William Lever began producing his first product in the mid-1880s out ot
his family's grocery store in Northern England. He created what might be
considered the first corporate advertising strategy, by wrapping the soap
in distinctive packaging and giving it a brand name, "Sunlight Soap," William wanted to "make cleanliness commonplace;
to lessen work for women; to foster health and contribute to personal attractiveness that life may be more enjoyable and
rewarding for the people who use our products," His innovative ideas helped to popularize cleanliness and hygiene in
Victorian England,
Today, William's company has evolved into the global company Unilever, Unilever is one of the largest consumer
products companies in the world today, with sales of its 900 brands occurring in nearly every country in the world.
Unilever's path from a family grocery business to a global company involved exporting products to other countries, setting
up manufacturing facilities in various locations around the world, making acquisitions of other international companies, and
creating alliances and agreements with many companies,
Unilever obtains capital to compete globally by selling its shares on the London, New York, Amsterdam, Frankfurt,
and Zurich exchanges. Listing on multiple international exchanges requires Unilever to prepare multiple sets of financial
accounting reports to comply with the regulations of each of these exchanges.
Chapter 15 Global Business and Accounting
692
The London-based International Accounting Standards Board began a mission in 1993 to
develop financial reporting rules that all countries could use. The board has made significant
progress. In this chapter we describe that progress and provide you with a foundation for
understanding the richness and complexity of international accounting issues.
Accounting rules, procedures, and standards in almost any chosen country developed
differently from those in the United States and those in other countries. Countries such as
the United Kingdom, Japan, and Germany establish their own accounting rules, procedures,
and standards. The goal of the International Accounting Standards Board is to identify a
set of accounting standards that will be acceptable to all governments and their related
securities markets. This is a very ambitious goal because accounting rules, procedures, and
standards are affected by the political, legal, economic, and cultural systems in which they
are embedded. Thus, the variations in these systems from country to country have a significant impact on how investors, creditors, and managers understand and use accounting
information.
The objective of this chapter is to introduce you to the complexity of global business and
to explore some of the accounting issues associated with global business. This is only a brief
introduction. As your business education progresses, additional details will be added to the
ideas introduced here.
Globalization
Globalization occurs as managers become aware of and engage in cross-border trade and
operations. Think of globalization as a continuous process where at the most basic level a
purely domestic company's managers become aware that changes in foreign exchange rates,
international technological advances, cultural diversity, or international political and economic issues will have an impact on their firm's ability to compete. An example of a higher
level of globalization is a multinational enterprise that begins with raw material extraction
and ends with final product assembly and sales in multiple foreign locations. Unilever provides an example of a firm with explicit global goals. In Exhibit 15-1 we show the global
reach of Unilever.
Exhibit 15-1
UNILEVER'S
GLOBAL REACH
Globalization typically progresses through a series of stages that include exporting, licensing, joint ventures, wholly owned subsidiaries, and, finally, global sourcing. Exporting is, at
the simplest level, selling a good or service to a foreign customer. While exporting maintains
control over product creation, licensing gives up some control for a monetary return. International licensing is a contractual agreement between a company and a foreign party allowing
the use of trademarks, patents, technology, designs, processes, intellectual property, or other
Environmental Forces Shaping Globalization
proprietary advantage. Most major multinational food manufacturing companies are involved
in some form of international product licensing. An international joint venture is a company
owned by two or more companies from different countries. A wholly owned international
subsidiary is created when a company uses its own funds to construct or purchase 100 percent
equity control of a foreign subsidiary. Finally, global sourcing is the close coordination of
R&D, manufacturing, and marketing across national boundaries and typically includes exporting, licensing, joint ventures, and wholly owned subsidiaries in cross-border operations.
As shown in Exhibit 15-2, companies typically engage in globalization through an outward
growth path. Those companies wishing to globalize typically progress through the following
stages: (1) exporting domestically produced products, (2) establishing licensing and joint venture arrangements, (3) creating wholly owned subsidiaries, and (4) full-scale global sourcing.
In practice, there are many subcategories that are not shown in the exhibit, and companies
may pursue multiple globalization processes simultaneously.
Exhibit 15-2
PROCESSES FOR
INCREASING
GLOBALIZATION
Globalization has implications for the type of accounting information gathered, created,
and reported. U.S. GAAP requirements for exporting, licensing, joint ventures, and wholly
owned subsidiaries are very different. In addition, differences in currency exchange rates create financial reporting issues. Management decisions about how to globalize clearly impact a
firm's accounting outputs, processes, and procedures.
Environmental Forces Shaping Globalization
To help you understand how international environmental forces affect the accounting information measured, reported, and created, we consider environmental forces in four categories:
(1) political and legal systems, (2) economic systems, (3) culture, and (4) technology and
infrastructure.
These categories are not independent. A country's economy and culture have an influence on its political and legal structures. Culture affects and is affected by economics. As
illustrated in Exhibit 15-3, the technological position of a country is dependent on political,
demographic, and cultural issues.
Chapter 15 Global Business and Accounting
694
Exhibit 15-3
ENVIRONMENTAL
FORCES IMPACTING
GLOBALIZATION
POLITICAL AND LEGAL SYSTEMS
Managers operating in or planning operations in foreign settings must monitor associated
political risks. Political risk occurs because governments have the ability to shift asset ownership from the company to the government or because the company may be asked to relinquish
control over operations due to government intervention. For example, when Iran nationalized
its oil industry in the late 1970s, many companies lost ownership of their Iranian assets
invested in oil exploration, drilling, and oil delivery. United States GAAP requires companies
to include in their financial reports discussions about political risk that may significantly
impair assets or profits.
Laws enacted by foreign governments often have an impact on the net profits earned from
international activities. Taxes, tariffs, and licensing fees vary substantially from country to
country. Laws restricting the flow of currency can affect the amounts of foreign-earned profits
that can be transferred out and used elsewhere. Ownership requirements are a common form of
governmental control. For example, governments in China and India have ownership restrictions on subsidiaries in their countries. Joint ventures in China typically result in Chinese companies (or citizens) owning at least 51 percent of the international joint venture company.
Other types of political intervention include content or value-added requirements and sourcing requirements. Trade agreements often specify the source of raw materials or labor content to
allow preferential treatment in tariffs and customs for products or services that are produced in
the regions covered by the agreement. For example, in order for a product to qualify for reduced
tariffs, NAFTA (the North American Free Trade Agreement) specifies the amount of total cost
that must be added in those countries that have signed the free trade agreement.
Another example of political intervention is the foreign trade zone within the United
States. Goods imported into these zones are duty-free until they leave the zone. Companies
that import raw materials frequently set up their factories in these trade zones. These companies are not required to pay duty on the imported raw materials until the finished product is
shipped out of the zone. Using foreign trade zones can have an impact on revenue recognition
and the cost of goods sold. In addition, a delay in paying the duty enlarges the company's
working capital as discussed in Chapter 14.
As countries change and grow, governments try to manage that growth through political
and legal means. For example, governments use tax incentives that encourage or discourage ownership of stocks. Policies also affect the level of individual savings, which impacts
the availability of capital. Educational policies impact the literacy rate, the extent of formal education and training, and the number of accounting professionals. The political and
legal structures of each country provide the framework for their economic structures.
ECONOMIC SYSTEMS
The economic systems under which businesses operate significantly affect the form and availability of accounting information. As shown in Exhibit 15-4, in a planned economy the government uses central planning to allocate resources and determine output among various
segments of the economy. Land and production facilities are government owned and controlled.
Environmental Forces Shaping Globalization
The former Soviet Union and Soviet Eastern Bloc countries used central planning and had
planned economies. China continues to use central planning extensively. In market economies, ownership of land and the means of production are private, and markets dictate the allocation of resources and the output among segments of the economy. Companies formerly
operating in a planned economy can encounter significant difficulties when attempting to
operate in a market economy. The reverse can also be true.
In some countries businesses arrange themselves into industrial organizations as one
method of raising capital. In South Korea and Japan, companies group themselves into conglomerates representing different industries. South Korean conglomerates, called chaebol,
and Japanese conglomerates, called keiretsu, consist of companies that are grouped as customers and suppliers, and they usually contain a bank. Within these cartels of companies, suppliers receive loans, investment capital, technology, and long-term supply agreements from
customers higher up on the pyramid. Suppliers integrate their operations with other suppliers
and with their customers. Transactions between suppliers and customers are not arm's-length
as in most U.S. transactions. In the United States, antitrust and price-fixing laws preclude the
type of organized business groups found in Japan and South Korea.
Exhibit 15-4
ECONOMIC SYSTEMS
CULTURE
Think of culture as the mental mindset that affects the way individuals in a society act and
perceive each others' actions.1 U.S. cultural practices have a significant effect on the way foreign companies conduct business in the United States. Likewise, certain forms of advertising,
methods of acquiring business, and hierarchical organizational structures, which are common
practices in the United States, would not be culturally preferred elsewhere. Ignoring cultural
variables can create significant business problems.
Experts have identified four cultural mindsets that significantly differ among international
locations.
• Individualism versus collectivism. The degree of interdependence that a society maintains
among individuals, where high interdependence connotes collectivism. Citizens of Asian
countries typically score higher on collectivism than those in the United States.
1
For a more detailed discussion of the information in this section, see G. Hofstede, Cultures and Organizations: Software of the Mind (Berkshire, England: McGraw-Hill, 1991), or www.geert-hofstede.com.
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Chapter 15 Global Business and Accounting
• Uncertainty avoidance. The extent to which members of a society feel uncomfortable or
threatened by unknown or uncertain situations. Citizens of South American countries score
high on uncertainty avoidance.
• Short-term versus long-term orientation. With a long-term orientation, perseverance, thriftiness,
maintaining of order, and lasting relationships are highly valued. A short-term orientation
focuses on the past and the present, ignores the future, and values personal stability.
• Large versus small power distance. Large power distance cultures accept unequally distributed
power within and across institutions and organizations. The idea that everyone is created
equal or should have an equal voice is more highly valued in small power distance societies.
Exhibit 15-5 provides a rough measure of the relative differences between selected countries.
We can use Exhibit 15-5 to understand how cultural variables can affect both the type of
accounting information that is produced and how that information is used. Studies have shown
that in South Korea and Japan, where collectivism is high, less emphasis is placed on the
transparency of financial statements for investors. The needs of creditors are given preference
over the needs of investors. Thus, because financing for companies comes primarily from a
bank in the keiretsu or chaebol, most accounting information is kept within the collectivist
group. In addition, because of the strict government control of accounting regulations, the
accounting profession in Asian countries has been slow to develop. The relative number of
independent accountants is small, but increasing in many Asian countries.
