Session 01- Global Acctg and Diversity (R 2010)

8/7/2019 Session 01- Global Acctg and Diversity (R 2010)

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McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

INTRODUCTION TO INTERNATIONAL

ACCOUNTING

Chapter 1



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Introduction to International Accounting

Learning Objectives

1. Understand the nature and scope of international accounting

2. Describe accounting issues created byinternational trade

3. Explain reasons for, and accounting issuesassociated with, foreign direct investment (FDI)



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Introduction to International Accounting

Learning Objectives

4. Describe the practice of cross-listing on foreignstock exchanges

5. Explain the notion of internationalharmonization of accounting standards

6. Examine the importance of international trade, FDI,and multinational corporations (MNCs) in theglobal economy



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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 standards and practicesbetween countries



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International Transactions, FDI and RelatedAccounting Issues

Sale to foreign customer

Most companies¶ first encounter with internationalbusiness occurs as sales to foreign cu stomer s.

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).



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This gives rise to foreign exchange ri sk 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).

Companies can hedge (i.e., protect itself) against aloss from an exchange rate fluctuation.

H edging can be accomplished by various means,including foreign currency exchange options,forwards, and other derivative products.



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Even though Jose SA agrees to pay 1,000,000pesos ($100,000 x 10 pesos/U.S. $), Joe, Inc.

records the sale (in U.S. dollars) on February 1,

2006 as follows:

Dr. Accounts receivable (+) 100,000Cr. Sales revenue (+) 100,000



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Suppose that on March 2, 2006, the spot rate for pesos is 11 pesos/US$1. 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



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Hedging

Joe can hedge (i.e., protect itself) against a lossfrom an exchange rate fluctuation. H edging can

be accomplished by various means, including:

Foreign currency option ± the right (but not the

obligation) to sell foreign currency at a

specific exchange rate for a specified period of

time.



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Hedging

Forward contract ± this is an obligation toexchange foreign currency at a date in the future, which is

typically 30, 60 or 90 days.



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Foreign Direct Investment (FDI) ± occurs when a

company invests in a business operation in aforeign country. This represents an alternative to

importing to customers and/or exporting from

suppliers in a foreign country. Two types of FDI

are greenfield investment and acquisition.



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Foreign Direct Investment (FDI)

G reenfield investment ± the establishment of a newoperation in the foreign country.

Acqui sition ± investment in an existing operation in theforeign country.



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The Global Economy

Several indicators demonstrate the extent of

business globalization: I nternational trade ± In 2006 exports worldwide topped

$11.7 trillion. Between 1996 and 2006, U.S. exportsincreased by 66% in volume.

Foreign Direct I nvestment ± Between 1982 and 2005worldwide FDI inflows increased from $58 billion to $916billion.



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The Global Economy


business globalization: M ultinational corporations ( MN C s) ± Companies that

have headquarters in one country and operate in one or more other countries. Currently, MNCs account for

approximately 10% of the world¶sG

ross Domestic Product ( G DP ).



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The Global Economy


business globalization: I nternational capital mar k et s ± As of the end of 2007

there were 422 companies representing 45 countriescross-listed on the New York Stock Exchange (NYSE).

In addition, over 70 U.S. companies are cross-listed onthe London Stock Exchange, for example.



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FDI creates several important issues:

Business Combinations The need to convert from local to U.S. GAAP.

The need to translate from local currency to U.S. dollars.

Access to financing

Large multinational companies need access to capitalthroughout the world.

Access requires clear, reliable, and transparent financialinformation.

Accounting and auditing diversity makes access moreexpensive.



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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¶sforeign-based income.



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International Transfer Pricing

T ransfer pricing ± setting prices on goods and services

exchanged between separate divisions within the samefirm. These prices have a direct impact on the profits of the different divisions.



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These exchanges are not arms-length

transactions, thus giving rise to certainproblems in an international context:

T axation ± governments in the various countries oftenscrutinize transactions to assure that sufficient profits

are being recorded in that country.



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Performance evaluation i ssues ± to the extent that

division managers are evaluated based on divisionalprofits, transfer prices influence division manager performance evaluation.



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International Auditing

Both internal and external auditors encounter

differences that arise between auditing in aninternational vs. domestic context. These

include:

Language and cultural differences

Different accounting standards (GAAP) and auditingstandards (GAAS)



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International Harmonization of AccountingStandards

The international movement towards a single set of

worldwide accounting rules is referred to asHarmonization or C onvergence.

International Financial Reporting Standards (IFRS) and

U.S. GAAP are the two most important sets of accounting rules.



