\'lethods of rravment in I nternatio nal Trade

In intemational commercial procedures. the dealers and buycrs shall want to make the sale under
the best conditions lbr themselves. While the buycr uill vote for the cheapest and longest termed
payment type in paying the cost of the goods, the dealers will pref'er cash payment, which is the most

advantageous payment type and the types of collection with the least risks. The agreement of buyers

and dealers on how and in which term the payment will be made is a quite critical period for both
sides. The exporter that prepares the goods and gets them ready for dispatch, as agreecl with the
importer, has to think of the payment terms and a financing program.
o Cash in advance

. Opsn account
. On consignment
. Draft or documentary collection
. Letter ol Credit
Cash in Advance: With cash-in-advance payment terms, an exporter can avoid credit risk becausc
payment is received before the ownership of the goods is transfened. For intemational sales, wire
transfers and credit cards are the most commonly used cash-in-advance oplions available to
exporters. However, requiring payment in advance is the least attractive option for the buyer,
because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not
be sent if payment is made in advance. Thus, exporters who insist on this payment method as their

sole manner of doing business may lose to competitors who offer more attractive payment terrns.

Paying in advance gives the greatest protection fbr the seller and puts the risk on the buyer.
Payment does not guarantee the shiprnent or delivery of the goods from the seller. In some qases,
however, where the manufacturing process is specialized, lengthy or capital-intensive, it may be
reasonable to ask for some of the l-ull payment in advance, or with progressive payments. In some
circumstances this payment method ccn be nroditlcd to a partial payntent in aclvancs with agreed
upon installments or additional tenns available.The cash in advance may be most practical method il
o The buyer laoks creditworthiness
. The buyer is not able to offer sufficient security for payment
o The buyer is located in a region of politic and/or economic instability
o The product is so specialized that it is specilically made for the customer and cannot be easily
sold to another customer

Open Account: An open account transaction is a sale where the goods are shipped and delivered
before payment is due, which in international sales is typically in i0. 60 or 90 days. Obviously', this
is one of the most advantageous options to the importer in terms of cash flow and cost, but it is
consequently one olthe highest risk options for an exporter. Because ol intense competition i1 export
 markets, foreign buyers often press exporters for open account terms since the extension of credit by
the seller to the buyer is more common abroad. Exporters can offer competitive open account terms
while substantially mitigating the risk of non-payment by using one or more of the appropriate trade
finance techniques covered later in this Guide. When offering open account terms. the exporter can

seek extra protection using export credit insurance. The method provides great flexibitity and in
many countries sales are likely to be made on an open-account basis if the manufacturer has been
dealing with the buyer over a long period of time and has established a secure working relationship.
This method cannot be used safely unless the buyer is credit u,orthy and the country of destination is
politicalty and economically stable. 1he open account mcthod may be usetul it':
r There is long-term relationship and confidence between the buyer and the seller
o The seller is under pressure to sell his goods
o The buyer has a very good reputation and is well-known in the market
o The buyer is solvent

On Consignment: With consignment sales, the seller does not receive payment until the
importer sells or resells the goods. The product stays with the importer until all the terms ofthe sale
have been satisfied. In the consignment method, the importer is called the consignee and he/she is
responsible for paying fbr the goods *'hct they are sold. Consignment sales are very risky and there
is no control available to the exporter. Obtaining sales proceeds or retum of the merchandise if it is
not sold can be diftlcult. Consignment in intemational trade is a variation olopen account in which
payment is sent to the exporter only after the goods have been sold by the foreign distributor to the

end customer. An intemational consignment transaction is based on a contractual arrangement in

which the foreign distributor receives, manages, and sells the goods for the exporter who retains title
to the goods until they are sold. Consignment helps exporters become more competitive on the basis
of better availability and faster delivery of goods. Selling on consignment can also help exporter.s
reduce the direct costsof storing and managing inventory. The key to success in exporting on
consignment is to partner with a reputable and trustworthy lbreign distributor or a third-party
logistics provider. Appropriate insurance should be in place to cover consigned goods in transit or in
possession ofa foreign distributor as well as to mitigate the risk ofnon-payment.
On Consignment payment method is useful if;
o The consignee is reliable
o consignee has a good credit historl

o The consignee's country has economic and political stability

o The consignee is the branch office ofthe main company

Draft or Documentary Collection: A documentary collection (D/C) is a transaction wherebl'

