Transcript MGT430 LECTURE 32

Previous Lecture
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Remaining Part of Chapter # 22
Comprehensive Cash Budget
The Budgeted Income Statement
The Budgeted Balance Sheet
Flexible Budgeting: Performance evaluation is
difficult when actual activity differs from the
activity originally budgeted.
• Flexible Budgeting Performance Report
Chapter
15
GLOBAL BUSINESS
AND ACCOUNTING
Globalization
The process of managers assessing the impact of
international activities on the future of their company.
Globalization typically progresses through an outward
growth path.
Exporting
Licensing &
Joint Venture
Wholly Owned
Subsidiaries
Global
Sourcing
Globalization
People around the globe are more connected to
each other than ever before. Information and
money flow more quickly than ever. Goods and
services produced in one part of the world are
increasingly available in all parts of the world.
International travel is more frequent.
International communication is commonplace.
This
phenomenon
has
been
titled
"globalization."
Environmental Forces Shaping
Globalization
Political/Legal
Cultural
Globalization
Economic
Technological
Environmental Forces Shaping
Globalization
Political/Legal
Cultural
•Businesses
•Transfer Risk
•Control Risk
Globalization
•Reporting
•Individuals
•Tax Laws
Economic
•Policies
Technological
Environmental Forces Shaping
Globalization
Political/Legal
Cultural
Globalization
Economic
Economic System
Obtaining Capital
Industrial
Organization
Exchange Rate
Fluctuation
Technological
Environmental Forces Shaping
Globalization
Political/Legal
Cultural
Individualism vs.
Collectivism
Globalization
Uncertainty
Avoidance
Short vs. Long
Horizon
Economic

Power Distance
Technological
Environmental Forces Shaping
Globalization
Political/Legal
Cultural
Globalization
Economic
Technological
Education Level
Infrastructure
Knowledge
Transfer
Foreign Currencies and Exchange Rates
 Each country uses its own
currency for internal
economic transactions.
 To make transactions in
another country, units of
that country’s currency
must be acquired.
 The cost of those
currencies is called the
exchange rate.
Exchange Rates

Exchange rates fluctuate daily.

Daily exchange rates are published in the financial
press, such as the Wall Street Journal.

