A guide to using foreign
by Susan M.
Sorensen and Donald L. Kyle
CPAs are finding themselves working
with foreign statements. As
progress is made in convergence and
harmonization between FASB and the IASB,
the interpretation of foreign financial
statements should become easier. CPAs in
the United States should watch these
developments carefully and familiarize
themselves with IFRSs.
Users should be ready to adjust
their expectations about
language, currency, accounting
practices, methods and presentation when
working with foreign statements.
Even if a companys statements
have been audited, CPAs
should be aware that the sophistication
and enforcement of accounting rules vary
significantly by country.
Approximately half of the countries
in the world have adopted
international standards for publicly
listed companies. Although the United
States is not one of them, FASB and the
IASB are working on convergence
domestic CPA firms can,
through their international alliances
and networks, help U.S.-based CPAs in
business and industry understand foreign
Cultural differences often make
foreign statements prepared
using U.S. GAAP quite different from
statements of U.S.-based companies. CPAs
should not accept anything at face
Susan M. Sorensen, CPA,
PhD, has 30 years of public accounting
experience and is an assistant
professor of accounting, and
Donald L. Kyle, CPA, PhD,
is a professor of accounting, both at
the University of HoustonClear Lake.
Their e-mail addresses are
Monday is off to a reasonably good start. The
improvements you made last year to your companys
financial reporting system are paying off. Youre
getting data faster and your boss, the president,
is delighted with the new reports you created. But
this mornings call is not a request for yet
| The Rise of Globalization
In 1990 U.S.
direct investment in Asia was $64.7
billion. By 2005 this number had
increased to $376.8 billion.
Department of Commerce
see what were paying for bearings for the new
800s? blurts your boss. Every time we turn
around, our domestic supplier hikes prices. Ive
found a new supplier, and its for sale.
Good, you reply. Where is it located?
Ukraine, he says. And I want you to take a
look at its financials. Theyre in English.
If you have not already experienced this
situation, you may soon. Globalization, once the
exclusive realm of Americas largest companies, is
now a reality for companies of all sizesso all
financial managers and CPAs must be prepared to
work with foreign financial statements. You may
need to include information from foreign
statements in your own statements or tax returns,
or to rely upon foreign financials when making
investment decisions, securing credit or using
foreign outsourcing firms. CPAs in industry may
find themselves dealing with foreign subsidiaries
or working for a subsidiary of a foreign company.
As CPAs, you have expectations about
language, currency, accounting practices, methods
and presentation when reading and analyzing U.S.
GAAP statements. When dealing with foreign or
transnational statementseven if they are presumed
to be prepared using U.S. GAAPbe ready to adjust
the Numbers |
approaches foreign businesses
take when providing financial
statements to U.S.
|| Selected items
reconciled to U.S.
to U.S. GAAP
No || No
under U.S. GAAP
|| U.S. ||
U.S. GAAP ||
N/A || N/A
|| No ||
|| U.S. ||
No || No
|| Yes ||
Reconciliation to U.S.
GAAP (Minimum required
by SECForm 20-F)
|| Yes |
for U.S.**/ Secondary
U.S./ U.S. or foreign
|| U.S. GAAP/
May use IFRS/IAS
|| N/A/ No
|| N/A/ No
*The term foreign
does not preclude the
possibility that English may
be spoken, the companys
primary reporting language may
be English, the primary
reporting currency may be the
U.S. dollar or the foreign
companys statements may be
prepared using U.S. GAAP.
**Meets SEC requirements.
statements to foreign users, companies adopt a
variety of approaches based on factors such as
language, currency and accounting practices. These
cover the spectrum from not changing the primary
foreign statement at all to preparing primary
statements using U.S. GAAP (see exhibit 1 ). The specific
approach may not be obvious and may vary from year
to year. The options include:
Doing nothing. If a
company chooses to provide its primary statements
without making any changes, it often will be
apparent because the statements will be written in
a foreign language.
Primary statements under U.S. GAAP.
Many foreign companies choose to prepare
primary statements using U.S. GAAP.
Companies may translate the
language into English, but provide no information
about the accounting practices and currency.
Volvos balance sheet in
exhibit 2 is an example of a convenience
translation. The currency is the Swedish krona
(SEK) and the format does not follow U.S. GAAP.
