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Factors around Choosing Accounting Methods in Emerging Markets

Although you may think that companies doing business in emerging markets have little or no choice in choosing their accounting system, they do have some say that affects how they present the numbers and how much information they give to investors. Several issues come into play when considering the best accounting method to use for a business operating in emerging markets:

  • Local laws: Most companies have to start with the requirements of the market where they do business. They may have to meet minimum reporting requirements to sell their securities to investors or to remain licensed to operate. Even where local laws set the reporting requirements, companies have some wiggle room to make choices. The more you know about the company and the applicable accounting law, the better you can understand why it keeps books the way it does.

  • The stock market: Companies that issue stock can usually choose where to issue it. After stock is issued, the shares can be traded on more than one exchange. Many companies in emerging markets choose to issue and trade shares in the United States, England, and Germany because they can reach more investors that way.

    Different governments and exchanges have different reporting requirements that may be tougher than the rules a company has to follow at home. For example, the U.S. Securities and Exchange Commission (SEC) requires foreign companies to file a special form, and the New York Stock Exchange (NYSE) not only requires non-U.S. companies to meet minimum size requirements but also sets reporting requirements.

    These requirements aren’t unusual; many other governments and exchanges in countries where securities trading is established have similar rules for listed companies. Many companies in emerging markets are willing to meet the higher reporting standards in order to meet the demands of the people with the money.

  • Perception: Give people a choice between something that makes them look better and something that makes them look worse, and they’ll go straight for the opportunity to look better. That doesn’t mean that they’re being deceitful — just that they’re human. And so it is with the human beings that run companies. They want to look good, and if one accounting method lets their company look better than another does, that’s what they’ll choose. Even within an accounting system, companies make choices about revenue recognition or depreciation based in part on how those choices make the numbers look.

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