McGraw-Hill/Irwin

Copyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
1.
2.
3.

Understand the nature and scope of

international accounting.
Describe accounting issues created by
international
trade.
Explain reasons for, and accounting issues
associated with, foreign direct investment (FDI).

1-2

Learning Objectives
4.
5.
6.

Describe the practice of cross-listing on foreign

stock exchanges.
Explain the notion of global accounting
standards.
Examine the importance of international trade,
FDI, and multinational corporations (MNCs) in the
global economy.

1-3

International Accounting can be

described at three different levels:
The

influence on accounting by international

political groups such as the OECD, UN, etc.
The accounting practices of companies in response
to their own international business activities.
The differences in accounting, auditing and
taxation standards and practices between
countries.

Learning Objective 1
1-4

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 it is agreed
that the foreign customer will pay in its own
currency (e.g., Mexican pesos).

Learning Objective 2
1-5

Sale to foreign customer

This gives rise to foreign exchange risk as the
value of the foreign currency is likely to change
in relation to the companys home country
currency (e.g., U.S dollars).

Learning Objective 2
1-6

Sale to foreign customer

Suppose that on February 1, 2011, Joe Inc., a U.S.
company, makes a sale and ships goods to Jose,
SA, a Mexican customer, for $100,000 (U.S.).
However, it is agreed that Jose will pay in pesos on
March 2, 2011. The exchange (spot) rate as of
February 1, 2011 is 10 pesos per U.S. dollar. How
many pesos does Jose agree to pay?

Learning Objective 2
1-7

Sale to foreign customer

Even though Jose SA agrees to pay 1,000,000 pesos
($100,000 x 10 pesos/U.S. $), Joe, Inc. records
the sale (in U.S. dollars) on February 1, 2011 as
follows:
Dr. Accounts receivable (+)
Cr. Sales revenue (+)

100,000

100,000

Learning Objective 2
1-8

Sale to foreign customer

Suppose that on March 2, 2011, the spot rate for
pesos is 11 pesos/U.S. $. Joe Inc. will receive
1,000,000 pesos, which are now worth $90,909.
Joe makes the following journal entry:
Dr. Cash (+)
Dr. Loss on foreign exchange (+)
Cr. Accounts receivable

90,909
9,091
100,000

Learning Objective 2
1-9

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.

Learning Objective 2
1-10

Hedging
Forward contract this is an obligation to
exchange foreign currency at a date in the
future, which is typically 30, 60 or 90 days.

Learning Objective 2
1-11

Foreign Direct Investment (FDI) occurs when

a company invests in a business operation in a
foreign country. This represents an alternative to
importing to customers and/or exporting from
suppliers in a foreign country. Two types of FDI are
greenfield investment and acquisition.

Learning Objective 3
1-12

Foreign Direct Investment (FDI)

Greenfield investment the establishment of a
new operation in the foreign country.
Acquisition investment in an existing operation
in the foreign country.

Learning Objective 3
1-13

FDI creates two primary issues:

The need to convert from local to U.S. GAAP

since accounting records are usually prepared
using local GAAP.
The need to translate from local currency to U.S.
dollars since accounting records are usually
prepared using local currency.

Learning Objective 3
1-14

Foreign income taxes the foreign government

will tax the companys profits at applicable rates.

U.S. income taxes the U.S. will tax the

companys foreign-based income.

Learning Objective 3
1-15

Transfer pricing setting prices on goods and

services exchanged between separate divisions
within the same firm. These prices have a direct
impact on the profits of the different divisions.

Learning Objective 3
1-16

These exchanges are not arms-length

transactions, thus giving rise to certain
problems in an international context:
Taxation

governments in the various countries

often scrutinize transactions to assure that
sufficient profits are being recorded in that country.

Learning Objective 3
1-17

Performance evaluation issues to the extent

that division managers are evaluated based on
divisional profits, transfer prices influence
division manager performance evaluation.

Learning Objective 3
1-18

Both internal and external auditors

encounter differ-ences that arise
between auditing in an international vs.
domestic context.
These include:
Language

and cultural differences

Different accounting standards (GAAP) and
auditing standards (GAAS)

Learning Objective 3
1-19

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.

Learning Objective 4
1-20

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.

Learning Objective 5
1-21

Several indicators demonstrate the

extent of business globalization:
International

trade In 2008 exports worldwide

topped $16 trillion. Between 1996 and 2008, U.S.
exports increased by 106% in volume.
Foreign Direct Investment Between 1982 and
2008 worldwide FDI inflows increased from $58
billion to $1.7 trillion.

Learning Objective 6
1-22

Several indicators demonstrate the

extent of business globalization:
Multinational

corporations (MNCs)
Companies that have headquarters in one country
and operate in one or more other countries.
Currently, MNCs account for approximately 10% of
the worlds Gross Domestic Product (GDP).

Learning Objective 6
1-23

Several indicators demonstrate the

extent of business 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.

Learning Objective 6
1-24