Download Appendix 13A

CHAPTER
13
INTERNATIONAL
ACCOUNTING
STANDARDS
&
TRANSLATING
FOREIGN CURRENCY
TRANSACTIONS
FOCUS OF CHAPTER 13
• International Accounting Standards:
– The Diversity of Worldwide GAAP
– Efforts to Harmonize Worldwide GAAP
• Currency Exchange Rates
• Causes of Exchange Rate Fluctuations
• Translating Foreign Currency Transactions
(importing and exporting) into U.S. Dollars
The Diversity of Worldwide GAAP:
An Almost Unbelievable Cornucopia
• Everything from soup to nuts.
• The United States is part of the
problem—many U.S. standards are either
rarely used or not used at all overseas:
– LIFO inventory method.
– Deferred income taxes.
– Goodwill capitalization.
Internationalize Accounting
Standards: The Grand Dream
• World GAAP—so many hurdles.
• All are for it—BUT few countries are
willing to change their own GAAP.
International Accounting Standards:
World GAAP’s Advantages
• Having a Uniform World GAAP:
– Would greatly streamline the quarterly
and year-end consolidation process for
the accountants of publicly-owned
companies.
Efforts To Internationalize Accounting
Standards: Progress Has Been Slow
• The International Accounting Standards
Board [“Committee” prior to 2001] (created in
1973—London based)
• IASB Standards to date: Minimal
impact—still fairly easy to comply with
virtually all IASB Standards.
Efforts To Internationalize Accounting
Standards: Capital Market Forces
• The Capital Markets—A much-needed
injection:
– Relatively recent trend of raising capital
in world markets has given greatly
added emphasis to the desirability of
having a world GAAP. The BIG
advantage:
• Would greatly streamline the process
by eliminating the need to comply with
multiple GAAPs in offering securities.
Efforts To Internationalize Accounting
Standards: The FASB Hops Aboard
• 2/97: FASB issues FAS 128 “Earnings
Per Share” conforming U.S. GAAP with
world GAAP.
• 6/01: FASB abolished the pooling of
interests method conforming U.S. GAAP
with world GAAP.
Currency Exchange Rates:
Terminology
• Conversion: Actually going to the bank
and physically exchanging currencies.
Currency Exchange Rates:
Terminology
• Translation: The process of applying an
exchange rate to a foreign currency
amount so that an amount can be
expressed in dollars.
100,000
x $1.25 = $125,000
Currency Exchange Rates:
Terminology
• Expressing Directly:
100,000
x $1.25 = $125,000
• Expressing Indirectly:
100,000
÷ .80
= $125,000
Currency Exchange Rates:
Terminology
• It is CUSTOM to always express certain
currencies directly (British pound):
1
= $1.60
• It is CUSTOM to always express certain
currencies indirectly (Japanese yen):
1$ = 110
Currency Exchange Rates:
Terminology
• FOREIGN CURRENCY STRENGTHENS:
– Direct exchange rate goes UP.
After:
Before:
–
1
1
= $1.64
= $1.60
Indirect exchange rate goes DOWN.
Before:
After:
$1 = .625
$1 = .610
Currency Exchange Rates:
Terminology
• Foreign currency strengthens:
– It becomes more expensive to buy.
• Imports cost more.
• Exports cost foreign customers less.
• Foreign currency weakens:
– It becomes less expensive to buy.
• Imports cost less.
• Exports cost foreign customers more.
Currency Exchange Rates:
Why Do They Change?
• Inflationary Factors:
– Foreign inflation makes the DIRECT
exchange rate decrease.
– Domestic inflation makes the DIRECT
exchange rate increase.
• Noninflationary Factors:
– Anything and everything else.
The Foreign Exchange Market:
The
Biggest
Market of All
• An OTC market—not an organized
exchange such as the NYSE.
• Open 24 hours a day.
• $1.5 trillion per day.
• The market-makers: Several hundred
banks located throughout the world.
Translating Importing & Exporting
Transactions: Terminology
• Denominated: The currency in which an
FX transaction is to be settled.
British pounds
• Measured: The currency in which an FX
transaction is recorded in the books and
records.
Translating Importing & Exporting
Transactions: The Relevant Dates
• Order (or Commitment) Date: The date the
purchase or sales order is issued.
• Transaction Date: The date that title
passes and the parties record the sale and
purchase.
• Intervening F/R (or B/S) Date: Dates
between the transaction date and the
settlement date.
• Settlement Date: The date that the debtor
pays the creditor.
Translating Importing & Exporting
Transactions: FX Gains & FX Losses
• The One-Transaction View (non-GAAP):
– Treat as an adjustment to either:
• Cost of item acquired.
• Sales price of item sold.
• The Two-Transaction View (GAAP):
– Recognize currently in earnings.
Recognizing
FX Losses at
Currently FX Gains &
Intervening F/R Dates
• Does it matter if FX gains & losses at
intervening balance sheet dates are
unrealized?
Recognizing Currently FX Gains &
FX Losses At Intervening F/R Dates
• NO! Because an economic gain or loss
has occurred.
Dear Ann:
I Just Don’t Know!
Dear Ann:
My Intel stock has gone up in value
$400,000. My accountant says the gain is
unrealized. Should I feel good or not?
Perplexed Peter Cruising in Tahiti
Dear Peter:
Feel good. If you have any doubts about
feeling good, sell the stock and buy it back the
same day. Then the gain will be realized—but
you will still be “IN THE SAME BOAT.”
