© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-1 GLOBAL BUSINESS AND ACCOUNTING Chapter 15

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-2 Globalization Occurs as managers become aware of an 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-3 Globalization Typically progresses through a series of stages that include: 1.Exporting, 2.Licensing, 3.Joint ventures, 4.Wholly owned subsidiaries, and 5.Global sourcing.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-4 Environmental Forces Shaping Globalization Globalization Political and legal system Economic system Culture Technology and infrastructure

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-5 Environmental Forces Shaping Globalization Planned Economy Government owns factors of production Market Economy People owns factors of production

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-6 Environmental Forces Shaping Globalization

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-7 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-8 Harmonization of Financial Reporting Standards

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 15-9 Foreign Currencies and Exchange Rates An exchange rate is the amount it costs to purchase one unit of currency with another currency. ¥1,000,000 × $ = $7,640

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on that date. On January 1, 2005, the exchange rate is $0.97 per Euro. U.S. company purchases €100,000 from financial institution.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005 the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting for Transactions with Foreign Companies On January 1, 2005, a U.S. company purchases equipment from an Italian company for €100,000. The amount is payable in full on February 15, On January 1, 2005, the exchange rate is $0.97 per Euro. At 1/31/05 the spot exchange rate is €1 = $0.96. On 2/15/05, the exchange rate is €1 = $0.98.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Hedge 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. Future contracts are the right to receive a specified quantity of foreign currency at a future date.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Translation of Foreign Currency Financial Statements

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Translation of Foreign Currency Financial Statements The translation adjustment is reported in other comprehensive income in the equity section of the balance sheet

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 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 discussed on the early slides in this presentation. 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 discussed on the early slides in this presentation. € ¥ £ ₣ ₧

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin In many countries around the world, bribery is part of doing business. In many countries, this officially sanctioned corruption is not viewed as wrong or unethical. However, U.S.-based businesses are prohibited from influence peddling. The IMF and World Bank instituted policies to cut off funding to countries ignoring corrupt practices. Foreign Corrupt Practices Act

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 15