Chapter 22
Accounting in
a Global
Financial Accounting
Earl K. Stice James D. Stice
PowerPoint presented by Douglas Cloud
Professor Emeritus of Accounting, Pepperdine University
© 2012 Cengage Learning
Dangers of Differing National
Accounting Standards
A key function of accounting standards is to
create a common set of rules to be used by
all companies so that outsiders can receive
financial reports that are comparable among
all the different companies they might want to
Without this comparability, financial reports
are virtually worthless.
Brief History of the IASB and
Its Standards (IFRS)
Both the FASB and the IASC (predecessor of
IASB) were established in 1973.
The FASB had the advantage of being an
independent board with broad representation
from the U.S. business community.
The IASC was a consortium of national CPA
organizations, and committee members served
part time while maintaining their connections
with their firms and their clients.
Brief History of the IASB and
Its Standards (IFRS)
The early IASC standards were just a
compilation of the diverse accounting
practices from around the world with some
expression of a preferred alternative but no
coherent conceptual foundation.
The original standards of the IASC were, and
are, called International Accounting
Standards (IAS). The body of standards
issued by the IASC/IASB is now referred to
as IFRS whether the label is IAS or IFRS.
Brief History of the IASB and
Its Standards (IFRS)
All during the 1990s, the IASC worked to
eliminate the large number of alternative
accounting treatments allowable under IAS
and also to improve the overall quality of the
The immediate goal of the IASC was to have
its set of standards endorsed by the
International Organization of Securities
Commission (IOSCO), which includes the
U.S. Securities and Exchange Commission.
Brief History of the IASB and
Its Standards (IFRS)
In 2001, the IASB was aggressive in
promoting its standards as THE international
accounting standard setter through a
substantial organizational restructuring.
In 2002, the IASB and the FASB entered into
a joint agreement, called the Norwalk
Agreement, in which they pledged to work
together to develop a set of “fully compatible”
accounting standards, and to continue to
work together to make those standards stay
Brief History of the IASB and
Its Standards (IFRS)
In 2007, the SEC announced that it approved
the use of IASB standards for the financial
reports of non-U.S. companies with shares
traded on U.S. stock exchanges (effective on
March 4, 2008).
In 2008, the SEC revealed a “time line” for the
rapid shift from U.S. GAAP to IFRS, with all
U.S. publicly traded companies being required
to use IASB standards by 2014.
Brief History of the IASB and
Its Standards (IFRS)
In October 2008, this rosy “time line” exploded
in a blaze of controversy when the IASB caved
into European banks urging for a favorable
accounting standard change.
This blatant politicization of the accounting
standard-setting process caused many in the
U.S. business community to rethink the
transfer of sovereignty over U.S. accounting
standards to the IASB.
Now the “time line” is 2015 at the earliest.
Foreign Currency
Financial Statements
There are two methods for converting foreign
currency financial statements.
• Translation is used when the foreign
subsidiary is a relatively self-contained
unit that is independent from the parent
company’s operations.
• Remeasurement is appropriate when
the subsidiary does not operate
independently of the parent company.
Foreign Currency
Financial Statements
• To determine the correct method of
conversion, the functional currency of
the foreign subsidiary must first be
• In most instances, the functional
currency is the currency in which most of
the subsidiary’s transactions are
• Assets and liabilities are translated using
the current exchange rate prevailing as of
the balance sheet date.
• Income statement items are translated at
the average exchange rate for the year.
• Dividends are translated using the
exchange rate prevailing on the date the
dividends were declared.
• Capital stock is translated at the historical
rate, that is, the rate prevailing on the date
the subsidiary was acquired or the stock was
• Retained earnings is translated in the first
year using historical rates, but in subsequent
years, it is computed by taking the U.S.
dollar balance in retained earnings from the
prior period’s translated financial statements,
adding translated net income and subtracting
translated dividends.
As a result of the translation process, debits
in the translated U.S. dollar trial balance
typically will not equal credits.
The balancing figure is called a translation
adjustment and is recognized as part of
the U.S. parent company’s stockholders’
Translation Example
USA Company purchased Swiss Inc. on January
1, 2013, for 50,000 francs. On that date, the
exchange rate for 1 Swiss franc was $0.25, so
the acquisition price was equivalent to $12,500.
Swiss Inc.’s trial balance dated December 31,
2013, is on Slide 22-16. The current exchange
rate is $0.28, and the average exchange rate for
the year was $0.27. Dividends were declared
and paid when the exchange rate was $0.275.
Translation Example
Swiss, Inc. determines its functional currency is
the Swiss franc. The translation process is shown
on Slide 22-17.
Translation Example
Chapter 22
The End