the exporter entrusts the collection ofthe payment for a sale to its bank (remitting bank). uhich sends
 the documents that its buyer needs to the impofter's bank (collecting bank), rvith instructions to
release the documents to the buyer lor payment. Funds are received from the importer and remitted
to the exporter through the banks involved in the collection in exchange for those documents. D/Cs
involve using a draft that requires the importer to pay the face amount either at sight (document
against payment) or on a specilicd datc' (document against acceptance). The collection letter giyes
instructions that specify the documents required lbr the transt'er of title to the goods. Although banks
do act as facilitators for their clients, D/Cs off'ers no verification process and limited recourse in the
event of non-payment. D/cs is generally less expensive than LCs. The Draft or Documentary
collection method is employed when either the cash in advance method is not acceptable to the
buyer, or the open account method is not acceptable to the seller. With the Drali or Documentary
Collection Method, the seller or exporter ships the goods and draws a dralt or bill olexchange on the
buyer or importer through an intermediary bank. The draft is an unconditional order to make a
payment in accordance with certain terms. The documents needed are specified belore the title lor

the goods transferred. Two methods under documentarl, collection:

a.) D/P or Documents against Payment: ln this method, the documents are delivered to the
importer only after collecting payment of goods by the importer's bank.

b') D/A or Document against Acceptance: ln this method, the document are delivered to the
importer only against acceptance of drafts.
Process of documentary collection method

First of all, the seller sends the draft to the remitting bank, the remitting bank, as an intermediary,
sends the draft to the collecting/presenting bank, the collectioni presenting bank, as an intermediary,

makes the docunents available to the buyel. The buy'er, after examine the documents, has three
options: to pay immediately, to pay at a future date, refuse to pay lor the draft
When the draft is paid, the title documents are released to the buyer so he/she can obtain
possession ofthe goods. As the title to the goods is not transferred until the draft is paid or accepted.
both the buyer and seller are protected. ln such cases, the expofier. who has already shipped the
goods, faces the problem of getting his/her merchandise back, which may involve warehousing or

insuring the goods, or even disposing of the merchandise at the collection point. If the buyer reluses
or defaults on payment of the draft, the seller may also have to pursue collection through the courts
(or possibly, by arbitration, if such had been agreed upon between the parties). The use of drafts
involves a ce(ain level of risk; but they are less expensive lor the purchaser than letters of credit.
Sight Dral'ts: If the exporter and impofier have agreed that paymenl shoutd be made immediately
upon receipt ofthe draft and/or shipping documents by the buyer's bank, the drait is said to be {rawn
at sight' A sight draft is an order signed by the seller instructing the buyer to pay a specified amount
to the seller upon presentation of the draf,.
 Time Drafts: lf thc seller has provided credit terms to the buyer, thereby allowing the merchandise
to be released before payment is received; it is called a time draft. The exporter will need a written
promise from the buyer that payment will be made at a specified future date. When a bank receives
time drafts, the bank is requested to deliver the documents only when the buyer has accepted. The
buyer's acceptance ofthe draft is his/her agreement to pay at an agreed upon future date.
r Goods may not be as representcd in the documentation

. Knows that title documents are controlled by the bank

o Evidence of indebtedness
r Buyer may refuse to pay or accept the draft
. Foreign cxchange risk
e Country's political risk

Letter of Credit: A Letter ol credit is a written undertaking by the Importer's bank, known as
the issuing bank, on behalfofthe Importer, promising to effect payment in favor ofthe exporter up to
a stated sum of money, within a prescribed time limit and against stipulated documents. Howcver,
the banks deal only in documents and not in goods. The letter of credit refers to the documents
representing the goods-not the goods themselves. Banks are not in the business of examining goods
on behalfoftheir customers. It does not give a guarantee that the goods depicted in the presentation

documents have been delivered. Banks don't deal with goods and services; they deal with documents

related to the Letter of credit. The quantity and quality of the goods shipped depends upon the
honesty and integrity of the seller that has manulactured or packaged the goods and organized the
delivery. The buyer may stipulate that the Letter of Credit be accompanied by laboratory test
certificates, inspection certificates or other documents that confirm the quality or quantity of the
goods. Generally, the buyer and seller agree in advance on which party is responsible lbr the sum of
these services. It does not provide a total assuance of payment to anyone. A Letter of Credit
guarantees payment only if its terms and conditions are satisfied by presenting the necessary
documents. The value of such a guarantee depends upon the stability of the bank providing its
undertaking and the buyer's and seller's honesty are paramount in any exchange ofgoods or services
regardless of the payment method. When preparing a shipment covered under a letter of credit, it is
important to closely follow the instructions in the letter of credit. The letter of credit will explain
exactly how to prepare the draft, how the commercial invoice musl be prepared, that documents must
be prepared and attached to the drall for payment, and by what specified deadline the seller must ship
the goods and present the documents lbr paymcut.

