IFM 1

19 flashcards · Other · by Daniel F.

multinational corporation
a corporate organization that owns or controls production of goods or services in one or more countries other than its home country
GAAP
Generally accepted accounting practices
IFRS
International Financial Reporting Standards
Key diffrences between UK IFRS
Order of Assets US: Lists assets in order of liquidity, cash ... goodwill UK Reverse Balance Sheet Format US: assets = liabilities + equity UK: assets - liabilities = equity Terminology: Called-up share capital (U.K.) = Common stock (U.S.) Paid-in capital (U.K.) = Share premium account (U.S.) Treasury stock (U.K.) = Own shares held (U.S.)
Reasons for Accounting Diversity: Institutional & Economic Determinants
Differences in Legal system taxation Providers of financing Inflation Political and economic ties
How does differences in legal system affect accounting
Code Law (Civil Law): most non-English-speaking countries (e.g., Germany, France) Accounting rules are written into national law by the government. These laws tend to be general. Common Law (Anglo-Saxon Law): English-speaking countries (e.g., U.S., U.K., Australia). Accounting rules are set by non-governmental professional organizations (like the FASB in the U.S.). These rules are much more detailed and specific.
How does differences in taxation affect accounting
In some countries (like Germany, historically), financial statements for reporting to the public must be the same as the statements used for calculating taxes. This is called conformity. In other countries (like the U.S.), companies keep two sets of books: one for financial reporting (GAAP) and one for tax purposes. use rules that reduce their tax bill (e.g., accelerated depreciation) without having to report lower income to investors.
How does differences in Providers of Financing affect accounting
Debt Financing: In countries where companies are mainly financed by banks (a form of debt), those banks can get financial information directly from the company. less need for detailed public disclosure. Equity Financing: In countries with large public stock markets (like the U.S.), companies are financed by thousands of individual shareholders (equity). investors demand a high level of transparent, detailed public information to make decisions.
How does differences in Inflation affect accounting
In countries with a history of high inflation, accounting based on historical cost (what you originally paid for an asset) becomes meaningless. more likely to adjust their financial statements for inflation to reflect more realistic values.
How do political and economic ties affect accounting
Accounting rules can be "borrowed" or imposed. Colonial history is a major factor. For example, India's accounting system has strong roots in the British system.
Reasons for Accounting Diversity: National Culture
Hofstede Individualism vs. Collectivism Power Distance Uncertainty Avoidance Masculinity vs. Femininity Gray's Accounting Values: Gray argued that cultural dimensions influence a country's "accounting values," which are: Professionalism vs. Statutory Control: Do professional accountants use their own judgment, or do they just follow prescriptive laws? Uniformity vs. Flexibility: Do all companies follow the exact same format, or is there flexibility? Conservatism vs. Optimism: Are accountants ca…
Problems Caused by Accounting Diversity
Preparation of Consolidated Financial Statements: An MNC with subsidiaries in many countries must collect financial data prepared under different rules and combine it into one set of statements for the parent company. This is complex and costly. Access to Foreign Capital Markets: A company wanting to be listed on a foreign stock exchange (e.g., a German company on the NYSE) may have to prepare financial statements that comply with the rules of that foreign country. Comparability of Financial St…
How to Solve Accounting Diversity
Reconciliation: financial statement prepared under one set of rules (e.g., IFRS) and showing what the key numbers would have been under a different set of rules (e.g., U.S. GAAP).
Classification of Accounting Systems
1. The Fair Presentation/Full Disclosure Model (Anglo— Saxon or Anglo—American Oriented toward the decision needs of large numbers of investors and creditors. Used in English—speaking countries influenced by the United Kingdom or the United States. 2. The Legal Compliance Model (Continental European model). Legalistic. Used to provide information for taxation and government-planning. Used in Europe, Japan, and code law countries. 3. The Inflation—Adjusted Model. Resembles the Continental Europe…
Profits and profit margins 3 levels
Level 1: Gross Profit = Revenue - Cost of Goods Sold (COGS) COGS: direct costs to create the product (raw materials, direct labor) margin: Gross Profit / Revenue For every dollar of sales, how many cents are left over to cover other expenses and contribute to profit? Level 2: Operating Profit (EBIT) = Gross Profit - Operating Expenses EBIT: Earnings Before Interest and Taxes Operating Expenses: indirect costs of running the business, like salaries for marketing and HR, rent, R&D, and utilities.…
Financial Ratios
Profitability Ratios ROA: new income / total assets how efficiently the company is using its assets to generate profit. ROE: net income / shareholders' equity key ratio for investors. It measures how much profit the company generates for every dollar of equity invested by the owners. Liquidity Ratios Current ratio = current assets / current liabilities A ratio of 2:1 is often considered healthy. It means you have $2 of short-term assets for every $1 of short-term debt. Quick ratio = Current Ass…
Difficulties of comparing profit margin across different companies in different industries in different countries
Differences in Accounting Rules The companies are from different countries (U.S., Germany, Spain, Thailand, U.K.) and likely use different accounting standards (U.S. GAAP vs. various forms of IFRS or local GAAP). These different rules dictate how and when revenue and expenses are recognized. For example, one country's rules might require a company to expense R&D immediately, while another might allow it to be capitalized. This directly affects the calculated profit, making a direct comparison m…
Greatest Impediment to accounting convergence
National Culture Strongest influence on accounting Slowest changing Taxation: A government can change its tax laws in a single year. Providers of Financing: A country's capital markets can develop and grow over a decade or two. Political Ties: Can shift with new governments or trade agreements.
Smallest Impediment to Convergence
overall lack of difference between two culturally similar nations