Doupnik

Chapter One Introduction to International Accounting
Learning Objectives
After reading this chapter, you should be able to • Discuss the nature and scope of international accounting. • Describe accounting issues confronted by companies involved in international trade (import and export transactions). • Explain reasons for, and accounting issues associated with, foreign direct investment. •Describe the practice of cross-listing on foreign stock exchanges. • Explain the notion of global accounting standards. • Examine the importance of international trade, foreign direct investment, and multinational corporations in the global economy.

WHAT IS INTERNATIONAL ACCOUNTING?
Most accounting students are familiar with financial accounting and managerial accounting, but many have only avague idea of what international accounting is. Defined broadly, the accounting in international accounting encompasses the functional areas of financial accounting, managerial accounting, auditing, taxation, and accounting information systems. The word international in international accounting can be defined at three different levels.1 The first level is supranational accounting, which denotesstandards, guidelines, and rules of accounting, auditing, and taxation issued by supranational organizations. Such organizations include the United Nations, the Organization for Economic Cooperation and Development, and the International Federation of Accountants.

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This framework for defining international accounting was developed by Professor Konrad Kubin in the preface to InternationalAccounting Bibliography 1982–1994, distributed by the International Accounting Section of the American Accounting Association (Sarasota, FL: AAA, 1997). 1

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Chapter One

At the second level, the company level, international accounting can be viewed in terms of the standards, guidelines, and practices that a company follows related to its international business activities and foreign investments.These would include standards for accounting for transactions denominated in a foreign currency and techniques for evaluating the performance of foreign operations. At the third and broadest level, international accounting can be viewed as the study of the standards, guidelines, and rules of accounting, auditing, and taxation that exist within each country as well as comparison of those itemsacross countries. Examples would be cross-country comparisons of (1) rules related to the financial reporting of plant, property, and equipment; (2) income and other tax rates; and (3) the requirements for becoming a member of the national accounting profession. Clearly, international accounting encompasses an enormous amount of territory—both geographically and topically. It is not feasible ordesirable to cover the entire discipline in one course, so an instructor must determine the scope of an international accounting course. This book is designed to be used in a course that attempts to provide an overview of the broadly defined area of international accounting but that also focuses on the accounting issues related to international business activities and foreign operations.

EVOLUTION OFA MULTINATIONAL CORPORATION
To gain an appreciation for the accounting issues related to international business, let us follow the evolution of Magnum Corporation, a fictional auto parts manufacturer headquartered in Detroit, Michigan.2 Magnum was founded in the early 1950s to produce and sell rearview mirrors to automakers in the United States. For the first several decades, all of Magnum’stransactions occurred in the United States. Raw materials and machinery and equipment were purchased from suppliers located across the United States, finished products were sold to U.S. automakers, loans were obtained from banks in Michigan and Illinois, and the common stock was sold on the New York Stock Exchange. At this stage, all of Magnum’s business activities were carried out in U.S. dollars,...