International accounting 6e frederick choi and gary meek

SIXTH EDITION

INTERNATIONAL
ACCOUNTING
Frederick D. S. Choi
New York University

Gary K. Meek
Oklahoma State University

Upper Saddle River, New Jersey 07458


Library of Congress Cataloging-in-Publication Data
Choi, Frederick D. S., 1942International accounting / Frederick D. S. Choi, Gary K. Meek.— 6th ed.
p. cm.
Includes bibliographical references and index.
ISBN-13: 978-0-13-158814-1 (alk. paper)
ISBN-10: 0-13-158814-1 (alk. paper)
1. International business enterprises—Accounting. I. Meek, Gary K., 1949II. Title.
HF5686.I56C53 2008
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2007042113
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Brief Contents
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12

Introduction
1
Development and Classification
35
Comparative Accounting: Europe
55

Comparative Accounting: The Americas and Asia
Reporting and Disclosure
151
Foreign Currency Translation
197
Financial Reporting and Changing Prices
243
Global Accounting and Auditing Standards
282
International Financial Statement Analysis
314
Managerial Planning and Control
373
Financial Risk Management
422
International Taxation and Transfer Pricing
466

115

v


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Contents
Preface

xvii

CHAPTER 1

Introduction

Historical Perspective

1

2

Contemporary Perspective

3

Growth and Spread of Multinational Operations
Financial Innovation

10

Global Competition

11

Cross-Border Mergers and Acquisitions

12

Internationalization of Capital Markets

12

Americas
15
Western Europe
15
Asia
16
Cross-Border Equity Listing and Issuance

Where Are We?

4

16

17

Learning Objectives

19

Appendix 1-1 Changes in Financial Sector Policy in 34 Nations, 1973–1996
Appendix 1-2 Stock Exchange Web Sites

23

27

Appendix 1-3 Financial Statements and Selected Notes from the Annual

Report of INFOSYS 28
Selected References
Discussion Questions
Exercises

29
29

30

Case 1-1 E-Centives, Inc.—Raising Capital In Switzerland
Case 1-2 Global Benchmarks: Infosys Technologies Limited

CHAPTER 2

Development and Classification

Development

36

Classification

42

32
33

35

vii


viii

Contents
Four Approaches to Accounting Development
42
Legal Systems: Common Law vs. Code Law Accounting
43
Practice Systems: Fair Presentation vs. Legal Compliance Accounting

Selected References

46

Discussion Questions
Exercises

47

48

Case 2-1 Are Classifications of Accounting Outmoded?
Case 2-2 Volkswagen Group

CHAPTER 3

51

52

Comparative Accounting: Europe

55

Some Observations about Accounting Standards and Practice
IFRS in the European Union
France
60
Germany
65
Czech Republic
The Netherlands
United Kingdom

60

70
74
78

Selected References

85

Discussion Questions

85

86

Case 3-1 Old Habits Die Hard

88

Case 3-2A What Difference Does It Really Make?
Case 3-2B Do the Differences Really Matter?

CHAPTER 4

89

106

Comparative Accounting: The Americas and Asia

Five National Financial Accounting Systems
United States
116
Mexico
122
Japan
126
China
131
India
136

Selected References

142

Discussion Questions
Exercises

56

57

Five National Financial Accounting Systems

Exercises

44

142

143

Case 4-1 Standing on Principles
Case 4-2 Casino Capital

148

147

116

115

Contents

CHAPTER 5

Reporting and Disclosure

Development of Disclosure

151

151

Voluntary Disclosure
152
Regulatory Disclosure Requirements
153
The U.S. SEC Financial Reporting Debate
154

Reporting And Disclosure Practices

156

Disclosures of Forward-Looking Information
156
Segment Disclosures
157
Social Responsibility Reporting

158
Special Disclosures for Nondomestic Financial Statement Users and Accounting
Principles Used
177
Corporate Governance Disclosures
179
Internet Business Reporting and Disclosure
187

Annual Report Disclosures in Emerging-Market Countries
Implications for Financial Statment Users and Managers
Selected References