Types of L/Cs
a. Revocable & Irrevocable Letter of Credit: A revocable LIC can be amended or cancelled
without the consent of the exporter. On the other hand, an irrevocable L/C cannot be cancelled or
amended without the consent of all parties including exporter.

b. Sight & Term Letter of Credit: When payment is to be made at the time that documents are
presented, this is refened to as a sight Letter of Credit. On the other hand, when the payment is to be

made at a future llxed time liom the presentation ol documents, this is relerred to as a term Lettcr ol'
Credit.

c. Confirmed Letter of Credit: Under this type of L/C, the Issuing Bank may request lhe Advising

Bank to add its confirmation on the LC. When Advising Bank agreed to add the confirmation, then it
will become the Confirming Bank and undertakes to pay the beneficiary (exporter) il all the terms
and conditions of the LC are met. Such Undertaking from the Confirming Bank is separate and in
addition to the undertaking given by the Issuing Bank.

The Pa rties
The parties concerned with a Letter of Credit are described belo\\':

Applicant: The party that organizes for the Letter ol Credit to be issued, usually the buycr
(importer) in a commercial transaction or the borrower in a financial transaction.
Beneficiary: The party named in the Letter of Credit in whose favor the Letter of Credit is issued, it
is generally the seller (exporter) in a commercial transaction or the creditor in a financial transaction.

Issuing Bank: The Applicant's bank that issues its undertaking to the Beneficiary in the form ol'a
Letter of Credit.
Advising Bank: The bank, usually in the Beneficiary's country, which inlorms the Beneficiary that
another bank has issued a Letter of Credit in their favor.

Basic Procedures for Establishing a Letter of Credit

The basic procedure used in a letter of credit transaction is shown below. It should be noted,
however, that for other Specific letter ofcredit different procedures are used.
r The buyer and seller decide on the terms, such as the means of transport, period of credit on
hand, Iinal date of shipment and the applicable term to be used
. The buyer applies to the bank for a letter ofcredit to be issued
o After assessing the buyer's credit rating, the issuing bank sends the letter of credit to the

advising bank
r The advising bank establishes the genuineness of the letter of credit using signature books or
test codes, then they send the letter of credit to the seller
 . The seller reviews all the conditions specified in the letter of credit and Ilthey cannot fulfill
any of the terms, they will ask the buyer to adjust the letter of credit. When the final terms
are settled, the seller ships the goods to the specified port or location

. After shipping the goods, the seller obtains the required documents.
o The documents are presented to a bank, in most cases the advising bank (prior to presenting
the documents to the bank, the seller should ensure there are no inconsistencies with the
letter of credit, and if there are amend the documents where necessary)
o The seller's advising bank reviews the documents. lf they are in order, it will forward them to
the buyer's issuing bank. If the letter of credit is confirmed, the advising bank will pay the
seller (cash or a bankers' acceptance check)
o Once the buyer's issuing bank takes deliverl' of and reviervs the documents, it either pays if
there are no inconsistencies; or sends the documents to the buyer if there are discrepancies lbr
their review and approval
. After applicant reviews and accepts the documents, the beneficiary receives payment from
the advising bank

r The issuing bank pays lor the advising bank fbr the goods according to the letter ofcredit
o Finally, the applicant pays the issuing bank lor the goods
Amendment of a Letter of Credit
If the seller doesn't agree with the terms of the Letter of Credit, the buyer will normally receive a

request for an amendment. Any modilication to an issued Letter of Credit is knorvn as an

amendment. For the seller to alter the terms noted on an lrrevocable Letter of Credit, it must ask lbr
an amendment from the buyer. The amendment procedure is as follows:

o Cover the risks stated in the Letter of Credit

. Cover, at minimum, I l0% ofthe cost, insurance and freight (CIF), or carriage and insurance
paid (CIP) value ofthe shipment
o Be countersigned and if the assured is other than the Confirming, Issuing bank or buyer, be

