Introduction to International Accounting
Chapter One Introduction to International Accounting
Learning Objective 1. Understand the nature and scope of international accounting. 2. Describe accounting issues created by international trade. 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.
What is International Accounting?
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.
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). * This gives rise to foreign exchange risk as the value of the foreign currency is likely to change in relation to the company’s home country currency (e.g., U.S dollars).
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?
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
Learning Objective 1. Understand the nature and scope of international accounting. 2. Describe accounting issues created by international trade. 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.
What is International Accounting?
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.
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). * This gives rise to foreign exchange risk as the value of the foreign currency is likely to change in relation to the company’s home country currency (e.g., U.S dollars).
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?
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