Standards (IFRS), 310, 311e principles and practices in accounting, 309–312 regulation of accounting profession, 305–309, 708 stock exchange, 308 vs China, People’s Republic of, 238, 241 vs United States, 24–27 United Nations Model, 558 United States corporate social reporting (CSR), 763e–764e dollar perspective, 416 generally accepted accounting principles (GAAP), 508–518 International Accounting Standards (IASs), 73–74 principles-based approach, 98–99 taxation of expatriates, 573–575 transfer pricing, 595–607 vs Japan, 285 vs United Kingdom, 24–27 Unrealized foreign exchange loss, 407 Value-added tax (VAT), 547–548 Value in use, 131 Violation of conservatism, 348–349 Walters, Ralph E., 32 Withholding taxes, 546–547, 546e transfer pricing objectives, 591–592 Work-related cultural value orientation, 302e World Trade Organization (WTO), 339 and China, 246 Worldwide approach to taxation, 548 Wyman, Peter, 304 Zeff, Steven, 108 ... of Accounting Literature; International Journal of Accounting; Advances in Accounting, incorporating Advances in International Accounting; Journal of International Financial Management and Accounting; ... International Accounting Research; Journal of Accounting Literature; International Journal of Accounting; and Journal of International Business Studies Professor Doupnik is a past president of the International. .. familiar with financial accounting and managerial accounting, but many have only a vague idea of what international accounting is Defined broadly, the accounting in international accounting encompasses