The process of restating a foreign currency amount
into a domestic currency amount is called
“translation”.
Exchange Rate
Country
Currency
(in US $)
Britain
Pound (£)
1.6295
France
French Franc (FF)
0.1576
Japan
Yen (¥)
0.0106
Mexico
Peso ($)
0.1058
Germany Deutche Mark (DM)
0.5283
Exchange Rates
When the US $ price
of a foreign currency
unit rises, we say
that the US $ is
“weaker”.
When the US $ price
of a foreign currency
unit falls, we say that
the US $ is
“stronger”.
I noticed that
the $ is stronger
against the Yen
today.
Yes. Yesterday, Yen
cost $0.0106, but
today, Yen only cost
$0.0100!
Accounting for Transactions with
Foreign Companies
When a transaction is
denominated in a foreign
currency . . .
And the transaction occurs on
one date (for example a
credit sale) . . .
. . . but the cash flow is at a
later date . . .
. . . fluctuating exchange rates
can result in exchange rate
gains or losses.
12/10/02 1 DM = $.55 US
1/9/03 1 DM = $.53 US
?
Exchange Rate Issues
Example
On 9/10/02, BobCo (a US firm) sells inventory to Knight
Corp. (a UK firm) on credit. Knight will pay BobCo
10,000 British pounds in 3 months.
The current exchange rate is $1 = .6093 £.
On 9/10/02, what is the expected US $ value of the 10,000
£ that BobCo expects to collect on 12/10/02?
On September 10, BobCo would expect to be able to
convert the 10,000 £ into $16,412.27 on December 10,
2002 based on the current exchange rate.
10,000£ ÷ .6093 = $16,412.28
Exchange Rate Issues
Example
By 12/10/02, the foreign exchange rate has
changed to $1 = .6115 £.
After receiving the British £ from Knight, and
exchanging them into US $, how much will BobCo
have actually received?
On December 10, 2002, BobCo would actually collect
$16,353.23, an exchange loss of of $59.05 since
September 10!
10,000£ ÷ .6115 = $16,353.23
Adjustment of Foreign Currency Transaction at
the Balance Sheet Date
Occasionally, a
transaction occurs in
one fiscal period, but
cash is not received or
paid until the next fiscal
period.
At the balance sheet
date, any outstanding
foreign currency
receivables or payables
must be “remeasured”
using the spot rate
available on the balance
sheet date.
Adjustment of Foreign Currency Transaction at
the Balance Sheet Date
On 12/1/02, Balloon Co., a US balloon manufacturer sells
balloons to Maison Rue., a french company, for 20,000
french francs on credit. Payment is due in 90 days.
The current exchange rate is $0.1575 per FF.
Prepare Balloon Co.’s 12/1/02 journal entry.
BALLOON CO. GEN'L JOURNAL
Date
Description
Page
Debit
18
Credit
Adjustment of Foreign Currency Transaction at
the Balance Sheet Date
On 12/1/02, Balloon Co., a US balloon manufacturer sells
balloons to Maison Rue., a french company, for 20,000
french francs on credit. Payment is due in 90 days.
The current exchange rate is $0.1575 per FF.
Prepare Balloon Co.’s 12/1/02 journal entry.
BALLOON CO. GEN'L JOURNAL
Date
Dec
Description
1 Accounts Receivable (FF)
Sales
Page
Debit
18
Credit
3,150
3,150
Adjustment of Foreign Currency Transaction at
the Balance Sheet Date
On 12/31/02, the value of the foreign currency
receivable must be adjusted based on the
12/31/02 spot rate of $0.1500 per FF.
Adjust the original receivable:
BALLOON CO. GEN'L JOURNAL
Date
Description
Page
Debit
25
Credit
Adjustment of Foreign Currency Transaction at
the Balance Sheet Date
On 12/31/02, the value of the foreign currency
receivable must be adjusted based on the
12/31/02 spot rate of $0.1500 per FF.
Adjust the original receivable:
BALLOON CO. GEN'L JOURNAL
Date
Description
Dec 31 Loss on Fluctuation of Exch. Rates
Accounts Receivable (FF)
$3,150 - $3,000 = $150
Page
Debit
25
Credit
150
150
Strategies to Avoid Losses from Rate
Fluctuations
Insist that the
transaction is
consumated in
your own currency
(US $).
Hedging!
Hedging
The practice of minimizing or eliminating risk of loss
associated with foreign currency fluctuations by using
forward exchange rates to offset changes in spot rates.
Spot Rates
The exchange rates that are
available today.
Forward Exchange Rates
The exchange rates that can be
locked in today for expected
future exchange transactions.
Hedging
A forward contract requires the purchase of
currency units at a future date at the
contracted exchange rate.
This forward contract
allows us to purchase
1,000,000 ¥ at a price
of $.0080 US in 30
days.
Good. If the spot rate is
$.0090 US in 30 days,
we only have to pay
$.0080 US, and we avoid
a $1,000 loss!
Foreign Corrupt Practices
Act of 1977
Record and
disclose all
payments, proper
or improper.
Bribery of
government
officials is
illegal.
Influence
peddling is
illegal.
(1986 Amendment)
Maintain an
adequate
system of
internal controls.
Facilitating
payments are
not illegal.
(1986 Amendment)
International Accounting?
International Accounting can be described at three
different levels:
• The influence on accounting by international political
groups such as the OECD, UN, etc.
• The accounting practices of companies in response
to their own international business activities
• The differences in accounting standards and
practices between countries
International Transactions, FDI and Related
Accounting Issues
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).
