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

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

3. 3 © Copyright Doug Hillman 2000 Differing Accounting Standards l 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

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

5. 5 © Copyright Doug Hillman 2000 Foreign Currency Exchange Transactions l 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

6. 6 © Copyright Doug Hillman 2000 Foreign Currency Exchange Transactions l 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

7. 7 © Copyright Doug Hillman 2000 Translation of Foreign Currency Statements l 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

8. 8 © Copyright Doug Hillman 2000 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

9. 9 © Copyright Doug Hillman 2000 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

10. 10 © Copyright Doug Hillman 2000 Translation of Foreign Currency Statements l 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

11. 11 © Copyright Doug Hillman 2000 Hedging Strategies l 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

12. 12 © Copyright Doug Hillman 2000 Sources of Generally Accepted Accounting Principles l 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

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

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

15. 15 © Copyright Doug Hillman 2000 Statements of Financial Accounting Concept l 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

16. 16 © Copyright Doug Hillman 2000 Objectives of Financial Reporting l 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

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

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

19. 19 © Copyright Doug Hillman 2000 Impact of Inflation on Accounting Information l 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