TECHNOLOGY AND INFRASTRUCTURE
Other cross-border differences create global business challenges because of variations in
infrastructure and education level. The ability to transfer information and knowledge between
and among various geographic locations and peoples can be difficult. Frequently companies
that create joint ventures or start wholly owned operations in foreign locations find few
employees with the education and technical training available in the U.S. workforce.
Western-style management training is a recent development in many countries. Budapest has one of the oldest graduate management programs in eastern Europe, and it was
founded in 1988. More specifically, because companies in formerly planned economies
used centrally determined accounts and procedures, accounting as a profession did not
exist in eastern Europe prior to 1988. Thus companies establishing business operations in
eastern European locations have difficulty locating trained accounting personnel. In addition, prior business records are unreliable. Before the early 1990s, there were no independent auditors, public accountants, or management accountants in most eastern European
countries.
Harmonization of Financial Reporting Standards
Differences in internal accounting systems can also create challenges for
international business dealings. Culture, education, language, and software differences hinder the free flow of information. Potential benefits from acquired
international operations are sometimes lost because of the inability to transfer
valuable information within and between international companies.
Infrastructure impediments also pose problems for globalization. Poor
access to communication equipment (for example, telephones, faxes, and computers), a lack of necessary R&D facilities (for example, specialized laboratory equipment, computer-aided design or manufacturing), and fluctuating or
unreliable power sources create significant hurdles to establishing international
business in some locations. Manufacturing plants in many developing countries © Dr. Parvinder Sethi
are not heated or cooled, which can create adverse operating environments for
equipment that relies on lubricants and coolants. Inadequate transportation systems can slow
the transfer of goods in and out of an international location. When estimating costs for inventory
balance sheet items or cost of goods sold, accountants need to incorporate these unexpected
costs into their computations to properly compute the cost of globally sourced products.
Harmonization of Financial
Reporting Standards
Cross-border differences in financial reporting standards create problems for analyzing and
comparing accounting information. For example, financial reporting in the United States is
based primarily on the principle of historical cost without adjustment for changes in general
price levels. South and Central American countries such as Brazil or Mexico, on the other
hand, have experienced such high rates of inflation that inflation-adjusted information is
required. These differences cause the financial statements of a U.S. company and a Mexican
company to be very different and difficult to compare.
As long as an enterprise operates solely within its own borders, differences in financial
reporting practices between countries are not as significant a problem as they are if business
activity extends across borders. For example, cross-border financing, in which a company
sells its securities in the capital markets of another country, has become increasingly popular. Business activities that cross borders create the need for more comparable mformation
between companies that reside in different countries.
The need for comparable information has led to an interest in the harmonization of
accounting standards, a term used to describe the standardization of accounting methods
and principles used in different countries throughout the world. The International Accounting Standards Board (IASB) is particularly interested in harmonization and is charged with
the responsibility of establishing and gaining acceptance of international financial reporting
standards (IFRSs). This committee represents over 120 professional organizations from more
than 91 countries and over 1 million accounting professionals worldwide. While the IASB has
no regulatory authority in any country, it uses its influence to move the reporting standards
of all countries closer together in hopes of better harmonizing those standards. For countries
that do not have well-developed capital markets, the IASB standards provide a model that
often has a significant influence on their early attempts to develop standardized accounting
practices.
INTERNATIONAL FINANCIAL REPORTING
STANDARDS: ADOPTION OR CONVERGENCE
Countries and jurisdictions have taken two approaches to implementing international accounting standards to achieve harmonization. First, some countries have chosen to adopt the international financial standards exactly as written and promulgated by the IASB. Adoption means
abandoning the country's current financial reporting standards and replacing them with IFRS.
The adoption approach was agreed to by the European Union in 2005 when all companies
trading on European Union securities markets were required to adopt IFRS for their annual
reports. Exhibit 15-6 shows that Chile and Canada have chosen to adopt IFRS.
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Chapter 15 Global Business and Accounting
698
Alternatively, Exhibit 15-6 shows that some countries or jurisdictions have chosen to converge their existing standards to IFRS. Convergence means changing the countries' existing
standards so that they will produce IFRS "equivalent" financial reports. Convergence has
been described as an ongoing process because, as IFRS changes, converging countries must
reconsider whether their standards continue to be equivalent, or need to be changed. China,
Japan, and Australia have chosen to amend their current financial reporting standards so that
they will converge with IFRS.
Exhibit 15-6
IFRS GLOBAL ADOPTION
AND CONVERGENCE
The United States has been working toward convergence of U.S. GAAP and IFRS for several years. However, progress has been slow and some companies and audit firms have called
for the outright adoption of IFRS. The SEC suggested in 2008 that a small number of U.S.
domestic companies might be allowed to use IFRS by 2009. The SEC is currently debating the
best approach to moving U.S. GAAP to be compliant with international standards.
Exhibit 15-7 provides a flavor of the differences that currently exist among financial
reporting requirements around the world. The first column shows that the number of available
auditors in any particular country varies significantly. This variation is a direct result of the
environmental variables discussed earlier. The United States and the United Kingdom have
the most highly developed capital markets in the world and the related auditing demands are
evident in the table. Column two shows that asset revaluations are more likely to be allowed in
countries like Brazil that have experienced long periods of high inflation. Variations in inventory valuation and depreciation practices are illustrated in columns three and four. The final column in Exhibit 15-7 displays differences in segment disclosure. Segment information has been
in demand from investors in recent years. Countries such as Germany and Brazil, where capital
is typically provided by banks, require lower levels of segment disclosure. These banks usually
have access to inside information from their borrowers. Thus, demand for segment information
to be included on required statutory financial reports is much lower in these countries.
Exhibit 15-7
GLOBAL VARIATION IN
ACCOUNTING PRACTICES
Foreign Currencies and Exchange Rates
699
Foreign Currencies and Exchange Rates
In addition to the environmental characteristics described above, companies with international
business dealings encounter financial measurement challenges that result from using multiple currencies. Consider, for example, a Japanese company that sells merchandise to a U.S.
corporation. The Japanese company will want to be paid in Japanese currency—yen—but the
U.S. company's bank account contains U.S. dollars. Thus one currency must be
converted into another.
Most banks participate in an international currency exchange that enables them
to buy foreign currencies at the prevailing exchange rate. Thus a U.S. corporation
can pay a liability to a Japanese company through the international banking system.
The U.S. company will pay its bank in dollars. The bank will then use these dollars
to purchase the required amount of yen on the international currency exchange and
will arrange for delivery of the yen to the Japanese company's bank. 2
EXCHANGE RATES
A currency exchange rate is the amount it costs to purchase one unit of currency
with another currency. Thus the exchange rate may be viewed as the "price" of
buying one unit of a foreign currency, stated in terms of the domestic currency
(which for our purpose is U.S. dollars). Exchange rates fluctuate daily, based on
the worldwide supply and demand for particular currencies. The current exchange
rate between the dollar and most major currencies is published daily in the financial press. For example, a few of the exchange rates in The Wall Street Journal are
shown in Exhibit 15-8.
Jules Frazier/Getty Images
Exhibit 15-8
U.S. DOLLAR
EQUIVALENTS FOR FIVE
FOREIGN CURRENCIES
"Many European countries, such as Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain, are using the euro.
Exchange rates may be used to determine how much of one currency is equivalent to a
given amount of another currency. Assume that a U.S. company owes a Japanese company
1 million yen (expressed ¥1,000,000). How many dollars are needed to settle this obligation,
assuming that the current exchange rate is $0.00764 per yen? To restate an amount of foreign
currency in terms of the equivalent amount of U.S. dollars, we multiply the foreign currency
amount by the exchange rate, as follows: 3
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Chapter 15 Global Business and Accounting
Alternatively, consider that a Japanese company agrees to pay a U.S. company $10,000 for
imported goods. To determine the equivalent amount of yen, the Japanese company needs to
know the number of yen per dollar. The yen per dollar can be computed by dividing one dollar
by the number of dollars per yen. Thus, $1 $.00764/yen = ¥130.9/dollar. Using the yen per
dollar exchange rate, we can convert the dollars to yen as follows:
This process of restating an amount of foreign currency in terms of the equivalent number
of dollars or restating a dollar amount into an equivalent amount of foreign currency is called
translating the currency.
Exchange Rate Jargon In the financial press, currencies are often described as "strong"
or "weak," or as rising or falling against one another. For example, an evening newscaster might
say, "A strong dollar rose sharply against the weakening British pound, but fell slightly against
the Japanese yen and the Swiss franc." What does this tell us about exchange rates?
To understand such terminology, we must remember that an exchange rate is simply the price
of one currency stated in terms of another currency. Throughout this chapter, we refer to the prices
of various foreign currencies stated in terms of U.S. dollars. In other countries, however, the U.S.
dollar is a foreign currency, and its price is stated in terms of the local (domestic) currency.
To illustrate, consider the table from The Wall Street Journal shown in Exhibit 15-8. The
exchange rate for the Japanese yen is $0.00764. At this exchange rate, $1 is equivalent to
¥130.9 (as shown above). Thus, while we would say that the exchange rate for the Japanese
yen is $0.00764, the Japanese would say that the exchange rate for the U.S. dollar is ¥130.9.
Now let us assume that the exchange rate for the yen (stated in dollars) rises to $0.0109.
At this exchange rate, $1 is equivalent to only ¥92 ($1 $.0109 = ¥92). In the United States,
we would say that the exchange rate for the yen has risen from $0.00764 to $0.0109. In Japan,
however, they would say that the exchange rate for the dollar has fallen from ¥130.9 to ¥92.
In the financial press, it might be said that "the yen has risen against the dollar" or that "the
dollar has fallen against the yen." The two statements mean the same thing—that the yen has
become more valuable relative to the dollar.
Now let us return to our original phrase, "A strong dollar rose sharply against the weakening
British pound, but fell slightly against the Japanese yen and the Swiss franc." When exchange
rates are stated in terms of U.S. dollars, this statement means that the price (exchange rate)
of the British pound fell sharply, but the prices of the Japanese yen and the Swiss franc rose
slightly. A currency is described as "strong" when its exchange rate is rising relative to most
other currencies and as "weak" when its exchange rate is falling. Exchange rates fluctuate
because of changes in the environmental forces discussed earlier in this chapter.
