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Title: INTERNATIONAL%20ACCOUNTING%20STANDARDS%20


1
CHAPTER 13
  • INTERNATIONAL ACCOUNTING STANDARDS
    TRANSLATING FOREIGN CURRENCY TRANSACTIONS

2
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

3
The Diversity of Worldwide GAAPAn Almost
Unbelievable Cornucopia
  • Everything from soup to nuts.
  • The United States is part of the problemmany
    U.S. standards are either rarely used or not used
    at all overseas
  • LIFO inventory method.
  • Deferred income taxes.
  • Goodwill capitalization.

4
Internationalize Accounting Standards The Grand
Dream
  • World GAAPso many hurdles.
  • All are for itBUT few countries are willing to
    change their own GAAP.

5
International Accounting Standards World
GAAPs Advantages
  • Having a Uniform World GAAP
  • Would greatly streamline the quarterly and
    year-end consolidation process for the
    accountants of publicly-owned companies.

6
Efforts To Internationalize Accounting Standards
Progress Has Been Slow
  • The International Accounting Standards Board
    Committee prior to 2001 (created in
    1973London based)
  • IASB Standards to date Minimal impactstill
    fairly easy to comply with virtually all IASB
    Standards.

7
Efforts To Internationalize Accounting Standards
Capital Market Forces
  • The Capital MarketsA 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.

8
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. GAAPwith world GAAP.

9
Currency Exchange RatesTerminology
  • Conversion Actually going to the bank and
    physically exchanging currencies.

10
Currency Exchange RatesTerminology
  • 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
11
Currency Exchange RatesTerminology
  • Expressing Directly 100,000 x 1.25
    125,000
  • Expressing Indirectly 100,000 .80
    125,000

12
Currency Exchange RatesTerminology
  • It is CUSTOM to always express certain
    currencies directly (British pound)
  • It is CUSTOM to always express certain currencies
    indirectly (Japanese yen)

1
1.60
1 110
13
Currency Exchange RatesTerminology
  • FOREIGN CURRENCY STRENGTHENS
  • Direct exchange rate goes UP.After 1
    1.64 Before 1 1.60
  • Indirect exchange rate goes DOWN.Before 1
    .625 After 1 .610

14
Currency Exchange RatesTerminology
  • 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.

15
Currency Exchange RatesWhy 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.

16
The Foreign Exchange Market The Biggest Market
of All
  • An OTC marketnot 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.

17
Translating Importing Exporting Transactions
Terminology
  • Denominated The currency in which an FX
    transaction is to be settled.
  • Measured The currency in which an FX
    transaction is recorded in the books and records.

British pounds
18
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.

19
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.

20
Recognizing Currently FX Gains FX Losses at
Intervening F/R Dates
  • Does it matter if FX gains losses at
    intervening balance sheet dates are unrealized?

21
Recognizing Currently FX Gains FX Losses At
Intervening F/R Dates
  • NO! Because an economic gain or loss has occurred.

22
Dear Ann I Just Dont 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 realizedbut you will still be IN THE
SAME BOAT.
Ann Anders
23
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.

24
Review Question 1With 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.

25
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
    12/21/061.10 12/31/061.11 and
    1/12/071.15. 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.

26
Review Question 2With 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
    12/21/061.10 12/31/061.11 and
    1/12/071.15. 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.

27
End of Chapter 13(Appendix 13A follows)
  • Time to Clear Things UpAny Questions?

28
APPENDIX 13A
  • GOING INTERNATIONAL

Appendix 13A
29
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
30
Going International Ways to Export(Choices
Galore)
Appendix 13A
  • Independent distributor.
  • Foreign commission agent.
  • Foreign marketing branch.
  • Foreign marketing subsidiary.
  • Export trade vehicle (FSC or IC-DISC).

31
Ways to Export The Concept of Physical Presence
Appendix 13A
  • 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.
32
Foreign Earnings DOUBLE Corporate Taxation???
Appendix 13A
  • Income of foreign units are taxed overseas and in
    the U.SBUT DONT 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
33
Foreign Earnings When Are U.S. Taxes Actually
Paid?
Appendix 13A
  • 3 possibilities exist
  • Foreign branches
  • When INCOME is earned.
  • Foreign subsidiaries
  • When DIVIDENDS are paid.
  • When INCOME is earned (applies to Subpart F
    income)

34
Reasons for Manufacturing Overseas The List is
Long
Appendix 13A
  • The lure of cheap labor
  • Tax holidays.
  • To establish a visible presence.
  • Lax environmental laws.

35
Reasons for Manufacturing Overseas The List is
Long
Appendix 13A
  • High literacy rates safe environments.
  • A Strong work ethic.
  • Loan guarantees, grants, subsidies.
  • The fluctuating exchange rate problem.

36
Risks of Investing OverseasAll That Glitters Is
Not Gold
Appendix 13A
  • Expropriationthe seizure of assets by the
    foreign government.
  • Devaluations/weakening of the foreign currency.
  • Currency transfer restrictions Wouldnt it be
    nice to be able to bring the profits home?
  • Wars and civil disorders.
  • Government mandated changes in the investment
    climate.

37
End of Appendix 13A
Appendix 13A
  • Time to Clear Things UpAny Questions?
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