mb0053-slm-unit-09

International Business Management Unit 9

Sikkim Manipal University Page No. 177

Unit 9 International Accounting Practices

Structure:

9.1 Introduction

Objectives

9.2 International Accounting Standards

Domestic vs. international accounting

National differences in accounting

Legal systems

9.3 Accounting for International Business

Classification of accounting systems

Harmonising of accounting systems

9.4 International Regulatory Bodies

9.5 International Financial Reporting Standards

9.6 Summary

9.7 Glossary

9.8 Terminal Questions

9.9 Answers

9.10 Caselet

9.1 Introduction

In the previous unit you studied about international financial management

and forex market. In this unit you will learn about international accounting

standards, regulatory bodies, and international financial reporting standards.

While presenting financial statements, publicly-traded companies should

follow some rules for international accounting practices so that the reader

can easily compare between different companies.

This unit covers various factors involved in accounting practices followed by

MNCs. It explains various regulators and accounting standards followed by

different countries and regions. It also includes international regulatory

bodies and the international financial reporting standards.

Objectives:

After studying this unit, you should be able to:

explain international accounting practices.

differentiate between domestic and international accounting practices.



describe the international regulatory bodies.

discuss the international financial reporting standards.

9.2 International Accounting Standards

Accounting is understood as the language of business. International

Accounting Standards state how should different types of transactions and

events be recorded in financial statements. International accounting refers

to international comparative analysis, accounting measurements, and

reporting issues distinctive to multinational business connections. It also

refers to harmonisation of global accounting and financial reporting through

political, organisational, professional, and standard-setting activities.

Accounting Standards are the key mandatory and regulatory mechanisms

for training on financial reports and conducting successful audit for the

same. It is used almost in all countries throughout the world. They are

concerned with the structure of measurement, rules for preparation and

arrangement of financial statements. They emerge as a set of authoritative

statements related to exact type of transactions, events, and other costs that

are recognised and reported in the financial statements. They are designed

to supply practical information to diverse users of the financial statements

such as shareholders, creditors, lenders, organisation, investors, suppliers,

competitors, researchers, regulatory bodies. These statements are designed

and approved to develop and benchmark the quality of financial reporting.

A financial reporting system of international standard is required to attract

foreign and present and potential investors at home, which can be achieved

by harmonising the accounting standards.

9.2.1 Domestic vs. international accounting

Different countries whether domestic or international, have different

accounting standards. A common belief is that these differences reduce the

quality and importance of accounting information. Accounting standards

determine the financial reporting quality and provides separately verified

information about an organisation's financial performance to investors’

creditors.

Though there are differences in accounting methods, domestic businesses

are not affected. The accounting system of a domestic organisation must



meet the specialised and regulatory standards of its home country. But, an

MNC and its subsidiaries must meet differing accounting and auditing

standards of all the countries in which it operates. This leads to a need for

comparability between businesses in the group. In order to successfully

manage and organise their operations, local managers require accounting

information, which should be prepared according to the local accounting

concepts and denomination in the local currency. Yet, for financial

controllers, to measure the foreign subsidiary’s performance and worth, the

subsidiary’s accounts must be translated into the organisation’s home

currency. This translation is done using accounting concepts and measures,

which are detailed by the organisation. Investors worldwide look for the

highest possible returns on their capital, in order to interpret the track

record, though they use a currency and an accounting system of their own.

The organisation also has to pay taxes to the countries where it does

business, based on the accounting statements prepared in these countries.

Besides this, when a parent corporation tries to combine the accounting

records of its subsidiaries to produce consolidated financial statements,

extra complexities occur because of the changes in the value of the host

and home currencies.

There are many differences between International Accounting Standards

(IAS) and Domestic Accounting Standards (DAS). On the basis of difference

between the two, two indices, namely 'divergence' and 'absence', are

created. Absence is the difference between DAS and IAS; the rules on

certain accounting issues are missed out in DAS and covered in IAS.

Divergence represents the differences between DAS and IAS; the rules on

the same accounting issue differ in DAS and IAS.

Measurement of differences between IAS and DAS

You can measure the differences between IAS and DAS in the following

way:

Literature on international accounting differences – Referring to

earlier reports on international accounting could give more information

about the subject. Most of the earlier reports understand international

accounting differences as various options adopted by nations for the

similar accounting problems, which correspond to divergence concept.



