Today, many businesses operate on a global scale. Each country has a different set of rules and regulations and this is no different when it comes to accounting criteria. Global business requires added consideration in the way of accounting reporting criteria and many countries do not have the high level of regulations that America has. This makes it extremely important for internationally operating organizations to understand and embrace best practices in financial reporting across borders. This paper will compare and contrast some of the challenges a U.S. company faces when dealing with a foreign company. Specifically, the paper will address the differences in the regulatory environment, issues with foreign currency, and the differences in general accepted accounting principles.
No two countries have exactly the same accounting regulatory systems, even though some countries have similarities (Edmonds, Edmonds, McNair, Olds & Schneider, 2006). An International Accounting Standards Board (IASB), with the hope of creating a common language for accounting reporting was established. Countries participate with IASB on a voluntary basis and therefore, no one regulation exists. The International Financial Reporting Standards (IFRS) are the standards adopted by the IASB. The IASB sets policies through the International Accounting Standards Committee.
The accounting rules in a country are affected by who provides financing to businesses in that country” (Edmonds et al, 2006, p. 520). Therefore, if an organization trades on the U.S. Stock Exchange, it will have to follow the rules for any U.S. organization.
The accounting practices of foreign companies have merged with the practices of the United States accounting practices with the introduction of the Sarbanes-Oxley Act of 2002 (SOX). The Securities and Exchange Commission is working on policies that will create accounting policies accepted globally.
An essential concept to U.S. and foreign accounting is foreign currency conversion. Dual reporting may be required under GAAP standards and IFRS in order to report appropriately on global business activity. Publicly traded organizations trading in the global market must adopt the IFRS in order to be up to standards (Bellandi, 2007). The main differences between GAAP and IFRS lie in the level of intricacy and specificity. “IFRS is a principles-based set of standards. U.S. GAAP has become a very rules-based body of standards that is more complex and more onerous that IFRS. Because IFRS is principles-based, it may provide a preparer with a little more leeway in how to account and report specific transactions” (Markley, 2007). ...