192

192

Case 5-1 Novartis

195

Case 5-2 Seeing Is Believing

CHAPTER 6

190

191

Discussion Questions

Exercises

189

195

Foreign Currency Translation

Results of Operations
Reasons for Translation

198
200

Background and Terminology
The Problem

197

201

204

Financial Statement Effects of Alternative Translation Rates
Foreign Currency Transactions
206
Single-Transaction Perspective
208
Two-Transaction Perspective
208

Foreign Currency Translation

209

Multiple-Rate Methods
211
Financial Statement Effects
213
Which Is Best?
215
Appropriate Current Rate
217
Translation Gains and Losses
217
Where Are We?
219

204

ix


x

Contents

Translation Accounting Development

219

Pre-1965
220
1965–1975
220
1975–1981
220
1981–Present
220

Features of Standard No. 52/International Accounting Standard 21

221

Translation When Local Currency Is the Functional Currency
221
Translation When the Parent Currency Is the Functional Currency
222
Translation When Foreign Currency Is the Functional Currency
222

Measurement Issues

224

Reporting Perspective
224
What Happened to Historical Cost?
Concept of Income
225

Managed Earnings
225

225

Foreign Currency Translation and Inflation
Foreign Currency Translation Elsewhere

226
227

Appendix 6-1 Translation and Remeasurement Under FAS No. 52
Selected References

232

Discussion Questions
Exercises

233

234

Case 6-1 Regents Corporation

238

Case 6-2 Managing Offshore Investments: Whose Currency?

CHAPTER 7

228

Financial Reporting and Changing Prices

Changing Prices Defined

239

243

246

Why Are Financial Statements Potentially Misleading During Periods of
Changing Prices?
248
Types of Inflation Adjustments
General Price-Level Adjustments
Price Indexes

249
250

250

Current-Cost Adjustments

254

General Price-Level Adjusted Current Costs

255

National Perspectives On Inflation Accounting
United States
258
United Kingdom
259
Brazil
260

International Accounting Standards Board
Inflation Issues

265

Inflation Gains and Losses
Holding Gains and Losses

265
266

264

257


xi

Contents

Foreign Inflation
266
Avoiding the Double-Dip

267

Appendix 7-1 Accounting for Foreign Inflation: A Case Analysis
Selected References
Discussion Questions
Exercises

273
274

275

Case 7-1 Kashmir Enterprises

279

Case 7-2 Icelandic Enterprises, Inc.

CHAPTER 8

270

280

Global Accounting and Auditing Standards

A Survey of International Convergence

282

283

Advantages of International Convergence
283
Criticisms of International Standards
284
Reconciliation and Mutual Recognition
285
Evaluation
286

Some Significant Events in the History of International Accounting Standard
Setting
286
Overview of Major International Organizations Promoting Accounting
Convergence
288
International Accounting Standards Board

291

IASC’s Core Standards and the IOSCO Agreement
292
The New IASB Structure
293
Recognition and Support for the IASB

295
U.S. Securities and Exchange Commission Response to IFRS

European Union (EU)

295

296

Fourth, Seventh, and Eighth Directives
297
Have EU Harmonization Efforts Been Successful?
297
The EU’s New Approach and the Integration of European Financial Markets

International Organization of Securities Commissions (IOSCO)
International Federation of Accountants (IFAC)

299

300

303

United Nations Intergovernmental Working Group of Experts on International
Standards of Accounting and Reporting (ISAR)
305
Organization For Economic Cooperation and Development (OECD)
Conclusion

306

Selected References
Discussion Questions
Exercises

307
308

308

Case 8-1 PetroChina Company Limited

312

Case 8-2 Whither The Withering Standard Setters?

312

306


xii

Contents

CHAPTER 9

International Financial Statement Analysis

Introduction

314

314

Challenges And Opportunities In Cross-Border Analysis
Business Analysis Framework

316

International Business Strategy Analysis
Information Availability
316
Recommendations for Analysis

Accounting Analysis

314

316

317

318

Suggestions for the Analyst

320

International Financial Analysis

321

Ratio Analysis
321
Cash Flow Analysis
324
Coping Mechanisms
324

International Prospective Analysis
Further Issues

325

328

Information Access
328
Timeliness of Information
331
Foreign Currency Considerations
331
Differences in Statement Format
335
Language and Terminology Barriers
336

Financial Statement Analysis and Auditing

The Attest Function 336
The Audit Report
337
Auditing and Credibility
339
Coping Mechanisms
342
Internal Auditing
343
Professional Organization 347
Evolving Role of Internal Auditing

336

347

Appendix 9-1 Illustration of Restatement of Japanese GAAP Financial
Statements to a U.S. GAAP Basis
349
Appendix 9-2 International Ratio Analysis
Selected References

355

Discussion Questions
Exercises

353

356

357

Case 9-1 Sandvik

362

Case 9-2 Continental A.G.

