Chapter 1:

Introduction to
International
Accounting

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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
transactions)
Explain the reasons for, and the accounting issues
associated with, foreign direct investment
Describe the practice of cross-listing on foreign stock
exchanges
Explain the notion of global accounting standards
Examine the importance of international trade, foreign
direct investment, and multinational corporations in the
global economy

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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

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Accounting Issues Related to International
BusinessSale 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

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Accounting Issues Related to International
BusinessSale to Foreign Customer
Suppose that on February 1, 2014, 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, 2014. The exchange rate as of February 1, 2014 is
U.S.$1 = 10 pesos. How many pesos does Jose agree to
pay?

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Accounting Issues Related to International
BusinessSale 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, 2014, as follows:

Dr. Accounts Receivable 100,000

Cr. Sales Revenue 100,000

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Accounting Issues Related to International
BusinessSale to Foreign Customer
Suppose that on March 2, 2014, 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

Dr. Cash 90,909

Dr. Loss on Foreign Exchange 9,091
Cr. Accounts Receivable 100,000

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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

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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

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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

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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

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International Income Taxation
Double taxation
Foreign income taxes
The companys profits taxed at foreign rates
U.S. income taxes
The U.S. will tax the companys 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

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International Transfer Pricing
Issue for multinational companies making intercompany
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

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Performance Evaluation of Foreign Operations

Evaluation is through periodic reports on individual units

performance
Issues in evaluation
Translation from one currency to another
Inflated price paid in transfer pricing
Issues unique to foreign operations

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

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

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

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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
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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End of Chapter 1

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