ACCOUNTING FOR TRANSACTIONS
WITH FOREIGN COMPANIES
When a U.S. company buys or sells merchandise in a transaction with a foreign company, the
transaction price may be stipulated either in U.S. dollars or in units of the foreign currency. If
the price is stated in dollars, the U.S. company encounters no special accounting problems.
The transaction may be recorded in the same manner as are similar transactions with domestic
suppliers or customers.
If the transaction price is stated in terms of the foreign currency, the company encounters
two accounting problems. First, as the U.S. company's accounting records are maintained
in dollars, the transaction price must be translated into dollars before the transaction can be
recorded. The second problem arises when (1) the purchase or sale is made on account and
(2) the exchange rate changes between the date of the transaction and the date that the account
is paid. This fluctuation in the exchange rate will cause the U.S. company to experience either
a gain or a loss in the settlement of the transaction.
Foreign Currencies and Exchange Rates
701
Credit Purchases with Prices Stated in a Foreign Currency Assume that
on August 1 a U.S. company buys merchandise from a British company at a price of 10,000
British pounds (£10,000), with payment due in 60 days. The exchange rate on August 1 is
$1.63 per British pound. The entry on August 1 to record this purchase (assuming use of a
perpetual inventory system) would be:
Let us now assume that by September 30, when the £10,000 account payable must be
paid, the exchange rate has fallen to $1.61 per British pound. If the U.S. company had paid
for the merchandise on August 1, the cost would have been $16,300. On September 30, however, only $16,100 is needed to pay the £10,000 liability (£10,000 X $1.61 = $16,100). Thus
the decline in the exchange rate has saved the company $200. This savings is recorded in
the accounting records as a Gain on Fluctuations in Foreign Exchange Rates. The entry on
September 30 to record payment of the liability and recognition of this gain would be:
Accounts Payable
Cash
Gain on Fluctuations in Foreign Exchange Rates
To record payment of £10,000 liability to British company and to
recognize gain from decline in exchange rate:
Original liability (£10,000 x $1.63)
Amount paid (£10,000 x $1.61)
Gain from decline in exchange rate
16,300
16,100
200
$16,300
16,100
$ 200
Now let us assume that instead of declining, the exchange rate had increased from $1.63
on August 1 to $1.66 on September 30. Under this assumption, the U.S. company would have
to pay $16,600 to pay off the £10,000 liability on September 30. Thus the company would be
paying $300 more than if the liability had been paid on August 1. This additional $300 cost
was caused by the increase in the exchange rate and should be recorded as a loss. The entry
on September 30 would be:
In summary, having a liability that is fixed in terms of a foreign currency results in a gain
for the debtor if the exchange rate declines between the date of the transaction and the date
of payment. The gain results because fewer dollars will be needed to repay the debt than had
originally been owed. An increase in the exchange rate, on the other hand, causes the debtor to
incur a loss. In this case, the debtor will have to spend more dollars than had originally been
owed in order to purchase the foreign currency needed to pay the debt.
Credit Sales with Prices Stated in a Foreign Currency A company that
makes credit sales at prices stated in a foreign currency also will experience gains or losses
Chapter 15 Global Business and Accounting
702
from fluctuations in the exchange rate. To illustrate, let us change our preceding example to
assume that the U.S. company sells merchandise on August 1 to the British company at a price
of £10,000. We shall again assume that the exchange rate on August 1 is $1.63 per British
pound and that payment is due in 60 days. The entry on August 1 to record this sale would be:
In 60 days (September 30), the U.S. company will collect from the British company the
U.S. dollar equivalent of £10,000. If the exchange rate on September 30 has fallen to $1.61
per pound, the U.S. company will collect only $16,100 (£ 10,000 X $1.61 = $16,100) in full
settlement of its account receivable. Since the receivable had originally been equivalent to
$16,300, the decline in the exchange rate has caused a loss of $200 to the U.S. company. The
entry to be made on September 30 would be:
A foreign exchange rate
loss occurs when the
exchange rate decreases
between the sales date and
the collection date
Now consider the alternative case, in which the exchange rate rises from $1.63 at August 1
to $1.66 at September 30. In this case, the British company's payment of £10,000 will convert
into $16,600, creating a gain for the U.S. company. The entry on September 30 would then be:
Adjustment of Foreign Receivables and Payables at the Balance Sheet
Date We have seen that fluctuations in exchange rates may cause gains or losses for companies with accounts payable or receivable in foreign currencies. Exchange rates fluctuate on a
daily basis. For convenience, however, the company usually waits until the account is paid or collected before recording the related gain or loss. An exception to this convenient practice occurs at
the end of the accounting period. An adjusting entry is made to recognize any gains or losses that
have accumulated on any foreign payables or receivables through the balance sheet date.
To illustrate, assume that the transaction illustrated in Exhibit 15-9 occurs on November 10
when a U.S. company buys equipment from a Japanese company at a price of 10 million yen
(¥10,000,000), payable on January 10 of the following year. If the exchange rate is $0.0100
per yen on November 10, the entry for the U.S. company to record the purchase would be:
Foreign Currencies and Exchange Rates
Equipment
703
100,000
Accounts Payable
100,000
To record purchase of equipment from Japanese company at
a price of ¥10,000,000, payable January 10 (¥10,000,000 x
$0.0100 = $100,000).
Exhibit 15-9
FOREIGN EXCHANGE
TRANSACTION: U.S.
COMPANY BUYS
EQUIPMENT FROM A
JAPANESE COMPANY
Now assume that on December 31, the exchange rate has fallen to $0.0097 per yen. At this
exchange rate, the U.S. company's account payable is equivalent to only $97,000 (¥10,000,000 X
$0.0097). Gains and losses from changes in exchange rates are recognized in the period in
which the change occurs. Therefore, the American company should make an adjusting entry
to restate its liability at the current dollar-equivalent and to recognize any related gain or loss.
This entry, dated December 31, would be:
Accounts Payable
3,000
Gain on Fluctuations in Foreign Exchange Rates
3,000
To adjust balance of ¥10,000,000 account payable to amount
indicated by year-end exchange rate:
Original account balance
$100,000
Adjusted balance (¥10,000,000 x $0.0097)
Required adjustment
97,000
$
3,000
Similar adjustments should be made for any other accounts payable or receivable at year-end
that are fixed in terms of a foreign currency.
If the exchange rate changes again between the date of this adjusting entry and the date that
the U.S. company pays the liability, an additional gain or loss must be recognized. Assume,
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Chapter 15 Global Business and Accounting
for example, that on January 10 the exchange rate has risen to $0.0099 per yen. As shown in
Exhibit 15-9, the U.S. company must now spend $99,000 to buy the ¥10,000,000 needed to pay its
liability to the Japanese company. Thus, the rise in the exchange rate has caused the U.S. company
a $2,000 loss since year-end. The entry to record payment of the account on January 10 would be:
Accounts Payable
Loss on Fluctuations in Foreign Exchange Rates
Cash
To record payment of ¥10,000,000 payable to Japanese
company and to recognize loss from rise in exchange rate
since year-end:
Account payable, December 31
Amount paid, January 10
Loss from increase in exchange rate
97,000
2,000
99,000
$97,000
99,000
$ 2,000
Notice the overall effect of entering into this credit transaction stated in yen was a $1,000
gain due to fluctuations in the exchange rate for the yen between November 10 and the date
of payment (January 10). The U.S. company recognized a $3,000 gain on fluctuations in the
exchange rate from November 10 through the balance sheet date (December 31). This was
partially offset in the next fiscal year by a $2,000 loss on fluctuations in the exchange rate
between December 31 and January 10. The overall effect can be computed directly by multiplying the amount of the foreign currency times the change in exchange rates between the
transaction date and the payment date (¥10,000,000 X [$0.0100 - $0.0099] = $1,000 gain).
The $3,000 gain recorded at the balance sheet date and the $2,000 loss recorded at the date of
payment have no associated cash flow effects.
Gains and losses from fluctuations in exchange rates on transactions carried out in a foreign currency should be included in the income statement. They typically are presented in a
manner much like interest expense and gains and losses on the sale of plant assets.
CURRENCY FLUCTUATIONS—WHO WINS AND WHO LOSES?
Gains and losses from fluctuations in exchange rates are sustained by companies (or individuals) that have either payables or receivables that are fixed in terms of a foreign currency.
United States companies that import foreign products usually have large foreign liabilities.
Companies that export U.S. products to other countries are likely to have large receivables
stated in foreign currencies.
As foreign exchange rates (stated in dollars) fall, U.S.-based importers will gain and
exporters will lose. When a foreign exchange rate falls, the foreign currency becomes less
expensive. Therefore, importers will have to spend fewer dollars to pay their foreign liabilities. Exporters, on the other hand, will have to watch their foreign receivables become worth
fewer and fewer dollars.
When foreign exchange rates rise, this situation reverses. Importers will lose, because
more dollars are required to pay the foreign debts. Exporters will gain, because their foreign
receivables become equivalent to an increasing number of dollars.
Strategies to Avoid Losses from Rate Fluctuations
There are two basic
approaches to avoiding losses from fluctuations in foreign exchange rates. One approach is to
insist that receivables and payables be settled at specified amounts of domestic currency. The
other approach is called hedging and can be accomplished in a number of ways.
To illustrate the first approach, assume that a U.S. company makes large credit sales to
companies in Mexico, but anticipates that the exchange rate for the Mexican peso will gradually decline. The U.S. company can avoid losses by setting its sales prices in dollars. Then, if
the exchange rate does decline, the Mexican companies will have to spend more pesos to pay
for their purchases, but the U.S. company will not receive fewer dollars. On the other hand,
the U.S. company will benefit from making credit purchases from Mexican companies at
prices stated in pesos, because a decline in the exchange rate will reduce the number of dollars
needed to pay for these purchases.
Foreign Currencies and Exchange Rates
The interests of the Mexican companies, however, are exactly the opposite of those of the
U.S. company. If the Mexican companies anticipate an increase in the exchange rate for the
U.S. dollar, they will want to buy at prices stated in pesos and sell at prices stated in dollars.
Ultimately, the manner in which the transactions will be priced simply depends on which
company is in the better bargaining position.
H e d g i n g Hedging refers to the strategy of "sitting on both sides of the fence"—that is,
of taking offsetting positions so that your gains and losses tend to offset one another. To illustrate the concept, assume that you make a large bet on a football game. Later you have second
thoughts about the bet, and you want to eliminate your risk of incurring a loss. You could
"hedge" your original bet by making a similar bet on the other team. In this way, you will lose
one bet, but you will win the other—your loss will be offset by a corresponding gain.
