CHAPTER 1 Introduction 1 Historical Perspective 1 Contemporary Perspective 2 Growth and Spread of Multinational Operations 4 Financial Innovation 9 Global Competition 10 Cross-Border Mergers and Acquisitions 11 Internationalization of Capital Markets 12 Americas 13 Western Europe 14 Asia 15 Cross-Border Equity Listing and Issuance 15 Where Are We? 16 Learning Objectives 17 Appendix 1-1 'Changes in Financial Sector Policy in 34 Nations, 1973-1996 21 Appendix 1-2 Stock Exchange Web Sites 24 Appendix 1-3 Financial Statements and Selected Notes from the Annual Report of INFOSYS 26CHAPTER 2 Development and Classification 27 Development 27 Classification 33 Four Approaches to Accounting Development 33 Legal Systems: Common Law vs. Code Law Accounting 34 Practice Systems: Fair Presentation vs. Legal Compliance Accounting 35CHAPTER 3 Comparative Accounting: Europe 37 Some Observations about Accounting Standards and Practice 38 IFRS in the European Union 39 Five National Financial Accounting Systems 41 France 41 Germany 46 Czech Republic 51 The Netherlands 54 United Kingdom 58CHAPTER 4 Comparative Accounting: The Americas and Asia 64 Five National Financial Accounting Systems 65 United States 65 Mexico 70 Japan 74 China 78 India 83CHAPTER 5 Reporting and Disclosure 88 Development of Disclosure 88 Voluntary Disclosure 89 Regulatory Disclosure Requirements 90 The US. SEC Financial Reporting Debate 91 Reporting and Disclosure Practices 92 Disclosures of Forward-Looking Information 93 Segment Disclosures 94 Social Responsibility Reporting 96 Special Disclosures for Nondomestic Financial Statement Users and Accounting Principles Used 111 Corporate Governance Disclosures 111 lnternet Business Reporting and Disclosure 120 Annual Report Disclosures in Emerging-Market Countries 121 Implications for Financial Statement Users and Managers 122CHAPTER 6 Foreign Currency Translation 124 Results of Operations 124 Reasons for Translation 127 BackgrOund and Terminology 127 The Problem 130 Financial Statement Effects of Alternative Translation Rates 130 Foreign Currency Transactions 132 Single- Transaction Perspective 134 Two- Transaction Perspective 134 Foreign Currency Translation 135 Multiple-Rate Methods 136 Financial Statement Effects 138 Which Is Best? 140 Appropriate Current Rate 142 Translation Gains and Losses 142 Where Are We? 144 Translation Accounting Development 144 Pre-1965 144 1965-1975 144 1975-1981 145 1981-Present 145 Features of Standard No. 52/International Accounting Standard 21 145 Translation When Local Currency Is the Functional Currency 146 Translation When the Parent Currency Is the Functional Currency 146 Translation When Foreign Currency Is the Functional Currency 146 Measurement Issues 148 Reporting Perspective 148 What Happened to Historical Cost? 149 Concept of lncome 149 Managed Earnings 149 Foreign Currency Translation and Inflation 150 Foreign Currency Translation Elsewhere 151 Appendix 6-1 Translation and Remeasurement Under FAS No. 52 151CHAPTER 7 Financial Reporting and Changing Prices 157 Changing Prices Defined 159 Why Are Financial Statements Potentially Misleading During Periods of Changing Prices? 162 Types of Inflation Adjustments 163 General Price-Level Adjustments 163 Price Indexes 163 Current-Cost Adjustments 167 General Price-Level Adjusted Current Costs 168 National Perspectives On Inflation Accounting 170 United States 170 United Kingdom 171 Brazil 173 International Accounting Standards Board 176 Inflation Issues 177 Inflation Gains and Losses 177 Holding Gains and Losses 178 Foreign Inflation 178 Avoiding the Double-Dip 179 Appendix 7-1 Accounting for Foreign Inflation: A Case Analysis 181CHAPTER 8 Global Accounting and Auditing Standards 184 A Survey of International Convergence 184 Advantages of International Convergence 184 Criticisms of International Standards 186 Reconciliation and Mutual Recognition I87 Evaluation 187 Some Significant Events in the History of International Accounting Standard Setting 188 Overview of Major International Organizations Promoting Accounting Convergence 189 International Accounting Standards Board 192 1ASC's Core Standards and the IOSCO Agreement 193 The New IASB Structure 194 Recognition and Support for the IASB 196 US. Securities and Exchange Commission Response to IFRS 196 European Union (EU) 197 Fourth, Seventh, and Eighth Directives 197 Have EU Harmonization Efforts Been Successful? 