1. Multinational Accounting Accounting and finance functions are closely related Financial manager—responsible for procuring and managing financial resources Controller—collects and analyzes data for internal and external uses

2. Factors Influencing the Development of Accounting Around the World Both the form and substance of financial statements are different in different countries Statements differ in format Terms differ Some companies present only consolidated financial statements

3. 3 Academic influences Government Other external users Development of Accounting Objectives, Standards, and Practices International influences Nature of the enterprise Accounting profession Enterprise users Characteristics of the local environment Environmental Influences on Accounting Practices

4. Cultural Differences in Accounting Culture influences: Measurement Disclosure Countries differ with respect to: Secrecy and transparency Optimism and conservatism Countries moving toward greater optimism and transparency

5. 5 Recording of transactions—importer must keep track of transactions when it trades its own currency for that of the exporter to make payment Correct procedures for U.S. companies Transactions in Foreign Currencies

6. 6 Translation— Consolidation— Translation methods— Functional currency— Current-rate method— Temporal method— Translation of Foreign-Currency Financial Statements

7. 7 Functional currency Local currency Current-rate method Reporting currency of parent Temporal method Selection of Translation Method

8. 8 Balance Sheet, December 31, 1999 TEMPORAL METHODCURRENT-RATE METHOD POUNDSRATEDOLLARSRATEDOLLARS Cash 20,000 1.6980 33,960 1.6980 33,960 Accounts receivable 40,000 1.6980 67,920 1.6980 67,920 Inventories 40,000 1.5606 62,424 1.6980 67,920 Fixed assets 100,000 1.5000 150,000 1.6980 169,800 Accumulated dep. (20,000) 1.5000 (30,000) 1.6980 (33,960) Total 180,000 284,304 305,640 Accounts payable 30,000 1.6980 50,940 1.6980 50,940 Long-term debt 44,000 1.6980 74,712 1.6980 74,712 Capital stock 60,000 1.5000 90,000 1.5000 90,000 Retained earnings 46,000 * 68,652 * 77,481 Accum. trans. adj. _____ ______ 12,507 Total 180,000 284,304 305,640

9. 9 Income Statement, 1999 TEMPORAL METHODCURRENT-RATE METHOD POUNDSRATEDOLLARS RATEDOLLARS Sales 230,000 1.5617 359,191 1.5617 359,191 Expenses CGS (110,000) 1.5600 (171,600) 1.5617 (171,787) Depreciation (10,000) 1.5000 (15,000) 1.5617 (15,617) Other (80,000) 1.5617 (124,936) 1.5617 (124,936) Taxes (6,000) 1.5617 (9,370) 1.5617 (9,370) 24,000 8,285 37,481 Transl. gain (Loss) (9,633) Net income 24,000 28,562 37,481

10. 10 Disclosure of foreign-exchange gains and losses Current-rate method Temporal method Environmental reports Identify the impact of the company on the environment Reports not required Focus on the use of natural resources and efforts to recycle waste Translation of Foreign-Currency Financial Statements (cont.)

11. 11 Exports of goods and services Foreign sales corporation (FSC)—used to shelter some of its export income from taxation –qualifications to become an FSC include: –a portion of the income of foreign corporations that qualify as FSCs is exempt from U.S. corporate income tax Foreign branch—extension of the parent company Taxation

12. 12 Foreign subsidiary—a foreign corporation established in a country as an independent legal entity Income is taxable to the parent or tax deferred Controlled foreign corporation (CFC)—foreign corporation of which more than 50% of its voting stock is held by U.S. shareholders –CFC income classified as either: »active income »passive income Tax haven—country with low or no taxes on foreign-source income Taxation (cont.)

13. Transfer Pricing 1. Definition –Transfer prices are prices used in accounting for movement of goods between operating units of a company.

14. Illustration: The Importance of Transfer Pricing Manufacturing affiliate (division) Distribution/sel ling affiliate (subsidiary) Consolidated company total Manufacturing affiliate (division) Distribution/sel ling affiliate (subsidiary) Consolidated company total Sales 1,400 2,000? 1,700 2,000? Cost of goods sold 1,0001,400?1,0001,700? Gross profit?????? Operating expense 100 ? ? Taxable income?????? Income taxes (25%/50%) ?????? Net income?????? Low mark-up policyHigh mark-up policy