A company that has similar amounts of accounts receivable and accounts payable in
the same foreign currency automatically has a hedged position. A decrease in the foreign
exchange rate will cause losses on the foreign receivables and gains on the foreign payables.
If the exchange rate rises, the gains on the foreign receivables will be offset by losses on the
foreign payables.
Most companies, of course, do not have similar amounts of receivables and payables in the
same foreign currency. However, they may create this situation by buying or selling foreign
currency future contracts. These contracts, commonly called futures, are the right to receive
a specified quantity of foreign currency at a future date. In short, they are accounts receivable
in foreign currency. Thus, for example, a company that has only foreign accounts payable
may hedge its position by purchasing a similar dollar amount of foreign currency future contracts. Then, if the exchange rate rises, any losses on the foreign payables will be offset by a
gain in the value of the future contracts.
Exchange Rates and Competitive Prices Up to this point, we have discussed
only the gains and losses incurred by companies that have receivables or payables stated in a
foreign currency. However, fluctuations in exchange rates change the relative prices of goods
produced in different countries. Exchange rate fluctuations may make the prices of a country's
products more or less competitive both at home and to customers throughout the world. Even
a small store with no foreign accounts receivable or payable may find its business operations
greatly affected by fluctuations in foreign exchange rates.
Consider, for example, a small store in Kansas that sells a U.S.-made brand of television sets.
If foreign exchange rates fall, which happens when the dollar is strong, the price of foreignmade television sets will decline. Thus, the store selling U.S.-made television sets may have
to compete with stores selling imported television sets at lower prices. Also, a strong dollar
makes U.S. goods more expensive to customers in foreign countries. Thus a U.S. television
manufacturer will find it more difficult to sell its products abroad.
The situation reverses when the dollar is weak—that is, when foreign exchange rates are
relatively high. A weak dollar makes foreign imports more expensive to U.S. consumers.
Also, a weak dollar makes U.S. products less expensive to customers in foreign countries.
Assume you are in the market for a new racing bicycle. You are considering
buying an Italian, British, or U.S. racing bicycle. You have recently heard that the
dollar is strengthening against the euro and is falling against the British pound.
These trends are expected to continue for another month. How would this news affect your
assessment of choices among racing bicycles?
(See our comments on the Online Learning Center Web site.)
In summary, we may say that a strong U.S. dollar helps companies that sell foreign-made
goods in the U.S. market. A weak dollar, on the other hand, gives a competitive advantage to
companies that sell U.S. products both at home and abroad.
Chapter 15 Global Business and Accounting
CONSOLIDATED FINANCIAL STATEMENTS THAT INCLUDE
FOREIGN SUBSIDIARIES
In Chapter 14, we discussed the concept of consolidated financial statements. These statements view the operations of the parent company and its subsidiaries as if the affiliated companies were a single business entity. Several special accounting problems arise in preparing
consolidated financial statements when subsidiaries operate in foreign countries. First, the
accounting records of the foreign subsidiaries must be translated into U.S. dollars. Second,
the accounting principles in use in the foreign countries may differ significantly from U.S.
generally accepted accounting principles.
These problems pose interesting challenges to professional accountants and will be
addressed in later accounting courses. Readers of the financial statements of U.S.-based corporations, however, should know that the consolidated financial statements of these companies
are expressed in U.S. dollars and conform to U.S. generally accepted accounting principles.
Global Sourcing
Differences in exchange rates can create significant complexities for firms practicing global
sourcing. An article in the Los Angeles Times illustrated the additional problems associated
with determining the cost of producing a doll using inputs from several countries. Exhibit
15-10 traces the multicountry path of a Barbie™ doll from its raw materials source in a Saudi
Exhibit 15-10
GLOBAL SOURCING
FOR MATTEL INC.'S
BARBIE™ DOLL
Global Sourcing
707
Arabian oil field to U.S. toy stores. After the oil is refined to produce ethylene, Taiwan uses
the ethylene to produce vinyl pellets that are shipped to Dongguan in China's Guangdong
province. At the Chinese joint-venture factory, 5,500 workers, paid between $30 and $40 per
month, make the plastic doll and her clothes. However, most of the machinery and tools,
including the plastic mold injection machines, are imported from the United States, Europe,
and Japan. The molds themselves come directly from the United States. Japan contributes
Barbie's nylon hair. Hong Kong manages the entire process, arranging banking and insurance,
supervising exporting and importing, and overseeing transportation back to the United States.
Finally, U.S. domestic packaging, trucking, advertising, and other functions that employ thou­
sands of U.S. workers result in a $10.00 Barbie™ wholesale price. Mattel Inc. has indicated
that its typical profit from the sale of a Barbie™ is about $1.00.
Exhibit 15-11 illustrates the costs and exchange rate issues involved in the production
of a Barbie™ doll. Panel A provides the currency exchange rates for the countries involved
in global sourcing for the Barbie™ doll. Panel В includes estimated product export costs
for the Mattel Inc. Barbie™ made at the Meitai factory in Dongguan, China. The esti­
mated costs in the exhibit are based on a single day's reported exchange rates. Companies
must choose a representative exchange rate to compute the cost buildup in their domestic
currency.
Exhibit 15-11
EXCHANGE RATES
AND ESTIMATED
PRODUCT COST FOR
BARBIE™ DOLLS
"Estimates based on information provided in R. Tempest, "Barbie and the World Economy," Los Angeles Times, September 22,
1999, p. 1.
t
Based on exchange rates from www.xe.com/ucc.
The information in the exhibit does not provide details about customs duties, import and
export fees, multicountry tax laws, and tax treaties. These are also costs of doing business in
a global environment. Many companies underestimate the cost of globalizing their business
operations because they are not familiar with the environmental characteristics discussed at
the beginning of this chapter. Making accurate estimates of costs for global sourcing is a chal­
lenge for companies wishing to become more global.
708
Chapter 15 Global Business and Accounting
FOREIGN CORRUPT PRACTICES ACT
In many countries, product costs also include expenses incurred to expedite official paperwork. Kenyan business executives refer to kitu kidogo ("something small"), the Chinese pay
huilu, Russians shell out vzyatka, and Middle Easterners pay baksheesh. In dozens of countries
around the world, bribery is part of doing business. In many countries, this officially sanctioned
corruption is not viewed as wrong or unethical. However, U.S.-based businesses are prohibited
from influence peddling. The Foreign Corrupt Practices Act (FCPA), passed in 1977 and
amended in 1986 and 1998 by the U.S. Congress, prescribes fines and jail time for managers
violating its rules. For over 20 years, U.S. companies have complained about the advantage
experienced by international competitors who are not bound by the FCPA.
Experiences in the past 5 to 10 years have changed international attitudes about the impact
of corrupt practices on economic viability. In particular, the 1997-1998 Asian crisis was
blamed partly on graft and influence peddling. According to some estimates, corruption associated with doing business in China can add 5 percent to operating costs. Corruption can be so
rampant that companies refuse to operate in some foreign locations, causing countries to lose
valuable direct foreign investment.
The International Monetary Fund and the World Bank instituted policies in the late 1990s
to cut off funding to countries ignoring corrupt practices. In 1997, $292 million in loans to
Kenya were suspended until policies and procedures to prevent corruption were instituted.
Many of the recommended policies and procedures are modeled after the FCPA. The scope
of the FCPA is very broad. Under FCPA rales, it is illegal for all U.S. companies and foreign
companies operating in the United States, their affiliates, and their agents to bribe a government official. Criminal and civil prosecution can lead to fines of up to $2 million for the company and $100,000 for executives involved, with prison terms of up to five years.
Assume you are the head of international acquisitions for a large multinational
toy company traded on the New York Stock Exchange. You have been involved
for several months in a deal to acquire a large facility in a midsize city in central
China. This building will be remodeled by your company to produce a range of toy products
for the Chinese market. For a variety of reasons, progress has been extremely slow on
completing the acquisition. In particular, city administrators have continually delayed issuing the necessary paperwork. You decide to fly to China to meet with the city's top three
officials. During your meeting it becomes clear that the three city officials would guarantee
processing the associated paperwork much faster if your company would provide a significant payment to each of them to help expedite the necessary work. These administrators
point out that a German company that acquired a facility in the city the previous year was
willing to pay extra to expedite paperwork.
Your CEO has made it clear to you that the China project is very important and expediting it is critical for its long-run success. What should you do?
(See our comments on the Online Learning Center Web site.)
The FCPA has implications for accounting in two specific areas: record keeping and internal
control procedures. The act requires that all payments, including improper payments, be
recorded and disclosed. Further, the act requires an adequate system of internal controls that
maintains the integrity of the company's assets, allowing only authorized personnel to have
access to them. The 1986 amendment to the FCPA distinguished between influence peddling, to
motivate the awarding of business that would not otherwise have been awarded, and facilitating
payments, to motivate officials to undertake actions more rapidly than they might otherwise. A
facilitating payment might be given to a customs official to expedite imported merchandise
through customs. This latter type of payment is not illegal under the act. Companies engaging
in globalization must ensure that their cross-border employees comply with the FCPA.
709
Concluding Remarks
The Foreign Corrupt Practices Act (FCPA) applies to U.S.
companies and foreign companies operating in the U.S., their
affiliates, and their agents. Violations of the FCPA expose
companies and individuals to both civil and criminal liability.
For example, the Securities and Exchange Commission (SEC)
brought an enforcement action against InVision Technologies,
Inc. (InVision), alleging that InVision violated the FCPA.
More specifically, the SEC alleged that InVision authorized
improper payments to government officials in China, Thailand, and the Philippines in connection with sales activities.
InVision is a manufacturer of explosive detection machines
used in airports. In order to facilitate sales outside the U.S.,
InVision retained local sales agents and distributors who were
familiar with the business practices and customs in foreign
markets. These local sales agents and distributors reported to
an InVision regional sales manager, who in turn reported
to an InVision senior sales executive.
In Vision's sales agent in China provided $95,000 of foreign
travel and other benefits to airport officials in Guangzhou. The
sales agent notified In Vision's regional sales manager, who
notified the senior sales executive of these payments. These
payments were improperly recorded by InVision as cost of
goods sold.
InVision paid its sales agent in the Philippines $108,000
to be used to make gifts and pay cash to government officials
in order to generate sales. InVision improperly recorded this
payment as a sales commission.
In Vision's sales agent in Thailand was compensated by
the difference between the retail price of In Vision's detection
machines and the price at which the sales agent could purchase the machines from InVision. The sales agent informed
the regional sales manager and the senior sales executive that
gifts and other payments to airport officials were being paid
out of the spread between the sales agent's cost and the final
selling price.
