Week_10_Course_Materials

Week_10_Course_Materials - Accounting in the International...

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Accounting in the International Business
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Accounting Information and Capital Flows Business Enterprise Providers of Capital (investors, Creditors and Government) Resource Users Resource Providers Information Providers Information Users Financial Accounting Information $
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Relationship Between Business and Providers of Capital c External sources of capital: c Individual investors. Buying shares and bonds. c Banks. Loan capital. c Government. Make loans or investment. Importance of each varies from country to country
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Determinants of National Accounting Standards National Accountin g System Political and Economic Ties with Other Countries Level of Economic Development National Culture Level of Inflation Relationship Between Business and Providers of Capital
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Inflation Accounting c Historic cost principle: i Assumes currency is not losing value to inflation. c Most significant impact = asset valuation. i Appropriateness varies with inflation. c Current cost accounting: i Factors out inflation. c Used in Great Britain until inflation rate declined.
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Accounting Clusters British-American-Dutch Group Firms raisecapital from investors. Accounting systems designed to inform investors Europe-Japan Group Havecloseties to banks. Accounting practices meet bank’s needs. South American Group Countries haveexperienced persistent and rapid inflation. Accounting principles reflect theinflation.
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International Accounting Standards Board c Representing 119 countries c Responsible for issuing international financial reporting standards (IFRS) c Develop global accounting standards c Promote the use and application of standards c Converge national accounting standards and International Accounting standards
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Currency Translation c The current rate method : the exchange rate at the balance sheet’s date is used to translate foreign subsidiary financial statements into home country currency. c Incompatible with ‘historic cost principle’. c The temporal method : translates foreign subsidiary assets into home-country currency at the time the asset is purchased. c Changing exchange rates may mean the balance sheet may not balance!
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U.S. Practice c Statement 52 “Foreign Currency Translation” c Self-sustaining autonomous subsidiary: c Functional currency is local currency. c Balance sheet uses exchange rate at end of financial year. c Income statement is financial year average. c Integral subsidiary: c Functional currency is US currency. c Financial statements use the temporal method.
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