Bài giảng International Accounting - Chapter 1: Introduction to international accounting

1/9/2021

International Accounting

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Lecturer: Assoc. Prof. Phạm Đức Cường, PhD.

School of Accounting and Auditing

The National Economics University

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Textbook:

 Doupnik, T. and H. Perera, International Accounting (5th

edition), McGraw-Hill Irwin, 2019

 Others

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International Accounting_ Main contents

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Topic 1 Accounting for Foreign Currency Transactions

Topic 2 Translation of Foreign Currency Financial

Statements

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Topic 3 International Financial Statement Analysis

Topic 4 Comparative Accounting

Topic 5 International Harmonization of Accounting

Standards and Practices

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Topic 6 International Transfer Pricing

Topic 7 International Taxation

Topic 8 Foreign Exchange Risk Management

First 9 chapters

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Assessment Scheme

Assessment Items

Value

Note

1. Class participation

10%

20%

50%

Continuous - class attendance and

tutorial participation

2. Mid-term exam.

3. Group Assignment

4. Final Exam

60-minute test

Group reports and Presentation

90 minute-test

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Definition



What is Accounting?

What is International Accounting?

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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

. Understand 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

1) General level

Study of standards, guidelines and rules of accounting, auditing

and taxation within and across countries

2) Supranational accounting

Standards, guidelines, and rules issued by supranational

organizations such as IASB, IFAC, OECD

3) Company level

Followed by company, specifically related to international business

activities and foreign investments

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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

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Accounting Issues Related to International

Business—Sale to Foreign Customer (2)

. Suppose that on February 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 NMUK will pay in Pound

Sterling on March 2, 2018. The exchange rate as of

February 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—Sale to Foreign Customer (3)

. Even though NMUK agrees to pay £100,000 Magnum

records the sale in U.S. dollars on February 1, 2018, as

follows: [£1 = $1.35]

Dr. Accounts Receivable

Cr. Sales Revenue

135,000

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Accounting Issues Related to International

Business—Sale to Foreign Customer (4)

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

Pound Sterling is £1 =$1.30. Magnum will receive

100,000 Pound Sterling which are now worth $130,000

Dr. Cash

130,000

5,000

Dr. Loss on Foreign Exchange

Cr. Accounts Receivable

135,000

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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 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

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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 unit’s

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

management’s control process

. Companies policies/procedures being followed

. Uncover errors, inefficiencies, and possibly fraud

. Abide by FCPA (Foreign Corrupt Practices Act)

. Issues faced by internal and external auditors

. Differences in language and culture

. Differences in 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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Sustainability Reporting

. Sustainability Value Report

. Corporate Responsibility Report

. Mostly voluntary but required in several countries

. Provide information on:

. Environmental impact

. Labor practices

. Product safety

. Innovation

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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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Bài giảng International Accounting - Chapter 1: Introduction to international accounting - Phạm Đức Cường