Chapter 1

CHAPTER 1:
INTRODUCTION TO INTERNATIONAL
ACCOUNTING

Semester II, 2013-2014
Department of Economics and Management

Thai Nguyen, 2014
LEARNING OBJECTIVES

1. Understand 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
econom.y

LEARNING OBJECTIVES

WHAT IS INTERNATIONAL ACCOUNTING?

International Accounting can be described at three
different levels:
The influence on accounting by international political groups
such as the Organization for Economic Corporation and
Development (OECD) , United Nations (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.
Clearly, International accounting encompasses an enormous
amount of territory both geographically and topically.
LO 1

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

LO 2

ACCOUNTING ISSUES

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).

LO 2

ACCOUNTING ISSUES


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?

LO 2

ACCOUNTING ISSUES


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 (+) 100,000
Cr. Sales revenue (+) 100,000

LO 2


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 (+) 90,909
Dr. Loss on foreign exchange (+) 9,091
Cr. Accounts receivable 100,000

LO 2

ACCOUNTING ISSUES

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.

LO 2

ACCOUNTING ISSUES

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.

LO 2

ACCOUNTING ISSUES

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.

LO 3

ACCOUNTING ISSUES

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.

LO 3
REASONS FOR FOREIGN DIRECT INVESTMENT
Increase Sales and Profits
Enter Rapidly Growing or Emerging Markets
Reduce Cost
Protect Domestic Markets
Protect Foreign Markets
Acquire Technological and Managerial Know-How

ACCOUNTING ISSUES

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.

LO 3

INTERNATIONAL INCOME TAXATION

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.

LO 3

INTERNATIONAL TRANSFER PRICING

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.

LO 3


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.

LO 3


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
INTERNATIONAL AUDITING
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)

LO 3

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.

LO 4

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.

LO 5

THE GLOBAL ECONOMY

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.

LO 6
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).

LO 6

THE GLOBAL ECONOMY

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.

LO 6

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