International Accounting and Financial Reporting Issues Copyright

International Accounting and Financial Reporting Issues © Copyright Doug Hillman 2000 1

Issues in Accounting for International Operations Accounting standards differ around world l Exchange rates between countries change frequently l © Copyright Doug Hillman 2000 2

Differing Accounting Standards Countries like US have private standard setting bodies l Countries with strongly socialized economies like Germany, government agencies sets standards l International Accounting Standards Committee’s goal to reduce differences in accounting methods l © Copyright Doug Hillman 2000 3

Financial Reporting Issues & International Transactions Accounting foreign currency exchange transactions l Translation of foreign subsidiary financial statements from foreign currency to reporting currency l © Copyright Doug Hillman 2000 4

Foreign Currency Exchange Transactions When sales transaction denominated in a foreign currency, cash received will be the foreign currency l Change in exchange rates between date of sale and date of collection will cause foreign currency exchange gain or loss l © Copyright Doug Hillman 2000 5

Foreign Currency Exchange Transactions Date of sale › Convert foreign currency to dollar equivalent › Record as receivable l Date of collection › Convert foreign currency to dollar equivalent › Record foreign currency exchange gain or loss for difference l © Copyright Doug Hillman 2000 6

Translation of Foreign Currency Statements Functional currency is currency of the primary economic environment in which the foreign entity generates revenues and expends cash l Different translation methods depending on whether functional currency is › Local currency of subsidiary › Reporting currency of parent l © Copyright Doug Hillman 2000 7

Translation of Foreign Currency Statements l When functional currency is local currency of subsidiary › Follow current rate method of translation › Use current exchange rate for assets and liabilities › Use average for period for revenues and expenses © Copyright Doug Hillman 2000 8

Translation of Foreign Currency Statements l When functional currency is reporting currency of parent › Use current/historical method › Translate monetary assets and liabilities at current rate › Translate other assets, liabilities, and owners’ equity at historical reates › Translate revenue and expense at weighted average rates for period © Copyright Doug Hillman 2000 9

Translation of Foreign Currency Statements Any change in currency exchange gives rise to situation where difference between assets and liabilities does not equal owners’ equity l To reconcile difference, parent reports foreign currency translation adjustment l Reported as part of owners’ equity l © Copyright Doug Hillman 2000 10

Hedging Strategies Limit or avoid losses from changes in exchange rates l Company may enter into transactions of equal value l Enter into hedging contracts › Contract to buy the foreign currency in the future at exchange rates on date of initial transaction l © Copyright Doug Hillman 2000 11

Sources of Generally Accepted Accounting Principles American Institute of Certified Public Accountants › 1937 through 1973 › Accounting Research Bulletins › Opinions of the Accounting Principles Board l Financial Accounting Standards Board › Statements of Financial Accounting Standards l © Copyright Doug Hillman 2000 12

Basic GAAP Entity concept l Going concern l Consistency l Conservatism l Periodicity l Objective evidence l Materiality l Full disclosure l © Copyright Doug Hillman 2000 13

Basic GAAP Historical cost l Stable dollar l Revenue realization › Point of sale › Collection method › Installment method › Percentage of completion method l Matching expenses and revenues l © Copyright Doug Hillman 2000 14

Statements of Financial Accounting Concept Attempt to develop a conceptual framework within which new accounting standards are developed l Important topics › Objectives of financial reporting › Qualitative aspects of accounting information › Elements of financial statements l © Copyright Doug Hillman 2000 15

Objectives of Financial Reporting Provide information useful in making investment and credit decisions l Provide information useful in judging amounts, timing, and certainty of future cash flows l Provide information about resources of the business, claims on the resources, and changes in the resources during the period l © Copyright Doug Hillman 2000 16

Qualitative Characteristics l Overall constraints › Benefits > costs › Materiality © Copyright Doug Hillman 2000 17

Qualitative Characteristics l Decision usefulness › Relevance –Predictive value, feedback value, timeliness › Reliability –Verifiability, neutrality, representational faithfulness © Copyright Doug Hillman 2000 18

Impact of Inflation on Accounting Information Historical cost assumes the value of the dollar does not change significantly l Balance sheet › Most assets do not reflect current value l Income statement › Some expenses may reflect historical cost versus current cost l © Copyright Doug Hillman 2000 19