365

CHAPTER 10 Managerial Planning and Control
Business Modeling
Planning Tools

374

374

373


Contents

Capital Budgeting

xiii

376

Financial Return Perspectives

377

Measuring Expected Returns

378

Multinational Cost of Capital

381

Management Information Systems

383

Systems Issues
384
Information Issues
385

Management Information and Hyperinflation
Sales Revenue

386

387

Issues In Financial Control

390

Domestic Versus Multinational Control System

Strategic Costing

391

399

Performance Evaluation of Foreign Operations

401

Consistency
402
Performance Criteria
404
Measurement Issues and Changing Prices in Evaluation

Performance Evaluation Practices: ICI
Foreign Currency Effects

Performance Standards
Value Reporting

408

409

411

Selected References
Discussion Questions
Exercises

406

406

412
413

414

Case 10-1 Foreign Investment Analysis: A Tangled Affair

418

Case 10-2 Assessing Foreign Subsidiary Performance In A World Of Floating
Exchange Rates
420

CHAPTER 11 Financial Risk Management
Essentials

422

425

Why Manange Financial Risks?
Role of Accounting

425

426

Identifying Market Risks
426
Quantify Tradeoffs
428
Risk Management in a World of Floating Exchange Rates
Accounting for Hedge Products
441

428

Hedge of a Recognized Asset or Liability or an Unrecognized Firm
Commitment
448
Hedge of a Net Investment in a Foreign Operation
Speculating in Foreign Currency

451

450


xiv

Contents

Disclosure

452

Financial Control

456

Appropriate Benchmarks
Reporting Systems

Selected References
Discussion Questions
Exercises

457

457

458
459

459

Case 11-1 Exposure Identification

462

Case 11-2 Value At Risk: What Are Our Options?

462

CHAPTER 12 International Taxation and Transfer Pricing
Initial Concepts

466

466

Diversity of National Tax Systems

467

Types of Taxes
467
Tax Burdens
468
Tax Administration Systems
471
Foreign Tax Incentives
472
Harmful Tax Competition
473
International Harmonization
473

Taxation of Foreign-Source Income and Double Taxation
Foreign Tax Credit 474

Limits to Tax Credits
476
Tax Treaties
477
Foreign Exchange Considerations

Tax-Planning Dimensions

473

477

478

Organizational Considerations
478
Controlled Foreign Corporations and Subpart F Income
Offshore Holding Companies
479
Financing Decisions
480
Pooling of Tax Credits
480
Cost Accounting Allocations
481
Location and Transfer Pricing
481
Integrating International Tax Planning
482

International Transfer Pricing: Complicating Variables
Tax Considerations
483
Tariff Considerations
485
Competitive Factors
485
Environmental Risks
486
Performance Evaluation Considerations
Accounting Contributions
487

487

479

482


Contents

Transfer Pricing Methodology

488

Market vs. Cost vs. . . . ?
488
Arm’s-Length Principle
488

Comparable Uncontrolled Price Method
489
Comparable Uncontrolled Transaction Method
Resale Price Method
489
Cost-Plus Pricing Method 490
Comparable Profits Method
492
Profit-Split Methods
492
Other Pricing Methods
493
Advance Pricing Agreements
493