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FDI and Related Accounting and Business Issues

Regulatory and Analytical challenge

Lack of comparability of financial information for companies in the same industry but located indifferent accounting jurisdictions.

Increases regulatory and investing cost.



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Factors Leading to Accounting Diversity

J uri sdictional Legal sy stems

Common law vs. Code law Common law systems

Have relatively fewer statutes and moreinterpretation by courts to apply laws to specificsituations.

Found most often in Great Britain and other English-speaking countries.

In these countries, the source of accounting rulestends to be non-governmental organizations.



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Legal sy stems -- Code law

Characterized by relatively more statutes or code

law. Found more often in non English-speaking

countries (Germany or Japan). Accounting rules in these countries tend to be

legislated (i.e., the source is the government).




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T axation

U.S. -- taxable income and book income are generallyquite different.

Germany -- rules governing taxable and book incometend to be the same, which generally results in moreconservative accounting.



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Taxation (continued)

Companies manage global tax obligations using³discretionary´ transfer pricing.

T ransfer pricing ± setting prices on goods and servicesexchanged between separate divisions within the samefirm. These prices have a direct impact on the profits of

the different divisions. These prices are not always arms-length agreement and, thus,

taxing authorities tend to audit transfer price arrangements andchallenge arrangements deemed designed to artificiallymanage income tax liability.



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Provider s of financing

In many countries major sources of capital are families,banks, and the government.

Accounting and disclosure in those countries tend to beless important.

In the U.S. and UK the providers of financing are diverse

shareholders, so accounting and disclosure are moreimportant.



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E conomic E nvironment

Some countries have historically high rates of inflation. Accounting in these countries often requires

adjustments to offset the impact of inflation. This is common in emerging business economies. Given extended periods of low inflation in the U.S.,

inflation accounting is not required.



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Political and economic ties

These linkages tend to make information sharing easier.

Nations that share ties often have similar accountingsystems.



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Correlation of factor s In summary, correlations exist among these factors.

Code law countries tend to have accounting rules basedon tax rules, and providers of financing with close ties tothe company (i.e., family, banks, government).



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The Influence of Culture on Financial Reporting

Culture is also widely considered to influence financialreporting systems.

H ofstede¶s five cultural dimensions is the mostcommonly used scheme to discuss cultural influences.

Gray classified culture along 4 dimensions.

N obes argued that international differences are afunction of culture and the system of financing.



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International Auditing

Both internal and external auditors encounter

differences that arise between auditing in aninternational vs. domestic context, including:

Language and cultural differences

Different accounting standards (GAAP) and auditing

standards (GAAS) Currently, the I nternational Audit and Assurance

S tandard s Board (http://www.ifac.org/IAASB/) sets globalauditing standards.



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Cross-listing on Foreign Stock Exchanges

Multinational Enterprises frequently raise capital outsidetheir home country.

Cross-listing - a company offers its shares on anexchange outside of its home country.

For example: Alcoa is a U.S. company listed on the NYSE and the London

International Main Market Exchange (Seeiasplus.com/stats/lonintl.pdf.)

There are over 400 non-U.S. companies listed on the U.S.NYSE from 45 different countries. (Seeiasplus.com/stats/nyseintl.pdf)



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International Convergence of Accounting Standards

T he N orwal k Agreement

Published in 2002.

Is a promise of cooperation in standard-setting between the InternationalAccounting Standards Board (IASB) and the Financial AccountingStandards Board (FASB).

Represents a significant step toward international harmonization.

F AS B/ IAS B M emo of U nder standing

Published in 2006. Establishes a roadmap for convergence. Includes short-term and long-term agenda projects. Revised in 2008 Revised again in 2009 Quarterly project reports ± 2010 to present



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International Convergence of Accounting Standards

S E C Activities Foreign companies filing in U.S. must submit financials in

accordance with GAAP; OR They could provide financials with reconciliations of income and

equity to U.S. GAAP.

In 2007, the SEC voted to allow foreign filers to submit financials inusing IFRS without the reconciliation. Effective for 2008 financial

reports.



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Some Challenges of International Convergence

S E C Activities (continued) Currently considering permitting U.S. companies option to file with IFRS rules.

Has publicly stated that IFRSs should be the global accounting standards.

S E C Concerns re: I F R S, include

Ensuring a fair and open standard-setting process

Funding an international standard-setter

Jurisdictional issues Enforcement

Consistent application across jurisdictions

Balancing representation on the global standard setting committees

Education and training



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End

Session 01- Global Acctg and Diversity (R 2010)

Documents

Transcript of Session 01- Global Acctg and Diversity (R 2010)