International Accounting between Nations - Coursework Example

International Accounting between Nations of the of the Table of Contents Introduction 3 Source of Finance 3 Legal system 4 Taxation 5 Political and Economic Ties 6 Reporting and disclosure 6 Impact of Inflation on Currency Translation 7 Performance of Qatar and GCC Countries 10 Method of Currency Translation 10 Impact of Fluctuating Exchange Rates on Trading Nations 11 Conclusion 13 References 15 Introduction International Accounting refers to the various aspects related to sources of finance, taxation, currency translation, legal system, political and economic ties and reporting and disclosure methods followed by companies. In this paper the comparison has been made among Qatar and other GCC countries. In order to form the union the Gulf Cooperation Council (GCC) countries pegged their currencies with respect to the US dollar which is needed for asset holding (Pinto, 2005). However Qatar differs from other GCC countries in terms of Sources of Finance, Taxation, Legal System, Political and Economic ties and the reporting and disclosure measures taken by the companies in Qatar and other GCC countries. The Fiscal policies undertaken by the government of GCC countries are considered to be the source of finance. Further the tight legal systems as well as the taxation policies are undertaken in the GCC countries as compared to Qatar (Pandit, Rubenfield & Phillips, 2006). Identification of the equilibrium exchange rates on the date of conversion of the currency is therefore essential to convert the currencies successfully. Hence currency translation is an important issue that needs to be discussed and the paper aims at evaluating the currency translation between Qatar and other countries that participates in the international trade (Payne & Vitale, 2003). The paper aims to undertake an overall study of the various policies introduced by the government of Qatar and other GCC nations. The paper would further discuss the issues related to the interest rate differentials that change the real exchange rates among Qatar and other GCC countries. Source of Finance Sourcing of Finance takes place within a country due to various reasons. The traditional areas of need can be purchasing of new machinery and equipments and construction of new plants. Normally the development of capital is financed internally. However the interest rates flow varies according to the purpose of different organization (Tille, 2008). There are different types of sources of finance that are internal as well as the external sources of finance. The internal sources refer to the money that comes from owner’s own funds which may be used for initiating a business within the country. The advantages of the internal sources are that it need not be repaid because it has come from the owner’s own interests. However there is a limit to the internal sources that depends on the savings of the owner. The oil producing companies in Qatar also runs its business using the internal funds of the organization (Tille, 2008). Nonetheless if the companies have low funds it borrows from government or draws funds by exporting its goods to other nations demanding crude oil. The external sources for Qatar’s oil exporting companies are bank Loans, Government grants and trade credit. The Government grants loans to the companies so that they can raise their production levels and meet the rising demands for crude oil. However the GCC countries has been benefitted from the high crude oil prices and increase in the oil production along with the expansionary fiscal policies set by the government and low interest rates creates an added advantage. There is a positive growth among the GCC countries and the inflation rates also remain moderate. The output growth in the economy has led to the rise in real GDP as well. Legal system Research says that Qatar follows a highly evolved legal system. On one side the country follows Islamic rules whereas on the other side it follows the principles of Napoleonic Civil Code. The judicial system in Qatar is well organized and the people follow the judicial law no. 10 of the year 2003 based on which there are three stages the court of first instance, court of appeal and court of cassation (Lane & Milesi-Ferretti, 2001). The law followed in Qatar involves participation of foreign investors in the crude oil producing countries in Qatar. The rule suggests that 51% of the capital in a business should be owned by the local people of Qatar. However the law states that the ownership of the investors in the foreign sectors can be raised from 49% to 100%. The law involves the licensing policies as the foreign countries can invest in Qatar to carry out their business activities (Lane & Milesi-Ferretti, 2001). Under the commercial companies law followed within Qatar a company in Qatar can have minimum 2 and maximum 50 shareholders and the company may not participate in investment brokerage, banking and insurance. However the research says that the shares belonging to the public shareholding companies can be traded in the stock exchange market of Qatar. Nonetheless the legal system followed in other GCC countries is controlled by highly judicial and legislative authority which is divided among federal government and seven constituent emirates ruled by different rulers. There are strict rules and regulations set by the authority that brings growth of the nations. Taxation The taxation system in Qatar follows the law no. 21 of 2009 tax law. The tax law within the country involves tax to be imposed on trade that takes place between Qatar and other countries, industry and other business practiced for the purpose of profit are taxed. Personal income comprising of the wages and salaries are not taxed. The tax rate that is imposed on taxable income is that of 10% and the tax rates are calculated on annual basis (Lane & Milesi-Ferretti, 2001). The Qatar tax regime is considered to be the territorial tax regime and