Transfer Pricing Practices
The Future

495

496

Selected References
Discussion Questions
Exercises

489

497
497

498

Case 12-1 The Shirts Off Their Backs

501

Case 12-2 Muscle Max: Your Very Own Personal Trainer

Index

505

503

xv


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Preface
This book is written with the express purpose of introducing students to the international dimensions of accounting, financial reporting, and financial control. The world
in which they will pursue their professional careers is a world dominated by global
business and cross-border investing. As these activities require decisions premised on
financial data, a knowledge of international accounting is crucial for achieving proper
understanding in external and internal financial communications. While ideal for
upper division undergraduate students and masters students, we are pleased that the
contents of this award-winning effort have also benefited practicing accountants,
financial executives, investment managers, university educators and professional

administrators around the world.
This revision of a work that has spanned three decades features a number of
enhancements. These include:
• Expanded coverage of corporate governance and related legislation. See chapters
4, 5, 8, and 9.
• Examination of international auditing, both external and internal. See chapters 8
and 9.
• Reorganized and updated discussion of comparative accounting emphasizing
developments in Europe, the Americas, and Asia in Chapters 3 and 4.
• Capital market, managerial, taxation, and institutional updates reflective of current trends and issues throughout most chapters.
• Discussion of international accounting convergence and the major players in this
important effort. See chapters 3, 5 and 8.
• Revised discussion of reporting and disclosure practices spanning both developed
and emerging market countries. See Chapters 3, 4, 5 and 7.
• Expanded listings of relevant international Web site addresses and data sources.
• New and updated discussion questions, exercises, and cases.
We have benefited from the professional literature and from many of our students
and faculty colleagues whose thoughtful comments have triggered new ideas for us to
consider. In addition, we wish to acknowledge the following individuals for reviewing,
providing data, or offering constructive suggestions for improving our work:
Nils Crasselt, Ruhr-Universität Bochum
Timothy A. Farmer, University of Missouri – St. Louis
Katerina Hellström, Stockholm School of Economics
Elmen Li, Hong Kong Polytechnic University
Thorston Sellhorn, Ruhr-Universität Bochum

xvii


xviii

Preface

Hervé Stolowy, HEC School of Management
Ann Tarca, University of Western Australia
Many individuals furnished able assistance in producing the manuscript. We especially thank Shevon Estwick and Cyril Martinez at New York University, and Cindy
Conway at Oklahoma State University for their assistance with Web searches and
exhibits and Wendy Craven, Steve Sartori, and Kerri Tomasso at Prentice–Hall for
their encouragement and editorial support.
However hard one tries to avoid them, errors are bound to occur in a work of this
type. As authors, we accept full responsibility for all errors and omissions in the manuscript. As always we welcome constructive comments from all who use this book as
students are the ultimate beneficiaries of your thoughtfulness.
F. D. S. Choi
New York, N.Y.
G. K. Meek
Stillwater, OK


CHAPTER 1

Introduction

A

ccounting plays a vital role in society. As a branch of economics, it provides
information about a firm and its transactions to facilitate resource allocation
decisions by users of that information. If the information reported is reliable
and useful, scarce resources are allocated in an optimal fashion, and conversely,
resource allocations are less than optimal when information is less reliable and useful.
International accounting, the subject of this text, is no different in its intended

role. What makes its study distinctive is that the entity being reported on is either a
multinational company (MNC) with operations and transactions that cross national
boundaries, or an entity with reporting obligations to users who are located in a country other than that of the reporting entity.
Recall that accounting entails several broad processes: measurement, disclosure,
and auditing. Measurement is the process of identifying, categorizing, and quantifying
economic activities or transactions. These measurements provide insights into the
profitability of a firm’s operations and the strength of its financial position.
Disclosure is the process by which accounting measurements are communicated to
their intended users. This area focuses on such issues as what is to be reported, when,
by what means, and to whom. Auditing is the process by which specialized accounting
professionals (auditors) attest to the reliability of the measurement and communication process. Whereas internal auditors are company employees who answer to management, external auditors are nonemployees who are responsible for attesting that
the company’s financial statements are prepared in accordance with generally
accepted standards.
An understanding of the international dimensions of the accounting processes
that were just described is important to those engaged in importing or exporting activities, as well as those seeking to manage a business or to obtain or supply financing
across national borders. Even a company operating solely within the confines of a single country is no longer insulated from the international aspects of accounting,
because reliance on international vendors to contain production costs and remain
globally competitive is a common feature of present-day business. Accounting
amounts may vary significantly depending on the principles that govern them.
Differences in culture, business practices, political and regulatory structures, legal systems, currency values, local inflation rates, business risks, and tax codes all affect how
the MNC conducts its operations and financial reporting around the world. Financial
statements and other disclosures are impossible to understand without an awareness
of the underlying accounting principles and business culture.
The importance of studying international accounting has grown over the years.
We begin with a brief history of the subject.

