International Accounting and Financial Reporting Issues

1. International Accounting and Financial Reporting Issues

2. Issues in Accounting for International Operations • Accounting standards differ around world • Exchange rates between countries change frequently

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

4. Financial Reporting Issues & International Transactions • Accounting for foreign currency exchange transactions • Translation of foreign subsidiary financial statements from foreign currency to reporting currency

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

6. Foreign Currency Exchange Transactions • Date of sale • Convert foreign currency to dollar equivalent • Record as receivable • Date of collection • Convert foreign currency to dollar equivalent • Record foreign currency exchange gain or loss for difference

7. Translation of Foreign Currency Statements • Functional currency is currency of the primary economic environment in which the foreign entity generates revenues and expends cash • Different translation methods depending on whether functional currency is • Local currency of subsidiary • Reporting currency of parent

8. Translation of Foreign Currency Statements • 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. Translation of Foreign Currency Statements • 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. 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 • To reconcile difference, parent reports foreign currency translation adjustment • Reported as part of owners’ equity

11. Hedging Strategies • Limit or avoid losses from changes in exchange rates • Company may enter into transactions of equal value • Enter into hedging contracts • Contract to buy the foreign currency in the future at exchange rates on date of initial transaction

12. Sources of Generally Accepted Accounting Principles • American Institute of Certified Public Accountants • 1937 through 1973 • Accounting Research Bulletins • Opinions of the Accounting Principles Board • Financial Accounting Standards Board • Statements of Financial Accounting Standards

13. Basic GAAP • Entity concept • Going concern • Consistency • Conservatism • Periodicity • Objective evidence • Materiality • Full disclosure

14. Basic GAAP • Historical cost • Stable dollar • Revenue realization • Point of sale • Collection method • Installment method • Percentage of completion method • Matching expenses and revenues

15. Statements of Financial Accounting Concept • Attempt to develop a conceptual framework within which new accounting standards are developed • Important topics • Objectives of financial reporting • Qualitative aspects of accounting information • Elements of financial statements

16. Objectives of Financial Reporting • Provide information useful in making investment and credit decisions • Provide information useful in judging amounts, timing, and certainty of future cash flows • Provide information about resources of the business, claims on the resources, and changes in the resources during the period

17. Qualitative Characteristics • Overall constraints • Benefits > costs • Materiality

18. Qualitative Characteristics • Decision usefulness • Relevance • Predictive value, feedback value, timeliness • Reliability • Verifiability, neutrality, representational faithfulness

19. Impact of Inflation on Accounting Information • Historical cost assumes the value of the dollar does not change significantly • Balance sheet • Most assets do not reflect current value • Income statement • Some expenses may reflect historical cost versus current cost