Chapter 1 introduction to international accounting

Chapter 1: Introduction to International Accounting Copyright © 2015 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGraw-Hill Education 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 [...]... 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...  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... 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... 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 ...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 ... 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 ( $10 0,000 x 10 pesos/U.S $), J oe... February 1, 2 014 , as follows: Dr Accounts Receivable Cr Sales Revenue 10 0,000 10 0,000 Accounting Issues Related to International Business—Sale to Foreign Customer  Suppose that on March 2, 2 014 ,... their own currency  Gives rise to foreign exchange risk Accounting Issues Related to International Business—Sale to Foreign Customer  Suppose that on February 1, 2 014 , J oe Inc., a U.S company,