1


2

CHAPTER 1

Introduction

HISTORICAL PERSPECTIVE
The history of accounting is an international history. The following historical summary
demonstrates that accounting has been remarkably successful in its ability to be transplanted from one national setting to another while allowing for continued development
in theory and practice worldwide.
To begin, double-entry bookkeeping, generally thought of as the genesis of
accounting as we know it today, emanated from the Italian city-states of the 14th
and 15th centuries. Its development was spurred by the growth of international commerce in northern Italy during the late Middle Ages and the desire of government
to find ways to tax commercial transactions. “Bookkeeping in the Italian fashion”
then migrated to Germany to assist the merchants of the Fugger era and the
Hanseatic League. At about the same time, business philosophers in the Netherlands
sharpened ways of calculating periodic income, and government officials in France
found it advantageous to apply the whole system to governmental planning and
accountability.
In due course, double-entry accounting ideas reached the British Isles. The development of the British Empire created unprecedented needs for British commercial
interests to manage and control enterprises in the colonies, and for the records of their
colonial enterprises to be reviewed and verified. These needs led to the emergence of
accounting societies in the 1850s and an organized public accounting profession in
Scotland and England in the 1870s. British accounting practices spread not only to
North America but throughout the British Commonwealth as it then existed.
Parallel developments occurred elsewhere. The Dutch accounting model was
exported to Indonesia, among other places. The French accounting system found a
home in Polynesia and French-administered territories in Africa, while the reporting framework of the Germans proved influential in Japan, Sweden, and czarist
Russia.1
As the economic might of the United States grew during the first half of the
20th century, its sophistication in matters of accounting grew in tandem. Business

schools assisted in this development by conceptualizing the subject matter and eventually having it recognized as an academic discipline in its own right on college and
university campuses. After World War II, U.S. accounting influence made itself felt
throughout the Western world, particularly in Germany and Japan. To a lesser extent,
similar factors are directly observable in countries like Brazil, Israel, Mexico, the
Philippines, Sweden, and Taiwan.
The paradox of the international heritage of accounting is that in many countries,
accounting remains a nationalistic affair, with national standards and practices deeply
anchored in national laws and professional regulations. (Examples of comparative
accounting practices are provided in Chapters 3 and 4.) There is little understanding
of parallel requirements in other countries. Nonetheless, accounting serves people and
organizations whose decisions are increasingly international in scope.

1For

a revisionist account of this summary, see Sy Aida and Tony Tinker, “Bury Pacioli in Africa: A
Bookkeepers Reification of Accountancy,” Abacus, Vol. 42, March 2006, pp. 105–127.


CHAPTER 1

Introduction

3

Resolving the historical paradox of accounting has long been a concern of both
users and preparers of accounting information. In recent years, institutional efforts to
narrow differences in measurement, disclosure, and auditing processes around the
world have intensified. A description of this effort and the major players with an
important stake in attaining convergence of global accounting systems is the focus of
Chapter 8.

CONTEMPORARY PERSPECTIVE
While the effort to reduce international accounting diversity is important in its own
right, there are today a number additional factors that are contributing to the growing
importance of studying international accounting. These factors stem from significant
and continuing reductions in national trade barriers and capital controls together with
advances in information technology.
National controls on capital flows, foreign exchange, foreign direct investment,
and related transactions have been dramatically liberalized in recent years, reducing
the barriers to international business. Appendix 1-1 presents selected information on
changes in financial sector policy in a sample of developed and developing countries
during the last three decades, and illustrates efforts by national governments to open
their economies to private enterprise and international investors and business. It
shows that, with a few exceptions, there has been a strong trend worldwide during this
period to privatize government-owned financial enterprises (especially banks) and to
reduce or eliminate foreign exchange controls and limits on cross-border investment.
As accounting is the language of business, cross-border economic interactions mean
that accounting reports prepared in one country must increasingly be used and understood by users in another.2
Advances in information technology are also causing a radical change in the
economics of production and distribution. Vertically integrated production is no
longer an efficient mode of operation. Real-time global information linkages mean
that production, including accounting services,3 is increasingly being outsourced to
whatever firm of whatever size wherever in the world can best do the job, or portions of the job. The adversarial, arm’s-length relationships that have characterized
companies’ relations with their suppliers, middle persons, and customers are being
replaced by cooperative global linkages with suppliers, suppliers’ suppliers, middle
persons, customers, and customers’ customers.
Exhibit 1-1 provides an illustration of the outsourcing phenomenon.4 In producing the ProLiant ML150, a small box that helps companies manage customer databases and run e-mail systems, among other things, Hewlett-Packard (H-P) turned to
the usual sources of low-cost labor: China and India. However, it decided to also

