international accounting Chap 001

7/21/2019 international accounting Chap 001

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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc !ll

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Chapter 1



1-2

Introduction to International Accounting

Learning Objectives

1. Understand the nature and scope ofinternational accounting

2. Describe accounting issues created byinternational trade

3. Explain reasons for, and accounting issuesassociated with, foreign direct investment (FDI)



1-3

Introduction to International Accounting

Learning Objectives

4. Describe the practice of crosslisting on foreignstoc! exchanges

5. Explain the notion of internationalharmoni"ation of accounting standards

6. Examine the importance of international trade, FDI,and multinational corporations (#$%s) in theglobal economy



1-5

International Transactions, FDI and

Related Accounting Issues

ale to foreign custo!er

#ost companies first encounter with internationalbusiness occurs as sales to foreign customers

'ften, the sale is made on credit and it is agreed thatthe foreign customer will pay in its own currency (eg,#exican pesos)

earning 'b*ective -



1-6




&his gives rise to foreign exchange risk as thevalue of the foreign currency is li!ely to change in

relation to the companys home country currency

(eg, U. dollars)

earning 'b*ective -


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.uppose that on February +, -//0, 1oe Inc, a U.company, ma!es a sale and ships goods to 1ose,

.2, a #exican customer, for 3+//,/// (U.)

4owever, it is agreed that 1ose will pay in pesos

on #arch -, -//0 &he exchange (spot ) rate as ofFebruary +, -//0 is +/ pesos per U. dollar

4ow many pesos does 1ose agree to pay5

earning 'b*ective -






Even though 1ose .2 agrees to pay +,///,///

pesos (3+//,/// x +/ pesos6U. 3), 1oe, Inc

records the sale (in U. dollars) on February +,

-//0 as follows7

Dr 2ccounts receivable (8)+//,///

%r .ales revenue (8) +//,///

earning 'b*ective -





"edging

1oe can hege (ie, protect itself) against a loss

from an exchange rate fluctuation !eging can

be accomplished by various means, including7

"oreign currenc# option : the right (but not the

obligation) to sell foreign currency at aspecific exchange rate for a specified period of

time

earning 'b*ective -





"edging

"or$ar contract : this is an obligation to

exchange foreign currency at a date in the future, which is

typically ;/, 0/ or 9/ days

earning 'b*ective -





#oreign $irect Invest!ent %#$I& ' occurs when a

company invests in a business operation in a

foreign country &his represents an alternative to

importing to customers and6or exporting from

suppliers in a foreign country &wo types of FDI

are greenfield investment and acquisition

earning 'b*ective ;





#oreign $irect Invest!ent %#$I&

%reenfiel in&estment : the establishment of a

new operation in the foreign country

'c(uisition : investment in an existing operation

in the foreign country

earning 'b*ective ;



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International Income Taxation

"oreign income taxes : the foreign government will taxthe companys profits at applicable rates

)*+* income taxes : the U. will tax the companysforeignbased income

earning 'b*ective ;



1-16

International Transfer Pricing

,ransfer pricing ' setting prices on goods and servicesexchanged between separate divisions within the same

firm &hese prices have a direct impact on the profits ofthe different divisions

earning 'b*ective ;



1-17


+hese e,changes are not ar!s-length

transactions thus giving rise to certain

)roble!s in an international conte,t:

,axation : governments in the various countries

often scrutini"e transactions to assure that

sufficient profits are being recorded in that country

earning 'b*ective ;



1-18


erformance e&aluation issues : to the extent thatdivision managers are evaluated based on divisional

profits, transfer prices influence division managerperformance evaluation

earning 'b*ective ;



1-19

International Auditing

/oth internal and e,ternal auditors encounter

differences that arise bet(een auditing in an

international vs. do!estic conte,t. +hese

include:

anguage and cultural differences

Different accounting standards (<22=) and auditingstandards (<22.)

earning 'b*ective ;



1-21

International "armoni#ation of

Accounting Standards

+he international !ove!ent to(ards a single

set of (orld(ide accounting rules is referred to

as !armoni/ation. International #inancial

e)orting tandards %I#& and .. 7AA8 are

the t(o !ost i!)ortant sets of accounting

rules.

earning 'b*ective ?



1-22

The $lo%al !conom&

everal indicators de!onstrate the e,tent of

business globali9ation:

nternational trae ' In -//0 exports worldwide topped3++@ trillion Aetween +990 and -//0, U. exportsincreased by 00B in volume

"oreign irect n&estment ' Aetween +9C- and -//?worldwide FDI inflows increased from 3?C billion to 39+0billion

earning 'b*ective 0



1-23

The $lo%al !conom&



ultinational corporations Cs ' %ompanies thathave headuarters in one country and operate in one ormore other countries %urrently, #$%s account forapproximately +/B of the worlds %ross omestic

rouct %

earning 'b*ective 0



1 24

The $lo%al !conom&



nternational capital markets ' 2s of the end of -//@there were >-- companies representing >? countriescrosslisted on the $ew or! .toc! Exchange ($.E)In addition, over @/ U. companies are crosslisted on

the ondon .toc! Exchange, for example

earning 'b*ective 0

international accounting Chap 001

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