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Lecture 1
Lecture 1
Introduction to
International Accounting
1-2
Introduction to International Accounting
1-3
Financial Accounting, Governmental Accounting, Cost
Accounting, and International Accounting are distinct branches
of accounting with unique characteristics and applications.
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Financial Governmental 0Cost
Accounting Accounting Accounting
International Accounting
International accounting deals with accounting practices and principles in a global business environment, encompassing
transactions and financial reporting across national borders.
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Scope of International Accounting:
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Here are the key aspects of the nature and scope of international accountin
1)Reporting Standards:
2)Currency and Exchange Rates:
3)Multinational Operations
4) Cultural and Legal Differences
5) Complexity of Consolidation
6) Cross-Border Transactions:
7)Comparative Analysis
8) International Auditing and Assurance
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Aspects Explanation
1) Reporting Standards:
International accounting may involve compliance with internationa
financial reporting standards (IFRS) or other global accounting
frameworks to ensure consistency and comparability. In contrast,
other types of accounting, such as national accounting systems,
may follow their own specific accounting frameworks and
standards
3) Multinational Operations International accounting addresses the financial reporting and operational
considerations of multinational companies, including consolidation of
financial statements across different entities and jurisdictions. Other types
of accounting, such as management accounting or cost accounting, may
primarily focus on the internal financial management of a single entity.
4) Cultural and Legal International accounting takes into account cultural and legal
Differences variations across countries in financial reporting practices and
requires an understanding of different accounting principles,
taxation systems, and legal requirements. In contrast, other
types of accounting may be more focused on specific local
regulations and practices
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Aspects Explanation
7) Comparative Analysis International accounting facilitates the comparison of financial
information across countries and companies. It enables
investors, creditors, and other stakeholders to assess the
financial performance and position of entities operating in
different jurisdictions, enhancing transparency and decision-
making.
8) International Auditing and Assurance International accounting extends to the auditing and assurance
practices for multinational companies. It involves understanding
and complying with international auditing standards and
conducting audits that meet the requirements of both global
and local regulations.
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Learning Objective 2:
Describe accounting issues created by international trade?
International trade can create several accounting issues that organizations need to address. Here are
some common accounting issues associated with international trade:
This gives rise to foreign exchange risk 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).
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Learning Objective 2:
Describe accounting issues created by international trade?
Learning Objective 2
1-16
-Suppose that on February 1, 2011, 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, 2011. The exchange (spot)
rate as of February 1, 2011, is 10 pesos per U.S. dollar. How many pesos does Jose agree to pay?
Even though Jose SA 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, 2011, as follows:
-Suppose that on March 2, 2011, the spot rate for pesos is 11 pesos/U.S. $. Joe Inc. will receive 1,000,000 pesos,
which are now worth $90,909. Joe makes the following journal entry:
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2-Hedging
With international trade, organizations face exchange rate risk, which can impact their financial
results. Accounting for hedging activities, such as forward contracts or options, and fair value
measurement of derivatives becomes important to manage and report these risks.
Joe can hedge (i.e., protect itself) against a loss from an exchange rate fluctuation. Hedging can be
accomplished by various means, including:
Ex:
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3-Transfer pricing :
1-19
Thus , giving rise to certain problems in an international context :
Governments in the various countries often To the extent that division managers are evaluated
scrutinize transactions to assure that sufficient based on divisional profits, transfer prices
profits are being recorded in that country. ( influence division manager performance
reduce overall tax liability ) evaluation.
( this can result in a loss of tax revenue for
countries and create an uneven playing field
for business )
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4-International Taxation:
Engaging in international trade introduces complex tax implications.
Organizations must address tax planning, tax compliance, and accounting for
deferred taxation, ensuring adherence to international tax laws and treaties.
1-21
5- Compliance with International Accounting Standards:
International trade may require compliance with international financial reporting standards, such as the International
Financial Reporting Standards (IFRS). Organizations need to ensure their accounting practices, financial statements,
and disclosures align with the relevant international accounting standards
International trade often involves longer supply chains and inventory movements across different countries. Proper
accounting for inventory valuation, including the recognition of transportation costs, duties, and handling charges,
becomes crucial to accurately reflect the value of inventory.
International trade requires the maintenance of various export and import documentation, such as bills of lading,
customs declarations, and export/import licenses. Organizations must ensure proper record-keeping and accounting
for these documents to comply with trade regulations and facilitate audits
1-22
8- Foreign Direct Investment (FDI) :
refers to the investment made by a company or individual from one country (the
home country) into another country (the host country) with the intention of
establishing a lasting interest and significant control over an enterprise in the host
country.
1-23
Types of Foreign Direct Investment:
This type of FDI involves establishing In this type of FDI, an investor A joint venture is a partnership
a new business operation or facility in acquires an existing company or a between a foreign investor and a
the host country. The investor builds significant stake in a company in the local company or entity in the host
the infrastructure and operations host country. Mergers and country. Both parties contribute
from scratch, creating new jobs and acquisitions allow investors to gain resources, share risks and profits,
contributing to the host country's access to an established market and collaborate in operating a
economy. presence, customer base, business venture.
distribution networks, and other Joint ventures enable foreign
valuable assets of the target investors to leverage the local
company. partner's knowledge, market access,
and relationships.
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Learning Objective 3:
Explain reasons for, and accounting issues associated with, foreign direct investment (FDI).
1- Market Access:
Companies invest in foreign markets to access new customers, expand their market share,
and tap into growing or emerging markets. FDI allows companies to establish a local
presence and better understand local consumer preferences and market dynamics.
2- Resource Acquisition:
Foreign direct investment may be driven by the need to access strategic resources such as
raw materials, energy, or technology that are abundant or of high quality in the host
country. Investing directly in the source country can provide a more secure and cost-
effective supply of resources.
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Reasons for Foreign Direct Investment:
3- Cost Efficiency:
Companies may choose to invest in foreign countries to benefit from cost advantages such as
lower labor costs, favorable tax regimes, reduced production costs, or access to skilled labor. FDI
allows companies to optimize their production and operational costs by leveraging these
advantages.
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Reasons for Foreign Direct Investment:
6- Policy Incentives:
Governments often offer incentives and favorable policies to attract foreign direct
investment. These incentives can include tax breaks, subsidies, streamlined regulations,
and infrastructure support. Companies may be motivated to invest in countries that
provide a favorable investment climate and incentives.
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Learning Objective 4:
Describe the practice of cross-listing on foreign stock exchanges.
1-28
Motivations for Cross-Listing:
Companies opt for cross-listing on foreign stock exchanges for various reasons, including:
a. Enhanced Access to Capital:
Cross-listing provides access to a broader investor base, including international investors, potentially increasing
liquidity and improving the company's ability to raise capital.
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d. Improved Valuation:
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Learning Objective 5:
Explain the notion of global accounting standards.
1-31
Examine the importance of international trade, FDI, and multinational corporations
(MNCs) in the global economy.
International trade :
In 2008 exports worldwide topped $16 trillion. Between 1996 and 2008, U.S.
exports increased by 106% in volume.
Foreign Direct Investment
Between 1982 and 2008 worldwide FDI inflows increased from $58 billion to
$1.7 trillion.
Multinational corporations (MNCs) –
Companies that have headquarters in one country and operate in one or more
other countries. Currently, MNCs account for approximately 10% of the world’s
Gross Domestic Product (GDP).
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Examine the importance of international trade, FDI, and multinational corporations (MNCs) in the global economy.
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development.
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a-Economic Growth:
International trade facilitates the exchange of goods and services between
countries, allowing them to specialize in producing goods they have a
comparative advantage in. This specialization leads to increased
productivity, efficiency, and economic growth for participating nations.
b. Market Expansion:
International trade opens new markets for businesses, enabling them to
International Trade: reach a larger customer base beyond their domestic borders. This expands
revenue opportunities, drives business growth, and supports job creation.
d. Infrastructure Development:
FDI can contribute to the development of physical and social infrastructure in h
countries. MNCs invest in infrastructure projects, such as transportation netwo
power plants, and telecommunications systems, improving connectivity and
facilitating economic growth.
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4. What is the term used to describe the possibility that a foreign currency will
decrease in US $ value over the life of an asset such as Accounts
Receivable?
A) foreign exchange translation
B) foreign exchange risk
C) hedging
D) foreign currency options
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7. Purchasing an option to buy foreign currency at a predetermined
exchange rate in order to reduce exchange risk is called:
A) transfer pricing.
B) hedging.
C) translating.
D) cross-listing.
8. What term is used to describe the process of reducing foreign exchange risk?
A) international accounting
B) exposure
C) hedging
D) globalization
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10. Which of the following is an example of a greenfield investment?
A) Nike contracts with a footwear company in China to make athletic
shoes.
B) A Chinese oil company buys a U.S. oil company.
C) Toyota, a Japanese automaker, builds an assembly plant in
Ohio.
D) Daimler, a German automaker, merges with Chrysler, a U.S.
automaker.
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