Reg101

1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 1:
Introduction to
International
Accounting

2. 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
1-2

3. 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
1-3

4. Accounting Issues Related to
International Business— Sale to
Foreign Customer
 Suppose that on February 1, 2015, 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, 2015. The exchange rate
as of February 1, 2015 is U.S.$1 = 10 pesos.
How many pesos does Jose agree to pay?
1-4

5. Accounting Issues Related to
International Business— Sale to
Foreign Customer
 Even though Jose 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, 2015, as follows:
Dr. Accounts Receivable
Cr. Sales Revenue
100,000
100,000
1-5

6. Accounting Issues Related to International
Business— Sale to Foreign Customer
 Suppose that on March 2, 2015, the
exchange rate for pesos is U.S.$1=11 pesos.
Joe Inc. will receive 1,000,000 pesos, which
are now worth $90,909
Dr. Cash
Cr. Accounts Receivable
90,909
100,000
Dr. Loss on Foreign Exchange 9,091
1-6

7. 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
1-7

8. 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
1-8

9. 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
1-9

10. 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
1-10

11. 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
1-11

12. International Transfer Pricing
 Issue for multinational companies making
inter company 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
1-12

13. 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
1-13

14. 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
1-14

15. Cross-Listing on Foreign Stock
Exchanges
 Cross-listing: stock listed and traded on
several foreign stock exchanges
 Issues
 Listing regulations differ for foreign companies
1-15

16. Global Accounting Standards
 Requires countries to adopt a common set of
accounting rules
 Advantages
 Avoids GAAP conversion
 Easier to evaluate foreign investment
opportunities
1-16

17. 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 (Exhibit 1.3)
 Multinational companies (Exhibit 1.4,1.5)
 International capital markets:
 Help companies find capital at a reasonable cost
 Help in having an “acquisition currency” for acquiring
firms through stock swaps 1-17

18. End of Chapter 1
1-18

19. Assignment 1
 Case 1-1 Besserbrau AG