198 The EU's New Approach and the Integration of European Financial Markets 199 International Organization of Securities Commissions (IOSCO) 200 International Federation of Accountants (IFAC) 203 United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) 205 Organization For Economic Cooperation and Development (OECD) 206 Conclusion 206CHAPTER 9 International Financial Statement Analysis 207 Introduction 207 Challenges And Opportunities In Cross-Border Analysis 207 Business Analysis Framework 208 International Business Strategy Analysis 209 Information Availability 209 Recommendations'for Analysis 210 Accounting Analysis 211 Suggestions for the Analyst 213 International Financial Analysis 213 Ratio Analysis 213 Cash Flow Analysis 216 Coping Mechanisms 216 International Prospective Analysis 217 Further Issues 219 Information Access 219 Timeliness of Information 222 Foreign Currency Considerations 223 Differences in Statement Format 226 Language and Terminology Barriers 226 Financial Statement Analysis and Auditing 227 The Attest Function 227 The Audit Report 228 Auditing and Credibility 230 Coping Mechanisms 232 Internal Auditing 233 Professional Organization 237 Evolving Role of lnternal Auditing 237 Appendix 9-1 Illustration of Restatement of Japanese GAAP Financial Statements to a U.S. GAAP Basis 238 Appendix 9-2 International Ratio Analysis 242CHAPTER 10 Managerial Planning and Control 245 Business Modeling 245 Planning Tools 246 Capital Budgeting 247 Financial Return Perspectives 248 Measuring Expected Returns 249 Multinational Cost of Capital 253 Management Information Systems 254 Systems Issues 255 Information Issues 256 Management Information and Hyperinflation 257 Sales Revenue 258 ' Issues In Financial Control 261 Domestic Versus Multinational Control System 261 Strategic Costing 269 Performance Evaluation of Foreign Operations 270 Consistency 271 Performance Criteria 273 Measurement Issues and Changing Prices in Evaluation 275 Performance Evaluation Practices: ICI 275 Foreign Currency Effects 277 Performance Standards 278 Value Reporting 279CHAPTER 11 Financial Risk Management 281 Essentials 283 Why Manange Financial Risks? 284 Role of Accounting 285 Identifying Market Risks 285 Quantify Tradeoffs 286 Risk Management in a World of Floating Exchange Rates 286 Accounting for Hedge Products 298 Hedge of a Recognized Asset or Liability or an Unrecognized Firm Commitment 305 Hedge of a Net Investment in a Foreign Operation 306 Speculating in Foreign Currency 308 Disclosure 308 Financial Control 312 Appropriate Benchmarks 313 Reporting Systems 313CHAPTER 12 International Taxation and Transfer Pricing 314 Initial Concepts 314 Diversity of National Tax Systems 315 Types of Taxes 315 Tax Burdens 316 Tax Administration Systems 318 Foreign Tax Incentives 319 Harmful Tax Competition 320 International Harmonization 320 Taxation of Foreign-Source Income and Double Taxation 320 Foreign Tax Credit 321 Limits to Tax Credits 323 Tax Treaties 324 Foreign Exchange Considerations 324 Tax-Planning Dimensions 325 Organizational Considerations 325 Controlled Foreign Corporations and Subpart F Income 325 Offshore ltolding Companies 326 Financing Decisions 326 Pooling of Tax Credits 327 Cost Accounting Allocations 327 Location and Transfer Pricing 328 Integrating International Tax Planning 328 International Transfer Pricing: Complicating Variables 329 Tax Considerations 329 Tariff Considerations 331 Competitive Factors 331 Environmental Risks 332 Performance Evaluation Considerations 333 Accounting Contributions 333 Transfer Pricing Methodology 333 Market vs. Cost vs...? 334 Arm's-Length Principle 334 Comparable Uncontrolled Price Method 334 Comparable Uncontrolled Transaction Method 335 Resale Price Method 335 Cost-Plus Pricing Method 336 Comparable Profits Method 337 Profit-Split Methods 337 Other Pricing Methods 338 Advance Pricing Agreements 339 Transfer Pricing Practices 339 The Future 341
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