Group Balance Sheet for 2005
sheet December 31
| SEK M
| Property, plant
under operating leases
| Shares and
|| 751 |
|| 464 |
and cash equivalents
| Other liabilities
percentage of total
minority interests SEK 260 M
Convenience statements. These
contain translated language and, often, converted
currency. They still lack information CPAs need
about accounting practices, the translation method
and how the currency was converted. Do not assume
they are in or comparable with U.S. GAAP. Even
large companies may choose to use convenience
statements. Suzuki Motor Corp., for example,
prepares statements that show both Japanese yen
and U.S. dollars. Amounts are converted to U.S.
dollars at the year-end exchange rate.
These attempt to provide more information by
reconciling some significant items to U.S. GAAP.
Critics argue they allow companies to selectively
choose items that improve their financial picture.
Reconciling to U.S. GAAP.
Companies that cross-list their
stock on foreign and U.S. exchanges must, at a
minimum, prepare a reconciliation of their
home-country statements to U.S. GAAP. These
companies file Form 20-F in lieu of Form 10-K with
the SEC; the filings are available on the SEC Web
These may be country-specific or universal. A U.S.
country-specific secondary statement would be
prepared using U.S. GAAP; universal statements may
use International Accounting
Standards/International Financial Reporting
Standards (IASs/IFRSs). (See Understanding IASs and
Understanding IASs and
Accounting Standards (IASs)
were issued by the
Standards Committee (IASC)
from 1973 to 2000. Although
the IASC Foundation continues
as the parent body of the
Standards Board (IASB), in
2001 the IASB took over the
activities. The IASB has
amended some IASs and proposed
to amend others, proposed to
replace some IASs with new
Reporting Standards (IFRSs)
and adopted or proposed
certain new IFRSs on topics
for which there were no
previous IASs. Through
committees, both the IASC and
the IASB also have issued
interpretations of standards.
Financial statements may not
be described as complying with
IFRSs unless they comply with
all the requirements of each
applicable standard and
Source: Deloittes IAS Plus
If the reporting
approach is not disclosed in the notes or referred
to in the auditors report, CPAs can contact the
company and make a detailed inquiry. The lack of
notes to the financial statements explaining how
they were prepared may show a lack of accounting
sophistication on the foreign companys part.
Even if the statements have been audited,
be aware that the sophistication and enforcement
of accounting rules vary significantly by country.
Some foreign accounting firms register with the
Public Company Accounting Oversight Board (PCAOB)
so they may conduct or participate in audits of
companies filing with the SEC; they therefore are
subject to PCAOB rules and oversight. About
one-third of the more than 1,500 public accounting
firms listed on the PCAOB Web site ( www.pcaobus.org
) are foreign.
More than 90
countries permitted or required their
domestic-listed companies to report under IFRSs in
2005, and the list is growing rapidly. Summaries
of IFRSs are available at
Although the summaries are inherently incomplete,
they offer a quick read for the beginner. Be
cautious, since implementation and enforcement of
IFRSs vary from country to country. An updated
list of adoption status by country is available at
Although Japan and the United States have not
yet adopted IFRSs, both have committed significant
resources toward international convergence. For
the United States, progress is being made on
harmonization under an agreement between FASB and
the IASB. Significant differences, however, remain
between IFRS and U.S. GAAP.
Bridging the Culture GAAP |
The foreign financial
statements youre examining
may have been prepared using
U.S. GAAP, but was it applied
in the same way it would have
been in the United States?
In a lot of cases,
probably not, says Gregory S.
Miller, CPA, a professor at
Harvard Business School.
Conservatism [in financial
reporting] is driven by the
litigation environment. Even
if a foreign company is
cross-listed on a U.S.
exchange, it does not run the
same risk of investor lawsuits
as a U.S.-based company.
Furthermore, research suggests
there are country-specific
biases, Miller says. For
example, a company in Germany
is far more likely than a
company in Italy to interpret
the same results negatively.
Paul Neubelt, CPA,
chairman of BDO
Internationals China region,
agrees that accounting
principles are applied
differently according to the
culture of the country where
the statements are prepared.
Anyone looking to invest in
another country needs to know
something about the cultures
of the country, he says. That
caution extends to choosing
your own translators, who can
explain the meaning behind the
U.S. GAAP may present other
problems with financial
statements of foreign
companies. A company may say
it knows U.S. GAAP and may
have someone on staff who has
lived in the United States,
but its often not up to
date, Neubelt says.
Even if you hire an expert
in the country in question,
ultimately youve got to have
the courage and conviction
that you understand the
numbers yourself, Miller says.