appropriately endorsed, or endorsed in blank

o Be presented in full set(s) (all relevant documents)
o Be in force as of a date not later than the date appearing on the transport document or "on
board" notation
. The seller requests a modification or amendment of questionable terms in the Ietter ol
credit;
o If the buyer and issuing bank agree to the changes, the issuing bank will change the letter ol
credit;
. The buyer's issuing bank notifies the seller's advising bank of the change/s;
 . The seller's advising bank notifies the seller ofthe change/s
Adr,rntapes and Risks of the Letter of Credit Method
Buyer
. Cuarantee that its bank will refuse payment unless the seller complies with the terms and
conditions of the letter ofcredit
o If the seller is willing to allow the buyer extended terms, the buyer may organize the payment

for a future date

o Through the use of a Banker's Acceptance, the buyer may finance the goods until they are
marketed
. By the documents called for, the buyer can seek to minimize the risks in not receiving the
goods ordered

o Banks deal only with documents. The goods may not be the same as stated in the documents

. The bank's credilworthiness must be taken into account

. To be able to obtain financing for the purchase or manuf'acture ofgoods that will be shipped
under LC
. The seller will receive funds shortly after presentation of shipping documents to the bank
o The seller can reduce the risk that payment lor the goods might be delayed
o The seller's documents must comply strictly n'ith the terms and conditions of the LC to
entitle the seller to payment
. The seller is exposed to the commercial risk that the bank providing its undertaking is
unwilling and unable to perlorm
o The seller assume any political and foreign exchange risk affecting the issuing bank's
obligation
MAIN TYPES OF MONEY TRANSFERS
SWIFT Inter-Bank Transfer - The bu1,er will instruct their bank to make payment to any bank
account specified by the exporter. [t is good practice, thercfore, lor the expofier 1o include their
account details on their invoice heads.

Buyer's Cheque - an unsatisfactory method ol settlement for the exporter as it carries the risk ol
dishonor upon presentation as well as the added inconvenience of being slow to clear. There is also
the very real danger ofthe cheque being lost in transit as well. A cheque is also unsatislactory if it is
in the currency of the buyer, as this will take longer to clear and will involve additional bank charges.
Exporters should only use this method if they have an established trading history with their customer

or in cases where the profit margin has been increased to offset cash flow problems anticipated by
the delay in receiving payment.
Banker's Draft- This is arranged by the buyer w,ho asks their bank to raise a draft on its
corresponding bank in the exporter's country. Provides additional security to a buyer's cheque, but

they can be costly to arange and they do run the risk ofgetting lost in transit.
lnternational Money Orders- These are similar in nature to postal orders. They are pre-printed
therefore cheaper to obtain than a Banker's Draft, although again there is the risk ofloss in transit.

Harmonizin accounting di ffcrence across cou n tries

Why accounting practices and standards differ from country to country and surveyed the efforts
under way to harmonize countries' accounting practices. We discussed the rationale behind
consolidated accounts and looked at currency translation. We reviewed several issues related to the
use of accounting-based control systems within international businesses.

l. Accounting is the language of business: the means by which firms communicate their
llnancial position to the providers ol capital and to govemments (for tax purposes). It is also
the means by which firms evaluate their own performance, control their expenditures, and
plan for the future.

2. Accounting is shaped by the environment in which it operates. Each country's accounting

system has evolved in response to the local demands 1br accounting information.

3. Five main factors seem to influence the type of accounting system a country has: (i) the
relationship between business and the providers of capital, (ii) politicat and economic ties
with other countries, (iii) the level of inflation, (iv) the level of a country's development, and
(v) the prevailing culture in a country.
4. National differences in accounting and auditing standards have resulted in a general lack of
comparability in countries' linancial reports.
5. This lack of comparability has become a problem as transnational financing and transnational
investment has grown rapidly in recent decades (a consequence of the globalization of capital
markets). Due to the lack of comparability, a firm may have to explain to investors why its
financial position looks very diflerent on financial reports that are based on different
accounting practices.
6. The most significant push for harmonization of accounting standards across countries has
come from the International Accounting Standards Committee (IASC). So far, the IASC's
success, while noteworthy, has been limited.

