Development of and student reactions to an international consolidation case problem Stanley H. Kratchman a , L. Murphy Smith b, ⁎ a Department of Accounting, Texas A&M University, 4353 TAMU, College Station, TX 77843-4353, United States b Department of Accounting, Murray State University, Murray, KY 42071-3314, United States abstract article info Keywords: International accounting Consolidation Foreign currency translation Use of case problems is a well established pedagogy for enhancing student learning. This paper describes de- velopment of an international consolidation case problem and reports how students responded to its assign- ment. The case problem could be effectively used in accounting classes such as international accounting and advanced accounting. Further, the case could be used to introduce professional accountants, who may not have previously faced this issue, with a basic overview of the international consolidation process. The issue of consolidation is typically covered in advanced accounting courses, and international financial reporting is covered in international accounting or intermediate accounting courses. The international consolidation case described in this paper makes a unique contribution by incorporating both consolidation accounting and international financial reporting (specifically, foreign currency translated financial statements) into one comprehensive case problem. When a subsidiary corporation is located in a different country from the parent corporation, the difficulty of consolidating the financial statements becomes more complex than for a strictly domestic company, as a result of different GAAPs and different currencies. The case problem has been used in two southwestern US universities. Student feedback indicates that the problem was well received and benefited student learning. © 2011 Published by Elsevier Ltd. 1. Introduction This paper describes a case problem that was designed to help students develop technical competence regarding consolidation accounting in a multinational setting. In addition, the paper reports on how the case problem was received by students to whom it was assigned at two universities. When a subsidiary corporation is located in different country from the parent corporation, the challenge of consolidating the financial statements becomes more complex than for a strictly domestic company. The prevalence of multinational cor- porations, along with increasing globalization of business, requires that modern-day accountants have at least a basic understanding of international consolidation accounting. The goal of the case problem described in this paper is to provide that basic understanding. The case was designed for use in an international accounting class or any class that deals with international financial reporting issues. The case could also be used to introduce professional accountants, who may not have previously faced this issue, with a basic overview of the international consolidation process. The issue of consolidation is typically covered in advanced accounting courses, and international financial reporting is covered in international accounting or intermediate accounting courses. The international consolidation case described in this paper makes a unique contribution by incorporating both consolidation accounting and international financial reporting (specifically, foreign currency translated financial statements) into one comprehensive case prob- lem. Thus, the case problem offers a practical example of the consol- idation process in the setting of a multinational corporation facing the parent-foreign subsidiary consolidation process. 2. Background and prior research Shown in Exhibit 1 is a model of information flows mediated by the various border crossings inherent in multinational operations. Additional complexity associated with multinational operations results from subsidiary operations in business settings that are markedly different from the parent, thereby resulting in a complex operating, reporting, and information environment. Information asymmetry between management and external stakeholders is increased for firms functioning in a complex environment. Firms involved in international business operate in a more complex envi- ronment than strictly domestic firms (Runyan & Smith, 2007). Business firms that operate in a multinational setting experience a number of challenges as a result of their global operations. Challenges occur due to different cultures, language differences, different legal sys- tems, political differences, different operating environments, and differ- ent accounting and financial reporting standards. An extensive amount of prior research considers international aspects of accounting and busi- ness. Some representative recent and older studies include Sagafi-nejad et al. (2010), Smith, Sagafi-Nejad, and Kun (2008), Runyan and Smith Advances in Accounting, incorporating Advances in International Accounting 27 (2011) 325–330 ⁎ Corresponding author. Tel.: + 1 979 845 3108; fax: + 1 979 845 0028. E-mail addresses: s-kratchman@tamu.edu (S.H. Kratchman), Lmsmith@tamu.edu (L.M. Smith). 0882-6110/$ – see front matter © 2011 Published by Elsevier Ltd. doi:10.1016/j.adiac.2011.09.001 Contents lists available at SciVerse ScienceDirect Advances in Accounting, incorporating Advances in International Accounting journal homepage: www.elsevier.com/locate/adiac