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WHAT IS ACCOUNTING?
INTERNATIONAL
ACCOUNTING Accounting is a way of recording, analysing and
summarizing transactions of an entity:
1 The transactions are recorded in “books of original entry”
2 The transactions are then analysed and posted to the ledgers
3 Finally, the transactions are summarised in the financial
statements

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Can be defined at three different levels

THE FINAL GRADE IS COMPUTED AS FOLLOWS:
GENERAL LEVEL
Study of standards, guidelines and
International On-going assessment:
rules of accounting, auditing and
Accounting taxation within and across countries - Attendance 10 %
- 01 progress test: 20 %
▪ Includes study of SUPRANATIONAL ACCOUNTING
various functional - 01 mid-term test: 20 %
areas of accounting Standards, guidelines, and rules issued by
▪ Focuses on the - Final Exam: 50 %
accounting issues supranational organizations such as IASB,
unique to
multinational
corporations IFAC, OECD

COMPANY LEVEL
Followed by company, specifically
related to international business
activities and foreign investments

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CHAPTER 1
SYLLABUS INTRODUCTION TO
INTERNATIONAL ACCOUNTING
✓ Chapter 1 : Introduction to International Accounting
✓ Chapter 2: Worldwide accounting diversity
✓ Chapter 3: International convergence of Financial Reporting
✓ Chapter 4: International financial reporting standards – Part 1
✓ Chapter 5: International financial reporting standards – Part 2
✓ Chapter 6: Foreign currency transactions and Hedging foreign exchange risk
✓ Chapter 7: Translation of foreign currency financial statements
✓ Chapter 8: International taxation
✓ Chapter 9: International transfer pricing

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LEARNING OBJECTIVES

▪ Discuss the nature and scope of international

accounting
▪ Describe accounting issues confronted by companies
involved in international trade (import and export
EVOLUTION OF A
transactions)
▪ Explain the reasons for, and the accounting issues
MULTINATIONAL
associated with, foreign direct investment
▪ Describe the practice of cross-listing on foreign stock
CORPORATION
exchanges
▪ Explain the notion of global accounting standards
▪ Understand the importance of international trade,
foreign direct investment, and multinational
corporations in the global economy

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Accounting Issues Related to International Business Accounting Issues Related to International Business
Sale to Foreign Customer (1) Sale to Foreign Customer (2)
▪ First encounter with international business occurs as sales to Magnum:
foreign customers produce and sell rearview mirrors to automakers in the
▪ Credit sales are made to foreign customers who will pay United States
in their own currency
▪ Gives rise to foreign exchange risk ▪ On Feb 1, 2018, Magnum., a U.S. company, makes
a sale and ships goods to NMUK, a British customer,
for £100,000 (UK)
▪ However, it is agreed that NUMK will pay in Pound
Sterling on Mar 2, 2018.
▪ The exchange rate as of Feb 1, 2018 is U.K. £1 =
$1.35 dollars.
▪ How many dollars does NMUK agree to pay?
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Accounting Issues Related to International Business Accounting Issues Related to International Business
Sale to Foreign Customer (3) Sale to Foreign Customer (4)

▪ Suppose that on March 2, 2018, the exchange rate for

Pound Sterling is £1 =$1.30. Magnum will receive
▪ Even though NMUK agrees to pay £100,000
100,000 Pound Sterling which are now worth $130,000
Magnum records the sale in U.S. dollars on
February 1, 2018, as follows: [£1 = $1.35]
Dr. Cash 130,000
Dr. Loss on Foreign Exchange 5,000
Dr. Accounts Receivable 135,000 Cr. Accounts Receivable 135,000
Cr. Sales Revenue 135,000

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Foreign Direct Investment

Hedges of Foreign Exchange Risk ✓ Because of the combination of
increased shipping costs and its
European customers’ desire to move
toward just-in-time inventory
▪ Techniques to manage, or hedge, their exposure to foreign systems,
exchange risk ✓ Magnum began thinking about
investing in a production facility
▪ Foreign currency option somewhere in Europe
▪ Right to sell foreign currency at a predetermined exchange rate
and time ▪ The ownership and control of foreign assets, such as
▪ Foreign currency Forward contract a manufacturing plant, is known as foreign direct
▪ Obligation to exchange foreign currency at a future date investment.
▪ Two ways
▪ Magnum purchased such an option for US$200 ▪ Acquisition
and was able to sell the £100,000 it received for ▪ Investment in existing operations in foreign countries
a total of US$135,000 because of the option’s ▪ Greenfield investment
strike price ▪ New operation in foreign countries
1-13 (to construct a brand-new plant)

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▪ In the early 1990s, Magnum identified a company in

