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