Ann Anders
Review Question #1
On 11/9/06, Selco recorded a sale denominated
in 100,000 euros. The customer paid on 1/5/07.
Direct exchange rates were: 11/9/06—$.90;
12/31/06—$.95; and 1/5/07—$.92. What does
Selco report in earnings in 2006?
A. Sales of $90,000 and FX Gain of $5,000 .
B. Sales of $90,000 and FX Loss of $5,000.
C. Sales of $90,000 and no FX gain or loss.
D. Sales of $95,000 and no FX gain or loss.
E. Sales of $85,000 and no FX gain or loss.
Review Question #1
With Answer
On 11/9/06, Selco recorded a sale denominated
in 100,000 euros. The customer paid on 1/5/07.
Direct exchange rates were: 11/9/06—$.90;
12/31/06—$.95; and 1/5/07—$.92. What does
Selco report in earnings in 2006?
A. Sales of $90,000 and FX Gain of $5,000.
B. Sales of $90,000 and FX Loss of $5,000.
C. Sales of $90,000 and no FX gain or loss.
D. Sales of $85,000 and no FX gain or loss.
E. Sales of $95,000 and no FX gain or loss.
Review Question #2
On 12/28/06, Purco recorded an inventory
purchase denominated in 100,000 euros.
Purco paid the vendor on 1/12/07. Direct
exchange rates were: 12/21/06—$1.10;
12/31/06—$1.11; and 1/12/07—$1.15. What does
Purco report at 12/31/06?
A. Inventory of $110,000 and FX Gain of $1,000.
B. Inventory of $110,000 and FX Loss of $1,000.
C. Inventory of $110,000 and no FX gain/loss.
D. Inventory of $109,000 and no FX gain/loss.
E. Inventory of $111,000 and no FX gain/loss.
Review Question #2
With Answer
On 12/28/06, Purco recorded an inventory
purchase denominated in 100,000 euros.
Purco paid the vendor on 1/12/07. Direct
exchange rates were: 12/21/06—$1.10;
12/31/06—$1.11; and 1/12/07—$1.15. What does
Purco report at 12/31/06?
A. Inventory of $110,000 and FX Gain of $1,000.
B. Inventory of $110,000 and FX Loss of $1,000.
C. Inventory of $110,000 and no FX gain/loss.
D. Inventory of $109,000 and no FX gain/loss.
E. Inventory of $111,000 and no FX gain/loss.
End of Chapter 13
(Appendix 13A follows)
• Time to Clear Things Up—Any
Questions?
Appendix 13A
APPENDIX 13A
GOING INTERNATIONAL
Appendix 13A
FOCUS OF APPENDIX 13A
• Globalization of Business:
– Ways to Export
– Ways to Manufacture Overseas
– Reasons for Manufacturing Overseas
• International Accounting Standards:
– The Diversity of Worldwide GAAP
– Efforts to Harmonize Worldwide
GAAP
Appendix 13A
Going International: Ways to Export
(Choices Galore)
•
•
•
•
•
Independent distributor.
Foreign commission agent.
Foreign marketing branch.
Foreign marketing subsidiary.
Export trade vehicle (FSC or IC-DISC).
Appendix 13A
Ways to Export:
The Concept of Physical Presence
• Defined: Having an “operation” overseas.
Examples: SALES OFFICE, WAREHOUSE,
FACTORY, EMPLOYING FOREIGN CITIZENS
AS SALES PERSONNEL.
• To make a determination:
– Review foreign tax laws.
– Review tax treaty.
• Significance: Subject to taxation in the
foreign country.
File a foreign
income tax return.
Appendix 13A
Foreign Earnings:
DOUBLE Corporate Taxation???
• Income of foreign units are taxed overseas
and in the U.S—BUT DON’T PANIC.
• U.S. tax laws allow a “foreign tax credit.”
Tax Calculation for
Brazil
U.S.
Pretax income of foreign unit... 100,000 100,000
Applicable tax rate.......................
20%
35%
Income taxes owed.................. 20,000 35,000
Less--Allowable tax credits........
(20,000)
U.S. taxes owed........................
15,000
Appendix 13A
Foreign Earnings: When Are
U.S. Taxes Actually Paid?
• 3 possibilities exist:
– Foreign branches:
• When INCOME is earned.
– Foreign subsidiaries:
• When DIVIDENDS are paid.
• When INCOME is earned (applies to
“Subpart F” income)
Appendix 13A
Reasons for Manufacturing
Overseas: The List is Long
•
•
•
•
The lure of cheap labor
Tax holidays.
To establish a visible presence.
Lax environmental laws.
Appendix 13A
Reasons for Manufacturing
Overseas: The List is Long
•
•
•
•
High literacy rates & safe environments.
A Strong work ethic.
Loan guarantees, grants, subsidies.
The fluctuating exchange rate problem.
Appendix 13A
Risks of Investing Overseas:
All That Glitters Is Not Gold
• Expropriation—the seizure of assets by the
foreign government.
• Devaluations/weakening of the foreign
currency.
• Currency transfer restrictions Wouldn’t it
be nice to be able to bring the profits home?
• Wars and civil disorders.
• Government mandated changes in the
investment climate.
Appendix 13A
End of Appendix 13A
• Time to Clear Things Up—Any
Questions?