7. Consolidated financial statements provide financial accounting information about a group of

companies that recognizes the companies' economic interdependence.
 8. Transactions among the members of a corporate family are not included on consolidated
financial statements; only assets, liabilities, revenues. and expenses generated with external
third parties are shown.
9. Foreign subsidiaries of a multinational firm normally keep their accounting records and
prepare their financial statements in the cunency of the country in which they are located.

When the multinational prepares its consolidated accounts, these financial statements must be
translated into the currency of its home country.
10. In most international businesses, the annual budget is the main instrument by which
headquarters controls foreign subsidiaries. Tkoughout the year, headquarters compares a
subsidiary's performance against the financial goals incorporated in its budget, intervening
selectively in its operations when shorlfalls occur.
I l. Most intemational businesses require all budgets and performance data within the firm to be

expressed in the corporate currency. This enhances comparability, but it distorts the control
process if the relevant exchange rates change between the time a foreign subsidiary's budget
is set and the time its performance is evalualed.

12. Transfer prices also can introduce signilicant distortions into the control process and thus
must be considered when setting budgets and evaluating a subsidiary's performance.
13. Foreign subsidiaries do not operate in uniform environments, and some environments are
much tougher than others. Accordingly. it has been suggested that the evaluation ol a

subsidiary should be kept separate from the evaluation of the subsidiary manager.

Accounting standards are solid principles for financial accounting and reporting developed
through a structured standard setting process and issued by a recognized standard setting bod).
Accounting standards spell out how transactions and other events are to be recognized, measured,
presented and disclosed in financial statements. The purpose ofsuch standards is to meet the needs of
users of financial statements by providing the information considered necessary to make informed
decisions. Different country groups practicing different accounting systems have distinctive and
unique patterns, depending on the hislor) and culture. ll securities markets u'ere to conl.inue to
operate in an international perspective, no matter where the parent company is based, then investors

and other users would prefer accounting standards to be harmonized for easy understanding and
comparability. Also, since most multinational firms are in the process of globalization, and because
of the free movement of securities and other lbrms of investments, the integration of markets has
brought about some convergence ol accounting practices at the level of consolidated accounts ol
Multinational Enterprises listed on cross boarder stock exchange markets.
If businesses are multinational in scope, it is likely that they will wish and need to raise their
capital in many different countries. And they are assisted in this by increasing competition among the
capital markets, each anxious to increase its share of world business. Indeed, competition among the
capital markets may the strongest factor in encouraging a change of attitude by national regulators
towards International Accounting Standards. And the strongest capital markets see the ability to
accept Intemational Accounting Standards as enabling them to compete more effectively: the need to

prepare extra accounts to have a cross-border about the desirability of allowing domestic companies

to use internalional standards for domestic companies may be content with the stock exchangc
quotations in other countries and see no need for a quotation on the domestic exchange.

The following are accounting areas where differing accounting policies can be applied by
different enterprises leading to different results.
. Methods of depreciation. depletion and amortization.
. Treatment of experrditure during construction.
. Conversion or translation of lbreign currency.
. Valuation ol inventories.
. Treatment ol goodwill.
. Valuation of investments
. Treatment of retirement benefits
. Recognition ofprofits on long-term contracts.
. Valuation of fixed assets
. Treatment of contingent liabilities.

There are several organizations that promote the harmonization ofIFRS globally. These are
just a few of them:
/ European Union
r' Intemational Organization ol Securities Commissions
/ International Federation of Accountants
/ World Trade Organization
r' Intemational Monetary Fund
/ World Bank
International Accounting Standards Committee (IASC)

Composition
- Members of accountancy bodies from over 100 countries
- Standards
. Standard setting activity has been successful
- Enforcement: The IASC has no enforcement powers

ob ective

"(a) to lormulate and publish in the public interest accounting standards to be observed in the
presentation offinancial statements and to promote their worldwide acceptance and
 observance, and (b) to work generally for the improvement and harmonization ofregulations.
accounting standards, and procedures relating to the presentation offinancial statements."
Goal is to achieve comparability fbr investors while reducirrg the costs to MNE's of preparing
multiple sets ol inlormation.