tax is imposed on the entire production of crude oil and petroleum in Qatar. However the income that is generated outside Qatar is not considered under the tax regime. Hence the crude oil producing companies has to pay heavy taxes on the income generated through the sale of crude oil. As per the study the tax structure followed in other GCC countries is uncomplicated compared to other countries in the world. Moreover the GCC nations earn their revenue from the energy exports and depend mostly on the indirect tax rates instead of the funds generated within the economy. However the GCC nations need a further effective taxation policy to enhance their future performance. Political and Economic Ties Qatar and other GCC nations focused on the enhancement of the mutual defense issues and also started the work in the field of economic, political and social spheres. The country was aware of the outside military intervention and had planned to raise the security level. Through the emergence of foreign investors in the country it was highly probable that the investors would try to capture the market share and so the government plans to take necessary steps to stop the investors from enjoying monopoly power. The crude oil producing nations of Qatar had economic ties with other countries as the demand for crude oil was rising. On the other hand the British embassy in Qatar is considered to be a foreign mission of Qatar and many of the British people worked for Qatari government at high levels. Research says that the British banks as well as other businesses are found to function smoothly in Doha. The Qataris also tend to attend universities in Britain and built up their homes in Britain. Reporting and disclosure Disclosures within an economy are of various kinds. For example the voluntary disclosures increase due to the investor’s demand for more detailed information regarding the products manufactured within the economy. The regulatory disclosure protects the investors in as it provides full information regarding whether the investment would be profitable or not. Likewise the company forecasts the revenues, capital expenditure and cash flows of the company. It would also help the investors to predict the future performance of the company and the strategies to be taken before investment (Pandit, Rubenfield & Phillips, 2006). The oil producing companies of Qatar also predicts the performance of the company based on its revenue, capital expenditure, assets as well as liabilities. However the reporting practices of the process of reporting to the shareholders as well as the employees and the customers by the managers of the company (Pandit, Rubenfield & Phillips, 2006). This comes under the corporate social responsibility of the company. The companies of Qatar also follow such policies that enhance the reputation of the company in the international markets. Despite having similar characteristics among GCC countries based on the culture and religion there are differences in the accounting procedures followed by the countries. Bahrain, Oman, Qatar, Kuwait and UAE are following the International Financial Reporting Standards (IFRS) and carries out a high quality financial disclosure and accounting. Impact of Inflation on Currency Translation The actions of the buyers and the sellers of the currencies in the foreign exchange market are equalized in order to determine the exchange rates. The demand and supply of the foreign currencies determine the equilibrium in the market. The demand and supply of currencies rises according to the international trade in the economies. The exchange rate regimes are of two types that are the fixed as well as flexible exchange rate systems (Bazaz & Senteney, 2001). Foreign exchange intervention often does not set levels to the exchange rates instead it moderates the rate of exchanges. Exchange rate with no pre-determined path is called managed float and dirty float. However the monetary authorities influence the movement of exchange rates through the direct or indirect exchange rates without a pre-determined exchange rate path (Payne & Vitale, 2003). There arises possibility of the tightly managed floating where the intervention takes place with tight monitoring strategy without a clear exchange rate path. However in case of the fixed exchange rate system there is no appreciation or depreciation of the currencies according to the inflation rates in the economy (Payne & Vitale, 2003). The appreciation of the currency value implies that if a nation’s currency buys more units of the other currency then the nation’s currency is said to have appreciated in value. Nonetheless if the nation’s currency buys less amount of the other currency then it said to have depreciated in value. There are different types of currency transactions that are used in the foreign exchange market. Spot transactions deals with the scenario when exchange of currencies takes place immediately. A spot contract is a contract that is signed with a spot exchange rate or a current exchange rate in order to settle the business in two days (Michaelowa, et al., 2003). The trade date is known as the date on which the contract is to be executed whereas the settlement date is the date on which the exchange takes place (Michaelowa, et al., 2003). The pricing system of the spot market is determined by the demand and supply of currencies in the spot market. The researcher says that the movements of the spot exchange markets are unpredictable during a single trading day and hence it is often risky for the companies to rely completely on spot markets in order to sell their contracts (Payne & Vitale, 2003). In case the exchange rate specifies the number of domestic currencies needed for one unit of the foreign curries the situation is known as direct quote. However the method of specifying the exact price of a unit of domestic currency in terms of foreign currency is said to be indirect quote. The forward contract refers to the phenomenon when a