1. Chapter 1: Introduction to International Accounting

2. International Accounting
Includes study of various functional areas of accounting
Focuses on the accounting issues unique to multinational corporations
Can be defined at three different levels
Supranational accounting
Standards, guidelines, and rules issued by supranational organizations
Company level
Followed by company in international business activities and foreign investments
International accounting
Study of the standards, guidelines, and rules of accounting, auditing, and taxation existing within each country and comparison across countries

3. Accounting Issues Related to International Business—Sale to Foreign Customer
First encounter with international business occurs as sales to foreign customers
Credit sales are made to foreign customers who will pay in their own currency
Gives rise to foreign exchange risk

4. Accounting Issues Related to International Business— Sale to Foreign Customer
Suppose that on February 1, 2015, 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, The exchange rate as of February 1, 2015 is U.S.$1 = 10 pesos. How many pesos does Jose agree to pay?

5. Accounting Issues Related to International Business— Sale to Foreign Customer
Even though Jose 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, 2015, as follows:
Dr. Accounts Receivable
100,000
Cr. Sales Revenue
100,000

6. Accounting Issues Related to International Business— Sale to Foreign Customer
Suppose that on March 2, 2015, the exchange rate for pesos is U.S.$1=11 pesos. Joe Inc. will receive 1,000,000 pesos, which are now worth $90,909
90,909
Dr. Cash
9,091
Dr. Loss on Foreign Exchange
Cr. Accounts Receivable
100,000

7. Hedges of Foreign Exchange Risk
Techniques to manage exposure
Foreign currency option
Right to sell foreign currency at a predetermined exchange rate and time
Forward contract
Obligation to exchange foreign currency at a future date

8. Foreign Direct Investment
Ownership and control of foreign assets
Two ways
Acquisition
Investment in existing operations in foreign countries
Greenfield investment
New operation in foreign countries

9. Reasons for Foreign Direct Investment
Increase sales and profits
Enter rapidly growing or emerging markets
Reduce costs
Gain a foothold in economic blocs
Protect domestic markets
Protect foreign markets
Acquire technological and managerial know-how

10. Financial Reporting for Foreign Operations
Steps in reporting for Foreign Operations
Conversion from local to U.S. GAAP
Records prepared using local GAAP
Translate from local currency to U.S. dollars
Records are prepared using local currency

11. International Income Taxation
Double taxation
Foreign income taxes
The company’s profits taxed at foreign rates
U.S. income taxes
The U.S. will tax the company’s foreign-based income
Tax treaties provide relief from double taxation
Objectives
Legally minimize taxes in foreign countries and home country
Maximize after-tax cash flows

12. International Transfer Pricing
Issue for multinational companies making inter company sales
Companies use of discretionary transfer pricing
Price negotiation between buyer and seller not feasible due to tax rate differences
Companies shift profits from countries with high-tax rates to countries with low tax-rates
Countries regulate international transfer pricing to ensure companies pay their fair share of local taxes

13. Performance Evaluation of Foreign Operations
Evaluation is through periodic reports on individual unit’s performance
Issues in evaluation
Translation from one currency to another
Inflated price paid in transfer pricing
Issues unique to foreign operations

14. International Auditing
Internal auditing is an important component of a management’s control process
Issues faced by internal and external auditors
Differences in language and culture
Differences accounting standards and auditing standards

15. Cross-Listing on Foreign Stock Exchanges
Cross-listing: stock listed and traded on several foreign stock exchanges
Issues
Listing regulations differ for foreign companies

16. Global Accounting Standards
Requires countries to adopt a common set of accounting rules
Advantages
Avoids GAAP conversion
Easier to evaluate foreign investment opportunities

17. The Global Economy
International trade constitutes a significant portion of the world economy
Largest exporters are China, the United States and Germany
Largest importers are United States, Germany, and China
Foreign direct investment to retain advantage over competition (Exhibit 1.3)
Multinational companies (Exhibit 1.4,1.5)
International capital markets:
Help companies find capital at a reasonable cost
Help in having an “acquisition currency” for acquiring firms through stock swaps

18. End of Chapter 1

19. Assignment 1
Case 1-1 Besserbrau AG