International Transactions, FDI and Related
Accounting Issues
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).
International Transactions, FDI and Related
Accounting Issues
Sale to foreign customer
Suppose that on February 1, 2006, 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, 2006. The exchange (spot) rate as of
February 1, 2006 is 10.00 pesos per U.S. dollar.
How many pesos does Jose agree to pay?
International Transactions, FDI and Related
Accounting Issues
Sale to foreign customer
Even though Jose SA agrees to pay 1,000,000
pesos ($100,000 x 10.00 pesos/U.S. $), Joe, Inc.
records the sale (in U.S. dollars) on February 1,
2006 as follows:
Dr. Accounts receivable (+)
Cr. Sales revenue (+)
100,000
100,000
International Transactions, FDI and Related
Accounting Issues
Sale to foreign customer
Suppose that on March 2, 2006, 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 (+) 9,091
Cr. Accounts receivable
100,000
International Transactions, FDI and Related
Accounting Issues
Hedging
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 – the right (but not the
obligation) to purchase foreign currency at a specific
exchange rate for a specified period of time.
International Transactions, FDI and Related
Accounting Issues
Hedging
Forward contract – this is an obligation to
exchange foreign currency at a date in the future,
typically 30, 60 or 90 days.
International Transactions, FDI and Related
Accounting Issues
Foreign Direct Investment (FDI) –
occurs when a company invests in a business operation
in a foreign country. This represents an alternative to
importing to customers and/or exporting from
suppliers in a foreign country. Two types of FDI are
Greenfield investment and acquisition.
International Transactions, FDI and Related
Accounting Issues
Foreign Direct Investment (FDI)
Greenfield investment – the establishment of a
new operation in the foreign country
Acquisition – investment in an existing operation
in the foreign country.
International Transactions, FDI and Related
Accounting Issues
FDI creates two primary issues:
• The need to convert from local to U.S. GAAP since
accounting records are usually prepared using local
GAAP.
• The need to translate from local currency to U.S.
dollars since accounting records are usually prepared
using local currency.
International Income Taxation
• Foreign income taxes – the foreign government will
tax the company’s profits at applicable rates.
• U.S. income taxes – the U.S. will tax the company’s
foreign-based income.
International Transfer Pricing
• Transfer pricing – 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.
International Transfer Pricing
These exchanges are not arms-length
transactions, thus giving rise to the certain
problems in an international context:
Taxation – governments in the various countries
often scrutinize transactions to assure that
sufficient profits are being recorded in that country.
International Transfer Pricing
• Performance evaluation issues – to the extent that
division managers are evaluated based on divisional
profits, transfer prices influence division manager
performance evaluation.
International Auditing
Both internal and external auditors encounter
differences that arise between auditing in an
international vs. domestic context. These
include:
• Language and cultural differences
• Different accounting standards (GAAP) and auditing
standards (GAAS)
Cross-listing on Foreign Stock Exchanges
MNEs 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.
International Harmonization of Accounting
Standards
The international movement towards a single
set of worldwide accounting rules is referred to
as Harmonization. International Accounting
Standards (IAS) and U.S. GAAP are currently
the two most important sets of accounting
rules.
International Harmonization of Accounting
Standards
The Norwalk Agreement
• Published in 2002.
• Is a promise of cooperation in standard-setting
between the International Accounting Standards
Board (IASB) and the Financial Accounting Standards
Board (FASB).
• Represents a significant step toward international
harmonization.
The Global Economy
Several indicators demonstrate the extent of
business globalization:
• International trade – In 2001 exports worldwide
topped $6 trillion. Between 1987 and 1999, U.S.
exporters increased by 233% in number.
• Foreign Direct Investment – Between 1982 and 1999
worldwide FDI inflows increased from $58 billion to
$865 billion.
The Global Economy
Several indicators demonstrate the extent of
business globalization:
• Multinational enterprises (MNEs) – Companies that
have headquarters in one country and operate in one
or more other countries. Currently, MNEs account for
over one-quarter of the world’s Gross Domestic
Product (GDP).
The Global Economy
Several indicators demonstrate the extent of
business globalization:
• International capital markets – In 2001 there were
462 companies representing 53 countries cross-listed
on the New York Stock Exchange (NYSE). In addition,
over 60 U.S. companies are cross-listed on foreign
exchanges…
End of Chapter 15
When the ad said,
“Job with a hot
future!” this isn’t
exactly what I
expected.