The International Environment 9

Learning Objectives Describe the international business environment. Describe the accounting issues associated with foreign currency transactions. Describe the accounting issues associated with foreign currency translation. Describe the factors and parties influencing the development of International Financial Reporting Standards. Understand the U.S. initiatives to converge with International Accounting Standards. COPYRIGHT © 2012 South-Western/Cengage Learning

Scope of International Business Activity Ranges from export/import activity to operations of a multinational enterprise European Union (EU) North American Fair Trade Agreement (NAFTA) American Free Trade Agreement (AFTA) World Trade Organization (WTO) COPYRIGHT © 2012 South-Western/Cengage Learning

Foreign Currency Transactions Denominated currency: The currency used to settle the transaction Measurement currency: The currency used to measure or record the transaction Economic gain or loss is realized If a transaction is denominated in a currency different than the measurement currency and If exchange rates change between the date of the transaction and the date of settlement COPYRIGHT © 2012 South-Western/Cengage Learning

Foreign Currency Translation The process of expressing amounts denominated or measured in foreign currencies into amounts measured in the reporting currency (dollars) of the domestic entity (U.S.) Issues related to foreign currency translation The impact that changes in exchange rates between the currencies will have on the parent company's cash flows What rates of exchange should be used to properly capture the impact of exchange rate changes Are the accounting principles used by the foreign entity different from those of the domestic entity? COPYRIGHT © 2012 South-Western/Cengage Learning

Harmonization of Accounting Standards Goal: The development of consistent accounting standards will improve comparability of financial information to Multinational companies Comparable standards for evaluation of subsidiaries, branches, other equity investments, etc. Entities seeking to raise capital Efficient allocation and regulation of capital exchange Other users Comparable information on which to base decisions COPYRIGHT © 2012 South-Western/Cengage Learning

Factors Influencing the Development of Accounting Social and cultural values Political and legal systems Business activities and economic conditions Standard-setting processes Forms of ownership and capital markets Cooperative efforts between nations COPYRIGHT © 2012 South-Western/Cengage Learning

The International Accounting Standards Board (IASB) Created from restructuring of International Accounting Standards Committee (IASC) in 2001 Takes a global approach to standard setting; sensitive to cultural, ethical, and economic differences IASC Foundation - the parent entity of the IASB 22 trustees appoint the members of the IASB, the Standing Interpretations Committee, and the Standards Advisory Council COPYRIGHT © 2012 South-Western/Cengage Learning

The International Accounting Standards Board (IASB) IASB issues International Financial Reporting Standards (IFRS) Adopted International Accounting Standards issued by the IASC Conceptual framework Concepts that underlie the preparation and presentation of financial statements for external users Serves as a platform against which future standards are developed and existing standards are reviewed Due process Open meetings; webcasts, Advisory Committee; Discussion Documents; Exposure Drafts COPYRIGHT © 2012 South-Western/Cengage Learning

International Financial Reporting Interpretations Committee Members appointed by the trustees of the IASC Foundation Responsible for reviewing accounting issues that arise in the context of IFRS; provide authoritative guidance in the form of interpretations (IFRICs) COPYRIGHT © 2012 South-Western/Cengage Learning

Convergence to International Accounting Standards Nearly 120 countries have either adopted or agreed to adopt IFRS EU has converged to international standards with qualification IFRS is principle-based rather than rule-based COPYRIGHT © 2012 South-Western/Cengage Learning

Convergence: Initiatives of the FASB The FASB believes a single set of accounting standards for domestic and international use is the optimal solution Norwalk agreement 2002 MoU (memorandum of understanding) with the IASB Formalized FASB and IASB commitment to the convergence of U.S. GAAP and international accounting standards Convergence is a collaborative effort 2006 MoU Roapmap identifying convergence topics Encouraged the SEC to allow public, foreign companies to file statements according to IFRS without reconciliation to U.S. GAAP COPYRIGHT © 2012 South-Western/Cengage Learning

Convergence: Initiatives of the FASB 2010 MoU reaffirmed the 2006 MoU Expanded efforts to creating new accounting standards where existing standards were deemed to be in need of significant improvement June 2011: target date for completing the major projects identified in the 2006 MoU Anticipated costs of international standard adoption Potential “Adopted in U.S.” qualifications LIFO prohibited by international standards FASB and the IASB have pledged to make their accounting standards fully compatible and maintain such compatibility over time COPYRIGHT © 2012 South-Western/Cengage Learning

Convergence: Initiatives of the SEC 2007: agreed to accept financial statements from foreign registrants prepared in accordance with IFRS without reconciliation to U.S. GAAP 2010: identified 2015 as the earliest date for requiring U.S. companies to use IFRS in filings with the SEC Final decision regarding the requirement to use IFRS deferred until 2011 The SEC is not pursuing the option of early adoption COPYRIGHT © 2012 South-Western/Cengage Learning