The SEC alleged that InVision failed to develop an adequate process to select and train its sales agents and distributors employed outside the U.S., and that it failed to establish
a program to monitor the compliance of its agents and distributors with the FCPA. Therefore, InVision violated the
following provisions of the FCPA: (1) illegal offers and
payments, (2) books and records (e.g., improperly recording gifts and other payments as cost of goods sold or sales
commissions), and (3) internal controls. InVision agreed
to disgorge $589,000 in profits from sales where the FCPA
was violated, pay $28,700 in prejudgment interest, and pay a
$500,000 civil penalty. In addition, InVision agreed to retain
an independent consultant to develop a corporate compliance
program designed to prevent and detect future violations of
the FCPA.
Concluding Remarks
In this chapter we have established a framework to help you understand international
financial reporting issues. You have learned how global environmental differences create
demand for different types of financial information. However, other global forces, particularly global securities markets and large international firms, are pushing for a uniform set
of international accounting standards for financial reporting. What does the development of
international accounting standards foreshadow? We believe that significant progress toward
harmonization is occurring. However, users of international financial statements should
expect wide variation in disclosure levels and financial reporting practices for several years
to come.
Demonstration Problem
harmonization of accounting standards (p. 697) The
standardization of accounting methods and principles used in
different countries throughout the world.
hedging (p. 705) The practice of minimizing or eliminating
risk of loss associated with foreign currency fluctuations.
industrial organizations (p. 695) Exist when companies group
themselves into conglomerates representing different industries.
South Korean conglomerates, called chaebol, and Japanese
conglomerates, called keiretsu, consist of companies that are
grouped as customers and suppliers and usually contain a bank.
infrastructure (p. 697) Access to communication, transportation,
and utilities provided to businesses in each global location.
International Accounting Standards Board (IASB) (p. 697)
Charged with the responsibility of creating and promulgating
international standards.
international joint venture (p. 693) A company owned by
two or more companies from different countries.
711
international licensing (p. 692) A contractual agreement
between a company and a foreign party allowing the use of
trademarks, patents, technology, designs, processes, intellectual
property, or other proprietary advantage.
market economy (p. 695) Exists when ownership of land
and the means of production are private and markets dictate the
allocation of resources and the output among segments of the
economy.
planned economy (p. 694) Exists when the government
uses central planning to allocate resources and determine
output among various segments of the economy. Government
ownership of land and the means of production characterize
planned economies.
wholly owned international subsidiary (p. 693) Created
through a company's foreign direct investment; involves using
domestically generated funds in another country to purchase 100
percent equity control of a foreign subsidiary.
Demonstration Problem
IronMan, Inc., is a U.S. company that manufactures exercise machines and distributes several lines
of imported bicycles. Selected transactions of the company were as follows:
Oct.
4
Oct. 18
Nov. 15
Dec. 3
Dec. 15
Purchased manufacturing equipment from Rhine Mfg. Co., a German company. The
purchase price was €400,000, due in 60 days. Current exchange rate, $0.7020 per
euro. (Debit the Equipment account.)
Purchased 2,500 racing bicycles from Ninja Cycles, a Japanese company, at a price of
¥60,000,000. Payment is due in 90 days; the current exchange rate is $0.0110 per yen.
(IronMan uses the perpetual inventory system.)
Purchased 1,000 touring bicycles from Royal Lion Ltd., a British corporation. The
purchase price was £192,500, payable in 30 days. Current exchange rate, $1.65 per
British pound.
Issued a check to First Bank for the U.S. dollar-equivalent of €400,000 in payment
of the account payable to Rhine Mfg. Co. Current exchange rate, $0.7110 per euro.
Issued a check to First Bank for dollar-equivalent of £192,500 in payment of the
account payable to Royal Lion Ltd. Current exchange rate, $1.60 per British pound.
Instructions
a.
Prepare entries in general journal form to record the preceding transactions.
b.
Prepare the December 31 adjusting entry relating to the account payable to Ninja Cycles. The
year-end exchange rate is $0.0113 per Japanese yen.
С
Identify some methods that IronMan, Inc., could use to decrease its exposure to foreign
exchange rate fluctuations.
d.
Discuss environmental characteristics of Japan, Germany, and the United Kingdom that influ­
ence their exchange rate fluctuations.
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Chapter 15 Global Business and Accounting
S o l u t i o n t o the D e m o n s t r a t i o n P r o b l e m
a.
The general journal entries to record the transactions are as follows:
Date
Oct. 4
Account Titles and Explanation
Equipment
Debit
Credit
280,800
Accounts Payable (Rhine Mfg. Co.)
280,800
To record purchase of equipment from Rhine Mfg. Co.
for €400,000, exchange rate $0.7020 per euro
(€400,000 X $0.7020 = $280,800).
Oct. 18
Inventory
660,000
Accounts Payable (Ninja Cycles)
660,000
Purchased 2,500 bicycles from Ninja Cycles for
¥60,000,000, exchange rate $0.0110
(¥60,000,000 x $0.0110 = $660,000).
Nov. 15
Inventory
317,625
Accounts Payable (Royal Lion Ltd.)
317,625
Purchased 1,000 bicycles from Royal Lion Ltd. for
£192,500, due in 30 days. Exchange rate $1.65 per pound
(£192,500 X $1.65 = $317,625).
Dec. 3
Accounts Payable (Rhine Mfg. Co.)
Loss on Fluctuations of Foreign Exchange Rates
280,800
3,600
Cash
284,400
Paid €400,000 liability to Rhine Mfg. Co.
(Original balance less amount paid equals loss:
$280,800 - (€400,000 X $0.7110) = -$3,600).
Dec. 15
Accounts Payable (Royal Lion Ltd.)
317,625
Gain on Fluctuations of Foreign Exchange Rates
9,625
Cash
308,000
Paid £192,500 liability to Royal Lion Ltd.
(Original balance less amount paid equals gain:
$317,625 - (£192,500 X $1.60) = $9,625).
b.
The December 31 adjusting entry for the account payable to Ninja Cycles:
Date
Dec. 31
Account Titles and Explanation
Loss on Fluctuations in Foreign Exchange Rates
Accounts Payable (Ninja Cycles)
Debit
Credit
18,000
18,000
To adjust balance of ¥60,000,000 liability to amount
indicated by year-end exchange rate:
(Original balance less adjusted balance equals loss:
$660,000 - (¥60,000,000 x $0.0113) = -$18,000).
с
IronMan could use offsetting payables and receivables to control potential foreign exchange rate
losses. For example, if IronMan could export its exercise equipment to Japan, then it would have
a receivable to offset its payable. IronMan could also purchase future contracts maturing
at the same time the liabilities were due. Gains and losses on the future contracts would
offset gains and losses resulting from foreign currency fluctuations.
d.
Germany has a lower volume and smaller capitalized equities market. Banks are a major
provider of capital to businesses in Germany. Japan has keiretsu organizations for many of
its industrial groups. These organizations include manufacturers, distributors, wholesalers,
Discussion Questions
713
retailers, and suppliers who work together and share resources. The accounting profession is
much weaker in both Germany and Japan than in the United States. The United Kingdom is
most like the United States, with active equity markets, a strong accounting profession, and
similar accounting rules.
Self-Test Questions
The answers to these questions appear on page 727.
a.
Individualistic and low power distance.
1.
b.
Collectivist and high power distance.
с
Individualistic and high power distance.
d.
Collectivist and low power distance.
Which of the following statements are true about globaliza­
tion methods?
a.
b.
Exporting involves contracts that allow a foreign com­
pany to use a domestic company's trademarks, patents,
processes, or technology.
с
Global sourcing involves the close coordination of
research and development, purchasing, marketing, and
manufacturing across national boundaries.
d.
2.
3.
International licensing involves the creation of a new
company that is owned by two or more firms from dif­
ferent countries.
A wholly owned international subsidiary is created
when a foreign government owns 100 percent of the
equity in a U.S.-based firm.
Which of the following environmental factors can affect the
cost of doing business in a foreign country? (Identify all
correct answers.)
5.
On March 1, Laton Products (a U.S. firm) purchased manu­
facturing inputs from a Mexican supplier for 20,000 pesos,
payable on June 1. The exchange rate for pesos on March 1
was $0.17. If the exchange rate increases to $0.19 on June 1,
what amount of gain or loss would be reported by Laton
related to the currency exchange?
a.
$400 gain.
b.
$200 loss.
с
$400 loss.
d.
$200 gain.
On January 1 a German company purchased merchan­
dise from a U.S. firm for $50,000, payable on March 1.
The exchange rate for the euro on January 1 was $1.10.
If the exchange rate increases to $1.12 on March 1, what
amount of gain or loss would the U.S. firm report related to
currency fluctuations?
a.
The educational level of the workforce.
b.
Laws regulating the transfer of profits out of a country.
с
Tax and tariff regulations.
a.
$1,000 gain.
d.
Restricted access to communication and transportation
networks.
b.
$1,000 loss.
A country whose citizens are highly group oriented and
who accept unequal power distributions between and within
organizations would be considered:
ASSIGNMENT MATERIAL
1.
4.
с
$500 gain.
d.
No gain or loss would be reported.
Discussion Questions
In general terms, identify several factors that prompt differ­
ent countries to develop different accounting principles.
2.
What is the International Accounting Standards Board?
Why has the board been unable to obtain uniform global
application of its standards?
3.
An American company is considering entering into a joint
venture with a Japanese firm. Describe what cultural differ­
ences each party should consider.
с
Culture
d.
Technology and infrastructure
7. Discuss two ways in which the Foreign Corrupt Practices
Act has affected U.S. companies.
8. Explain why some U.S. companies believe that the Foreign Cor­
rupt Practices Act provides an advantage to foreign companies.
4.
Consider Exhibit 15-5. Explain the cultural differences
between the United States and Brazil.
9. Explain two ways in which a company that makes pur­
chases on account from foreign companies can protect itself
against the losses that would arise from a sudden increase
in the foreign exchange rate.
5.
Why is it important to understand the economic system
under which a company operates before entering into a
business relationship?
10. What does the globalization of business mean? Think of
two companies with which you are familiar. How would
you describe their level of globalization?
6.
Briefly describe how the following environmental forces
affect accounting practices:
11. Why is it important for a company and its accountants to
understand its level of globalization?
a.
Political and legal systems
b.
Economic systems
12. You've just read in The Wall Street Journal that the U.S. dol­
lar has weakened relative to the euro. All else equal, what
714
Chapter 15 Global Business and Accounting
would you expect to happen to the quantity of Italian leather
jackets sold in the United States? Why?