Framework of analysis – Links between variations in accounting

standards and financial reporting quality of various countries could be

clearly seen from the reports published earlier. We should consider the

institutional determinants of accounting differences such as legal origin,

governance structure, economic development, and equity market.

9.2.2 National differences in accounting

One of the major problems encountered by an international business is lack

of consistency in accounting standards in various countries. Organisations

show opposite financial results because of the differences in accounting

standards.

Differences in accounting standards exist because of diverse political, legal,

economic, and cultural systems of the countries. Accounting standards and

practices are also prejudiced by the sources of capital used to fund

business. Figure 9.1 shows the influencing factors on a country’s accounting

practices.

Figure 9.1: Influences on a Country’s Accounting System

You might think that accounting systems in the world were uniformly

influenced by a few historical developments. There could be some

similarities but no two countries and their systems are alike. Accounting

systems are developed suiting the country’s specific needs. It is a fact that

different countries evolved in different ways. Accounting systems were

influenced by private ownership, industrialisation, inflation, and so on. When

there are differences in economic conditions, it is not surprising to find

differences in accounting practices. However, there are other influencing

elements apart from economic factors. These are legal systems, educational

systems, socio cultural features, and political systems. These also influence

the need for accounting, speed and direction of its development. Due to the



increasing trend in globalisation of business, understanding various

accounting systems is important.

9.2.3 Legal systems

Law system is divided into civil law and common law in countries worldwide.

In countries like US, Australia, UK and New Zealand accounting procedures

originate from decisions of independent standards setting boards, such as

US Financial Accounting Standards Board (FASB). Each board works with

professional accounting groups. In countries, which follow common law,

accountants follow Generally Accepted Accounting Principles (GAAP),

which provides a 'true and fair view' of the organisation's performance,

based on the standards approved by these professional boards. Many civil

law countries also have a similar approach as that of GAAP. Functioning

within the limitations of these standards, accountants have freedom to

implement their professional judgment in reporting a 'true and fair'

representation of the organisation's performance.

Countries following civil law are likely to codify their national accounting

measures and standards. In these countries, accounting practices are

determined by the law. To assist the legal role, all business accounting

records must be officially registered with the government.

The way in which the accounting practices are imposed depends on the

legal system. Most of the developed countries depend on both private and

public enforcement of business performance, though the public or private

combination varies from country to country. The difference of legal system is

a major restriction in the growth of accounting standards. In some countries,

the accounting policies are restricted to detailed legislation, which is passed

by governments. This restriction forms a major problem to international

accounting bodies that are created to increase harmonisation of national

accounting frameworks. This is because, such government-controlled

regimes are inclined to be less flexible, and perceive private sector

influences as less acceptable.

Self Assessment Questions 1

1. Accounting Standards are the key mandatory and regulatory

mechanisms for training on financial reports and succeeding audit of

the same. (True/False)



2. __________ and ___________ are the two indices created based on

the differences between IAS and DAS.

3. GAAP stands for generally accepted accounting principle. (True/False)

Activity 1

The link below provides an article on ‘International Accounting

Standards’. Find out how standards help to bring financial stability in the

market and discuss how it affect companies.

Hint: Refer link: www.iasplus.com/dttpubs/dtiias.pdf

9.3 Accounting for International Business

In the previous section you learnt about international accounting standards

and differences between accounting standards in different countries. In this

section you will cover accounting for international business.

It is through import or export that an organisation gets more practical

knowledge about international accounting. In exports, an organisation may

either receive an unwanted inquiry or get an order from a foreign

company/buyer. If this foreign buyer needs an addition of credit, the buyer is

examined once before exporting. This process may look easy but it is not

so.

The buyer is not always a scheduled buyer in the international credit rating

directories. Either the seller should ask its bank to have foreign affiliations to

check the buyer's credibility or the seller can ask the buyer to provide

financial information. Though the buyer could provide the required

information, it might be difficult for the selling organisation to understand the

complicated financial statements. Those statements could be in a foreign

language, based on accounting assumptions and measures that are alien to

the organisation's accountants. Organisations new to international business

should take the help of banks or accounting agencies who are experts in

international accounting. When foreign companies/buyers use their currency

for transactions, the exporting organisation gets to know about possible

profit and loss from the changes in exchange rates. This is due to the

change in currency rate which happens between the time of placing the

order and time at which the payment is made.



