Solutions For International
Accounting, 6th Edition By Timothy
Doupnik
6th Edition
, Chapter 01 - Introduction To International Accounting
CHAPTER 1
INTRODUCTION TO INTERNATIONAL 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 Statements Of A 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) To Achieve Corporate Objectives And At The Same
Time Comply With Governmental Regulations.
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.
1-1
, Chapter 01 - Introduction To International Accounting
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 Lead 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 With
810,000 Foreign Subsidiaries. The 100 Largest Multinationals Generated Approximately
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, Six Of The Ten
Most Multinational Companies In The World In 2020 Were Headquartered In Europe.
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.
Answers To Questions
1. In 2020, Companies Worldwide Exported Over $17.5 Trillion Worth Of Merchandise.
Although International Trade Has Existed For Thousands Of Years, Recent Growth In
Trade Has Been Phenomenal. Over The Period 2009–2019, U.S. Exports Increased From
$1,056 Billion To
$1,645 Billion Per Year, A 56% Increase. During The Same Period, Chinese Exports More
Than Doubled To $2,499 Billion In 2019.
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.
1-2
, Chapter 01 - Introduction To International Accounting
3. 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.
4. 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.
5. 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.
6. 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.
7. The United Nations, As An Example, Measures The Multinationality Of Companies Based
On The Average Of Three Factors: The Ratio Of Foreign Sales To Total Sales, The Ratio
Of Foreign Assets To Total Assets, And The Ratio Of Foreign Employees To Total
Employees. Information About Foreign Sales And Foreign Assets Generally Is Provided In
A Company’s Annual Report. Information About The Number Of Foreign Employees Also
Might Be Provided In The Annual Report Or Other Publications Through Which A
Company Provides Information To The Public.
8. A Single Set Of Accounting Standards Used Worldwide Would Have The Following
Benefits For Multinational Corporations:
• Reduce The Cost Of Preparing Consolidated Financial Statements
• Reduce The Cost Of Gaining Access To Capital In Foreign Countries
• Facilitate The Analysis And Comparison Of Financial Statements Of Competitors
And Potential Acquisitions
Solutions To Exercises And Problems
1. Sony Uses The Following Procedures To Translate The Foreign Currency Financial
Statements Of Its Foreign Subsidiaries Into Japanese Yen:
• All Assets And Liabilities Are Translated At The Year-End Exchange Rate
• All Income And Expense Accounts Are Translated At The Exchange Rate Prevailing
On The Transaction Date
• The Resulting Translation Adjustment Is Included In Accumulated Other
Comprehensive Income (Stockholders’ Equity)
Sony Uses The Following Procedures To Translate Foreign Currency Payables And
Receivables Into Japanese Yen:
• All Foreign Currency Receivables And Payables Are Translated Into Japanese Yen
At The Year-End Exchange Rate
• Changes In The Japanese Yen Value Of Foreign Currency Receivables And
Payables Are Reported As Gains And Losses In Income
1-3
Accounting, 6th Edition By Timothy
Doupnik
6th Edition
, Chapter 01 - Introduction To International Accounting
CHAPTER 1
INTRODUCTION TO INTERNATIONAL 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 Statements Of A 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) To Achieve Corporate Objectives And At The Same
Time Comply With Governmental Regulations.
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.
1-1
, Chapter 01 - Introduction To International Accounting
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 Lead 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 With
810,000 Foreign Subsidiaries. The 100 Largest Multinationals Generated Approximately
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, Six Of The Ten
Most Multinational Companies In The World In 2020 Were Headquartered In Europe.
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.
Answers To Questions
1. In 2020, Companies Worldwide Exported Over $17.5 Trillion Worth Of Merchandise.
Although International Trade Has Existed For Thousands Of Years, Recent Growth In
Trade Has Been Phenomenal. Over The Period 2009–2019, U.S. Exports Increased From
$1,056 Billion To
$1,645 Billion Per Year, A 56% Increase. During The Same Period, Chinese Exports More
Than Doubled To $2,499 Billion In 2019.
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.
1-2
, Chapter 01 - Introduction To International Accounting
3. 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.
4. 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.
5. 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.
6. 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.
7. The United Nations, As An Example, Measures The Multinationality Of Companies Based
On The Average Of Three Factors: The Ratio Of Foreign Sales To Total Sales, The Ratio
Of Foreign Assets To Total Assets, And The Ratio Of Foreign Employees To Total
Employees. Information About Foreign Sales And Foreign Assets Generally Is Provided In
A Company’s Annual Report. Information About The Number Of Foreign Employees Also
Might Be Provided In The Annual Report Or Other Publications Through Which A
Company Provides Information To The Public.
8. A Single Set Of Accounting Standards Used Worldwide Would Have The Following
Benefits For Multinational Corporations:
• Reduce The Cost Of Preparing Consolidated Financial Statements
• Reduce The Cost Of Gaining Access To Capital In Foreign Countries
• Facilitate The Analysis And Comparison Of Financial Statements Of Competitors
And Potential Acquisitions
Solutions To Exercises And Problems
1. Sony Uses The Following Procedures To Translate The Foreign Currency Financial
Statements Of Its Foreign Subsidiaries Into Japanese Yen:
• All Assets And Liabilities Are Translated At The Year-End Exchange Rate
• All Income And Expense Accounts Are Translated At The Exchange Rate Prevailing
On The Transaction Date
• The Resulting Translation Adjustment Is Included In Accumulated Other
Comprehensive Income (Stockholders’ Equity)
Sony Uses The Following Procedures To Translate Foreign Currency Payables And
Receivables Into Japanese Yen:
• All Foreign Currency Receivables And Payables Are Translated Into Japanese Yen
At The Year-End Exchange Rate
• Changes In The Japanese Yen Value Of Foreign Currency Receivables And
Payables Are Reported As Gains And Losses In Income
1-3