Reasons f<rr harmonization

Investors and creditor needs

Multinational company needs
Intergovernmental transnational bodies needs
Needs of international accountancy finns

Obstacle s to Harrnonization

The size of accounting differences

The differcnt purposes of accounting
The lack of strong professional accounting associations
The strength of nationalism
The economic consequences of accounting standards

Advantages of Harmonization
/ Achieve comparabitity in financial statements.
Due to different sets of hnancial repofiing standards. the way financial statements prepared and
presented are different from each other which make it complicated to compare them. This is even
more noticeable in multinational companies when they operate in more than just one country. If
intemational harmonization is achieved, the level of international comparability also increases
making it easier for companies to prepare the financial statements under one set of rules; investors
who understand the financial statemenls due to the nature of IFRS and make well thought investment
decisions.
/ Increased auditing efficioncy and money saving
As companies has to use only one set of reporting standards. This also serves to reduce trade barriers
among countries allowing more access to intemational capital markets.

/ Worth noting is the consistency to be achieved

The consistency also contributes to better understanding between investors, lenders and other
businesses as there will be the nature of predictability in place. Moreover, companies operating in
different countries also can use their expertise and systems in all countries they are operating due to
consistency ofthe reporting standards. Another benefit that derives from consistency is the time scale
needed to implement in new countries as there will be no need to leam and adapt to new county
specific rules except minor adjustments.

Disadvantages of Harmonization
/ Impossitrle to eliminate every single difference in international reporting standards.
Information wilt be difficult to obtain from domestic accounting standards. He further states that
according to critics of intemational accounting systems, with different social and economic
institutions, political approaches, tax implications, laws and business practices, a single set of rule
which is IFRS is hard to be achieved and even if achieved. it will be less useful than it has been
expected.
/ Existence of different economic environment as harmonization could be considered
useless.
If a particular country has its own practice in place, and even though they adapt to use one of the
intemational reporting standards, it could be more harmful to the country rather than make anlhing
good. This is because the irrelevant element of the new reporting standard may be of no use and
therefore may even introduce anrbiguitl'and cornplication to that country's reporting standards.
/ Difficult to distinguish changes in the performance from the effects arising from the use
of different accounting requirements.
The aim of accounting harmonization is to rnake the tlnancial statements of companies comparable
with the financial statements olcompanies in other countries. On the simplest level, harmonization is
the process of bringing intemational accounting standards into some sort of agreement so that the
financial statement from diflerent counlries are prepared according to a common set of principles ol
measurement and disclosure.
The importance of international accounting harnronization
/ The rapid development of international capital markets is strengthening their dominant role as
economic resource distributor. How information disclosed to the market is a central issue ir.t

ensuring market effi ciencl,.

r' The increasing frequent cross-listing of mLrltinationals generate an urgent need for a single
universal set of accounting standards lbr these firms in order to reduce inlormatiol
production costs and send out a unified, reliable message to the market.

/ The activities ofinstitutional investors are becoming increasingly intemationalized. Their

presence in foreign markets is forcing domestic listed lirms to play the accounting game by

global rules.
Variables that influence a country's accounting system:
o
The relationship between business and the providers ofcapital.
o
The political and economic ties with other countries.
o The level of inflation.
o The level ofa country's economic development.
o The prevailing culture in a country.

DifficultieE in Lhe Developrnent of Standards:

Provincialism: Many countries hold provincial outlook in many spheres. As long as people believe
that their own views are superior to those of othcrs, known or unknown, it is hardly possible to reach
agreement on a common solution. This provincialism is found greatly in developed countries, or
countries where accounting is most developed. Such countries are reluctant to change their views and
listen to others. Each country believes its system is the best and is reluctant to adopt a system it
perceives to be inferior or unsuitable.
Differences in Economic and Social Environmcnt: Harmonization is adversely affected by the
differences in economic and social environment, in which accounting has a role to play. In different
countries, there is a different view on what is, or should be, the primary purpose of financial
statements. In some countries, it is believed companies have a public accountability to a great variety
of interest groups, These dillerenccs in purposes which are in the minds of accountants lead to
different views on what is appropriate accounting treatment. Some operate lrom an environment of
extreme conseryatism, others from an environment that borders on creative accounting.
DiYers€ Accounting Practices: Another difficulty is that at the present time, there are wide
divergences in norld-wide accounting practices. Each practice may have its own justification and
we'll be understood in the national environment. Obviously, it is the task of IASC to try and nanow.
these areas of divergence. However. variations in accounting practices hamper harmonization. IASC
is operating in an environment of conflict between ideals and practicality. The IASC has, first, to
outlaw practices that are clearly misleading or allow management too much latitude; and then should
try to eliminate options that do not contribute to fairness and usefulness in financial reporting.
Gaps between Developed and Developing Countries: In many areas. developing countries dilfer
from those of developed. In fact most developing countries had little chance to evolve accounting
systems which truly reflected the needs and circumstances of their own societies. Their existing
systems are largely extensions of those in developed countries. In this situation, the benefits of their
being more deeply integrated into systems that predominantly suit developed countries become
questionable. On the contrary, developing countries must create their own systems before this
adverse influence has reached an irreversible stage.
Difficulties in Enforcement of Standards:
Tax Laws: Harmonization faces problems due to differing tax laws. In many countries of the world,
enterprise are required to draw up one set of financial statements only serving both tax purposes and
financial reporting purposes. Government has an overriding interest in profit as computed lbr fiscal
purposes; tax laws often prescribe in detail how profit should be measured.
In this framework, it is unavoidable that business is more concerned about tax saving than it is about
accurate determination and reporting of financial performance. And equally unavoidable is the
consequence that Intemational Accounting Standards are judged primarily by these tax implications.
the govemment opposing standards that would reduce profits and business opposing standards that
would boost profits. Due to these reasons local standards and international standards differ and,
where they differ, local standards prevail and international standards tend to be ignored.

