McGraw-Hill/I rwin Copyright 2012 by The McGraw-Hill Companies, I nc. All rights reserved.

1-2
Learning Objectives

1. Understand the nature and scope of international
accounting.
2. Describe accounting issues created by international
trade.
3. Explain reasons for, and accounting issues associated
with, foreign direct investment (FDI).

1-3
Learning Objectives

4. Describe the practice of cross-listing on foreign stock
exchanges.
5. Explain the notion of global accounting standards.
6. Examine the importance of international trade, FDI, and
multinational corporations (MNCs) in the global
economy.

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International Accounting can be described at three
different levels:

The influence on accounting by international political
groups such as the OECD, UN, etc.
The accounting practices of companies in response to their
own international business activities.
The differences in accounting, auditing and taxation
standards and practices between countries.

Learning Objective 1
1-5
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).

Learning Objective 2
1-6
Sale to foreign customer

This gives rise to foreign exchange risk as the value of the
foreign currency is likely to change in relation to the
companys home country currency (e.g., U.S dollars).

Learning Objective 2
1-7
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 (spot) rate as of February 1, 2011 is 10
pesos per U.S. dollar. How many pesos does Jose agree to
pay?


Learning Objective 2
1-8
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 (+) 100,000
Cr. Sales revenue (+) 100,000

Learning Objective 2
1-9
Sale to foreign customer

Suppose that on March 2, 2011, the spot 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 (+) 90,909
Dr. Loss on foreign exchange (+) 9,091
Cr. Accounts receivable 100,000


Learning Objective 2
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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.



Learning Objective 2
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Hedging

Forward contract this is an obligation to exchange foreign
currency at a date in the future, which is typically 30, 60 or 90
days.


Learning Objective 2
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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.


Learning Objective 3
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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.

Learning Objective 3
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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.

Learning Objective 3
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Foreign income taxes the foreign government will tax the
companys profits at applicable rates.

U.S. income taxes the U.S. will tax the companys foreign-
based income.

Learning Objective 3
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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.

Learning Objective 3
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These exchanges are not arms-length transactions,
thus giving rise to certain problems in an
international context:

Taxation governments in the various countries often
scrutinize transactions to assure that sufficient profits are
being recorded in that country.


Learning Objective 3
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Performance evaluation issues to the extent that division
managers are evaluated based on divisional profits,
transfer prices influence division manager performance
evaluation.


Learning Objective 3
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Both internal and external auditors encounter differ-
ences that arise between auditing in an international
vs. domestic context.

These include:
Language and cultural differences
Different accounting standards (GAAP) and auditing
standards (GAAS)

Learning Objective 3
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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.

Learning Objective 4
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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.

Learning Objective 5
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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.


Learning Objective 6
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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 worlds Gross Domestic Product
(GDP).

Learning Objective 6
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Several indicators demonstrate the extent of business
globalization:

International capital markets As of January 31, 2010 there
were 499 companies representing 47 countries cross-listed
on the New York Stock Exchange (NYSE). In addition, over
50 U.S. companies are cross-listed on the London Stock
Exchange, for example.

Learning Objective 6