Chapter 1 Flashcards
International Accounting focuses on
the accounting issues unique to multinational corporations, especially with respect to international transactions and foreign investments
encompasses the study of the various functional areas of accounting in all countries of the world as well as the activities of a number of supranational organizations
International Accounting can be defined at these 3 levels
- General level
- Supranational accounting
- Company level
General Level International Accounting
study of standards, guidelines and rules of accounting, auditing and taxation within and across countries
Supranational Accounting
Standards, guidelines, and rules issued by supranational organizations such as IASB, IFAC, OECD
Company Level International Accounting
Standards, guidelines, and rules followed by a company, specifically relating to its international business activities and foreign investments
The first encounter with international business occurs through
sales to foreign customers
Accounting issues encountered by companies involved in international trade
-credit sales are made to foreign customers who will pay in their own currency; it’s a foreign exchange
risk
-accounting for foreign currency-denominated export sales and import purchases; AR and AP that occur as exchange rates fluctuate
-accounting for derivative financial statements; forward contracts and foreign currency options, used to hedge the foreign exchange risk associated with foreign currency transactions.
A U.S. company makes a sale to a UK/British customer for 100k pound sterling; exchange rate is 1 pound = $1.35. How many dollars does the British customer agree to pay? What is the journal entry?
Accounts Receivable US$ 135,000
Sales Revenue US$ 135,000
*$1.35 x 100K Pounds sterling= US$135,000
Suppose that on the date payment is received, the exchange rate for Pound Sterling is £1 =$1.30. Magnum will receive 100,000 Pound Sterling, which are now worth $130,000.
Cash US$ 130,000
Loss on Foreign Exchange US$ 5,000
Accounts Receivable US$ 135,000
Hedges of foreign exchange risk; Techniques to manage exposure
- foreign currency option
- forward contract
Foreign currency option
gives the option owner the right, but not the obligation, 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
the ownership and control of foreign assets
TWO WAYS:
1. Acquisition- investment in existing operations in foreign countries
2. Greenfield investment- new operation in foreign countries
Reasons for Foreign Direct Investment
- Increase sales and profits.
- Enter rapidly growing or emerging markets.
- Reduce shipping costs.
- Gain a foothold in economic blocs.
- Protect domestic markets.
- Protect foreign markets.
- Acquire technological and managerial know-how.
Steps in reporting for Foreign Operations:
Conversion from local to U.S. G A A P.
Records prepared using local G A A P.
Translate from local currency to U.S. dollars.
Records are prepared using local currency.
Translation adjustment to balance may be needed.
May be adjustment to component of OCI.
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
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.
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 units’ performance.
Issues in evaluation:
-Use of local or home currency for evaluation.
-Inflated price paid in transfer pricing.
-Issues unique to foreign operations.
Internal auditing is an important component of management’s
control process.
International Auditing
-Ensure that company policies/procedures are being followed.
-Uncover errors, inefficiencies, and possibly fraud.
-Abide by FCPA (Foreign Corrupt Practices Act).
Issues faced by internal and external auditors.
Differences in language and culture.
Differences in 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 can differ for foreign companies.
Reconciling to U.S. G A A P.
Sustainability Report/Corporate Responsibility Report
Mostly voluntary but required in several countries.
Provides information on:
-Environmental impact.
-Labor practices.
-Product safety.
-Corporate governance.
Global Financial Reporting Standards
Requires countries to adopt a common set of financial reporting standards.
Advantages:
-Avoids G A A P conversion.
-Easier to evaluate foreign investment opportunities.
Largest exporters are
China, the United States, and Germany
Largest importers are
United States, China, and Germany
International trade constitutes a significant portion of the world economy.
Largest exporters are China, the United States, and Germany.
Largest importers are United States, China, and Germany.
Foreign direct investment to retain advantage over competition.
Multinational corporations.
International capital markets:
Help companies find capital at a reasonable cost.
Help in having an “acquisition currency” for acquiring firms through stock swaps.
There is an even greater number of accounting issues encountered by companies that have made a direct investment in a foreign operation. These issues primarily result from the fact that accounting rules, tax laws, and other regulations differ across countries, and include:
A. Making sense of financial stmts. of a foreign acquisition target prepared with unfamiliar GAAP when making a foreign direct investment decision
B. Determining correct amounts to include in consolidated financial statements for assets, liabilities, revenues, and expenses of foreign operations. Determining how to translate foreign currency to parent company currency and parent company GAAP.
C. Complying with host country income tax laws and home country tax laws related to income earned in a foreign country (foreign secure income); makes double taxations a potential problem (foreign tax credits are the most important relief from this.
D. Establishing prices for intercompany transactions that cross national borders (international transfer prices) to achieve corporate objectives and comply with gov. regulations.
E. Evaluating the performance of both a foreign operating unit and its management. Which currency should the foreign operations be evaluated with. Should mgmt. be held accountable for items over which they have little control.
F. Establishing an effective internal audit function over foreign operations taking differences in culture, customs, and language into consideration.
G. Deciding whether to cross-list securities on foreign stock exchanges and complying with local stock exchange regulations; could require using a GAAP different from the parent company
Steps to consolidate a foreign subsidiary
- restate foreign GAAP financial statements into parent company GAAP
- translate foreign currency amounts into parent company currency
The Big 4 public accounting firms are among the most
multinational business organizations in the world.
Problems encountered by MNCs when confronted with different local GAAP in different countries lead to
the desire for a single set of global accounting standards; There would be significant advantages to MNCs if all countries used the same GAAP.
The world economy is becoming increasingly more
-International trade (imports and exports) has grown substantially in recent years and has become a normal part of business for relatively small companies
-The number of U.S. exporting companies has increased four-fold over the last three decades.
The tremendous growth in foreign direct investment (FDI) over the last several decades is partially attributable to the
-liberalization of investment laws in many countries specifically aimed at attracting FDI.
-The aggregate revenues generated by foreign operations are more than twice as large as the revenues generated through exporting
VIII. There were more than _______multinational companies in the world in 2009 with ______foreign subsidiaries
82k; 810k
The 100 largest multinationals generated approximately____% of global GDP
4
A disproportionate number of multinational corporations are headquartered in the
United States, China, Japan, and the European Union
According to one definition of multinationality used by the United Nations, six of the ten most multinational companies in the world in 2020 were headquartered in
Europe
Many companies also cross-list their shares on stock exchanges outside of their home countries. . There are a number of reasons for doing this, including
having access to a larger pool of capital.
