By the end of this section, you will be able to:
- Explain why corporations expand beyond domestic borders.
- Determine how different strategic decisions may influence corporate performance.
Important Differences among Domestic, International, and Global Organizations
If a company becomes global or multinational in scope, fundamental analysis of the organization by the investment community can become more complex. In order to better understand a company, it is important to determine what laws affect the company’s governance process and which set of accounting rules is used to fashion its financial reports.
Domestic companies operate completely or for the most part within the borders of the United States. While such organizations may import raw materials and supplies from other nations or end up exporting their finished products to other countries around the world, in the end, these international activities represent only a very small portion of their overall business activities.
Domestic companies are typically governed by US accounting and securities laws that have been established by the SEC. Further, financial reporting for these domestic organizations is to be completed using Generally Accepted Accounting Principles (GAAP).
International firms, while based in the United States, will typically maintain significant levels of international investment and conduct operations that may be quite diverse, both geographically and culturally. For such international firms, parent company accounting will usually adhere to GAAP standards. Conversely, non-US subsidiaries of such international firms may be regulated by laws dictated by their host countries. These will often differ significantly from those in the United States.
In recent years, accounting regulations in countries outside the United States have come under the jurisdiction of International Financial Reporting Standards (IFRS). It should be noted that guidelines and regulations under IFRS and those under GAAP can differ significantly. As a result of these regulatory differences, any specific divergences in accounting or governance practices between foreign subsidiaries and a US parent company should be clearly stated and disclosed in the parent company’s financial reports.
Global firms have substantial operations and investments in different countries (global markets), and they may have no single center or basis of operational activity. In such cases, regulations for corporate governance are usually determined by the laws of the country in which the parent company has been established. While there are some global firms that report their financial statements according to GAAP standards, usually to satisfy the informational needs of US investors, most global parent companies’ financials will adhere to IFRS reporting standards.
Difference in Financial Reporting: GAAP versus IFRS
Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) were designed with similar objectives in mind: to provide a common and structured set of guidelines to assist in the preparation of accurate and unbiased financial reporting for public corporations.
Yet despite these commonalities in purpose, there are important differences between them. Among these are differences in inventory accounting and reporting, guidelines for consolidation of subsidiaries, and the accounting and reporting of minority interests.
SEC Reporting and EDGAR
EDGAR (Electronic Data Gathering, Analysis, and Retrieval system) is the primary system for collecting and indexing documents submitted by companies to the SEC under the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the Investment Company Act of 1940.
- 6“About EDGAR.” US Securities and Exchange Commission. Modified March 23, 2021. https://www.sec.gov/edgar/about