Introduction To International Accounting: Internationalschol Hanoinationaluniversity H TP: /is - Vnu.Edu - VN

INTERNATIONALSCHOL
HaNoiNationalUniversity
h tp:/is.vnu.edu.vn/
CHAPTER 1:
INTRODUCTION TO INTERNATIONAL
ACCOUNTING
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LEARNING OBJECTIVES
1. Discuss the nature and scope of international

accounting.
2. Describe accounting issues created by international
trade (import and export transactions)
3. Explain reasons for, and accounting issues associated
with, foreign direct investment (FDI).
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
INTERNATIONALSCHOL
1. INTERNATIONAL ACCOUNTING
• The word “Accounting” encompasses various functional areas of financial

accounting, managerial accounting, auditing, taxation and accounting
information systems.
• The word “International” can be defined at three different levels
– International accounting: Study of the standards, guidelines, and
rules of accounting, auditing, and taxation existing within each
country and comparison across countries
– Supranational accounting: Standards, guidelines, and rules issued
by supranational organizations, eg. International federation of
accountants (IFA), Organization for economic cooperation and
development (OECD), United nations (UN).
– Company level: standards, guidelines, and practices followed by
company in international business activities and foreign investments.
Eg, standards for foreign currency transactions, techniques for
INTERNATIONALSCHOL
evaluating performance of foreign operations.
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
ACCOUNTING ISSUES
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 if it is denominated in foreign
currency  This gives rise to foreign exchange risk due to the
change in exchange rate between the invoiced date and payment
date.
• Eg: On February 1, 2011, Joe Inc., a U.S. company, makes a sale on
account to Jose Ltd, a Mexican customer, for 1,000,000 Pesos when
the exchange rate is 10 pesos per USD.
On March 2, 2011, the exchange rate for pesos is 11 pesos/USD. Joe
Inc. has receipt 1,000,000 pesos in full.
Required: Prepare journal entries for the above transactions at Joe Inc
company.
LO 2 INTERNATIONALSCHOL
2. INTERNATIONAL TRANSACTIONS, FDI AND RELATED
ACCOUNTING ISSUES
Sale to foreign customer

On February 1, 2011, Joe Inc sold 1,000,000 Pesos of goods to Jose Ltd. The
exchange rate on that date is 10 Pesos per USD. Joe Inc makes the following
journal entry:
Dr. Accounts receivable $100,000
Cr. Sales revenue $100,000
On March 2, 2011, Joe Inc. has receipt 1,000,000 pesos in full. The
exchange rate on that date is 11 Pesos per USD. Joe Inc makes the
following journal entry:
Dr. Cash $90,909
Dr. Loss on foreign exchange* $9,091
Cr. Accounts receivable $100,000
* Alternative treatment: recognize the difference as a reduction in sales revenue
ACCOUNTING ISSUES
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.
Eg: Joe purchased a put option for US$50 and able to sell the 1,000,000
pesos for a total of 950,000USD after 1 months.
- Forward contract – this is an obligation to exchange foreign currency at

a date in the future, which is typically 30, 60 or 90 days.
Eg: Joe entered into a forward contract to sell the 1,000,000 pesos for a
total of 980,000USD after 30 days.
ACCOUNTING ISSUES
Foreign Direct Investment (FDI)

• Occurs when a company invests in a business operation in a foreign
country.
• Reasons for FDI
− Increase Sales and Profits
− Enter Rapidly Growing or Emerging Markets
− Reduce Cost
− Protect Domestic Markets
− Protect Foreign Markets
− Acquire Technological and Managerial Know-How
• Two types of FDI:
− Greenfield investment – the establishment of a new operation in the
foreign country.
− Acquisition – investment in an existing operation in the foreign
LO 3 country. INTERNATIONALSCHOL
ACCOUNTING ISSUES
Financial reporting for foreign operations:

• At the end of the accounting period, the parent company is often required
to prepare consolidated financial statements. To consolidate the results
of a foreign subsidiary, two procedures must be completed.
• The need to convert from local country’s GAAP to home country’s
GAAP since accounting records are usually prepared using local
GAAP.
Eg: according to local GAAP, cash flow information is not provided, many
liabilities are kept off-balance-sheet, etc.
• The need to translate from local currency to U.S. dollars since
accounting records are usually prepared using local currency.
For example: an US company has a subsidiary in Vietnam.
ACCOUNTING ISSUES
International Income Tax

