Chapter 1 introduction to international accounting

Chapter 1:
Introduction to
International
Accounting

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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


International Accounting
 Includes study of various functional areas of accounting
 Focuses on the accounting issues unique to multinational corporations

 Can be defined at three different levels
 Supranational accounting
 Standards, guidelines, and rules issued by supranational organizations

 Company level
 Followed by company in international business activities and foreign investments

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


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


Accounting Issues Related to International Business—Sale to Foreign Customer

 Suppose that on February 1, 2014, J oe Inc., a U.S.
company, makes a sale and ships goods to J ose
SA, a Mexican customer, for $100,000 (U.S.)
 However, it is agreed that J ose 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
J ose agree to pay?


Accounting Issues Related to International
Business—Sale to Foreign Customer
 Even though J ose agrees to pay 1,000,000 pesos
($100,000 x 10 pesos/U.S. $), J oe Inc. records the
sale in U.S. dollars on February 1, 2014, as follows:

Dr. Accounts Receivable
Cr. Sales Revenue

100,000
100,000


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. J oe Inc. will receive
1,000,000 pesos, which are now worth $90,909
Dr. Cash
Dr. Loss on Foreign Exchange
Cr. Accounts Receivable

90,909
9,091
100,000


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

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


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


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

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


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


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


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


Cross-Listing on Foreign Stock Exchanges

 Cross-listing: stock listed and traded on several
foreign stock exchanges
 Issues
 Listing regulations differ for foreign companies


Global Accounting Standards
 Requires countries to adopt a common set of
accounting rules
 Advantages

 Avoids GAAP conversion
 Easier to evaluate foreign investment opportunities


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


End of Chapter 1