2For

a recent study on the association between economic interactions and financial reporting practices, see
Tarun Khanna, Krishna G. Palepu, and Suraj Srinivasan, “Disclosure Practices of Foreign Companies
Interacting with U.S. Markets, Journal of Accounting Research 42, no. 2 (May 2004): 475–508.
3For example, see Gary S. Shamis, M. Cathryn Green, Susan M. Sorensen, and Donald L. Kyle,
“Outsourcing, Offshoring, Nearshoring: What to Do?” Journal of Accountancy (June 2005), pp. 1–7.
4Rebecca Buckman, “H-P Outsourcing: Beyond China,” Wall Street Journal, February 23, 2004, p. A14.


4

CHAPTER 1

Introduction

EXHIBIT 1-1 Outsourcing Process for Hewlett-Packard’s ProLiant ML150
India
5
China
5
Australia
5

Taiwan
4

Singapore
5 3 1

Houston

2

make some ML150s in higher-cost locations such as Singapore and Australia, which
were closer to targeted customers. Initial design for the ML150 was done in
Singapore, approved in Houston, and then handed off to an outside contractor in
Taiwan. Although China possesses the lowest wage rates, it is but one part of a
highly specialized manufacturing system. Considerations ranging from logistics to
tariff policies reportedly kept H-P from putting all of its production lines in China.
It would take too long for machines manufactured in China to reach customers in
other Asian markets. Moreover, shipping goods to India triggered steep tariffs, so it
made sense to produce some ML150s in India with imported parts for the local market. All of the links in this outsourcing example are associated with accounting
issues discussed in the following pages of this chapter.
Spurred by the twin developments we have just described, there are several
factors that are contributing to the growing importance of the subject matter of this
text. We describe each in turn.

GROWTH AND SPREAD OF MULTINATIONAL OPERATIONS
International business has traditionally been associated with foreign trade. This
activity, rooted in antiquity, continues unabated. While trade in services has traditionally palled in comparison with trade in merchandise, the former is gaining in significance and growing at a faster rate than the latter. Current trends in exports and
imports of both goods and services by region and selected economy are depicted in
Exhibit 1-2.
What is not shown in Exhibit 1-2 is the composition of each region’s exports and
imports. To obtain a better picture of the pattern of global trade at the micro level,
one need simply examine the foreign-operations disclosures of any major MNC.
Exhibit 1-3 shows the geographic distribution of sales of Heineken, one of the
world’s leading international brewers. As can be seen, the company’s sales literally
blanket every continent in the world. Unisys, the U.S.-based information technology
services company, provides its expertise to clients in over 100 countries, while
Sweden’s Volvo Group sells both automotive products and financial services in some
185 countries. An aggregation of such disclosures for all MNCs in all countries would

confirm that trade today is neither bilateral nor regional, but truly global.


CHAPTER 1

5

Introduction

EXHIBIT 1-2 World Trade by Region
Total Merchandise
Trade

Region
Africa
Africa
Asia
Asia
Europe
Europe
Middle East
Middle East
North America
North America
South/
Central America
South/
Central America
World
World

Unit: U.S. dollar at current prices (millions)

Activity
Exports
Imports
Exports
Imports
Exports
Imports
Exports
Imports
Exports
Imports

Partner
World
World
World
World
World
World
World
World
World
World

1985
83,700
75,600

416,400
386,600
846,245
862,075
102,200
87,800
336,560
452,660

1990
106,000
99,600
792,400
761,500
1,684,940
1,750,925
138,400
101,300
562,035
684,460

1995
112,000
126,700
1,446,800
1,403,300
2,335,635
2,334,760
151,000
132,500

856,550
1,015,760

2000
147,800
129,400
1,836,200
1,677,100
2,633,930
2,774,755
268,000
167,400
1,224,975
1,687,580