13 What is the difference between an international licensing
agreement and an international joint venture?
14
Visit the IASB Web site at www.iasb.org.uk. Identify the
current board members and the countries they represent.
Speculate about why Indonesia is not represented.
17. What do the phrases high power distance and low power
distance mean? How would the organizational structures of
companies operating in high and low power distance countries differ?
18. A French furniture maker agrees to purchase wood stain
from a U.S. paint manufacturer. If all payments are to be
made in U.S. dollars, which company bears the risk of
exchange rate gains and losses?
15. To maintain a high level of control over production operations and final product quality, what types of globalization
activities could a company engage in?
19. In the United States, what is a foreign trade zone? What is
the advantage of operating in one?
16. How might the required financial reports differ between countries that are individualistic and countries that are collectivist?
20. What is meant by the phrase natural hedging against
exchange rate risk1.
Brief Exercises
Translate the following amounts of foreign currency into an equivalent number of U.S. dollars
using the exchange rates in Exhibit 15.8.
a.
£800,000
b.
¥350,000
с
€50,000
Assume that a U.S. company makes a purchase from a British company and agrees to pay a price
of £2 million.
a.
How will the U.S. company determine the cost of this purchase for the purpose of recording it
in its accounting records?
b.
Briefly explain how the U.S. company can arrange for the payment of pounds to the British
company.
A recent newspaper shows the exchange rate for the British pound at $1.74 and the yen at $0.0106.
Does this indicate that the pound is stronger than the yen? Explain.
Explain how an increase in a foreign exchange rate will affect a U.S. company that makes:
a.
Credit sales to a foreign company at prices stated in the foreign currency.
b.
Credit purchases from a foreign company at prices stated in the foreign currency.
c.
Credit sales to a foreign company at prices stated in U.S. dollars.
You are the purchasing agent for a U.S. business that purchases merchandise on account from
companies in Mexico. The exchange rate for the Mexican peso has been falling against the U.S.
dollar and the trend is expected to continue for at least several months. Would you prefer that
the prices for purchases from the Mexican companies be specified in U.S. dollars or in Mexican
pesos? Explain.
CompuTech is a U.S.-based multinational corporation. Foreign sales are made at prices set in
U.S. dollars, but foreign purchases are often made at prices stated in foreign currencies. If the
exchange rate for the U.S. dollar has risen against most foreign currencies throughout the year,
would CompuTech have recognized primarily gains or losses as a result of exchange rate fluctuations? Explain.
When business transactions are conducted internationally, cultural differences must be taken into
consideration. Geert Hofstede is a leading researcher on how cultural variables can affect such
international arrangements. Hofstede has a Web site where he is quoted as saying:
For those who work in international business, it is sometimes amazing how different people
in other cultures behave. We tend to have a human instinct that "deep inside" all people are
715
Exercises
the same—but they are not. Therefore, if we go into another country and make decisions
based on how we operate in our own home country—the chances are we'll make some very
bad decisions.
Go to Hofstede's Web site (http://www.geert-hofstede.com) and find an example of how busi­
ness dealings can be hindered by a lack of understanding of cultural differences.
Bell Corporation has a receivable denominated in British pounds and a payable in Mexican pesos
resulting from imports from Mexico. Bell recorded foreign exchange gains related to both its
pound-related receivable and its peso-denominated payable. Did the foreign currencies increase or
decrease in dollar value from the date of the transaction to the settlement date?
In 1995, Lockheed was prosecuted by the U.S. government for allegedly paying $1 million to a
member of the Egyptian parliament in order to sell its military jets to Egypt's armed forces. The
company paid a $24.5 million fine and a vice president was fined $125,000 and sentenced to
18 months in prison. What U.S. law was violated and why?
A U.S. company purchased a shipment of fabrics from Bahrain for 3,500,000 dinars. Using the
current exchange rate, what is the value of this contract in U.S. dollars?
Exercises
The following are nine global business terms used in this chapter:
Hedging
Foreign Corrupt
Practices Act
Globalization
Foreign exchange risk
Planned economy
International Accounting
Standards Board
International licensing
Harmonization
Exporting
Each of the following statements may describe one of these terms. For each statement, indicate the
global business term described, or answer "None" if the statement does not correctly describe any
of the terms.
a.
The amount it costs to purchase one unit of currency with another currency.
b.
Selling a good or service to a foreign customer.
с
A cross-border contractual agreement allowing one company to use the trademarks, patents,
or technology of another company.
d.
Distinguishes between illegal influence peddling and legal facilitating payments.
e.
The practice of minimizing or eliminating risk of loss associated with foreign currency
fluctuations.
f.
Markets dictate the allocation of resources and output among segments of the economy.
g.
The group charged with the responsibility of creating and encouraging the use of international
financial reporting standards.
With a group of two or three students, choose a publicly traded global company that you think you
might want to invest in some time in the future. Use the Internet or annual report data to answer
the following questions.
a.
In which geographical regions does the company operate?
b.
What is the proportion of total sales represented by foreign sales? How has this changed over
the past five years?
с
What efforts has the company recently undertaken to increase/decrease globalization (for
example, joint ventures, licensing agreements, etc.)?
d.
What are the company's hedging practices/policies?
e.
Have any overseas activities been unsuccessful, discontinued, or resulted in asset losses? If so,
what happened?
f.
Overall, how aggressively do you feel this company is pursuing globalization?
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Chapter 15 Global Business and Accounting
For each of the following scenarios, use the current exchange rates in The Wall Street Journal or
from an Internet site such as www.xe.com/ucc to compute the required amount:
a.
A Citroen automobile is advertised in France for 15,000 euros. What is the dollar equivalent
of 15,000 euros?
b.
Jackk's food emporium is importing foreign hot sauce from Brazil for 7,000 reals. What is the
dollar equivalent?
с
You are traveling on safari in South Africa and have brought $3,000 in spending money. How
many South African rand will you receive for spending money?
d.
While traveling in Europe, you cross the border between Germany and Switzerland. You have
150 euros left from your German travels when you spot a souvenir in a Swiss shop for 250
Swiss francs. Do you have enough spending money to buy the souvenir if you convert your
euros to Swiss francs?
The Central Intelligence Agency (CIA) of the U.S. government maintains an Internet site contain­
ing information on various countries (www.cia.gov). The site includes a database known as the
"World FactBook." Use the CIA data or other publicly available data to answer the following ques­
tions about Indonesia.
a.
What are the country's main exports and imports?
b.
What is the educational and job classification composition of the labor force?
с
How would you describe the infrastructure and technology base of the country?
d.
What are the political and legal risks of doing business there?
e.
If you were advising a U.S. company that wanted to locate a wholly owned subsidiary in Indo­
nesia, what aspects of the country would you stress that management take into account when
deciding whether to invest there and how to organize the subsidiary's manufacturing process?
Indicate whether each of the companies or individuals in the following independent cases would
benefit more from a strong U.S. dollar (relatively low foreign exchange rates) or a weak U.S. dollar
(relatively high foreign exchange rates). Provide a brief explanation of your reasoning.
a.
Boeing (a U.S. aircraft manufacturer that sells many planes to foreign customers).
b.
A Nikon camera store in Beverly Hills, California (Nikon cameras are made in Japan).
с
Toyota (made by the Japanese auto manufacturer in Japan).
d.
The Mexico City dealer for Caterpillar tractors (made in the United States).
e.
A U.S. tourist visiting England.
f.
A small store that sells U.S.-made video recorders in Toledo, Ohio (the store has no foreign
accounts receivable or payable).
The following table summarizes the facts of five independent cases (labeled a through e) of U.S.
companies engaging in credit transactions with foreign corporations while the foreign exchange
rate is fluctuating:
Column
717
Exercises
You are to fill in each blank space after evaluating the information about the case provided in the
other three columns. The content of each column and the word or words that you should enter in
the blank spaces are described as follows:
Column 1 indicates the type of credit transaction in which the U.S. company engaged with the
foreign corporations. The answer entered in this column should be either Sales or Purchases.
Column 2 indicates the currency in which the invoice price is stated. The answer may be either
U.S. dollars or Foreign currency.
Column 3 indicates the direction in which the foreign currency exchange rate has moved
between the date of the credit transaction and the date of settlement. The answer entered in this
column may be either Rising or Falling.
Column 4 indicates the effect of the exchange rate fluctuation on the income of the American
company. The answers entered in this column are to be selected from the following: Gain, Loss,
or No effect.
Visit the IASB Web site at www.iasplus.com/country/useias.htm#*
a.
Name three governments that have agreed to let companies that prepare their financial reports
only in accordance with IFRS list their stocks on the country's securities markets.
b.
Name three governments that have not agreed to let companies that prepare their financial
reports only in accordance with IFRS list their stocks on the country's securities markets.
Assume that on May 1, Zavior Corporation (a U.S. company) sells goods to a Portuguese corpora­
tion at a price of 100,000 euros, with payment due within three months. At the date of the sale, the
exchange rate is $1.20 per euro. The Portuguese customer waits until the three months have passed
and pays for the purchase on July 31, when the exchange rate is $1.18 per euro. What is the gain
or loss on the transaction for Zavior? Show the journal entries that Zavior would record on May 1
and on July 31.
In the Home Depot 2007 financial statements in Appendix A at the end of this textbook, read note 1.
Find the information about Home Depot's international store locations.
a.
In what countries (other than the U.S.) does Home Depot have stores?
b.
What environmental factors does it need to consider when expanding to foreign countries
and why?
Match the following transactions, which are denominated in a foreign currency, with the appropri­
ate foreign currency and exchange gain or loss effects.
Transaction
a. Export sale
b. Import purchase
с
Foreign currency receivable
d. Payable in foreign currency
Find the Consolidated Statement of Stockholders' Equity and Comprehensive Income section of
the Home Depot 2007 financial statements in Appendix A. Locate the translation adjustment for
2007. Was the effect of the adjustment positive or negative on Comprehensive Income? What is the
implication of the translation adjustment?
Reconsider Exhibit 15-11, panel B, in the chapter. Use current exchange rates to estimate the
global costs of making a Barbie™ doll. Has the total cost increased or decreased as a result of
changes in exchange rates?
718
Chapter 15 Global Business and Accounting
Refer to Exhibit 15-7 in this chapter. Assume a United Kingdom company, Brits International, lists
on both the London Exchange using U.K. GAAP and the New York Stock Exchange. Brits Inter­
national must prepare a reconciliation from U.K. GAAP to U.S. GAAP. This reconciliation shows
the following difference associated with revaluations of fixed assets:
Required:
a.