firm agrees to pay a fixed amount of currency in exchange of a contract at some time in future (Michaelowa, et al., 2003). The contracts are helpful in case of the fluctuations in exchange rate. During inflation there is depreciation in the value of currencies in the home country and the export of goods turns out to be expensive. Hence the firms can use the forward contract to settle the payment in future when there is fall in prices of goods. There are some other types of contracts known as the futures contracts that are almost equivalent to the forward contracts. The futures contract has limited contract sizes, expiry dates as well as other features (Michaelowa, et al., 2003). The futures contract other unlike the forward contract has a liquid secondary market that enables the closure of the contract in case the contract timings do not match with the timings of the foreign exchange exposure (Michaelowa, et al., 2003). There are other strategies that can be used to hedge the foreign exchange exposure. For example the foreign currency options that provides the owner the right but not the obligation to buy or sell the contracts at some time in future. There are put as well as the call options. The call options deals with the right given to the buyers as well as the sellers of the options to purchase the contract at a specified time in future whereas the put options allows the provision to sell the option at a specified time (Payne & Vitale, 2003). The currency swaps are considered as a contract that is signed by two counter-parties who agree to exchange payment operations over a period of time. There are various types of swaps that are used in the foreign exchange market (Payne & Vitale, 2003). There can be equity swaps, commodity swaps as well as the credit swaps. Equity swaps deals with the process that one party pays return on stock index and other pays at benchmark rate of interest. In case of the commodity swap one party pays a fixed price for a commodity whereas the other party pays a fluctuating amount for a contract (Payne & Vitale, 2003). Further the credit swaps are of two type, currency swaps as well as interest rate swaps. The Forward, Futures, Swaps and Options are collectively considered under the derivative market. Performance of Qatar and GCC Countries The fluctuations in the exchange rates affect the export of crude oil and petroleum from Qatar to other countries and hence the companies need to hedge their foreign exchange exposure in order to save their companies from getting bankrupt (Bazaz & Senteney, 2001). There are fluctuations in the crude oil prices based on the availability of crude oil in the country and its demand in the international market. Excess demand for crude oil and low availability results in high prices of crude oil and it is expected that Qatar oil reserves would run dry in the next few years. The 2011 earthquake of Japan and the Tsunami disaster has increased the Qatar’s export of crude oil (Chor & Manova, 2012). Japan is considered as the most important exporter of Liquefied Natural Gas and its demand for crude oil increases Qatar’s export of Crude oil. Further the European Union has signed a free trade agreement with six members of the Gulf Cooperation Council that is Bahrain, Qatar, Oman, Kuwait, UAE and Saudi Arabia (Bazaz & Senteney, 2001). There are various contracts related to the trade agreement signed between the countries and the GCC members account for 4.2% of the trade in European Union which is the fifth largest in the world trade (Bazaz & Senteney, 2001). The exports of the European Union to the Gulf countries focus on the manufactured products such as power generation plants, aircraft and railway locomotives and mechanical appliances. Method of Currency Translation There are various methods of currency translation that is the single rate method and multiple rate method. The single rate method comprises of a single exchange rate, current rate for all the foreign currency assets as well as liabilities. Under this method all the assets and the liabilities are translated at current rate (Bazaz & Senteney, 2001). It is studied that all the revenue and expenses are translated by an approximate weighted average of current exchange rate for the period. Whereas the multiple rate methods involves either some combination of current and historical rates in order to translate the foreign currency balances. There are gains or losses to the translation process that takes place due to the exchange of currencies (Bazaz & Senteney, 2001). The translation gains and losses are then recorded in the financial statements of the companies (Bazaz & Senteney, 2001). Another method in the currency translation process is that of Current-Non Current method (Bazaz & Senteney, 2001). The method involves translation of the current assets and liabilities at current rates and translating non-current assets and liabilities at historical rates. In case of the monetary and non-monetary method the monetary assets are translated at current rates whereas the non-monetary assets are translated at historical rates. The depreciation and amortization charges and the cost of sales are measured at the historical rates. These methods are mostly used in the balance sheets of the companies that reflect their overall performance in the economy (Bazaz & Senteney, 2001). By evaluating these balance sheets the company can plan for its future growth prospect and the strategies that it can undertake to set up its reputation in the international markets. Impact of Fluctuating Exchange Rates on Trading Nations The recent introduction of Euro has facilitated the trade of the European nations within other countries (Campa & Goldberg, 2005). However the trade with US has facilitated the exchange of currencies in terms of dollars and this eliminates the possibility of having different monetary policy regimes. The use of foreign currency for the exchange of goods and services is most important in order to avoid the problem