Transnational Financial Reporting is a complex and multi-faceted process that demands professionalism and high levels of liability by accounting professionals. The preparation and submission of financial statements across borders requires an approach from the most apolitical nature of expertise to prevent problems that can occur owing to lack of accurate financial reporting. Accountants and those in management positions need to devise the proper ways through which they can relay financial information to all users with the minimal amount of prejudice. Agreeably, the development of one set of financial statements to be used worldwide is the best option to ensure proper transnational financial reporting.
Key Words: Transnational Financial Reporting, Financial Statements, Foreign Users
Financial statements refer to the statements of account that organizations prepare illustrating the financial operations of the organization. Accordingly, accountants and the management team need to develop financial reporting systems to ensure that all company stakeholders are aware of the organization’s financial activities. For companies that have decided to globalize their business operations, a transnational approach to financial reporting is required to ensure that the presented financial statements are understood by all users irrespective of their locations (Wutsemann, 2004).
This paper highlights five approaches to Transnational Financial reporting, illustrating the advantages and disadvantages of each approach. The paper also justifies the preparation of one set of financial statements based on worldwide accepted accounting as the best approach to Transnational Financial reporting.
Approaches to Transnational Financial Reporting
Economists and the international accounting committee have identified five main approaches to transnational financial reporting to ensure accurate accounting of financial statements in organizations. The first approach to transnational financial reporting is the correspondence of similar sets of financial statements to all company stakeholders in their various locations (Schroeder et al., 2010). With this approach, company accountants prepare a single set of financial reports with one common language and currency. The only advantage of using this approach is the reduction of the workload regarding the submission of financial statements to company stakeholders. The uniformity of financial reporting reassures stakeholders that the organization is providing accurate financial information. However, since this information is to be relayed to other foreign nations, the probability of misinterpretation of the financial records is high hence lack of trust by foreign stakeholders. The second approach to transnational financial reporting is the preparation of financial statements followed by translation of these statements into the different languages of the foreign nations’ users (Schroeder et al., 2010). This approach is advantageous because it limits the occurrence of financial misapprehensions by translation of the statements to a language that the foreign stakeholders can understand. However the process of translation is exasperating especially since organizations are required to translate these statements into various foreign languages that they may not be familiar with. Translating financial statements into foreign languages and currencies is the third approach to transnational financial reporting (Schroeder et al., 2010). This approach to financial reporting is much similar to the second approach with the additional translation and conversion of financial figures into the respective foreign currencies. Just as the previous approach to transnational accounting, this approach fosters proper communication of organizational financial activities across all nations thud reducing the probability of conflict in the workplace. However, the translation of both the language and currency does not ensure that users understand some of the accounting principles used for financial reporting, thus posing a disadvantage to the process.
Organizations also have the option of preparing different sets of financial statements as an approach to transnational financial reporting. This approach demands that one set of financial statements be prepared using the principal country’s language, currency, and accounting principles, and the others using the language, currency, and accounting codes of the foreign countries (Schroeder et al., 2010). Agreeably, this is the most tedious approach to financial reporting and most accountants are discouraged by the bureaucracy of the processes involved. Otherwise, it is a good approach since it fosters organization and accurate reporting of financial statements. Conclusively, the fifth approach to transnational financial reporting involves the preparation a single set of financial statements based on worldwide-accredited accounting principles (Schroeder et al., 2010). This approach implies the harmonization of accounting standards and principles across all nations for easier comprehension of the presented financial statements.
From a closer examination of the advantages and disadvantages of the five approaches, it is evident that the latter is the most favorable approach to transnational financial reporting in organizations. This is because this approach allows the institution of a harmonized accounting system, which further promotes promulgation of financial reporting to organizational stakeholders. Synchronization of accounting standards and principles prevents misinterpretation of the financial records, thus reducing the possibility of organizational conflict in the various regions. Additionally, this approach also curbs the problems associated with regional, political and environmental influences. The development of one set of accounting standards allows stakeholders to understand certain anomalies in the statements that are influenced by such external factors. This approach further assists organizations in convincing their respective financial bodies on what is to be done regarding company stocks and financial operations.
Wustemann, J. (2004). Legalization of Transnational Accounting: The Case of International Financial reporting Standards. Retrieved from: http://wp.bwl.uni-mannheim.de/fileadmin/files/Forschung/LegalizationofTransnationalAccounting.pdf