Disclosure Laws: Another difficulty is, again, the law-not the tax law but laws regulating financial
reports to shareholders and the public.
In some countries, this law provides great details both on
disclosure and on measurement. In this environment, the notion of 'true and t-air reporting' loses
importance and the primary purpose of preparers and auditors comes to comply with law and
regulations.
Existence of local standards: Difficulties may evolve from the activities of the national standards-
setting bodies. In more and ntore ctrurrtrics. accounting stanclards have been fbund established by thc
prof-essionor government agencies or.jointll' bi' both. Seen on thc national level, this ntay havc
merits. But seen from an international viewpoint, problems arise. lf many countries have detailed
rules on many subjects, there is bound to arise conflict between these national systems. This is
unfortunate for intemational enterprises who address their reports to users both at home and abroad,
and it reduces the credibility oftheir statements abroad.
Competition among International Standards-Sctting Agencies: There is found a potential
competition between international standards-setters. As it is clear, apart from IASB, the UN and the
OECD are now engaged in the field of company reporting, especially by multinational enterprises.
Unhelpful Corporate Attitudes: Standards are basically meant for business enterprises. They are
expected to comply with Intemational Accounting Standards, and ifthey do not, they are an obstacle
in geuing compliance.
(a) Those whose affairs are purely domestic" and that hold the view that international standards are
none of their business. The vast majority of companies in countries of the world belong to this
category.

(b) Those whose affairs are intemational, that recognize there is a need for international
harmonization, but are hesitant to back IASB as long as they are not sure iASB is a winning horse.

Sussesti ons for Increased Conversence and Harmonization:

There is no doubt that harmonization of company annual reports would be beneficial to all countries
of the world and would achieve the goal of comparability in international financial reponing.
Although many international agencics and bodies are working towards harmonization in financial
reporting, the Intemational Accounting Standards Board (IASB), earlier IASC, pla1,s (and uoultl
play) an imponant role in harmonization programme.

Enlarge representation on IASB: At present, IASB is seen by many as an organization heavily

influenced by Western accounting profession. The eff'ective representation of third world countries is
not found in IASB. The IASC has to be 'lnternational' in real terms. That is, more countries.
especially the developing countries, must be represented on the IASB than at present. in that
situation IASB's statements will have world-wide acceptance and compliance.
Avoid political pressures on IASB: Generally political pressures on IASB come from various
interest groups in the private sector and government agencies who are interested in intemational
standards. Developing useful intemational standards requires that all kinds of pressures from any
quarter should be eliminated in the decision- making process applied in the development of
intemational standards. If intemational standards are the result of pressures exercised by vested
interests, the IASB will not be able to function in an objective and purposeful manner.
IASB should publicize standards dr:r'eloped b1 it: For this should try to get support ol'the
accounting profession, member countries and corporate managements all over the world. IASB
should encourage member bodies to adopt IFRSs or phrase or rephrase their rules in such a way that
they are in line with IFRSs.
Each country should pass legislation: The effect that as and when an international standard is set or
amended by IASB, local standards, ifthey exist, should be brought into line; iflocal standards do no1
exist the IFRS should be adopted. Legislation of this character would enjoy the necessary degree of
flexibility.
UN should recognizc IASB as thc bodl qualilicd to sct up intcrnational standards: The l-lN
should then use its authorit-r to hasten unir ersal acceptance of such international standards. IASB
should be formally recognized by govemments as an inremational standards setting body.
The governing bodies of the accounting prolession should lbrmally acknowledge: That it is their
task, among many others, to apply disciplinary procedures when bad prof'essional work, including the
non- observance of standards, is brought to their notice.
Local stoch exchangc should cooperrte : In each country the local stock exchange should cooperatc
in taking appropriate action against companies which failed to comply with standards.
Continuous research: Continuous research is needed to ascertain why the differences arise and to
determine what will be the economic effects of some countries changing practices.
CURRENCY TRANSLATION
Foreign subsidiaries of multinational firms normally keep their accounting records and
prepare their financial statements in the currency of the country in which they are located. When a