Explain why the adjustment to U.S. GAAP resulted in additions to net income.
b.
Explain why there are additions to shareholders' equity and why those additions are greater
than the additions to net income.
с
Explain why there is a deduction to shareholders' equity.
Honda Motor Company reports that it has manutactunng facilities in over 25 locations around
the world. Only five of those locations are in Japan. Several are in the U.S., Europe, and South
America. Identify the advantages and disadvantages for Honda Motor Company of reporting its
financial results using either IFRS or U.S. GAAP.
Research China and write a brief comparison of Chinese political-legal, economic, cultural, and
infrastructure factors as contrasted to those in the U.S. Explain how these factors might affect
accounting practices in the two countries.
Problem Set A
Cramer Cookie Company is a relatively new company and so far has sold its products only in its
home country, Denmark. In December, Cramer determined that it had excess capacity to produce
more of its special Christmas cookies. It is trying to decide whether to use that capacity to ship a
batch of cookies overseas. The marketing department has determined that the United States and
Great Britain are the two most viable markets. Cramer has enough excess capacity to produce only
one batch, which can be shipped to either country. The materials and labor cost to produce the
batch amount to 8,500 kroner. The marketing department, which located a U.S. shipping company
that could deliver to either location, also provided the following information:
Problem Set A
719
Instructions
a.
If Cramer exports the batch to the United States, what is its estimated profit/loss in Danish
kroner?
b.
If Cramer exports the batch to Great Britain, what is its estimated profit/loss in Danish
kroner?
c.
If the British pound has exhibited rather large fluctuations relative to the Danish kroner
recently, how might this impact Cramer's decision as to which country to ship to?
Europa-West is a U.S. corporation that purchases automobiles from European manufacturers for
distribution in the United States. A recent purchase involved the following events:
Nov. 12
Dec. 31
Jan. 11
Purchased automobiles from Stockholm Motors in Swedish kronor for Sk20,000,000,
payable in 60 days. Current exchange rate, $0.12745 per krona. (Europa-West uses the
perpetual inventory system.)
Made year-end adjusting entry relating to the Sk20,000,000 account payable to Stockholm Motors. Current exchange rate, $0.12874 per krona.
Issued a check to World Bank for $2,566,800 in full payment of the account payable to
Stockholm Motors.
Instructions
a.
Prepare in general journal form the entries necessary to record the preceding events.
b.
Compute the exchange rate (price) of the krona in U.S. dollars on January 11.
c.
Explain a hedging technique that Europa-West might have used to protect itself from the
possibility of losses resulting from a significant increase in the exchange rate for the krona.
Wallerton, Inc., is a U.S. company that has business operations in Canada. Wallerton's Canadian
operation exports the majority of its output to customers in the U.S. and sells only a small portion of
its output to Canadian customers. The following budgeted income statement for Wallerton separates
the revenue and costs that are in Canadian dollars from those in U.S. dollars. Wallerton wants to know
the impact of three possible exchange rate scenarios for the Canadian dollar on its budgeted income
statement (assume one Canadian dollar is equivalent to either $.75, $.80, or $.85 in U.S. dollars).
Additional information
720
Chapter 15 Global Business and Accounting
Instructions
a.
Complete the chart in the working papers related to Wallerton's budgeted income statement in
U.S. dollars:
b.
Explain the impact of a stronger Canadian dollar on budgeted earnings before tax.
Ulsa Company has manufacturing subsidiaries in Malaysia and Malta. It is considering shipping
the subcomponents of Product Y to one or the other of these countries for final assembly. The final
product will be sold in the country where it is assembled. Other information is as follows:
In both countries, the import duties are based on the value of the incoming goods in the receiving
country's currency.
Instructions
a.
For each country, prepare an income statement on a per-unit basis denominated in that coun­
try's currency.
b.
In which country would the highest profit per unit (in dollars) be earned?
с
In which country would the highest total profit (in dollars) be earned?
Problem Set A
721
Form a group of students and research the ASEAN Initiative. A government Web site, www.ustr.
gov, provides information on various trade agreements. Prepare a short presentation or a paper
that explains how the North American Free Trade Agreement (NAFTA) differs from the ASEAN.
Explain how trade agreements help businesses and people in various countries.
Wolfe Computer is a U.S. company that manufactures portable personal computers. Many of the
components for the computer are purchased abroad, and the finished product is sold in foreign
countries as well as in the United States. Among the recent transactions of Wolfe are the
following:
Oct. 28 Purchased from Mitsutonka, a Japanese company, 20,000 disk drives. The purchase
price was ¥180,000,000, payable in 30 days. Current exchange rate, $0.0105 per yen.
(Wolfe uses the perpetual inventory method; debit the Inventory of Raw Materials
account.)
Nov. 9 Sold 700 personal computers to the Bank of England for £604,500 due in 30 days. The
cost of the computers, to be debited to the Cost of Goods Sold account, was $518,000.
Current exchange rate, $1.65 per British pound. (Use one compound journal entry to
record the sale and the cost of goods sold. In recording the cost of goods sold, credit
Inventory of Finished Goods.)
Nov. 27 Issued a check to Inland Bank for $1,836,000 in full payment of account payable to
Mitsutonka.
Dec.
2 Purchased 10,000 gray-scale monitors from German Optical for €1,200,000, payable in
60 days. Current exchange rate, $0.7030 per euro. (Debit Inventory of Raw Materials.)
Dec.
9 Collected dollar-equivalent of £604,500 from the Bank of England. Current exchange
rate, $1.63 per British pound.
Dec. 11 Sold 10,000 personal computers to Computique, a Swiss retail chain, for
SFr23,750,000, due in 30 days. Current exchange rate, $0.6000 per Swiss franc.
The cost of the computers, to be debited to Cost of Goods Sold and credited to
inventory of Finished Goods, is $7,400,000.
Instructions
a.
Prepare in general journal form the entries necessary to record the preceding transactions.
b.
Prepare the adjusting entries needed at December 31 for the €1,200,000 account payable
to German Optical and the SFr23,750,000 account receivable from Computique. Year-end
exchange rates, $0.7000 per euro and $0.5980 per Swiss franc. (Use a separate journal entry
to adjust each account balance.)
с
Compute (to the nearest dollar) the unit sales price of computers in U.S. dollars in either the
November 9 or December 11 sales transaction. (The sales price is the same in each transaction.)
d.
Compute the exchange rate for the yen, stated in U.S. dollars, on November 27.
e.
Explain how Wolfe Computer could have hedged its position to reduce the risk of loss from
exchange rate fluctuations on (1) its foreign payables and (2) its foreign receivables.
Company A, a U.S. company, has a subsidiary located in Country Z, where various forms of brib­
ery are accepted and expected. To oversee the operations of the subsidiary, Company A sent one
of its top U.S. managers to Country Z. Manager M engaged in the following activities while in
Country Z during recent months of operation:
a.
Paid the equivalent of $200 to a government inspector to reschedule the inspection date of a
new manufacturing facility from April 15 to February 15.
b.
Paid an average of $50 each to four local police officers who are in charge of patrolling the
area around the new manufacturing facility. The officers have agreed to increase the number
of times they check the area.
с
Company N, a domestic company, is in competition with Company A for a government con­
tract. Company A has learned that N has given approximately $5,000 to the official who will
722
Chapter 15 Global Business and Accounting
make the final contract decision. To remain in the running, Manager M authorized Company
A to pay an equal amount to the official.
d.
The electric utilities are government owned and operated. Due to the frequency of severe
storms, there are often power outages due to downed lines. Manager M has paid the official
in charge of coordinating repair crews $200 to ensure that the manufacturing plant's power is
one of the first restored.
Under the Foreign Corrupt Practices Act, as amended, which of the above activities do you think
would be considered illegal? From an operations standpoint, which of the above activities would
be considered bad management practice? Are there solutions other than bribery?
Consider note 1 to the 2007 financial statements of Home Depot, Inc., in Appendix A at the end
of this textbook. Use this report to assess the globalization of Home Depot by answering the fol­
lowing questions:
a.
What are the locations of Home Depot's international stores? What other global operations
does Home Depot undertake?
b.
Refer to note 1 on page A-13 under "Segment Information." What percentages of total assets
and net sales revenue were associated with international operations in 2007? in 2006?
c.
Read note 1 on page A-12 under "Foreign Currency Translation." What exchange rate is used
to translate foreign assets and liabilities for reporting purposes?
d.
Read note 1 on page A-12 under "Derivatives." Is there any evidence that management under­
takes any formal hedging to attempt to reduce the impact of currency exchange risk?
e.
Home Depot's provision for taxes for 2007 and 2006 was $2,410 and $3,236 million, respec­
tively. Of the total taxes each year, $295 and $321 million, respectively, were paid to foreign
governments. What percentage of taxes was paid to foreign countries each year?
f.
Do you believe Home Depot, Inc., is a multinational company? Why or why not?
Problem Set В
Monster Cookie Company is located in Denmark. It is a relatively new company and so far has
sold its products only in its home country. In December, Monster determined that it had excess
capacity to produce more of its special Halloween cookies. It is trying to decide whether to use
that capacity to ship a batch of cookies overseas. The marketing department has determined
that the United States and Great Britain are the two most viable markets. Monster has enough
excess capacity to produce only one batch, which can be shipped to either country. The materials
and labor cost to produce the batch amount to 9,000 kroner. The marketing department, which
located a U.S. shipping company that could deliver to either location, also provided the following
information:
Instructions
a.
If Monster exports the batch to the United States, what is its estimated profit/loss in Danish
kroner?
b.
If Monster exports the batch to Great Britain, what is its estimated profit/loss in Danish
kroner?
c.
If the British pound has exhibited rather large fluctuations relative to the Danish krone recently,
how might this impact Monster's decision as to which country to ship to?
723
Problem Set В
Euroam is a U.S. corporation that purchases motors from European manufacturers for distribution
in the United States. A recent purchase involved the following events:
Dec.
1
Dec. 31
Purchased tractors from WMB Motors for SFr4,000,000, payable in 45 days.
Current exchange rate, $0.75 per Swiss franc. (Euroam uses the perpetual
inventory system.)
Made year-end adjusting entry relating to the SFr4,000,000 account payable to
WMB Motors. Current exchange rate, $0.78 per Swiss franc.
Jan. 15
Issued a check to World Bank for $3,080,000 in full payment of the account payable
to WMB Motors.
