Chapter 1 international accounting

INTERNATIONALSCHOOL HaNoiNational University http://is.vnu.edu.vn/ CHAPTER 1: INTRODUCTION TO INTERNATIONAL ACCOUNTING Semester II, 2018-2019 Department of Social, Business and Management HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN LEARNING OBJECTIVES Discuss the nature and scope of international accounting Describe accounting issues created by international trade (import and export transactions) Explain reasons for, and accounting issues associated with, foreign direct investment (FDI) INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN LEARNING OBJECTIVES Describe the practice of cross-listing on foreign stock exchanges Explain the notion of global accounting standards Examine the importance of international trade, FDI, and multinational corporations (MNCs) in the global economy INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN 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 INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Sale to foreign customer • Most companies’ first encounter with international business occurs as sales to foreign customers • Often, the sale is made on credit and it is agreed that the foreign customer will pay in its own currency (e.g., Mexican pesos)  This gives rise to foreign exchange risk as the value of the foreign currency is likely to change in relation to the company’s home country currency (e.g., U.S dollars LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Sale to foreign customer Suppose that on February 1, 2011, 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, 2011 The exchange rate as of February 1, 2011 is 10 pesos per U.S dollar How many pesos does Jose agree to pay? LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Sale to foreign customer Even though Jose SA 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, 2011 as follows: Dr Accounts receivable (+) Cr Sales revenue (+) LO 100,000 100,000 INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Sale to foreign customer Suppose that on March 2, 2011, the exchange rate for pesos is 11 pesos/U.S $ Joe Inc will receive 1,000,000 pesos, which are now worth $90,909 Joe makes the following journal entry: Dr Cash (+) Dr Loss on foreign exchange (+) Cr Accounts receivable LO 90,909 9,091 100,000 INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Hedging Joe can hedge (i.e., protect itself) against a loss from an exchange rate fluctuation Hedging can be accomplished by various means, including: Foreign currency option – the right (but not the obligation) to sell foreign currency at a specific exchange rate for a specified period of time Forward contract – this is an obligation to exchange foreign currency at a date in the future, which is typically 30, 60 or 90 days LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Foreign Direct Investment (FDI) – occurs when a company invests in a business operation in a foreign country This represents an alternative to importing to customers and/or exporting from suppliers in a foreign country Two types of FDI are greenfield investment and acquisition LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES Foreign Direct Investment (FDI) Greenfield investment – the establishment of a new operation in the foreign country Acquisition – investment in an existing operation in the foreign country LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN REASONS FOR FOREIGN DIRECT INVESTMENT • • • • • • Increase Sales and Profits Enter Rapidly Growing or Emerging Markets Reduce Cost Protect Domestic Markets Protect Foreign Markets Acquire Technological and Managerial Know-How INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSACTIONS, FDI AND RELATED ACCOUNTING ISSUES FDI creates two primary issues: • The need to convert from local to U.S GAAP since accounting records are usually prepared using local GAAP • The need to translate from local currency to U.S dollars since accounting records are usually prepared using local currency LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN 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 LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL TRANSFER PRICING • Transfer pricing – setting prices on goods and services exchanged between separate divisions within the same firm These prices have a direct impact on the profits of the different divisions • 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 LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL AUDITING Both internal and external auditors encounter differences that arise between auditing in an international vs domestic context These include: • Language and cultural differences • Different accounting standards standards (GAAS) LO (GAAP) and auditing INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN CROSS-LISTING ON FOREIGN STOCK EXCHANGES MNCs frequently raise capital outside their home country When a company offers its shares on an exchange outside of its home country, this is referred to as Cross-Listing LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN GLOBAL ACCOUNTING STANDARDS • There is an international movement towards adopting a set of global accounting standards These standards are known as “International Financial Reporting Standards” or “IFRS” • Countries adopting these standards, will, for example, be in a better position to evaluate FDI • Another advantage of the adoption of global accounting standards is the elimination of the need to convert from local GAAP when preparing consolidated financial statements LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN THE GLOBAL ECONOMY Several indicators demonstrate the extent of business globalization: • International trade – In 2008 exports worldwide topped $16 trillion Between 1996 and 2008, U.S exports increased by 106% in volume • Foreign Direct Investment – Between 1982 and 2008 worldwide FDI inflows increased from $58 billion to $1.7 trillion LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN THE GLOBAL ECONOMY Several indicators demonstrate the extent of business globalization: • Multinational corporations (MNCs) – Companies that have headquarters in one country and operate in one or more other countries Currently, MNCs account for approximately 10% of the world’s Gross Domestic Product (GDP) LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN THE GLOBAL ECONOMY Several indicators demonstrate the extent of business globalization: • International capital markets – As of January 31, 2010 there were 499 companies representing 47 countries crosslisted on the New York Stock Exchange (NYSE) In addition, over 50 U.S companies are cross-listed on the London Stock Exchange, for example LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN End of Chapter GAAP: Generally Accepted Accounting Principles INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN Review Questions What accounting issues arise for a company as a result of engaging in international trade (imports and exports)? What financial reporting issues arise as a result of making a foreign direct investment? INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN Review Questions What accounting issues arise for a company as a result of engaging in international trade (imports and exports)?  companies in international trade with imports and exports denominated in foreign currencies are faced with the accounting issue of translating foreign currency amounts into the company's reporting currency and reporting the effects of exchange rates in the financial statements INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN Review Questions What financial reporting issues arise as a result of making a foreign direct investment? Financial reporting issues that result from foreign direct investment are: 1) conversion of foreign GAAP to parent company GAAP 2) Translation of foreign currency to parent company reporting currency to prepare consolidated financial statements, in additional supplementary disclosure about foreign operations might be required INTERNATIONALSCHOOL ... RELATED ACCOUNTING ISSUES Sale to foreign customer Even though Jose SA agrees to pay 1, 000,000 pesos ( $10 0,000 x 10 pesos/U.S $), Joe, Inc records the sale (in U.S dollars) on February 1, 2 011 as... February 1, 2 011 is 10 pesos per U.S dollar How many pesos does Jose agree to pay? LO INTERNATIONALSCHOOL HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN-HTTP://IS.VNU.EDU.VN INTERNATIONAL. .. February 1, 2 011 , Joe Inc., a U.S company, makes a sale and ships goods to Jose, SA, a Mexican customer, for $10 0,000 (U.S.) However, it is agreed that Jose will pay in pesos on March 2, 2 011 The