multinational prepares consolidated accounts, it must convert all these financial statements into the
currency of its home country. However, exchange rates vary in response to changes in economic
circumstances. Companies can use two main methods to determine what exchange rate to use when
translating financial statement currencies-the current rate method and the temporal method.

The Current Rate Method

Under the current rate method, the exchange rate at the balance sheet date is used to translate

the financial statements of a foreign subsidiary into the home currency of the multinational firm.
Although this may seem logical. it is incompatible rvith the historic cost principle. which, as'uve sa\\'
earlier, is a generally accepted accounting principle in many countries. including the United States.
Consider the case ol a U.S. firm that invests $ 100,000 in a Malaysian subsidiary. Assume thc

exchange rate at the time is $1 : 5 Malaysian ringgit. The subsidiary converts the $100,000 into
ringgit, which gives it 500,000 ringg:it. h then purchases land with this money. Subsequently, the
dollar depreciates against lhe ringgit, so that by year-end, Sl = 4 ringgit.lfthis exchange rate is used
to convert the value of the land back into U.S. dollars for preparing consolidated accounts, the land
will be valued at $125,000. The piece of land would appear to have increased in value by $25,000.

although in reality the increase would be simpty a function of an exchange rate change. Thus, the
consolidated accounts would preser.rt a somewhat misleading picture.
The Temporal Method
One way to avoid this problem is to use the temporal method to translate the accounts of a foreign
subsidiary. The temporal method translates assets valued in a foreign currency into the home-country
currency using the exchange rate that exists uhen the assets are purchased. Rcferring to our example.
the exchange rate of$l = 5 ringgil, the rate on the day the Malaysian subsidiary purchased the land,
would be used to convert the value of the land back into U.S. dollars at year-end. However, although
the temporal method will ensure that the dollar value of the land does not fluctuate due to exchange
rate changes, it has its own serious problem. Because the various assets ola foreign subsidiary will in
all probability be acquired at different times and because exchange rates seldom remain stable fqr
long, different exchange rates will probably have to be used to translate those foreign assets into the
multinational's home currency. Consequently, the mulrinational's balancc sheet may not balance!
consider the case of a U.S. firm that on January 1, 2009, invests $100,000 in a new Japanese
subsidiary. The exchange rate at that time is $1 = Y100. The initial investment is therefore Y10
million, and the Japanese subsidiary's balance sheet looks tike this on January 1, 2009: Assume that
on January 31, when the exchange rate is $l = Y95, the .lapanese subsidiary invests Y5 million in a
factory (i.e., fixed assets). Then on February 15, when the exchange rate is $1 : Y90, the subsidiary
purchases Y5 million of inventory. The balance sheet of the subsidiary will look like this on March 1,
2009: Although the balance sheet balances in yen, it does not balance when the temporal melhod is
used to translate the yen-denominated balance sheet figures back into dollars. In translation, the

balance sheet debits exceed the credits by $8,187. The accounting profession has yet to adopt a

satisfactory solution to the gap between debits and credits. The practice currently used in the United
States is explained next.

The LESSARD-LORANGE Model

Firms can deal with the problems ofexchange rates and control in thrce rvays
l. The initial rate
. the spot exchange rate when the budget is adopted
2. The projected rate
. the spot exchange rate forecast for the end ofthe budget picture
3. The ending rate
the spot exchange rate when the budget and performance are being compared. Possible
Combinations of Exchange Rates in the Control Process

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