International Accounting and Taxation

Accounting rules vary across countries because people or institutions that set the accounting rules in a specific country have different experiences that influence and affect their outlook on business and accounting. Some of the factors that affect accounting standards include the following:

  • Sources of capital. In the US., shareholders provide the majority of capital to businesses. These shareholders often own relatively small ownership stakes and are not involved with company operations, As a result, US GAAP is oriented towards full disclosure and relative transparency. In some countries, the predominant providers of capital are banks. Transparency and disclosure are not as extensive because the capital providers are more likely to be privy to operational details.
  • Inflation. When inflation is very high, financial statements begin to lose their comparability from period-to-period. Countries that have experienced very high levels of inflation often promulgate rules designed to increase comparability by use of inflation indices or similar mechanisms to adjust prior year amounts to a level equal to current year amounts.
  • Taxation. In some countries accounting rules are driven by tax policy. In others, such as the U.S., tax rules and accounting rules often are different.
  • Culture. Culture is what makes us who we are, what we believe, how we view right and wrong, and what behavior is acceptable and unacceptable. Since culture gets to the core of beliefs, it will affect the nature and content of accounting rules.
  • Legal System. In most countries, the legal system is based on a code or common law foundation. Code countries have accounting regulations that tend to be detailed and comprehensive, whereas common law countries such as the U.S. require companies and accountants to exercise higher levels of professional judgment.
  • Accidents of History. War, conquest, and colonialism can create or change accounting rules in a country as a result of a change in allegiance.
  • Business Complexity. Countries with complex business entities are more likely to have complex accounting rules. In addition, complex entities are more likely to participate in cross-border trade and capital seeking.

All of these forces can, and do create accounting differences across countries that can be substantial and that can hinder both trade and capital movement. Some material differences include the following:

  • Tax-based accounting – In some countries, the tax treatment of a transaction must also be used for financial accounting purposes.
  • Asset Revaluations - It is permissible in some jurisdictions to revalue assets to fair value on a periodic basis. For entities owning appreciated assets, such as real estate, revaluation amounts can be significant. Comparability is reduced when comparing the assets and equity of a revalued balance sheet versus one prepared on the basis of historical cost.
  • Form Over Substance – In the U.S. and many other countries, the substance of a transaction, not the form, controls the accounting treatment. An example is the accounting treatment of a leased asset. It does not matter what the transaction is called, the rights, responsibilities, risks, and rewards of the parties will control the accounting treatment. Some countries, however, account for transactions with reference to the form of the transaction. If the parties call the transaction a lease, it will be accounted for as a lease, and the asset and liability will appear on the books of the lessor.

    At Kopin & Company, CPA, PC, we are familiar with the differences in accounting treatments on a very broad level. We work with international companies that wish to do business in the U.S. and assist in setting up their operations in the locality of their choice. We help them understand the differences between the countries and also monitor any treaties that may exist between the countries to ensure compliance and to take advantage of any favorable tax treatments afforded.

    International Financial Reporting Standards (IFRS) – The International Accounting Standards Board (IASB) is an international standard-setting organization which has become required or a permitted alternative in a number of countries around the world.

    IFRS use is increasing and is likely to soon skyrocket as a result of some significant events:

    1. The International Organization of Securities Commissions is an organization of securities regulators promoting international coordination.
    2. In June 2002, the Council of Ministers of the European Union adopted a regulation that requires the use of IFRS for financial reporting for publicly traded companies in the EU no later than January 1, 2005 (with some exceptions).
    3. The Canadian Securities Administrators issued a proposal to permit foreign companies to file financial information in Canada without reconciliation.
    4. In July 2002, the Financial Reporting Council of Australia endorsed adoption of IFRS for Australian reporting entities by January 1, 2005.
    5. In October 2002, FASB and the IASB announced the issuance of a memorandum of understanding marking a step toward formalizing their commitment to convergence of US and international accounting standards.
    6. Standards setters in additional key countries have announced that their domestic public entities will be required to use international standards. Brazil will require IFRS adoption in 2010, and Canada, India, and Korea will require IFRS beginning in 2011.
    7. The U.S. Securities and Exchange Commission (SEC) has recently taken actions that strongly support the use of international standards.

    At Kopin & Company, CPA, PC we are actively preparing for the conversion to accounting under IFRS because of its importance in the rise of the number of multinational corporations and the growth of global capital markets. The success of the IASB in working towards a comprehensive set of standards and the movement by standard setters and regulators in major capital markets around the world both combine to clearly indicate that the acceptability of international standards will continue to grow.

    Establishing U.S. Operations

    Kopin & Company, CPA, PC will assist companies wishing to set up U.S. subsidiaries by providing the following services:

    • Assisting in a choice of a location
    • Consultation in determining where to incorporate
    • Providing full bookkeeping services
    • Payroll preparation
    • Tax consultation
    • Accounting services including IFRS
    • Tax planning and consultation
    • Assistance with transfer price agreements
    • Treaty consultations
    • Strategic planning
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