The organisation selling the product has to have many documents like

customers’ declaration forms, special international shipping and insurance

documents and international legal documents. The orgsanisation should

take the help of bankers, shippers, lawyers and accountants.

Responsibilities lie with the foreign company if the product is being

imported. In this case international accouting is unaffected. But international

bank or accounting agency or lawyer should be consulted when the foreign

company demands for payment in their currency or when the buying

company needs to be sure about the credibility of the foreign company.

9.3.1 Classification of accounting systems

It is important to classify accounting systems because these are developed

to provide information to the decision makers. The classification of

accounting systems in financial and cost systems leads to difference of

opinion between the decision makers. Creditors, investors, tax authorities,

government agencies, and others are people who are involved in the

making of accounting systems, but are outside the organisation. Whereas,

managers are within the organisation and they also take part in the

accounting decisions.

Financial accounting

The information provided in financial accounting is not for organisation

managers but for the decision makers. Managers are normally outside the

organisation. The information for public organisations is available on the

websites of the organisations. Managers in the organisation are sincerely

concerned about reports that produce financial accounting, but the

information would not be sufficient for making operational decisions of the

organisation. Individuals, who depend on information from the financial

accounts, usually compare their organisation with others’. For example,

comparing Apple Computer and Microsoft for investment. Information

obtained after financial accounting can be compared between organisations.

This means that when an investor looks at revenues of Apple Computers

and then looks at the revenues of Microsoft signify the same thing.

Because of this, financial accounting systems are characterised by a series

of regulations that explain how to check transactions.



Cost accounting

Cost accounting information is planned for managers. The need for

comparison between different organisations does not arise in case of

managers as they take decisions only for their organisation. But The

significant principle is that the information must be appropriately decided.

Though information on cost accounting is usually used in financial

accounting, it should be determined whether this is beneficial for managers

to take decisions. The accountants add value by giving the cost accounting

information to managers so that they can take appropriate decisions. The

cost accounting system results from the decisions made by managers about

an organisation. Some aspects of cost accounting in regard to its clients,

with GAAP and ethics are given below:

Cost accounting and GAAP – The key principle of financial accounting

is to supply information about the organisation and the performance of

the management to the investors or creditors. The financial information

for this purpose is overseen by Generally Accepted Accounting

Principles (GAAP). GAAP maintain consistency in the accountancy data

used for reporting information between organisations. The cost

accounting information used to evaluate the expenditure of goods sold,

inventory assessment, accounting used for external reports should be in

accordance with GAAP.

Clients of cost accounting – The administration must consider

customer as important out of all the participants in a business. Without

customers, the organisation loses its capability and reason to exist. The

cost information itself is a product with its individual customers. The

major problem with accounting system occurs when managers utilise

accounting information that was designed for external reporting, in

decision-making.

Cost accounting and ethics – The format of costing systems is finally

about the payment of costs to various activities, products, projects and

corporate units, and people. The method in which this is done, affects

prices, reimbursement and payment. Based on the events, the cost

accounting systems plan the potential to misuse and fraud the

shareholders, employees or customers. As user or preparer of the cost

information, you should be aware of what it means, and how it could be



utilised. Most importantly you should be aware of when the system has

the potential to be misused.

9.3.2 Harmonising of accounting systems

Though there are many differences in accounting standards and practices, a

number of forces are leading to harmonisation. Some of these forces are:

A ‘movement to present information’ well-matched with the

‘requirements of investors’.

The global mixing of capital markets, which means that investors have

easier and quicker access to investment opportunities around the world,

and thus require financial information that is more equivalent to other

accounting standards.

The need of MNCs to increase the capital outside their home-country

capital markets, while generating few diverse financial statements.

Regional, political and economic harmonisation, such as, the initiatives

by the European Union (EU) influence accounting, trade and investment

issues.

Pressure from MNCs for consistent standards, which allows for reduced

costs in each country, and in reporting that is used by investors in the

organisations’ home-country.

