1. The International Environment9

2. 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.
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3. 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)
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4. 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
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5. 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?
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6. 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
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7. 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
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8. 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
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9. 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
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10. 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)
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11. 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
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12. 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
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13. 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
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14. 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
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