Chapter 1 introduction to international accounting

Learning Objectives Discuss the nature and scope of international accounting  Describe accounting issues confronted by companies involved in international trade import and export tra

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Chapter 1: Introduction

to International Accounting

Learning Objectives

 Discuss the nature and scope of international

accounting

 Describe accounting issues confronted by

companies involved in international trade (import and export transactions)

 Explain the reasons for, and the accounting issues associated with, foreign direct investment

 Describe the practice of cross-listing on foreign

stock exchanges

 Explain the notion of global accounting standards

 Examine the importance of international trade,

foreign direct investment, and multinational

corporations in the global economy

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International Accounting

 Includes study of various functional areas of

accounting

multinational corporations

 Can be defined at three different levels

 Standards, guidelines, and rules issued by supranational organizations

 Followed by company in international business activities and foreign investments

 Study of the standards, guidelines, and rules of accounting, auditing, and taxation existing within each country and

comparison across countries

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Accounting Issues Related to

International Business—Sale to

Foreign Customer

 First encounter with international business

occurs as sales to foreign customers

 Credit sales are made to foreign customers

who will pay in their own currency

 Gives rise to foreign exchange risk

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Accounting Issues Related to

International Business—Sale to

Foreign Customer

 Suppose that on February 1, 2014, Joe Inc., a U.S company, makes a sale and ships goods

to Jose SA, a Mexican customer, for $100,000 (U.S.)

 However, it is agreed that Jose will pay in

pesos on March 2, 2014 The exchange rate

as of February 1, 2014 is U.S.$1 = 10 pesos How many pesos does Jose agree to pay?

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Accounting Issues Related to

International Business—Sale to

Foreign Customer

 Even though Jose agrees to pay 1,000,000

pesos ($100,000 x 10 pesos/U.S $), Joe Inc

records the sale in U.S dollars on February 1,

2014, as follows:

Dr Accounts Receivable

Cr Sales Revenue

100,00

0 100,00

0

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Accounting Issues Related to International Business—Sale to

Foreign Customer

 Suppose that on March 2, 2014, the exchange rate for pesos is U.S.$1=11 pesos Joe Inc will receive 1,000,000 pesos, which are now

worth $90,909

Dr Cash

Cr Accounts Receivable

90,909

100,00

0

Dr Loss on Foreign Exchange 9,091

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Hedges of Foreign Exchange Risk

 Techniques to manage exposure

 Foreign currency option

 Right to sell foreign currency at a predetermined exchange rate and time

 Forward contract

 Obligation to exchange foreign currency at a future date

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Foreign Direct Investment

 Ownership and control of foreign assets

 Two ways

 Acquisition

 Investment in existing operations in foreign

countries

 Greenfield investment

 New operation in foreign countries

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Reasons for Foreign Direct Investment

 Increase sales and profits

 Enter rapidly growing or emerging markets

 Reduce costs

 Gain a foothold in economic blocs

 Protect domestic markets

 Protect foreign markets

 Acquire technological and managerial know-how

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Financial Reporting for Foreign Operations

 Steps in reporting for Foreign Operations

 Conversion from local to U.S GAAP

 Records prepared using local GAAP

 Translate from local currency to U.S dollars

 Records are prepared using local currency

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International Income Taxation

 Double taxation

 Foreign income taxes

 The company’s profits taxed at foreign rates

 U.S income taxes

 The U.S will tax the company’s foreign-based

income

 Tax treaties provide relief from double

taxation

 Objectives

 Legally minimize taxes in foreign countries and home country

 Maximize after-tax cash flows

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International Transfer Pricing

 Issue for multinational companies making

intercompany sales

 Companies use of discretionary transfer

pricing

 Price negotiation between buyer and seller not feasible due to tax rate differences

 Companies shift profits from countries with

high-tax rates to countries with low tax-rates

 Countries regulate international transfer

pricing to ensure companies pay their fair

share of local taxes

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Performance Evaluation of Foreign Operations

 Evaluation is through periodic reports on

individual unit’s performance

 Issues in evaluation

 Translation from one currency to another

 Inflated price paid in transfer pricing

 Issues unique to foreign operations

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International Auditing

 Internal auditing is an important component

of a management’s control process

 Issues faced by internal and external auditors

 Differences in language and culture

 Differences accounting standards and auditing standards

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Cross-Listing on Foreign Stock Exchanges

 Cross-listing: stock listed and traded on

several foreign stock exchanges

 Issues

 Listing regulations differ for foreign companies

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Global Accounting Standards

 Requires countries to adopt a common set of accounting rules

 Advantages

 Avoids GAAP conversion

 Easier to evaluate foreign investment

opportunities

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The Global Economy

 International trade constitutes a significant

portion of the world economy

 Largest exporters are China, the United States

and Germany

 Largest importers are United States, Germany,

and China

 Foreign direct investment to retain advantage

over competition

 Multinational companies

 International capital markets:

 Help companies find capital at a reasonable cost

 Help in having an “acquisition currency” for

acquiring firms through stock swaps

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End of Chapter 1

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