• Double taxation
– Foreign country’s income taxes: A foreign subsidiary should pay
income tax to the local government.
– Home country’s income taxes: The parent also has to pay income
tax to home country’s government on its foreign based income.
• Tax treaties between two countries can provide relief from double
taxation
• Objectives
– Legally minimize taxes in foreign countries and home country
– Maximize after-tax cash flows
ACCOUNTING ISSUES
International transfer pricing

• Objective: minimize the amount of worldwide tax paid by shifting profits
from countries with high-tax rates to countries with low tax rates.
• Meaning: setting prices on goods and services exchanged within the
same firm or same group.
• Eg: A parent in U.S sold materials to a subsidiary in Vietnam. The
income tax rate in Vietnam is higher than in U.S. How should the
US company set the selling price?
• To ensure companies pay their fair share of local taxes, most
countries have laws that regulate international transfer pricing
ACCOUNTING ISSUES
International Auditing
Both internal and external auditors encounter differences that arise between
auditing in an international vs. domestic context.
These include:
• Language and cultural differences
• Different accounting standards (GAAP) and auditing standards (GAAS)
ACCOUNTING ISSUES
Cross-Listing on Foreign stock exchanges
• 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.
Global Accounting Standards
• 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.
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 3. THE GLOBAL ECONOMY
Several indicators demonstrate the extent of business

globalization:
• International trade* – In 2018 total merchandise trade worldwide topped
$19 trillion, compared to $16 trillion and $12 trillion in 2008, 2009,
respectively.
• China, United states and Germany are 3 largest exporters in that order.
• Vietnam’s total merchandise export increased approximately forthfold
from $62 trillions in 2008 to $242 millions in 2018.
• Foreign Direct Investment** – worldwide FDI inflows increased from
$1.5 trillion in 2008 to $2 trillion in 2015 before reduced to $1.3 trillion in
2018. While FDI inflows to developing economies remain stable, the FDI
outflows tend to increase between 2008 and 2018.
* Source: https://www.wto.org/english/res_e/statis_e/statis_e.htm
** Source: https://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx
HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP: /IS.VNU.EDU.VN-HTP:/IS.VNU.EDU.VN 3. THE GLOBAL ECONOMY

globalization:
• Multinational enterprises (MNEs) – Companies that have

headquarters in one country and operate in one or more other
countries.
• Currently, MNEs account for approximately a third of the global
economic output (OECD, 2018). Top 100 MNEs account for more
than a third of the business-funded R&D worldwide (United
nations, World investment report 2019, 2019)
3. THE GLOBAL ECONOMY

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.
End of Chapter 1
GAAP:
Generally Accepted
Accounting Principles
INTERNATIONALSCHOL
Review Questions
1. What accounting issues arise for a company as a result of

engaging in international trade (imports and exports)?
2. What financial reporting issues arise as a result of making a
foreign direct investment?
INTERNATIONALSCHOL
Review Questions
1. What accounting issues arise for a company as a result of

engaging in international trade (imports and exports)?
 companies do 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 exchange rates in the financial
statements
INTERNATIONALSCHOL
Review Questions
2. What financial reporting issues arise as a result of

making a foreign direct investment?
Financial reporting issues that result from foreign direct
investment are:
1) conversion of foreign GAAP to parent company GAAP
2) Translation of foreign currency to parent company
reporting currency to prepare consolidated financial
statements, in additional supplementary disclosure
about foreign operations might be required
INTERNATIONALSCHOL

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INTERNATIONALSCHOL

1. Discuss the nature and scope of international

• The word “Accounting” encompasses various functional areas of financial

Sale to foreign customer

Sale to foreign customer

- Forward contract – this is an obligation to exchange foreign currency at

Foreign Direct Investment (FDI)

Financial reporting for foreign operations:

International Income Tax

International transfer pricing

Several indicators demonstrate the extent of business

Several indicators demonstrate the extent of business

• Multinational enterprises (MNEs) – Companies that have

Several indicators demonstrate the extent of business

• International capital markets – As of January 31, 2010

1. What accounting issues arise for a company as a result of

1. What accounting issues arise for a company as a result of

2. What financial reporting issues arise as a result of

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