Chapter 1 Flashcards
How important is international trade (imports and exports) to the world economy?
In 2008, companies worldwide exported over $16.0 trillion worth of merchandise. Although international trade has existed for thousands of years, recent growth in trade has been phenomenal. Over the period 1996-2008, U.S. exports increased from $625 billion to $1,287 billion per year, a 106% increase. During the same period, Chinese exports increased six-fold to $1,428 billion in 2008.
What accounting issues arise for a company as a result of engaging in international trade (imports and exports)?
Companies engaged in international trade with imports and exports denominated in foreign currencies are faced with the accounting issue of translating foreign currency amounts into the company’s reporting currency and reporting the effects of changes in exchange rates in the financial statements.
Why might a company be interested in investing in an operation in a foreign country (foreign direct investment)?
As listed in Exhibit 1-1, following are several reasons why companies might want to invest overseas:
• Increase sales and profits
• Enter rapidly growing or emerging markets
• Reduce costs
• Protect domestic markets
• Protect foreign markets
• Acquire technological and managerial know-how
How important is foreign direct investment to the world economy?
FDI is playing a larger and more important role in the world economy. Global sales of foreign affiliates were about 1.5 times as high as global exports in 2008, compared to almost parity about two decades earlier. Global sales of foreign affiliates comprises about one tenth of worldwide gross domestic product.
What financial reporting issues arise as a result of making a foreign direct investment?
Financial reporting issues that result from foreign direct investment are (a) conversion of foreign GAAP to parent company GAAP and (b) translation of foreign currency to parent company reporting currency to prepare consolidated financial statements. In addition, supplementary disclosures about foreign operations might be required.
What taxation issues arise as a result of making a foreign direct investment?
Two major taxation issues related to a foreign direct investment are (a) taxation of the investee’s income by the host country in which the investment is located and (b) taxation of the investee’s income by the investor’s home country. Companies with foreign direct investments need to develop an expertise in the host country’s income tax rules so as to minimize the amount of taxes paid to the host country, as well as in the home country’s tax rules with respect to foreign source income.
What are some of the issues that arise in evaluating and maintaining control over foreign operations?
Companies must make several decisions in designing the system for evaluating the performance of foreign operations. Two of these are (a) deciding whether to evaluate performance on the basis of foreign currency or parent company reporting currency and (b) deciding whether to factor out of the performance measure those items over which the foreign operation’s managers have no control.
Why might a company want its stock listed on a stock exchange outside of its home country?
Two reasons to have stock listed on the stock exchange of a foreign country are (a) to obtain capital in that country, perhaps at a more reasonable cost than is available at home, and (b) to have an “acquisition currency” for acquiring firms in that country through stock swaps.
Where might one find information that could be used to measure the “multi-nationality” of a company?
The United Nations measures the multinationality of companies based on the average of three factors: the ratio of foreign sales to total sales, the ratio of foreign assets to total assets, and the ratio of foreign employees to total employees. Information about foreign sales, foreign assets, and the number of foreign employees might be provided in a company’s annual report or other publications through which a company provides information to the public.
What would be the advantages of having a single set of accounting standards used worldwide?
A single set of accounting standards used worldwide would have the following benefits for multinational corporations:
• Reduce the cost of preparing consolidated financial statements
• Reduce the cost of gaining access to capital in foreign countries
• Facilitate the analysis and comparison of financial statements of competitors and potential acquisitions
LO1: Discuss the nature and scope of international accounting.
A. At a minimum it focuses on the accounting issues unique to multinational corporations, especially with respect to foreign operations.
B. At the other extreme it 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.
C. This book provides an overview of the broadly defined area of international accounting, with a focus on the accounting issues encountered by multinational companies engaged in international trade and invested in foreign operations.
LO2: Describe accounting issues confronted by companies involved in international trade (import and export transactions).
A. One issue is the accounting for foreign currency-denominated export sales and import purchases. An important issue is how to account for changes in the value of the foreign currency-denominated account receivable (payable) that occur as exchange rates fluctuate.
B. A related issue is the accounting for derivative financial instruments, such as forward contracts and foreign currency options, used to hedge the foreign exchange risk associated with foreign currency transactions.
LO3: Explain reasons for, and accounting issues associated with, foreign direct investment.
?
LO4: Describe the practice of cross-listing on foreign stock exchanges.
?
LO5: Explain the notion of global accounting standards.
?
