spective and the difficulty of getting all countries to agree to a single set of interna-
tionally accepted accounting principles. Emphasis is given to discussing the role of
International Financial Reporting Standards (IFRS), formerly known as International
Accounting Standards (IAS), and the policies and activities of the U.S. Securities and
Exchange Commission (SEC) as they relate to the international capital markets.
12.2 GLOBALIZATION OF FINANCIAL DECISIONS. The world is constantly
changing, and it is important to identify the forces generating change and the pres-
sures they create when evaluating differences in accounting measurement between
countries. The increase in the number of multinational companies, combined with
floating foreign exchange markets, globalization of the capital markets, and the open-
ing up of markets in previously centrally planned economies (e.g., Russia and China)
to foreign direct investment have important implications for financial reporting.
These factors indicate that business and investment decisions are becoming increas-
ingly international in scope.
The continuing trend toward a single “global” marketplace reflects the results of
the economic policies many countries are pursuing to increase the opportunities for
international trade by reducing barriers to trade such as tariffs and quotas, to reduce
the size of government by privatizing certain government-owned businesses such as
telecommunications and postal services, to encourage the growth of competitive mar-
kets, and to minimize market regulation. One of the most recent examples of this type
is China’s entry to the World Trade Organization in 2001. Changes in the accessibil-
ity and competitiveness of markets and in the regulatory environment have led to an
increase in the overall number of multinational companies and have resulted in many
multinationals’ relocating manufacturing and service operations to developing
economies to obtain efficiencies. Multinationals need to consolidate accounting data
that is sourced from many different countries. Depending on whether the parent en-
tity is located in Chile, Germany, or the United States, for example, a different basis
of accounting may apply at the group level. In a time when multinationals had a pre-
dominantly national identity, with creditors and shareholders who shared that iden-
tity, this situation was tolerable. Multinationals are increasingly seeking to define an
international identity, with investors and creditors from several countries, and the na-
tional accounting rules are frequently a barrier to achieving this objective.
There are many reasons for the globalization of the capital markets. From an in-
vestor’s perspective, the relatively unregulated and open foreign exchange markets
in most currencies facilitate cross-border capital flows. In this environment, subject
to foreign investment constraints in some industries within some countries (e.g., tel-
evision and media), investors are free to acquire existing businesses, to establish new
businesses, and to form joint ventures and other alliances in many countries around
the world. Also, mutual funds, pension funds, and insurance companies are able to
allocate capital to publicly traded equities, debt, and derivatives in other countries.
This represents a large pool of capital when aggregated globally that is allocated
based on investment decisions that reflect an assessment of prospective returns and
risks from one investment relative to other opportunities on a cross-border or
“global” basis.
From the perspective of an issuer of securities (i.e., a company seeking to raise
capital), the availability of investor funds in other markets creates new sources of
capital. Their goal is to access the capital markets for funds with terms that match
12 • 2 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES