Chapter One

Introduction to
International Accounting

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 INTRODUCTION TO INTERNATIONAL ACCOUNTING
Learning Objectives

1. Understand the nature and scope of

international accounting.
2. Describe accounting issues created by international
trade.
3. Explain reasons for, and accounting issues associated
with, foreign direct investment (FDI).

1-2
Introduction to International Accounting

4. Describe the practice of cross-listing on foreign

stock exchanges.
5. Explain the notion of global accounting standards.
6. Examine the importance of international trade,
FDI, and multinational corporations (MNCs) in
the global economy.

1-3
 Financial Accounting, Governmental Accounting, Cost
Accounting, and International Accounting are distinct branches
of accounting with unique characteristics and applications.

Here are the key differences between these accounting

disciplines:

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 Financial Governmental 0Cost
Accounting Accounting Accounting

Purpose Financial Governmental Cost accounting focuses on the internal management of

accounting focuses accounting costs, helping organizations understand and control their
on the preparation focuses on the expenses, facilitate pricing decisions, and support
and reporting of financial performance evaluation.
financial management and
statements for reporting of public Cost Accumulation:
external users, such sector entities, Cost accounting involves the accumulation, allocation,
as investors, such as and analysis of costs related to various activities,
creditors, and government products, or services within an organization.
regulatory bodies. agencies, Decision Support:
municipalities, and Cost accounting provides management with crucial
nonprofit information for decision-making, such as cost-volume-
organizations. profit analysis, budgeting, and variance analysis.
Costing Methods:
Cost accounting employs various costing methods,
including job costing, process costing, and activity-based
costing (ABC), to assign costs to products or services
accurately

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 Financial Accounting Governmental Cost Accounting
Accounting

Reporting Financial accounting follows Governmental accounting Internal Reporting:

Standards generally accepted follows specific The primary users of cost accounting
accounting principles accounting standards information are internal stakeholders,
(GAAP) or international tailored for the public such as managers, executives, and
financial reporting sector, such as the operational teams, who use it for
standards (IFRS) to ensure Governmental planning, control, and performance
consistency and Accounting Standards evaluation purposes.
comparability of financial Board (GASB) standards
information. in the United States.

Audience The primary audience for The primary audience for

financial accounting governmental accounting
includes shareholders, includes government
lenders, government officials, taxpayers, and
agencies, and the general oversight bodies involved
public. in fiscal decision-making.

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 Financial Accounting Governmental Cost Accounting
Accounting

Time Financial accounting Governmental accounting

Orientation provides historical employs fund accounting,
financial information, which segregates
documenting past resources into different
transactions and events. funds based on their
specific purposes and
legal restrictions

Financial The key financial Emphasis on

Statements statements in financial Accountability:
accounting are the Governmental accounting
balance sheet, income emphasizes transparency,
statement, cash flow accountability, and
statement, and compliance with legal and
statement of changes in regulatory requirements.
equity.

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 Learning Objective 1 :
Understand the nature and scope of international accounting.

International Accounting
International accounting deals with accounting practices and principles in a global business environment, encompassing
transactions and financial reporting across national borders.

International Accounting can be described at three different levels:

The influence on accounting by The accounting practices of The differences in accounting,

international political groups companies in response to their auditing and taxation
such as the Organization for own international business standards and practices
Economic Cooperation and activities. between countries.
Development (OECD), UN, etc.
(Supranational organizations)

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 Scope of International Accounting:

The scope of international accounting encompasses various aspects of financial reporting,

including recognition, measurement, presentation, and disclosure of financial information.
It also encompasses aspects of managerial accounting and cost accounting when dealing with
multinational operations and decision-making.
International accounting acknowledges the need for standardized and
transparent financial reporting practices in a global business environment
while considering the cultural, legal, and economic diversity among
countries.

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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

2) Currency and Exchange Rates:

International accounting considers transactions conducted in
different currencies and requires understanding and management
of foreign exchange rates. This adds complexity to financial
reporting and requires considerations for currency translation and
hedging strategies. In other types of accounting, where
transactions are primarily conducted within a single country,
currency and exchange rate considerations may not be as
prominent

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 Aspects Explanation

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
5) Complexity of Consolidation International accounting involves consolidation of financial
statements across various entities, which can be complex
due to different accounting methods, reporting periods,
and currency translations. Consolidation is less prevalent or
less complex in other types of accounting that focus on
individual entities or smaller-scale operations.

6) Cross-Border Transactions: International accounting involves the recording,

measurement, and reporting of financial transactions that
occur between entities in different countries. It addresses
the complexities of dealing with multiple currencies,
exchange rate fluctuations, and international trade
regulations.

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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:

1-Foreign Currency Transactions:

International trade often involves transactions conducted in different currencies. Organizations must account
for foreign currency exchange rate fluctuations, translation of foreign currency financial statements, and
recording gains or losses resulting from currency fluctuations.
Example:
Sale to foreign customer

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?

Sale to foreign customer

Most companies’ first encounter with international business

occurs as sales to foreign customers.
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).

Learning Objective 2
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 -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:

Dr. Accounts receivable (+) 100,000

Cr. Sales revenue (+) 100,000

-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:

Dr. Cash (+) 90,909

Dr. Loss on foreign exchange (+) Cr. Accounts
9,091 receivable
100,000

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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:

Foreign currency option Forward contract

The right (but not the obligation) This is an obligation to exchange
to sell foreign currency at a foreign currency at a date in the
specific exchange rate for a future, which is typically 30, 60
specified period of time. or 90 days.

Ex:
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3-Transfer pricing :

Is a technique used by multinational corporations to

shift profit out of the countries where they operate and into
tax havens . The technique involves a multinational selling
itself goods and services at an artificially high price.

Transfer pricing refers to setting prices on goods and

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

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 Thus , giving rise to certain problems in an international context :

Taxation Performance evaluation issues

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.

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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

6- Supply Chain and Inventory Management:

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.

7- Export and Import Documentation:

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

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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.

Foreign direct investment plays a crucial role in global economic

development by facilitating capital flows, creating employment opportunities,
fostering technological advancements, and promoting international trade and
collaboration.

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 Types of Foreign Direct Investment:

Greenfield Investment: Merger and Acquisition (M&A): Joint Ventures:

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.

4- Technology and Knowledge Transfer:

Investing in foreign markets allows companies to transfer technology, knowledge, and
expertise to the host country. This can involve introducing advanced production techniques,
research and development capabilities, and managerial know-how, contributing to local
economic development and capacity building.

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 Reasons for Foreign Direct Investment:

5- Diversification and Risk Management:

FDI offers companies the opportunity to diversify their operations and reduce risks
associated with operating in a single market. By expanding into multiple countries,
companies can mitigate risks associated with economic downturns, regulatory changes, or
market-specific challenges.

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.

Multinational corporations (MNCs) frequently raise capital

outside their home country. When a company offers its shares
on an exchange outside of its home country, this is referred to
as Cross-Listing.

Compliance and Reporting Obligations:

Cross-listing involves complying with the regulations, listing rules, and reporting
requirements of each foreign exchange. This typically includes periodic financial
reporting, disclosure of material information, and adherence to corporate
governance standards.

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 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.

b. Global Visibility and Prestige:

Listing on well-established foreign exchanges can enhance a company's reputation and visibility on a
global scale, improving its credibility among investors, customers, and business partners.
c. Diversification of Shareholder Base:
Cross-listing allows companies to attract investors from different regions, diversifying their shareholder
base and reducing concentration risk.

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 d. Improved Valuation:

A secondary listing on a foreign exchange may lead to a higher

valuation for the company's shares due to increased visibility, investor
demand, and potential inclusion in global indices.

e. Regulatory and Legal Advantages:

Listing on certain foreign exchanges may provide regulatory
benefits, such as access to more favorable listing standards, investor
protection mechanisms, or tax advantages.

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Learning Objective 5:
Explain the notion of global accounting standards.

-There is an international movement towards adopting a set

of global accounting standards. These standards are
known as “International Financial Reporting Standards” or
“IFRS”.
-Countries adopting these standards, will, for example, be in a
better position to evaluate FDI.
-Another advantage of the adoption of global accounting
standards is the elimination of the need to convert from
local GAAP when preparing consolidated financial
statements.

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

Several indicators demonstrate the extent of business globalization:

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.

Overall, international trade, FDI, and MNCs are integral components of

the global economy, fostering economic growth, technological progress,
job creation, and market integration. Their importance lies in their ability
to leverage comparative advantages, promote efficiency, and facilitate the
flow of goods, services, capital, and knowledge across borders,
ultimately contributing to improved living standards and economic

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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.

c. Access to Resources and Inputs:

International trade allows countries to access resources and inputs that are
scarce domestically. It enables countries to obtain raw materials, energy
resources, and intermediate goods from other nations, enhancing production
capabilities and promoting economic development.

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 a. Capital Inflows:
FDI involves the direct investment of capital by a company from one country
int another.
A-It brings in foreign capital, technology, management expertise, and access to
markets, contributing to economic growth and development in the host country
B. Job Creation and Skill Transfer: FDI often leads to the establishment of new
businesses or expansion of existing ones, resulting in job creation and skills
development in the host country. MNCs invest in local talent, provide training
opportunities, and transfer knowledge and technology, enhancing human
capita productivity.

Foreign Direct Investment c. Technological Advancements:

(FDI): FDI brings advanced technologies and production methods to host countries,
fostering innovation and technological progress. MNCs often introduce new
manufacturing techniques, research and development activities, and best practi
which have spillover effects on the local economy.

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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 a. Job Creation and Economic Impact:
MNCs operate in multiple countries, creating employment opportunities and
contributing to local economies. They invest in production facilities, hire local
workers, and stimulate economic activity through procurement, marketing, and
distribution activities.
b. Technology Transfer and Innovation:
MNCs bring advanced technologies, research and development capabilities, and
managerial expertise to host countries, fostering innovation and raising productivity
levels. They often collaborate with local firms and institutions, leading to knowledge
Multinational and technology spillovers.
Corporations (MNCs): c. Trade and Investment Linkages:
MNCs play a crucial role in global trade and investment flows. They establish cross-
border supply chains, facilitate the exchange of goods and services, and promote
foreign investment by expanding operations into new markets.
d. Tax Revenue and Government Relations:
MNCs contribute to government revenues through corporate taxes, import duties,
and employment-related taxes. They also engage in dialogue and negotiations
with host governments, promoting cooperation and influencing policy decisions.
e. Corporate Social Responsibility:
MNCs are increasingly expected to adhere to ethical and sustainable business
practices. They can contribute to social and environmental initiatives in host
countries, support local communities, and drive responsible business conduct.
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 1. Which of the following groups is a supranational organization?
A) United Nations
B) Organization for Economic Cooperation and
Development
C) International Federation of Accountants
D) All of the above
2. International accounting can be defined in terms of which the
following levels?
A) Supranational organizations
B) Company
C) Country
D) All of the above

3. The factor used to convert from one country's currency to another

country's currency is called the:
A) Interest rate.
B) Cost of capital.
C) Exchange rate.
D) Strike price.

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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

5. Foreign exchange risk arises when:

A)business transactions are denominated in foreign currencies.
B) sales are made to customers in a foreign country.
C) goods or services are purchased from suppliers in a foreign
country.
D) accounting reports are prepared in a foreign currency.
6. As used in international accounting, a “hedge” is:
A) a business transaction made to reduce the exposure of foreign exchange risk.
B) the legal barrier between the various divisions of a multinational company.
C) the loss in US $ resulting from a decline in the value of the US $ relative to
foreign currencies.
D) one form of foreign direct investment.

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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

9. The ownership and control of foreign assets such as a manufacturing plant

is called:
A) a hedge.
B) foreign direct investment.
C) exposure.
D) derivatives.

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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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