Differences in accounting systems are confusing and expensive to

international business. Superiority in these systems makes it complex for

organisations to examine their foreign operations and for investors to

understand the relative performance of organisations that are based in

different countries. To help in solving such problems, many accounting

professionals and national regulatory bodies are trying to harmonise diverse

accounting practices. It is also important to understand the arguments in

favour of harmonisation.

Arguments supporting harmonisation

Harmonisation of accounting and exterior financial reporting assists in the

optimal global delivery of private-sector finance. Harmonisation means to

bring down the gap between accounting practices so that comparability

between financial reports from various countries can be improved. Investors

should be able to realise a more proficient portfolio of organisations on

national, as well as, international scale. This will benefit the investor. When



global capital markets operate properly, the financial information disclosed

to the market-place must be global. Figure 9.2 highlights for and against

harmonisation.

Figure 9.2: Arguments for and Against Harmonisation

The standard of accounting disclosure needs and auditing vary in different

countries, and makes cross-border investigation very difficult. It is difficult for

investors to understand the information presented, which is very different

from what exists in their home-country.

Harmonisation of accounting and auditing practices help to reduce the

difficulty. Investors must deal with diverse accounting practices and

disclosures, and have trust in the figures presented by accepting the

standard of auditing.


4. Information in _______________ is planned for decision makers and

who are not involved in the daily management of the organisation.

5. Cost accounting information is planned for _________.

6. Customer is the most important participant in a business who should be

given importance by the administration. (True/False)

9.4 International Regulatory Bodies

In the previous section, we covered accounting for international business. In

this section you will learn about various international regulatory bodies.

Certain regulatory bodies are active in bringing out harmonisation of

accounting standards. Efforts of some of the bodies are explained here.



European Union

European Union is pro-active in the harmonisation process. European

Commission sets directives, which are orders to the member countries, to

bring their laws inline with EU needs, within some transition period. The

earlier accounting directives are:

The nature and design of financial statements.

The measurement support on which the financial statements are to be

organised.

The significance of consolidated financial statements.

The need that auditors should ensure that the financial statements

reflect a true perspective of the organisation’s operations.

Though the EU has enhanced the comparability of financial statements, the

directives do not cover several essential issues. Additionally, some

directives provide options, but member countries understand the directives

differently. Thus, EU organisations listing outside their home-countries must

supply the following two sets of financial statements, they are:

Home-country statements.

Reconciliation statements.

United Nations

The United Nations is interested in international accounting since the early

1970s and has been operating under a 'Group of Eminent Persons'. This

further led to the establishment of Intergovernmental Working Group of

Experts on International Standards of Accounting and Reporting (ISAR) by

the UN Economic and Social Council.

The ISAR attempts to support the developing countries, by creating

recommendations on the accessibility and comparability of information

disclosed by international businesses.

The discussions of the ISAR are reported in annual publications.

Publications cover accounting developments worldwide, and reports on

issues significant to global accounting.

The ISAR is presently concerned about developing discussions on the

international environment reporting, and the role and responsibilities of

accountants and auditors.



Organisation for Economic Cooperation and Development (OECD)

The OECD was established by world's 24 developed countries, of which

some are Australia, Austria, Belgium, and Canada. This was set up for

promoting world trade and international economic growth. This looks at

matters from the perspective of economically developed countries. The

council of OECD has established a committee on International Investment

and Multinational Enterprises (MNEs). This committee in turn has

established a Working Group on Accounting Standards.

The ‘Working Group’ has recently published a 'Clarification of the OECD

Guidelines', and published reports as an element of an 'Accounting

Standards Harmonisation' series. Most recently, the OECD has established

a 'Centre for European Economies in Transition', which along with ‘Working

Group’ has prepared workshops, seminars, and meetings, to recognise the

purpose and constituents of accounting systems in these countries.

International Accounting Standards Committee (IASC)

International Accounting Standards Committee was created in the year

1973. It has issued a series of standards to harmonise management of

accounting issues globally. The chief objective of IASC is the

encouragement of comparability of financial statements between countries,

by establishing standards for inventory assessment, depreciation, delayed

income taxes, and so on.