Instructions
a. Prepare in general journal form the entries necessary to record the preceding events.
b.
Compute the exchange rate (price) of the Swiss franc in U.S. dollars on January 15.
с
Explain a hedging technique that Euroam might have used to protect itself from the pos­
sibility of losses resulting from a significant increase in the exchange rate for the Swiss
franc.
Jelton, Inc., is a U.S. company that has some business operations in Canada. The Canadian
operation exports most of its output to the U.S., but incurs most of its costs in Canadian dollars.
The budgeted income statement for next year is shown below. Jelton wants to know the impact
of three possible exchange rate scenarios for the Canadian dollar on its budgeted income
statement (assume one Canadian dollar is equivalent to either $0.70, $0.80, or $0.90 in U.S.
dollars).
Additional Information
Possible Exchange Rate
Projected U.S. Sales
$0.70
$395
0.80
400
0.90
405
724
Chapter 15 Global Business and Accounting
Instructions
a.
Complete the chart in the working papers related to Jelton's budgeted income statement in
U.S. dollars:
b.
Explain the impact of a stronger Canadian dollar on earnings before tax.
ALSU Company has manufacturing subsidiaries in Malaysia and Malta. It is considering shipping
the subcomponents of Product X to one or the other of these countries for final assembly. The final
product will be sold in the country where it is assembled. Other information is as follows:
In both countries, the import duties are based on the value of the incoming goods in the receiving
country's currency.
Problem Set В
725
Instructions
a.
For each country, prepare an income statement on a per-unit basis denominated in that coun­
try's currency.
b.
In which country would the highest profit per unit (in dollars) be earned?
c.
In which country would the highest total profit (in dollars) be earned?
Form a group of students and research Dominican Republic-Central America-United States
(CAFTA-DR) trade agreement for central America. A government Web site, www.ustr.gov, pro­
vides information on various trade agreements. Prepare a short presentation or a paper that explains
how requirements for CAFTA-DR differ from those of the North American Free Trade Agreement
(NAFTA). Explain how trade agreements help businesses and people in various countries.
Fox Games is a U.S. company that manufacturers computer game consoles. Many of the compo­
nents for the consoles are purchased abroad, and the finished product is sold in foreign countries as
well as in the United States. Among the recent transactions of Fox are the following:
Oct. 25
Purchased from Sutaki, a Japanese company, 15,000 parts. The purchase price was
¥120,000,000, payable in 30 days. Current exchange rate, $0.01 per yen. (Fox uses
the perpetual inventory method; debit the Inventory of Raw Materials account.)
Nov. 15
Sold 500 consoles to British Vibes for £200,000, due in 30 days. The cost of the
consoles, to be debited to the Cost of Goods Sold account, was $160,000. Current
exchange rate, $1.60 per British pound. (Use one compound journal entry to record
the sale and the cost of goods sold. In recording the cost of goods sold, credit Inventory of Finished Goods.)
Nov. 24 Issued a check to Inland Bank for $1,150,000 in full payment of account payable to Sutaki.
Dec. 4
Dec. 15
Dec. 21
Purchased 5,000 black cases from Swiss Plastics for SFr80,000, payable in 60 days.
Current exchange rate, $0.70 per Swiss franc. (Debit Inventory of Raw Materials.)
Collected dollar-equivalent of £200,000 from British Vibes. Current exchange rate,
$1.55 per British pound.
Sold 6,000 game consoles to Sounds, a Norwegian retail chain, for NOK40,000,000,
due in 30 days. Current exchange rate, $0.20 per Norwegian krone. The cost of the
consoles, to be debited to Cost of Goods Sold and credited to Inventory of Finished
Goods, is $5,000,000.
Instructions
a.
Prepare in general journal form the entries necessary to record the preceding transactions.
b.
Prepare the adjusted entries needed at December 31 for the SFr80,000 account payable to
Swiss Plastics and the NOK40,000,000 account receivable from Sounds. Year-end exchange
rates, $0.68 per Swiss franc and $0.18 per Norwegian krone. (Use a separate journal entry to
adjust each account balance.)
c.
Compute (to the nearest dollar) the unit sales price of consoles in U.S. dollars in both the
November 15 and the December 21 sales transaction. (The sales price may not be the same in
each transaction.)
d.
Compute the exchange rate for the yen, stated in U.S. dollars, on November 24.
e.
Explain how Fox Games could have hedged its position to reduce the risk of loss from
exchange rate fluctuations on (1) its foreign payables and (2) its foreign receivables.
Company P, a U.S. company, has a foreign subsidiary in Country Q, where various forms of bribery
are accepted and expected. Company P sent one of its top U.S. managers to oversee operations in
its subsidiary in Country Q. That manager engaged in the following activities while in Country Q:
a.
Paid the equivalent of $200,000 to a government official to win the bid for a new manufacturing facility that opened on April 15.
b.
Paid about $80 each to four local clerks at the import agency who agreed to move the company's
import inspection process to expedite status, saving the company one week of inspection time.
с
The streets and sanitation department in Country Q is government owned and operated.
Because of many hurricanes, downed trees and other debris frequently block access to the
726
Chapter 15 Global Business and Accounting
roads leading to the plant. The manager paid the official in charge of streets an additional
$200 to ensure quick clearing of the streets leading to the plant.
d.
After learning that a competing foreign company paid a government official in Country Q
$10,000 to have priority consideration on a new contract to supply the military, the manager
of Company P offered the official $20,000 for priority consideration for the same contract.
Under the Foreign Corrupt Practices Act as amended, which of the above activities would be con­
sidered illegal? From an operations standpoint, which of the above activities would be considered
bad management practice? What alternative actions could you suggest for the manager?
Critical Thinking Cases
Bristow Inc. is interested in establishing a presence in Country Y. Bristow is expecting demand for
several of its products to increase in that country because a major customer, Kale Enterprises, is
building a large manufacturing plant in Y. Bristow has been supplying Kale's other foreign manu­
facturing operations mainly through exporting. However, shipping costs and long delivery times
have been somewhat troublesome to both companies in the past. Bristow has also identified several
other companies native to Country Y as potential customers.
Bristow currently has operations only in the United States. Kale Enterprises is a successful
global company with operations in over 20 countries. Bristow's managers have identified the fol­
lowing possible options:
a.
Simply export to Country Y
b.
A company in Y has expressed an interest in licensing Bristow's technology and has the capa­
bility and capacity to produce the products used by Kale.
с
A joint venture with Kale may be possible, but managers for Kale would be willing to enter into
an agreement only if substantial control for Bristow's operations is given to Kale managers.
d.
Bristow's managers have located a company that could be purchased and operated as a subsidiary.
The company currently produces products similar to Bristow, but it is using outdated technology.
Instructions
Discuss what factors should be considered when choosing among the above options. Develop a list
of additional information you believe would be useful in making the decision.
The International Organization of Securities Commissions (IOSCO) is a group of top securities
administrators from about 50 countries. The Securities and Exchange Commission (SEC) is a member
of IOSCO. IOSCO is a primary supporter of the internationalization of financial reporting standards
through the International Accounting Standards Board (IASB). At a recent meeting, a discussion of the
pros and cons of internationalizing financial reporting standards included the following arguments:
Pro:
Having the same accounting standards for external financial reporting for all securities mar­
kets will reduce misunderstandings and create comparable information. For example, inves­
tors will be able to compare the financial reports of similar companies located in the United
States with those located in China and decide where best to allocate their investments. One
set of accounting standards will also save corporations money because they will not need
multiple sets of books to track their international operations.
Con:
Requiring companies that list on all global securities exchanges to use the same external re­
porting requirements will mislead investors. For example, in countries where the majority of
investment funds come from banks in the form of long-term borrowing, debt to equity ratios
will look very different than those of comparable U.S. firms. Accounting information must
reflect its environment. Besides, as all business becomes global, reporting requirements will
naturally evolve to what investors demand.
Instructions
Write a one-page summary reflecting your opinion about the value of harmonizing accounting stan­
dards for global equity markets. Support your opinions by referencing comparable cross-country
companies you have located on the Internet.
Critical Thinking Cases
727
Finding an auditor in Japan can be challenging. In a BusinessWeek article, "Bean-Counting AmericanStyle," Chester Dawson states that demand for U.S.-trained CPAs has really taken off as more
Japanese companies go global and more foreign firms enter Japan. A significant revision in report­
ing requirements over the past few years has increased demand for qualified accountants. Jeffrey
Alfano, an audit senior manager at Deloitte Touche Tohmatsu in Tokyo, says "Japanese account­
ing standards are shifting to U.S. accounting standards."
Instructions
a.
Identify two other students to form a group (or your instructor will identify these students).
With your group members prepare a one-page typed paper identifying some political, legal,
economic, cultural, and/or technological/infrastructure issues that you think are affecting
Japan's accounting profession.
b.
Discuss among your group members what you think the quotation from Jeffrey Alfano means.
In particular, include in your group paper one paragraph giving the group consensus about
whether you think Japanese standards are shifting to U.S. standards and whether you believe
it will be good for Japan's capital markets and its investors. Provide supporting evidence.
The National Association of Foreign Trade Zones (FTZs) maintains an Internet site containing
information on U.S. foreign trade zones. Locate the site by searching under "foreign trade zone,"
or go to:
www.naftz.org
Instructions
a.
What is the difference between a zone and a subzone?
b.
Identify an FTZ in your state. Where is it located? What types of business use it?
с
Other information is available at the site. Use that information to answer the following:
1.
How are FTZs created?
2.
What businesses utilize FTZs?
3.
What benefits can firms obtain from operating in FTZs?
The international business community has been calling for stronger corporate governance for com­
panies around the globe. As a result, in 1999 the Organization for Economic Cooperation and
Development (OECD) issued some principles that deal with the ethical and fair treatment of share­
holders, the importance of transparency, and adequate disclosure. These OECD principles were
revised in 2004. The World Bank and the International Monetary Fund support these efforts. In
particular, principle number five, called Disclosure and Transparency, states:
The corporate governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial situation,
performance, ownership and governance of the company (see Mww.oecd.org).
Required
Form a group of four students. Visit the OECD Web site and use the information to write a onepage paper that explains why OECD corporate governance principle number five is important for
international capital flows.
Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore
the Internet. You may need to use the Yahoo! search engine http://www.yahoo.com (or another
favorite search engine) to find a company's current Web address.
Answers to Self-Test Questions
1.
5.
с
2. a,b,c, d
3. b
4. с (.17 - .19) X 20,000
d (the transaction was denominated in dollars)