Chapter 1:

Introduction to
International
Accounting

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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
 Examine 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
 Supranational accounting
 Standards, guidelines, and rules issued by supranational
organizations
 Company level
 Followed by company in international business activities and foreign
investments
 International accounting
 Study of the standards, guidelines, and rules of accounting, auditing,
and taxation existing within each country and comparison across
countries

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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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Accounting Issues Related to International
Business—Sale to Foreign Customer
 Suppose that on February 1, 2014, 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, 2014. The exchange rate as of February 1, 2014
is U.S.$1 = 10 pesos. How many pesos does Jose agree
to pay?

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Accounting Issues Related to International
Business—Sale to Foreign Customer
 Even though Jose 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, 2014, as follows:

Dr. Accounts Receivable 100,000

Cr. Sales Revenue 100,000

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Accounting Issues Related to International Business—Sale to Foreign Customer

 Suppose that on March 2, 2014, the exchange rate for

pesos is U.S.$1=11 pesos. Joe Inc. will receive 1,000,000
pesos, which are now worth $90,909

Dr. Cash 90,909

Dr. Loss on Foreign Exchange 9,091
Cr. Accounts Receivable 100,000

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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 a
management’s control process
 Issues faced by internal and external auditors
 Differences in language and culture
 Differences 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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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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