of lack of monetary policy credibility. Many of the economies during their crisis have adopted the effective monetary policy regimes. There are legal aspects associated with the introduction of the shared regional currency (Broda, 2004). When the trade takes place between Qatar and other GCC countries or between Qatar and other countries there are certain rights and responsibilities associated with the currency issuing country in case another country wishes to use its currency (Bazaz & Senteney, 2001). In case of trade between Qatar and European Union, the currency that is used to exchange the goods and services is Euro. Hence Qatar needed an access to the payment system of Euro in order to conduct the exchange of currencies of other countries in terms of Euro. It has been studied that Qatar’s revenue is mainly driven from the production of natural gas and petroleum. Qatar is a member of OPEC and is considered to be the third largest among the natural gas reserves in the world. The study reveals that the total reserves of Qatar comprises of 6% of the world’s total crude oil reserves which is expected to last for a long period of time (Tenreyro, 2007). Qatar earns the highest revenue from oil production and export of crude oil to other parts of the world. However the export of crude oil to other countries also involves exchange of currencies within the economies and hence the exporting country must sign an agreement with the other trading partner regarding the currency in which the payment is to be made. The countries that import crude oil and petroleum products from Qatar enter into foreign exchange contracts in case there is a fluctuation in the exchange rates of the trading partners. A rise in oil price reflects the possibility of inflation within the economy (Bazaz & Senteney, 2001). However the fluctuation in the price of oil is important to determine the actual amount of oil present in the oil exporting economy. Studies have indicated that apart from Kuwait the oil exporting countries peg mainly to dollar and also to Euro (Lane & Milesi-Ferretti, 2001). The oil exporting countries tend to increase the government spending by carrying out large government sponsored mega projects. This results in further high inflation within the economy and it becomes costly for the countries to import crude oil (Bazaz & Senteney, 2001). However the research says that the oil exporting countries have much to gain with the flexibility in the exchange rate but it would also be beneficial for the world economy as a whole. An oil exporting country is expected to save the oil reserves rather than export the entire oil produced. However the oil importing country should save the imported oil in order to cover the temporary rise in oil prices rather than reducing the consumption and investment in the economy. A permanent rise in oil prices due to the high inflation in the economy leads to a rise in consumption and investment in the oil exporting economies and there is an appreciation of the currencies in the economy whereas there is a fall in consumption levels in the oil importing countries and there is depreciation of the currency (Tille, 2008). Researcher says that the countries that follow a floating exchange rate system are expected to have an appreciation of exchange rate when there is availability of oil whereas a depreciation in exchange rate when there is low availability of oil (Tille, 2008). However in case of the fixed exchange rate regime the adjustment in the real exchange rate takes place through the changes in domestic prices in the economy that is a rise in oil price indicate temporary inflation whereas a fall in oil price implies temporary deflation. Conclusion The research has been carried out on the philosophy of international accounting that is needed when the countries participate in the trade practices. The study is mainly based on Qatar and the Gulf Cooperation council (GCC) countries and also the trade relations of Qatar with other countries. The international trade depends on the most important factor that is foreign exchange market. The payment for the goods imported by the countries has to be made in a certain exchange rate regime that is decided by the government. There are several other relationships that can be derived between Qatar and other countries on the basis of sources of finance, legal system, economic and political relationship and methods of currency translation. There are two types of sources of finance that is the internal as well as the external sources. The internal sources involves that the funding is done from the savings of the owner where as the external funding is done through government funds and loans from banks. Further the legal system involves various laws that are to be followed by the oil producing companies of Qatar while exporting oil to other countries. It also involves measure taken by the government of Qatar in case there is emergence of a lot of foreign investors in the country. Further tax is also imposed on the export and import of crude oil by government in order to control the excess demand for crude oil in the international markets. The method of currency translation involves various exchange rate regimes in the economy. There are floating as well as fixed exchange rate regimes. In case of the fixed exchange rate regime there is no appreciation or depreciation of the currencies in the economy due to the inflationary pressure. However in case of the floating exchange rate system there is appreciation as well as depreciation of currency values that in turn affects the export and import of goods and services. Due to this fluctuation in the exchange rates the countries adopt varies techniques to hedge the foreign exchange exposure. References Bazaz, M. S. & Senteney, D. L., (2001). Value relevance of unrealized foreign currency translation gains and losses. American Journal of Business, 16(2), 55-62. Broda, C., (2004). 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