The same [cultural] factors
that make it difficult to
understand the accounting can
make it difficult to
understand a local
Matthew G. Lamoreaux is a
senior editor of the
JofA . Mr. Lamoreaux is
an employee of the AICPA,
and his views, as expressed
in this article, do not
necessarily reflect the
views of the Institute.
Official positions are
determined through certain
procedures, due process and
WATCH FOR PRESENTATION DIFFERENCES
Some countries present items
differently. For example, the Volvo balance sheet
in exhibit 2 lists
long-term assets before short-term assets and
shareholders equity before liabilities. This
format is consistent with the IAS-compliant model
financial statements for 2005 available at
www.iasplus.com/fs/2005modelfs.pdf . CPAs
also should seek information about accounting
practices such as the grouping or netting of
accounts and the definition of current vs.
noncurrent. These types of differences make it
important to read the footnotes and to obtain
Information about doing business in specific
foreign countries can be obtained from sources
such as HLB International (
www.hlbi.com/DBI_list.asp ) and the Tax and
Accounting Sites Directory (
www.taxsites.com ). HLB International is a
global network of accounting firms and business
advisers whose Web site includes information on
currency and languages, investment factors,
business organizations and taxation. The Tax and
Accounting Sites Directory provides links to a
variety of other international information Web
Its also important to know
whether a companys foreign statements reflect
historical cost or contain inflation adjustments.
Two common models for inflation adjustment are the
general price-level-adjusted (GPLA) model and the
current cost-adjusted (CCA) model. Information
about the accounting methods and presentation
rules may be disclosed in the supplemental
information included with the statements. If the
information is difficult to locate, a source of
last resort may be the accounting principle
disclosures or the reconciliation to U.S. GAAP in
the statements of multinational corporations based
in that country.
Do not assume common
accounting terms have the same meaning outside the
United States. For example, although some
companies in the United Kingdom have adopted
IFRSs, many continue to use terminology that can
be confusing to CPAs in the United States (see exhibit 3 ).
|| U .K.
vs. U.S. Reporting Terminology
Debtors || Accounts
charges || Rent
Turnover || Sales and
other operating income
Source: BPs 2004 Annual
The currency used in
the financial statements may not be obvious, as
shown in exhibit 2 . The
SEK M above the Assets caption shows the
statements are in the Swedish krona. Remember that
Canada, Australia and Jamaica also call their
currency dollars and many currencies use the
familiar $ symbol.
statements are meaningful only if the reader knows
the method used to convert foreign currencies to
U.S. dollars. A basic convenience statement may be
prepared by multiplying all the amounts on the
income statement and balance sheet by the
translation rate in effect at the balance sheet
date. In that case there would not be any
translation gains or losses, and the statements
would not provide any information about the
effects of rate changes over time.
Multinational enterprises have been dealing with
translation issues for many years because their
foreign divisions and subsidiaries often keep
records in the local currency. Exhibit 4 lists four
common methods of translation. Each uses a
different combination of the following three
rates: the historical rate in effect on the date
of the transaction, the rate in effect at the end
of the current year and the weighted average rate
for the period.
Translation rules are addressed by FASB
Statement no. 52 in the United States and by IAS
21 in the international standards. Current and
historical exchange rate information is available
from Web sites such as the Federal Reserve Bank (
or the Federal Reserve Bank of St. Louis (
Understand the common approaches
foreign companies take when they
provide statements to users in the
United States. |
Understand the effects of
currency translation on
financial statements and the
common conversion methods.
Become familiar with IASs/IFRSs,
since more than 90 countries
have adopted these international
up sources of help in advance.
Many accounting firms belong
to international networks or alliances to expand
their resources. Your domestic CPA firm may be
able to help arrange for an accounting firm in the
foreign country to provide assistance in
interpreting the financial statements. Exhibit 5 , contains a list
of some of the larger networks and alliances that
provide international resources to accounting
Firm Networks and Alliances
The global integration of national
economies is well under way and will accelerate
over the next two decades. The result is that
U.S.-based CPAs will see more financial statements
originating in foreign countries. Foreign
investment in the United States also is likely to
increase, and many financial executives in the
United States may soon be required to report
results in compliance with IFRSs. As progress is
made in convergence and harmonization between FASB
and the IASB, the interpretation of foreign
financial statements should become easier. CPAs
who develop expertise in the international
reporting arena will be in increasingly high