An important accomplishment of the IASC has been the creation of the

International Accounting Standards (IAS). The publication and global

recognition of these standards is necessary for the harmonisation efforts of

the IASC.

The International Federation of Accountants (IFA)

The International Federation of Accountants was founded in the year 1977.

It completely supports the work of the IASC, and recognises the IASC as

having responsibility and authority to issue rules on international accounting

standards. IFA has parallel responsibility of IASC’s objective of developing

international guidelines for auditing, ethics, education and management

accounting.

Some of the other international regulatory bodies are:

Governmental Accounting Standards Board.

Independence Standards Board.



International Accounting Standards Board.

International Organisation for Securities Commission.

National Association of State Boards of Accountancy.

Public Company Accounting Oversight Board.

UK Accounting Standards Board.


7. The European Commission sets directives which are orders to member

countries to bring their laws inline with EU needs within some transition

period. (True/False)

8. _____________________considers the matters from the perspective

of economically developed countries.

9. The International Federation of Accountants was founded in the year

______________.

Activity 2

The link below provides an article on various International Regulatory

Bodies. Find out the responsibilities of OECD and WHO.

Hint: Refer link: http://www.iraup.com/results.php?page_name=int_org

9.5 International Financial Reporting Standards

After learning about different international regulatory bodies, we shall now

discuss about reporting standards used in international finance.

International Financial Reporting Standards (IFRS) are principle-based

values, interpretations and the structure followed by the International

Accounting Standards Board (IASB).

Structure of IFRS

International Financial Reporting Standards comprise of the following:

International Financial Reporting Standards (IFRS) (Standards issued

after 2001).

International Accounting Standards (IAS) (Standards issued before

2001).

Interpretations developed from the International Financial Reporting

Interpretations Committee (IFRIC) (Issued after 2001).

Standing Interpretations Committee (SIC) (Issued before 2001).



Framework for the Preparation and Presentation of Financial Statements

(1989).

Framework

The framework used for the preparation and presentation of financial

statements states the basic rules for IFRS.

Objective of financial statements

A financial statement should reproduce true and fair view of the business

dealings of the organisation, because these statements are used by

different constituents of the society.

Underlying assumptions

IFRS approved two basic accounting models, which are:

Financial capital preservation in nominal monetary units.

Financial capital preservation in units of invariable purchasing power.

The four underlying assumptions in IFRS are given below:

Accrual basis – The result of dealings and other measures are

recognised when they happen.

Going concern – An entity for the predictable future.

Stable measuring unit assumption - The assumption that financial

capital is measured in nominal monetary units. This is the historical cost

accounting in which assets and liabilities are recorded at their values

when first acquired and not generally restated for changes in values..

That is, accountants believe that it would not be sufficient for them to

take decisions when variations in the purchasing power of functional

currency changes is up. Taking decisions, here, imply for financial

capital safeguarding in the units of regular purchasing power during low

inflation and deflation as authorised in IFRS, in the Framework.

Units of constant purchasing power - Financial capital preservation in

units of regular purchasing power during low inflation and deflation, that

is, the denial of the constant measuring unit statement. Measurement in

units of constant purchasing power (inflation - adjustment) helps to sort

out the loss due to historical cost accounting.

http://www.e-conomic.com/accountingsoftware/accounting-words/assets

http://www.e-conomic.com/accountingsoftware/accounting-words/what-is-a-liability



Qualitative characteristics of financial statements

There are some qualitative characteristics of financial statements. These are

as given below:

Comparability.

Reliability.

True and fair view or fair presentation.

Relevance.

Understandability.

Elements of financial statements

The financial position of an enterprise is mainly provided in the ‘Statement of

Financial Position’. The fundamentals of financial statements are given

below:

Asset – An asset is a resource guarded by the enterprise as an effect of

past procedures, from which potential economic benefits are likely to

flow.

Liability – A liability is a present requirement of the enterprise that is

rising from past procedures, the closure of which is likely to result in an

outflow from the enterprise' possessions (assets).

Equity – Equity is the outstanding concentration on the assets of the

enterprise after subtracting all the liabilities under the historical cost

accounting model. Equity is well-known as owner's equity. Under the

units of invariable purchasing power model, equity is the regular real

value of shareholders´ equity.

