Chapter 1 - Introduction To IA - Handout

1/9/2021
International Accounting
• Lecturer: Assoc. Prof. Phạm Đức Cường, PhD.

School of Accounting and Auditing
The National Economics University
• Textbook:
 Doupnik, T. and H. Perera, International Accounting (5th
edition), McGraw-Hill Irwin, 2019
 Others
•
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International Accounting_ Main contents
• Topic 1 Accounting for Foreign Currency Transactions

• Topic 2 Translation of Foreign Currency Financial
Statements
• Topic 3 International Financial Statement Analysis
• Topic 4 Comparative Accounting
• Topic 5 International Harmonization of Accounting
Standards and Practices
• Topic 6 International Transfer Pricing
• Topic 7 International Taxation
• Topic 8 Foreign Exchange Risk Management
• First 9 chapters
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Assessment Scheme
Assessment Items Value Note
1. Class participation 10% Continuous - class attendance and

tutorial participation
2. Mid-term exam. 20% 60-minute test
3. Group Assignment 20% Group reports and Presentation
4. Final Exam 50% 90 minute-test
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Definition
 What is Accounting?
 What is International Accounting?
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Chapter 1:
Introduction to
International
Accounting
Copyright © 2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
 Discuss the nature and scope of international accounting
 Describe accounting issues confronted by companies
involved in international trade (import and export
transactions)
 Explain the reasons for, and the accounting issues
associated with, foreign direct investment
 Describe the practice of cross-listing on foreign stock
exchanges
 Explain the notion of global accounting standards
 Understand the importance of international trade, foreign
direct investment, and multinational corporations in the
global economy
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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
1) General level
Study of standards, guidelines and rules of accounting, auditing
and taxation within and across countries
2) Supranational accounting
Standards, guidelines, and rules issued by supranational
organizations such as IASB, IFAC, OECD
3) Company level
Followed by company, specifically related to international business
activities and foreign investments
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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
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Business—Sale to Foreign Customer (2)
 Suppose that on February 1, 2018, Magnum., a U.S.
company, makes a sale and ships goods to NMUK, a
British customer, for £100,000 (UK)
 However, it is agreed that NMUK will pay in Pound
Sterling on March 2, 2018. The exchange rate as of
February 1, 2018 is U.K. £1 = $1.35 dollars. How many
dollars does NMUK agree to pay?
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 Even though NMUK agrees to pay £100,000 Magnum
records the sale in U.S. dollars on February 1, 2018, as
follows: [£1 = $1.35]
Dr. Accounts Receivable 135,000

Cr. Sales Revenue 135,000
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 Suppose that on March 2, 2018, the exchange rate for
Pound Sterling is £1 =$1.30. Magnum will receive
100,000 Pound Sterling which are now worth $130,000
Dr. Cash 130,000

Dr. Loss on Foreign Exchange 5,000
Cr. Accounts Receivable 135,000
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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
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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
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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
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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
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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
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International Transfer Pricing

 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
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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
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International Auditing
 Internal auditing is an important component of
management’s control process
 Companies policies/procedures 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
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Cross-Listing on Foreign Stock Exchanges

 Cross-listing: stock listed and traded on several foreign
stock exchanges
 Issues
 Listing regulations differ for foreign companies
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Sustainability Reporting
 Sustainability Value Report
 Corporate Responsibility Report
 Mostly voluntary but required in several countries
 Provide information on:

 Environmental impact
 Labor practices
 Product safety
 Innovation
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Global Accounting Standards

 Requires countries to adopt a common set of accounting
rules
 Advantages
 Avoids GAAP conversion
 Easier to evaluate foreign investment opportunities
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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
 Multinational companies
 International capital markets:
 Help companies find capital at a reasonable cost
 Help in having an “acquisition currency” for acquiring firms
through stock swaps
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End of Chapter 1
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1/9/2021

• Lecturer: Assoc. Prof. Phạm Đức Cường, PhD.

International Accounting_ Main contents

• Topic 1 Accounting for Foreign Currency Transactions

Assessment Items Value Note

1. Class participation 10% Continuous - class attendance and

2. Mid-term exam. 20% 60-minute test

3. Group Assignment 20% Group reports and Presentation

4. Final Exam 50% 90 minute-test

Accounting Issues Related to International

Accounting Issues Related to International

Accounting Issues Related to International

Dr. Accounts Receivable 135,000

Accounting Issues Related to International

Dr. Cash 130,000

Hedges of Foreign Exchange Risk

Foreign Direct Investment

Reasons for Foreign Direct Investment

Financial Reporting for Foreign Operations

International Income Taxation

International Transfer Pricing

Performance Evaluation of Foreign Operations

 Evaluation is through periodic reports on individual unit’s

Cross-Listing on Foreign Stock Exchanges

 Mostly voluntary but required in several countries

 Provide information on:

Global Accounting Standards

The Global Economy

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