Global Business and

Accounting
Chapter 15

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Globalization
Occurs as managers become aware of and
engage in cross-border trade and
operations. A high level of globalization is a
multinational enterprise that begins with raw
material extraction and ends with final
product assembly and sales in multiple
foreign locations.

15-2
Globalization

Unilever Global Revenue

Europe 35%

Asia and other

markets 42%
The Americas
23%

15-3
Globalization
Globalization typically progresses through
a series of stages that include:
1. Exporting
2. International licensing
3. International joint ventures
4. Wholly owned international subsidiaries
5. Global sourcing.

15-4
Environmental Forces
Shaping Globalization
Political and legal
Culture
system

Globalization

Economic Technology and

system infrastructure
15-5
Political and Legal Systems
• Threat of government control or seizure of assets.
• Differing taxes, tariffs and licensing fees.
• Restrictions on foreign ownership percentage.
• Restrictions on currency flows.
• Trade agreements specifying raw material sources
and labor content.
• Duty-free foreign trade zones.
• Tax incentives encouraging or discouraging share
ownership.
• Policies affecting individual savings.
• Policies impacting educational level of citizens.

15-6
Economic Systems

Planned Economy
Government owns factors of production

Market Economy
People owns factors of production

15-7
Culture

15-8
Technology and Infrastructure
Difficulty transferring Differences in
knowledge and educational and
information training levels

Inadequate
transportation Unreliable utilities
systems

Differences in Poor access to

internal accounting communication
systems equipment

Lack of specialized
equipment
15-9
Harmonization of Financial
Reporting Standards
The International Accounting Standards
Board (IASB) has as one of its stated goals
the harmonization of accounting standards.
Harmonization is used to describe the
standardization of accounting methods and
principles used in different countries
throughout the world.

15-10
Harmonization of Financial
Reporting Standards

Global Variation in Accounting Practices

Asset Segment
Auditors per Valuation Depreciation Diclosure
Country/Standards 100,000 Method LIFO Used Basis Required
Revaluation Economic
IFRS allowed Used based Yes
Historic Economic
United States 168 cost Used based Yes
Revaluation Economic
United Kingdom 352 allowed Not Used based Yes
Historic
Germany 26 cost Not Used Tax based Limited
Revaluation Economic
Brazil 1 allowed Not Used based No
Historic
Japan 10 cost Used Tax based Yes

15-11
International Financial Reporting
Standards and Budgeting
Two approaches to implementing
international financial accounting standards

Adoption Convergence

Hong Kong
Europe 2005
2005

Chili 2009 Australia 2007

Canada 2011 China 2007

15-12
Foreign Currencies
and Exchange Rates
An exchange rate is the amount it costs to
purchase one unit of currency with another currency.

Foreign Exchange Rate

Exchange
Exchange Rate (in
Rate foreign
Country/Region Currency (in dollars) currency)
Britain Pound (£) $ 1.74250 0.534
Europe Euro (€) 0.89490 1.117
Japan Yen (¥) 0.00764 130.900
Mexico Peso ($) 0.10946 9.136
India Rupee (Rs) 0.02045 48.889

¥1,000,000 × $0.00764 = $7,640 15-13

Accounting for Transactions
with Foreign Companies
Cash Purchase ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company purchases

equipment from an Italian company for €100,000. The
amount is payable in full on that date. On 1 January
2009, the exchange rate is $0.97 per Euro.
U.S. company purchases €100,000 from financial institution.
Date Description Debit Credit
Jan. 1 Equipment 97,000
Cash 97,000
(€100,000 x $0.97) = $97,000

15-14
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company purchases

equipment from an Italian company for €100,000. The
amount is payable in full on 15 February 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.

Date Description Debit Credit

Jan. 1 Equipment 97,000
Accounts payable 97,000
(€100,000 x $0.97) = $97,000

15-15
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company purchases

equipment from an Italian company for €100,000. The
amount is payable in full on February 15, 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.

Date Description Debit Credit

Jan. 31 Accounts payable 1,000
Gain on rate fluctuation 1,000

15-16
Accounting for Transactions
with Foreign Companies
Credit Purchase ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company purchases

equipment from an Italian company for €100,000. The
amount is payable in full on 15 February 2009. On 1
January 2009, the exchange rate is $0.97 per Euro. At
31/1/09 the spot exchange rate is €1 = $0.96. On
15/2/09, the exchange rate is €1 = $0.98.