The financial performance of an enterprise is mainly provided in an income

statement or profit and loss statement. The elements of an income

statement or the elements that determine the financial performance are as

follows:

Revenues – It is the increase in economic profit during an accounting

period, in the type of inflows or enhancements of assets, or diminishing

of liabilities that results in the increase of equity. But it does not

comprise the contributions made by the equity participants, like owners,

partners and shareholders.



Expenses – It is the reduction in economic benefits in an accounting

period, in the form of outflows, or reduction of assets or committing to

liabilities that results in decreasing equity.

Measurement of the elements of financial statements

Measurement is the method of determining the monetary amounts. But it

does not comprise the contributions made by the equity participants, that is,

owners, partners and shareholders. The components of the financial

statements are documented and approved in the balance sheet and income

statement. A number of diverse measurement bases are engaged in various

degrees, and in changing combinations in financial statements. These

measurements include the following:

Historical cost – Assets are entered as the amount of cash or cash

equivalents paid or the fair cost of the consideration given to obtain them

at the time of purchase. Liabilities are recorded as the amount of

earnings received in exchange for the commitment, or in some situations

(for example, income taxes), as the amounts of cash or cash equivalents

likely to be paid to convince the liability in the normal course of business.

Current cost – Assets are approved at the amount of cash or cash

equivalents that needs to be paid, if the similar or an equivalent asset

was acquired at present. Liabilities are approved at the undiscounted

amount of cash or cash equivalents that would be necessary to settle

the requirement at present.

Realisable (settlement) value – Assets are approved at the amount of

cash or cash equivalents that could, at present, be obtained by

exchanging the asset in a methodical removal. Assets are accepted at

the current discounted value of the future net cash inflows that the item

is likely to produce in the typical course of business. Liabilities are

carried at the current discounted value of the future net cash outflows

that are likely to be essential to resolve the liabilities in the typical course

of business.

The measurement basis that is generally adopted by entities in preparing

their financial statements is historical cost. This is generally combined with

other measurement bases.




10. Accrual basis is one of the underlying assumptions of _____________.

11. Equity is the outstanding concentration on the assets of the enterprise

after subtracting all the liabilities under the historical cost accounting

model. (True/ False)

12. Which among the following is not an element of financial statements?

a) Asset.

b) Liability.

c) Equity.

d) Accountability.

9.6 Summary

Let us now summarise the salient points you learnt in this unit on the

international accounting practices:

Accounting standards are the type of compulsory and regulatory

mechanisms for training on financial reports and conducting successful

audit for the same. It is used in almost all countries.

International businesses meet number of accounting problems that do

not stop domestic businesses. There are many differences between

both Domestic Accounting Standards (DAS) and International

Accounting Standards (IAS). Considering the list of differences, two

indices are created-'absence' and 'divergence'.

Law system is divided into civil law and common law in countries

worldwide.

Harmonisation of accounting and exterior financial reporting helps in the

best international delivery of private-sector finance. Harmonisation of

accounting and auditing practices help to diminish the size of the barrier.

Certain regulatory bodies are dynamic in bringing harmonisation of

accounting standards. Some of them are European Union, United

Nations, and so on.

International Financial Reporting Standards (IFRS) are principle-based

values; interpretations and the arrangement followed by the International

Accounting Standards Board (IASB).



9.7 Glossary

Benchmark: It is used to evaluate performance in the organisation.

Depreciation: It refers to the decrease in price or value.

Harmonisation: It refers to the process of making a pleasing or consistent

whole.

9.8 Terminal Questions

1. Explain briefly how the differences between IAS and DAS can be

measured.

2. Explain briefly about accounting for international business.

3. Explain the factors that lead to harmonisation of accounting system.

4. Explain briefly the work of United Nation as one of the international

regulatory bodies.

5. How do you measure the elements of financial statements of IFRS?

9.9 Answers


1. True

2. Absence, divergence

3. True


4. Financial accounting

5. Managers

6. True


7. True

8. OECD

9. 1977


10. IFRS

11. True

12. Accountability



Terminal Questions

1. You can measure the differences between IAS and DAS in the following

way:

Literature on international accounting differences.

Framework of analysis.

These are explained in sub section 9.2.1 of this unit. Refer the same for

details.

