INTERNATIONAL ACCOUNTING STANDARDS

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CHAPTER 13

• INTERNATIONAL ACCOUNTING STANDARDS
  TRANSLATING FOREIGN CURRENCY TRANSACTIONS

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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

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The Diversity of Worldwide GAAPAn 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.

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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.

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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.

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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.

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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.

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Efforts To Internationalize Accounting Standards
The FASB Hops Aboard

• 2/97 FASB issues FAS 128Earnings Per Share
  conformingU.S. GAAP with world GAAP.
• 6/01 FASB abolished the pooling of interests
  method conforming U.S. GAAPwith world GAAP.

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Currency Exchange RatesTerminology

• Conversion Actually going to the bank and
  physically exchanging currencies.

for
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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
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Currency Exchange RatesTerminology

• Expressing Directly 100,000 x 1.25
  125,000
• Expressing Indirectly 100,000 .80
  125,000

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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
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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

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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.

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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.

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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.

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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
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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.

bank wire transfer
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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.

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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?

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Recognizing Currently FX Gains FX Losses At
Intervening F/R Dates

• NO! Because an economic gain or loss has occurred.

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Dear Ann I Just Dont Know!
Dear Ann My Intel stock has gone up invalue
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
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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.

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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
  85,000 and no FX gain or loss. E. Sales of
  95,000 and no FX gain or loss.

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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.

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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.

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End of Chapter 13(Appendix 13A follows)

• Time to Clear Things Up--Any Questions?

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APPENDIX 13A

• GOING INTERNATIONAL

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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

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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).

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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.

tax laws
File a foreign income tax return.
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Foreign Earnings DOUBLE Corporate Taxation???

• Income of foreign units are taxed overseas and in
  the U.S--BUT 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
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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)

IRS
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Reasons for Manufacturing Overseas The List is
Long

• The lure of cheap labor.
• Tax holidays.
• To establish a visible presence.
• Lax environmental laws.

Taxes
Dumping allowed
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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.

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Risks of Investing OverseasAll That Glitters Is
Not Gold

• Expropriation--the 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.

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End of Appendix 13A

• Time to Clear Things Up--Any Questions?