International Business Management

Unit 9

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.
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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
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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 subsidiarys performance and worth, the
subsidiarys accounts must be translated into the organisations 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.

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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 countrys accounting
practices.

Figure 9.1: Influences on a Countrys 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 countrys 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
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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)
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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.

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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.

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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

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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
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.

information

well-matched

with

the

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
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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.
Self Assessment Questions 2
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.
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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 organisations 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.
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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 IASCs 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.
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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.

Self Assessment Questions 3

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).

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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.

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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.

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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.

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Self Assessment Questions 4

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).

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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
Self Assessment Questions 1
1. True
2. Absence, divergence
3. True
Self Assessment Questions 2
4. Financial accounting
5. Managers
6. True
Self Assessment Questions 3
7. True
8. OECD
9. 1977
Self Assessment Questions 4
10. IFRS
11. True
12. Accountability

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Terminal Questions
1. You can measure the differences between IAS and DAS in the following
way:
Literature on international accounting differences.
Framework of analysis.

2.

3.

4.

5.

These are explained in sub section 9.2.1 of this unit. Refer the same for
details.
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.
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.
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.
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
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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 IASs 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.
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International Business Management

Unit 9

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

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