2. Export or import of a shipment gives an organisation the opportunity to

be exposed to international accounting process. In exports, an

organisation may receive an unwanted inquiry or obtain order from a

foreign company. This is explained in the section 9.3 of this unit. Refer

the same for details.

3. Though there are many differences in accounting standards and

practices, a number of forces are leading to harmonisation. It is a

movement to present information well-matched with the requirements of

investors. These are explained in sub-section 9.3.2 of this unit. Refer the

same for details.

4. The United Nations is interested in international accounting since the

early 1970s under a 'Group of Eminent Persons'. This further led to the

establishment of Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting (ISAR) by the UN

Economic and Social Council. These are explained in the section 9.4 of

this unit. Refer the same for details.

5. Measurement is the method of determining the monetary amounts at

which the elements of the financial statements are to be documented

and approved in the balance sheet and income statement. A number of

diverse measurement bases are engaged in various degrees and in

changing combinations in financial statements. They include historical

cost, current cost, and realisable (settlement) value. These are

explained in the section 9.5 of this unit. Refer the same for details.

9.10 Caselet

Application of International Accounting Standards to Central Banks

As the financial markets are becoming internationalised, the international

accounting standards are applied to central banks. The primary objective



of these entities is to maintain the value of the country's currency.

The idea of applying IAS is to guarantee high level transparency and

comparability among financial reports and find an efficient operation of

the Community's capital market and the domestic market.

A sample of accounting and financial information were published on the

websites of 19 central banks to know as to how the IAS’s are being

applied to the accounting policies and practices used by central banks in

the region. The findings of the analysis are described as follows:

1. Accounting standards governing the preparation of financial

statements - It was found that there was a beginning of an alignment

with International Accounting Standards.

2. Publication of financial statements - IAS states that a total set of

financial statements should include an income statement, a balance

sheet, changes in equity statement, and a summary of accounting

policies and a cash flow statement. It was found out that the biggest

problem for central banks was to prepare statements of changes in

equity and cash flow statements.

3. Proper disclosure of information - According to IAS, a business is

appreciative to disclose the accounting policies used and other

explanatory notes. The study show that the central banks reveal

accounting policies and practices in their notes.

4. Use of ultimate exchange rates and fair value - AS states that in each

balance sheet, the dates of the items in foreign currency must be

reported at closing rate. The findings about central bank focuses on

the use of closing rates for assets and liabilities decreased in foreign

currency and on the use of reasonable values for portfolios in both

foreign and domestic currency.

5. Reporting changes in the exchange rate - According to IAS, exchange

differences that happen when monetary items are developed, must

be reported as fixed cost or income for the phase in which they

appeared. Through the study, it was found out that the central banks

apply diverse policies and procedures to proof their exchange

differences.

All these helped in internationalisation of central banks and helped in

maintaining the international accounting standards on the domestic

currency.



Discussion Question

1. Discuss the application of international accounting standards to

central bank. (Hint: Accounting Standards Governing the Preparation

of Financial Statements)

Source: www.cemla.org/pdf/acp/acp_9_Jairo_Contreras.pdf retrieved on 30

october 2010

References:

Aswathappa. K. (2008). International Business. Tata McGraw Hill

Education: New Delhi.

Paul Rodgers (2007), International Accounting Standards, From UK

Standards to IAS – An Accelerated Route for Understanding the Key

Principles, Elsevier Ltd.

International Accounting Standards Committee (2000), International

Accounting Standards Explained, Chichester: Wiley.

E-References:

media.wiley.com/product_data/excerpt/22/EHEP0005/EHEP000522.pdf,

retrieved on 31 october 2010

http://www.indianmba.com/faculty_column/fc137/fc137.html, retrived on

30 october 2010

http://www.loscostos.info/english/accsyst.html, retrieved on October 31st,

2010

http://www.cemla.org/pdf/acp/acp_9_Jairo_Contreras.pdf

http://www.indianmba.com/faculty_column/fc137/fc137.html

http://www.loscostos.info/english/accsyst.html

mb0053-slm-unit-09

Documents

accounting measurements

accounting legal systems

quality of financial

financial reports

previous unit

regulatory mechanisms

reporting issues distinctive

language of business