2005
297,700
249,300
3,050,900
2,871,000
4,371,915
4,542,675
538,000
322,100
1,477,530
2,284,735

Exports

World

81,800

106,000

148,900

195,800

354,900

Imports
Exports
Imports

World
World
World

65,400
1,954,000
2,015,000

85,900
3,449,000
3,550,000

176,900
5,164,000
5,284,000

206,300
6,452,000
6,724,000

297,600
10,431,000
10,783,000

Total Trade in Commercial Services

Region
Africa
Africa
Asia
Asia
Europe
Europe
Middle East
Middle East
North America
North America
South/
Central America
South/
Central America
World
World

Unit: U.S. dollar at current prices (millions)

Activity
Exports
Imports
Exports
Imports
Exports
Imports
Exports
Imports
Exports
Imports
Exports

Partner
World
World
World
World
World
World
World
World
World
World
World

1985
11,100
20,700

60,800
77,400

1990
18,600
26,500
131,500
178,800

1995
25,700
34,400
257,800
328,100
597,100
560,200
171,200
171,200
34,600

2000
31,300
37,400
309,500
367,900
721,900
674,100
33,100
48,800
268,200

268,200
47,100

2005
56,900
69,300
525,300
573,500
1,244,800
1,120,100
54,900
85,400
366,300
366,300
68,200

75,700
75,700
13,600

135,500
135,500
22,400

Imports

World

16,700

24,900

45,300

54,600

70,500

Exports
Imports

World
World

381,600
401,100

780,500
820,500

1,185,100
1,200,700

1,491,000
1,474,600

2,414,300
2,347,400

EXHIBIT 1-3 Heineken’s 2005 Geographic Distribution of Sales (millions of hectolitres)

Western Europe
Netherlands
Spain
France
Italy
Other

5.8
10.9
6.8
5.7
3

32.2

Central and Eastern Europe
Poland
Russia

10.2
7.2

45.5

(continued)


6

CHAPTER 1

Introduction

EXHIBIT 1-3 Heineken’s 2005 Geographic Distribution of Sales (millions of hectolitres)
(continued)
Germany
Austria
Greece
Other

8.7
4.6
3.2
11.6

Americas

15.1
U.S.
Latin America
Other

Africa and Middle East
Nigeria
Egypt
Other
Asia Pacific

6.9
6.9

1.3
15
5.4
1
8.6
10.8

A major accounting issue associated with export and import activities relates to
accounting for foreign currency transactions. Assume, for example, that Heineken
exports a certain quantity of beer to a Brazilian importer and invoices the sale in
Brazilian reals. Should the real devalue relative to the euro prior to collection,
Heineken will experience a foreign exchange loss because reals will yield less in euros
upon conversion after the devaluation than before. The measurement of this transaction loss is not straightforward and is a subject that is dealt with in Chapter 6.
Today, international business transcends foreign trade and is increasingly associated with foreign direct investments, which involve operating production or distribution systems abroad by way of a wholly- or majority-owned affiliate, a joint venture, or
a strategic alliance.
While there is clearly a developed-country bias among foreign direct investors,
the boom of foreign direct investment flows to developing countries since the early
1990s indicates that MNCs are increasingly finding these host countries to be attractive
investment locations.5
At the level of the firm, foreign direct investment activities are captured by a
company’s segmental disclosures and its roster of shareholdings in affiliated companies. Exhibit 1-4 provides operating statistics by region for AKZO Nobel, a
multinational company headquartered in the Netherlands and concentrating on
healthcare products, coatings, and chemicals.
Exhibit 1-5 illustrates the extensive holdings in operating group companies of
Nestlé, one of the world’s largest food and beverage companies, headquartered in
Vevy, Switzerland. While both AKZO and Nestlé’s foreign operations are extensive,
the numbers relating to capital expenditures, invested capital, production sold locally,

5The World

Bank’s chief economist, Francois Bourguignon, predicts that over the next 25 years, developing
countries will move to the center stage in the global economy; see “Global Economic Prospects 2007:
Managing the Next Wave of Globalization” (World Bank Panel Discussion sponsored by the Global
Business Institute), New York University, Stern School of Business, December 12, 2006.