Magnum Portugal (Espelho Ltda.) as a potential acquisition
Reasons for Foreign Direct Investment
candidate
▪ In determining NPV, Magnum needed to forecast
future cash flows and determine a fair price to pay ▪ Increase sales and profits
for Espelho. ▪ Enter rapidly growing or emerging markets
▪ Magnum asked for Espelho’s financial statements for
the past 5 years. ▪ Reduce costs
▪ The financial statements had been prepared in ▪ Gain a foothold in economic blocs
accordance with Portuguese accounting rules ▪ Protect domestic markets
▪ The balance sheet did not provide a clear picture of
▪ Protect foreign markets
the company’s assets, and many liabilities appeared
to be kept off-balance-sheet. Footnote disclosure was ▪ Acquire technological and managerial know-how
limited, and cash flow information was not provided.
▪ Portuguese income tax system and the taxes and
restrictions imposed on dividend payments made to
foreign parent companies

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Financial Reporting for Foreign Operations International Income Taxation

▪ Steps in reporting for Foreign Operations ▪ Double taxation

▪ Conversion from local to U.S. GAAP ▪ Foreign income taxes
▪ The company’s profits taxed at foreign rates
▪ Records prepared using local GAAP
▪ U.S. income taxes
▪ Translate from local currency to U.S. dollars ▪ The U.S. will tax the company’s foreign-based income
▪ Records are prepared using local currency ▪ Tax treaties provide relief from double taxation
▪ Objectives
✓ Magnum Corporation is required to prepare consolidated ▪ Legally minimize taxes in foreign countries and home country
financial statements, must be presented in U.S dollars and
▪ Maximize after-tax cash flows
prepared using U.S. GAAP
✓ Espelho Ltda., being a Portuguese corporation, keeps its
accounting records in euros (€) in accordance with
Portuguese GAAP

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International Transfer Pricing

In 2018, the United States abandoned its worldwide
approach in favor of a territorial approach to taxing foreign ▪ Issue for multinational companies making intercompany
source income. Beginning that year, sales
✓ income earned by foreign subsidiaries of U.S. companies ▪ Companies’ use of discretionary transfer pricing
was no longer subject to U.S. corporate income taxation. ▪ Price negotiation between buyer and seller not feasible due
✓ However, income earned by foreign branches of U.S. to tax rate differences
companies remains taxable in the United States. ▪ 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

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Performance Evaluation of International Auditing

Foreign Operations
▪ Evaluation is through periodic reports on individual unit’s ▪ Internal auditing is an important component of management’s
performance control process
▪ Companies policies/procedures being followed
▪ Issues in evaluation
▪ Uncover errors, inefficiencies, and possibly fraud
▪ Translation from one currency to another
▪ Abide by FCPA (Foreign Corrupt Practices Act)
▪ Inflated price paid in transfer pricing
▪ Issues unique to foreign operations ▪ Issues faced by internal and external auditors
▪ Differences in language and culture
▪ Differences in accounting standards and auditing standards

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▪ External auditors encounter - the same problems as Cross-Listing on Foreign Stock Exchanges
internal auditors in dealing with the foreign operations of
their clients. ▪ Cross-listing: stock listed and traded on several foreign
▪ External auditors - expertise in the various sets of financial stock exchanges
accounting rules as well as the auditing standards in the ▪ Issues
various jurisdictions ▪ Listing regulations differ for foreign companies
▪ Magnum’s external auditors
▪ must be capable of applying Portuguese auditing standards
to attest that Espelho’s financial statements present a true and
fair view in accordance with Portuguese GAAP.
▪ must apply U.S. auditing standards to verify that the
reconciliation of Espelho’s financial statements for
consolidation purposes brings the FSs into compliance with
U.S. GAAP.
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Sustainability Reporting Global Accounting Standards

▪ Sustainability Value Report

▪ Requires countries to adopt a common set of accounting
▪ Corporate Responsibility Report rules
▪ Mostly voluntary but required in several
▪ Advantages
countries
▪ Avoids GAAP conversion
▪ Provide information on:
▪ Easier to evaluate foreign investment opportunities
▪ Environmental impact
▪ Labor practices
▪ Product safety
▪ Innovation

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The Global Economy

▪ International trade constitutes a

significant portion of the world economy
THE GLOBAL ECONOMY ▪ Foreign direct investment to retain advantage over competition
▪ Multinational companies
▪ International capital markets:
▪ Help companies find capital at a reasonable cost
▪ Help in having an “acquisition currency” for acquiring firms
through stock swaps

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EXHIBIT 1.3 Growth in Foreign

International trade constitutes a
significant portion of the world economy EXPORT Direct Investment, 1990–2016

✓ The 3 largest exporters were China, the United

States, and Germany, in that order. IMPORT
✓ The 3 largest importers. A The United States,
China, and Germany, in that order,

The number of companies involved in trade also has grown substantially

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EXHIBIT 1.4 Home Country of Largest 100 Companies by EXHIBIT 1.5 The World’s Top 10 Nonfinancial Companies in Terms
Revenues, 2016 of Multinationality, 2016

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THE END

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