Date Description Debit Credit

Feb. 15 Accounts payable 96,000
Loss on rate fluctuation 2,000
Cash 98,000

15-17
Accounting for Transactions
with Foreign Companies
Cash Sale ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company sells equipment

to an Italian company for €100,000. The amount is
collected in full on that date. On 1 January 2009, the
exchange rate is $0.97 per Euro.

Date Description Debit Credit

Jan. 1 Cash 97,000
Sales 97,000
(€100,000 x $0.97) = $97,000

15-18
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company sells equipment

to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.

Date Description Debit Credit

Jan. 1 Accounts receivable 97,000
Sales 97,000
(€100,000 x $0.97) = $97,000

15-19
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company sells equipment

to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.

Date Description Debit Credit

Jan. 31 Loss on rate fluctuation 1,000
Accounts receivable 1,000

15-20
Accounting for Transactions
with Foreign Companies
Credit Sale ― Prices Stated in a Foreign Currency

On 1 January 2009, a U.S. company sells equipment

to an Italian company for €100,000. The full amount
will be collected on 15 February 2009. On 1 January
2009, the exchange rate is $0.97 per Euro. At 31/1/09
the spot exchange rate is €1 = $0.96. On 15/2/09, the
exchange rate is €1 = $0.98.

Date Description Debit Credit

Feb. 15 Cash 98,000
Gain on rate fluctuation 2,000
Accounts receivable 96,000

15-21
Hedging
Future contracts are the right to
receive a specified quantity of
foreign currency at a future date.

Fair Value Hedge

Any gain or loss is recognized currently in
earnings. If the hedge is on available-for-sale
securities, any gain or loss is reported in
other comprehensive income on the equity
section of the balance sheet.

15-22
 Translation of Foreign Currency
Financial Statements
This is the first year of
operations for a 100%
owned Mexican
subsidiary of the U.S.
enterprise, Matrix, Inc.

Peso U.S. $
1 January 2009 1 $ 0.125
31 December 2009 1 $ 0.100
Average for the year 1 $ 0.110

15-23
Translation of Foreign Currency
Financial Statements

Peso U.S. $
1 January 2009 1 $ 0.125
31 December 2009 1 $ 0.100
Average for the year 1 $ 0.110

Pesos Rate Dollars

Revenues 17,000 $ 0.110 $ 1,870
Expenses 10,200 0.110 1,122
Profit 6,800 $ 748
15-24
Translation of Foreign Currency
Financial Statements

If dividends are paid, the translation is based on

the historical rate when the dividend is paid. The
translated ending retained earnings carries
forward to the next accounting period.
15-25
Translation of Foreign Currency
Financial Statements
Zapato de Nationale, SA
Balance Sheet
Pesos Rate Dollars
Cash At 2,000
31 December 2009 $
$ 0.100 200
Receivables 4,000 Assets0.100 400 The translation
Inventory
Equipment 1,800 0.100 180$ 1,600 adjustment is
Equipment
Supplies 16,000 0.100 1,600 180
Total assets
Accounts receivable23,800 $ 2,380 400
reported in
Cash 200 other
Total assets
Pesos Rate
$ 2,380
Dollars comprehensive
Accounts payable 2,000 $ 0.100
Liabilities and Shareholders' Equity
Notes payable 5,000 0.100
$ 200
500
income in the
Liabilities
Common stock 10,000 0.125 1,250 equity section
Accounts payable $ 200
Retained earnings
Notes payable
Translation adjustments
6,800
500
748
(318)
of the balance
Total
Totalliabilities
assets 23,800 $$ 2,380
700 sheet
Shareholders' equity
Ordinary share 1,250
Retained earnings 430
Total shareholders' equity 1,680
Total liabilities and shareholders' equity 2,380
15-26
Global Sourcing
Differences in exchange rates in many different
countries can create significant complexities for
firms practicing global sourcing.
Many companies underestimate the cost of
globalizing their business operations because they
are not familiar with the environmental
characteristics previously discussed.

Tax Multicountry
treaties tax laws
Customs
duties
Import
fees £ € ¥
15-27
End of Chapter 15

15-28