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.
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 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, 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.
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.
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 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, 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.
