International
Accounting, 5e
Timothy
Doupnik, Hector
Perera
(Solutions Manual All
Chapters)
,Chapter 01 - Introduction to International Accounting
CHAPTER 1
INTRODUCTION TOINTERNATIONAL ACCOUNTING
Chapter Outline
I. International accounting is an extremely broad topic.
A. At a minimum it focuses on the accounting issues unique to multinational corporations,
especially with respect to international transactions and foreign investments.
B. At the other extreme it encompasses the study of the various functional areas of
accounting in all countries of the world, as well as the activities of a number of
supranational organizations.
C. This book provides an overview of the broadly defined area of international accounting,
including certain supranational guidelines, but focusing on the accounting issues
related to international business activities and foreign investments. In other words, this
book focuses on international accounting issues at the company level that are
specifically relevant to multinational corporations.
II. There are several accounting issues encountered by companies involved in international
trade.
A. One issue is the accounting for foreign currency-denominated export sales and import
purchases.An important issue is how to account for changes in the value of the foreign
currency-denominated account receivable (payable) that occur as exchange rates
fluctuate.
B. A related issue is the accounting for derivative financial instruments, such as forward
contracts and foreign currency options, used to hedge the foreign exchange risk
associated with foreign currency transactions.
III. There is an even greater number of accounting issues encountered by companies that
have made a direct investment in a foreign operation.These issues primarily result from the
fact that accounting rules, tax laws, and other regulations differ across countries, and
include:
A. Figuring out how to make sense of the financial statementsofa foreign acquisition
target prepared in accordance with an unfamiliar GAAP when making a foreign direct
investment decision.
B. Determining the correct amounts to include in consolidated financial statements for the
assets, liabilities, revenues, and expenses of foreign operations.The consolidation of a
foreign subsidiary involves a two-step process: (1) restate foreign GAAP financial
statements into parent company GAAP and (2) translate foreign currency amounts into
parent company currency.Determining the appropriate translation method and deciding
how to report the resulting translation adjustment are important questions.
C. Complying with host country income tax laws, as well as home country tax laws related
to income earned in a foreign country (foreign source income).Double taxation of
income is a potential problem, and foreign tax credits are the most important relief from
this problem.
D. Establishing prices for intercompany transactions that cross national borders
(international transfer prices) toachieve corporate objectives and at the same time
comply with governmental regulations.
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,Chapter 01 - Introduction to International Accounting
E. Evaluating the performance of both a foreign operating unit and its
management.Decisions must be made with respect to issues such as the currency in
which a foreign operation should be evaluated and whether foreign management
should be held responsible for items over which they have little control.
F. Establishing an effective internal audit function to help maintain control over foreign
operations.Differences in culture, customs, and language must be taken into
consideration.
G. Deciding whether to cross-list securities on foreign stock exchanges, and complying
with local stock exchange regulations to do so.This could involve the preparation of
financial information in accordance with a GAAP different from that used by the
company.
IV. As companies have become more multinational, so have their external auditors.The Big 4
public accounting firms are among the most multinational business organizations in the
world.
V. Problems encountered by MNCs when confronted with different local GAAP in different
countries leads to the desire for a single set of global accounting standards.There would be
significant advantages to MNCs if all countries used the same GAAP.
VI. The world economy is becoming increasingly more integrated.International trade (imports
and exports) has grown substantially in recent years and has become a normal part of
business for relatively small companies.The number of U.S. exporting companies has
increased four-fold over the last three decades.
VII. The tremendous growth in foreign direct investment (FDI) over the last several decades is
partially attributable to the liberalization of investment laws in many countries specifically
aimed at attracting FDI.The aggregate revenues generated by foreign operations are more
than twice as large as the revenues generated through exporting.
VIII. There were more than 82,000 multinational companies in the world in 2009 with810,000
foreign subsidiaries.The 100 largest multinationals generatedapproximately 4% of global
GDP.A disproportionate number of multinational corporations are headquartered in the
United States, China, Japan, and the European Union.
IX. According to one definition of multinationality used by the United Nations, nine of the ten
most multinational companies in the world in 2016 were headquartered in Europe, including
four companies based in the United Kingdom.
X. In addition to establishing operations overseas, many companies also cross-list their
shares on stock exchanges outside of their home countries.There are a number of reasons
for doing this including having access to a larger pool of capital.
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Education.
, Chapter 01 - Introduction to International Accounting
Answers to Questions
1. In 2016, companies worldwide exported over $15.9 trillion worth of merchandise. Although
international trade has existed for thousands of years, recent growth in trade has been
phenomenal.Over the period 2006-2016, U.S. exports increased from $1,026 billion to
$1,455 billion per year, a 42% increase.During the same period, Chinese exports more than
doubled to $2,098 billion in 2016.
2. Companies engaged in international trade with imports and exports denominated in foreign
currencies are faced with the accounting issue of translating foreign currency amounts into
the company’s reporting currency and reporting the effects of changes in exchange rates in
the financial statements. Many of these companies also engage in hedging activities to
reduce the risk of changes in exchange rates.The accounting for derivative financial
instruments used to hedge foreign exchange risk can be quite complicated.
3. As listed in Exhibit1-1, following are several reasons why companies might want to invest
overseas:
Increase sales and profits
Enter rapidly growing or emerging markets
Reduce costs
Gain an foothold in economic blocs
Protect domestic markets
Protect foreign markets
Acquire technological and managerial know-how
4. FDI is playing a larger and more important role in the world economy.Global sales of foreign
affiliates were more than twice as large as global exports in 2016, compared to almost parity
about three decades earlier.Global sales of foreign affiliates comprise about one half of
worldwide gross domestic product.
5. Financial reporting issues that result from foreign direct investment are (a) conversion of
foreign GAAP to parent company GAAP and (b) translation of foreign currency to parent
company reporting currency to prepare consolidated financial statements.
6. Two major taxation issues related to a foreign direct investment are (a) taxation of the
investee’s income by the host country in which the investment is located and (b) taxation of
the investee’s income by the investor’s home country.Companies with foreign direct
investments need to develop an expertise in the host country’s income tax rules, as well as
in the home country’s tax rules with respect to foreign source income.
7. Companies must make several decisions in designing the system for evaluating the
performance of foreign operations.Two of these are (a) deciding whether to evaluate
performance on the basis of foreign currency or parent company reporting currency and (b)
deciding whether to factor out of the performance measure those items over which the
foreign operation’s managers have no control.
8. Two reasons to have stock listed on the stock exchange of a foreign country are (a) to
obtain capital in that country, perhaps at a more reasonable cost than is available at home,
and (b) to have an “acquisition currency” for acquiring firms in that country through stock
swaps.
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Education.
