Introduction to International Accounting

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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 (+) 100,000

Cr. Sales revenue (+)100,000

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

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.

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. International Income Taxation

* Foreign income taxes – the foreign government will tax the company’s profits at applicable rates. * U.S. income taxes – the U.S. will tax the company’s foreign-based income. 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.

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. 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)

Cross-listing on Foreign Stock Exchanges

MNCs frequently raise capital outside their home country. When a company offers its shares on an exchange...
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